10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

OR

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

For the transition period from to

Commission file number: 001-33435

CAVIUM, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	77-0558625
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2315 N. First Street San Jose, California	95131
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (408) 943-7100

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares of the Registrant’s Common Stock, $0.001 par value, outstanding as of November 1, 2013 was: 51,970,746

   

CAVIUM, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION		24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 5.	Other Information	40
Item 6.	Exhibits	41

   

 2 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAVIUM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	September 30, 2013			December 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	112,960		$	76,784
Accounts receivable, net of allowances of $951 and $991, respectively		46,504			33,567
Inventories		42,455			46,508
Prepaid expenses and other current assets		4,255			4,865
Assets held for sale		—			2,609
Deferred tax assets		112			568
Total current assets		206,286			164,901
Property and equipment, net		25,776			30,692
Intangible assets, net		53,003			62,888
Goodwill		71,478			71,478
Deferred tax assets, net of current portion		60			449
Other assets		1,044			1,096
Total assets	$	357,647		$	331,504
Liabilities and Equity
Current liabilities:
Accounts payable	$	23,992		$	16,083
Other accrued expenses and other current liabilities		9,754			8,680
Deferred revenue		10,689			12,944
Notes payable		11,012			1,012
Capital lease and technology license obligations		11,755			16,500
Total current liabilities		67,202			55,219
Notes payable, net of current portion		—			4,000
Capital lease and technology license obligations, net of current portion		18,268			24,832
Deferred tax liability		2,128			2,421
Other non-current liabilities		2,789			1,970
Total liabilities		90,387			88,442
Commitments and contingencies (Note 11)
Equity
Common stock, par value $0.001
200,000,000 shares authorized; 51,962,790 and 50,630,991 shares issued and outstanding, respectively		52			51
Additional paid-in capital		433,507			398,133
Accumulated deficit		(157,244	)		(154,092	)
Total stockholders’ equity attributable to the Company		276,315			244,092
Non-controlling interest		(9,055	)		(1,030	)
Total  equity		267,260			243,062
Total liabilities and equity	$	357,647		$	331,504

The accompanying notes are an integral part of these condensed consolidated financial statements.

 3 

CAVIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2013			2012			2013			2012
Net revenue	$	79,124		$	61,081		$	222,858		$	169,111
Cost of revenue		28,516			24,796			85,620			77,553
Gross profit		50,608			36,285			137,238			91,558
Operating expenses:
Research and development		33,630			26,185			98,469			79,366
Sales, general and administrative		14,833			19,213			46,217			50,186
Total operating expenses		48,463			45,398			144,686			129,552
Income (loss) from operations		2,145			(9,113	)		(7,448	)		(37,994	)
Other expense, net:
Interest expense		(390	)		(11	)		(1,107	)		(65	)
Other, net		(126	)		(720	)		(805	)		(828	)
Total other expense, net		(516	)		(731	)		(1,912	)		(893	)
Income (loss) before income taxes		1,629			(9,844	)		(9,360	)		(38,887	)
Provision for (benefit from) income taxes		714			(1,719	)		1,817			(5,094	)
Net income (loss)		915			(8,125	)		(11,177	)		(33,793	)
Net loss attributable to non-controlling interest		(3,421	)		—			(8,025	)		—
Net income (loss) attributable to the Company	$	4,336		$	(8,125	)	$	(3,152	)	$	(33,793	)
Earnings per share attributable to the Company:
Net income (loss) per common share, basic	$	0.08		$	(0.16	)	$	(0.06	)	$	(0.68	)
Shares used in computing basic net income (loss) per common share		51,772			50,060			51,425			49,684
Net income (loss) per common share, diluted	$	0.08		$	(0.16	)	$	(0.06	)	$	(0.68	)
Shares used in computing diluted net income (loss) per common share		53,492			50,060			51,425			49,684

The accompanying notes are an integral part of these condensed consolidated financial statements.

 4 

CAVIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended  September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(11,177	)	$	(33,793	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation expense		25,768			28,773
Depreciation and amortization		26,589			23,298
Deferred income taxes		552			(5,479	)
Gain on sale of held for sale assets		(747	)		—
Loss on disposal of property and equipment		—			178
(Gain) loss on disposition of certain consumer product assets		(750	)		2,728
Changes in assets and liabilities:
Accounts receivable, net		(12,937	)		4,875
Inventories		4,147			(2,414	)
Prepaid expenses and other current assets		915			(802	)
Other assets		52			404
Accounts payable		6,202			2,265
Deferred revenue		(2,254	)		2,662
Accrued expenses and other current and non-current liabilities		1,910			(2,195	)
Net cash provided by operating activities		38,270			20,500
Cash flows from investing activities:
Purchases of property and equipment		(5,528	)		(11,300	)
Purchases of intangible assets		(3,568	)		(4,153	)
Proceeds received from sale of held for sale assets		3,350			—
Proceeds received from disposition of certain consumer product assets		750			—
Net cash used in investing activities		(4,996	)		(15,453	)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of options		9,528			6,647
Principal payment of capital lease and technology license obligations		(13,369	)		(7,629	)
Notes payable of the VIE to non-controlling interest		6,000			—
Tax withholdings for stock option exercises on behalf of employees		743			—
Net cash provided by (used in) financing activities		2,902			(982	)
Net increase in cash and cash equivalents		36,176			4,065
Cash and cash equivalents, beginning of period		76,784			63,225
Cash and cash equivalents, end of period	$	112,960		$	67,290
Supplemental disclosure of cash flows from investing activities
Property and equipment and intangible assets acquired included in accounts payable and other accrued expense and other current liabilities		2,272			382
Supplemental disclosure of cash flow from financing activities:
Property and equipment and intangible assets acquired included in capital lease and technology license obligations		313			23,794

The accompanying notes are an integral part of these condensed consolidated financial statements.

 5 

CAVIUM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November 21, 2000 and was reincorporated in the state of Delaware effective February 6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or US GAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. Intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with US GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No. 001-33435) on file with the SEC for the year ended December 31, 2012.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at September 30, 2013, and the condensed consolidated results of its operations for the three and nine months ended September 30, 2013 and 2012, and condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There had been no material changes to these accounting policies.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued a new accounting guidance relating to the financial statement presentation of unrecognized tax benefits. The new update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company does not expect that this new guidance to have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.

 6 

2. Net Income (Loss) Per Common Share

The following table sets forth the computation of net income (loss) per share:

	Three Months Ended  September 30,					Nine Months Ended  September 30,
	2013		2012			2013			2012
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	4,336	$	(8,125	)	$	(3,152	)	$	(33,793	)
Weighted average common shares outstanding—basic		51,772		50,060			51,425			49,684
Dilutive effect of employee stock plans		1,720		—			—			—
Weighted average common shares outstanding—diluted		53,492		50,060			51,425			49,684
Net income (loss) per common share, basic	$	0.08	$	(0.16	)	$	(0.06	)	$	(0.68	)
Net income (loss) per common share, diluted	$	0.08	$	(0.16	)	$	(0.06	)	$	(0.68	)

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2013		2012		2013		2012
	(in thousands)
Options to purchase common stock		727		4,346		3,637		4,346
Restricted stock units		1		2,040		1,887		2,040

3. Fair Value Measurements

At September 30, 2013 and December 31, 2012, all of the Company’s investments were classified as cash equivalents and are comprised of an investment in a money market fund. In accordance with the guidance for fair value measurements and disclosures, the Company determined the fair value hierarchy of its money market fund as Level 1, which approximated $72.2 million and $50.2 million as of September 30, 2013 and December 31, 2012, respectively. The carrying amount of the Company’s accounts receivable, accounts payable and accrued expenses approximate fair value due to their short term maturities. Notes payable are carried at cost which approximates fair value based on current interest rates available to the Company and are a Level 2 measurement. There are no other financial assets and liabilities that require Level 2 or Level 3 fair value hierarchy measurements and disclosures.

4. Balance Sheet Components

Inventories

	As of September 30, 2013		As of December 31, 2012
	(in thousands)
Work-in-process	$	34,791	$	33,418
Finished goods		7,664		13,090
	$	42,455	$	46,508

During the second quarter of 2013, the Company incurred a $3.9 million inventory write-down associated with discontinued consumer products.

 7 

Property and equipment, net

	As of September 30, 2013			As of December 31, 2012
	(in thousands)
Mask costs and test equipment	$	37,392		$	32,771
Software, computer and other equipment		38,363			35,563
Furniture, office equipment and leasehold improvements		1,181			1,089
		76,936			69,423
Less: accumulated depreciation and amortization		(51,160	)		(38,731	)
	$	25,776		$	30,692

Depreciation and amortization expense was $4.4 million and $3.8 million for the three months ended September 30, 2013 and 2012, respectively, and $13.2 million and $10.3 million for the nine months ended September 30, 2013 and 2012, respectively.

The Company leases certain design tools under capital lease and certain financing arrangements which are included in property and equipment, which total cost, net of accumulated amortization amounted to $12.1 and $16.8 million at September 30, 2013 and December 31, 2012, respectively. Amortization expense related to assets recorded under capital lease and certain financing agreements was $1.6 million and $1.2 million for the three months ended September 30, 2013 and 2012, respectively, and $4.8 million and $3.3 million for the nine months ended September 30, 2013 and 2012, respectively.

Other accrued expenses and other current liabilities

	As of September 30, 2013		As of December 31, 2012
	(in thousands)
Accrued compensation and related benefits	$	4,843	$	4,458
Professional fees		1,593		1,067
Contractual settlement payable		1,250		—
Restructuring related payables		107		210
Income tax payable		47		467
Other		1,914		2,478
	$	9,754	$	8,680

Warranty Accrual

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2013			2012			2013			2012
	(in thousands)
Beginning balance	$	317		$	423		$	440		$	412
Accruals and adjustments		25			113			257			391
Settlements		(68	)		(109	)		(423	)		(376	)
Ending balance	$	274		$	427		$	274		$	427

Deferred revenue

	As of September 30, 2013		As of December 31, 2012
	(in thousands)
Services / support and maintenance	$	6,534	$	8,017
Software license / subscription		1,523		2,529
Distributors		2,632		2,398
	$	10,689	$	12,944

 8 

5. Business Combinations and Divestitures

Variable Interest Entity

In May 2012, the Company entered into a secured note purchase agreement with a VIE to provide cash advances. As of September 30, 2013, the Company had made cash advances of $4.0 million under three convertible notes receivable which mature between December 31, 2013 and August 31, 2014. In addition, a third-party company and third party investors (“non-controlling interest”) had made cash advances of $5.0 million and $6.0 million, respectively, under twelve convertible notes receivable which mature between December 31, 2013 and August 31, 2014. Certain of the convertible notes are collateralized by a lien on the VIE’s assets. Pursuant to the convertible notes, in the event of a qualified equity financing of the VIE, the outstanding principal balance plus the accrued interest of the convertible notes would be automatically converted into preferred stock of the VIE. The Company has a purchase option to acquire the assets of the VIE at a price specified in the secured note purchase agreement. The option to purchase expires on December 31, 2013, provided the VIE has met certain milestones specified in the secured note purchase agreement. If the certain milestones have not been met by December 31, 2013, the expiration shall be the date that is the earlier of 30 days after the VIE meets the specified milestones or July 31, 2014. The Company has concluded that it is the primary beneficiary of the VIE due to the Company’s involvement with the VIE and the purchase option to acquire the assets of the VIE. As such, the Company has included the accounts of the VIE in the condensed consolidated financial statements. The significant components of the VIE’s financial statements included in the Company’s condensed consolidated financial statements as of September 30, 2013 include cash of $1.8 million; property and equipment and intangible assets of $1.0 million; accounts payable of $2.9 million; notes payable of $11.0 million and non-controlling interest of $9.0 million. For the three and nine months ended September 30, 2013, the Company’s portion of the net loss of the VIE was $1.3 million and $4.1 million, respectively. For the three and nine months ended September 30, 2012, the Company’s portion of the net loss of the VIE was $0.8 million.

Disposition of Certain Consumer Product Assets

In September 2012, the Company completed the sale of certain consumer product assets to a third party company. The consumer product assets that were sold originated from the acquisition of Star Semiconductor Corporation in fiscal year 2008 and had been further developed by the Company. Under an asset purchase agreement, the Company agreed to transfer certain assets such as property and equipment and intangible assets to the third party company for an aggregate cash consideration of $2.4 million, payable in installments starting from January 10, 2013 through January 10, 2015. The Company determined that the payment terms were not fixed and determinable and as such the Company treated this transaction as disposition of assets and will recognize the future payments as a credit to sales, general and administrative expenses when the payments are due. The carrying value of the assets related to the sale of $2.7 million was recognized as a loss on disposition of certain consumer product assets within sales, general and administrative expenses during the third quarter of 2012. During the three and nine months ended September 30, 2013, the Company received total installment cash consideration of $0.3 million and $0.8 million, respectively, which were recognized as credits within sales, general and administrative expenses.

Sale of Held for Sale Assets

In January 2013, the Company completed the sale of certain assets to a third-party company. The assets sold originated from the acquisition of MontaVista Software, Inc. in fiscal year 2009. Under the asset purchase agreement, the Company agreed to transfer certain assets for an aggregate cash consideration of $3.3 million. The carrying value of the assets held for sale was approximately $2.6 million, consisting of a portion of goodwill of $2.2 million and the remaining related to the carrying costs of the transferred property and equipment and intangible assets. These assets were classified as assets held for sale in the consolidated balance sheets as of December 31, 2012. The difference between the sale consideration and the carrying value of the assets held for sale of $0.7 million was recognized as a gain on sale of held for sale assets within sales, general and administrative expenses during the first quarter of 2013.

 9 

6. Goodwill and Intangible Assets, Net

Goodwill

The carrying amount of goodwill at September 30, 2013 was $71.5 million, unchanged from the balance at December 31, 2012.

The Company reviews goodwill for impairment annually at the beginning of its fourth calendar quarter and whenever events or changes in circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. For the most recent annual goodwill impairment analysis performed during the fourth quarter of 2012, the Company had two reporting units, namely, semiconductor product unit and software and services unit. The result of the most recent annual impairment test showed that goodwill impairment does not exist in its semiconductor product reporting unit due to a significant excess of the fair value over the carrying value of the reporting unit. The Company however determined that goodwill impairment existed in its software and services reporting unit as a result of the most recent annual goodwill impairment assessment. As such, the Company recorded a $27.7 million goodwill impairment charge in the fourth quarter of 2012. The carrying amount of the goodwill at December 31, 2012 was $56.3 million in the semiconductor products reporting unit and $15.2 million in the software and services reporting unit.

During the first quarter of 2013, due to the sale of certain assets of MontaVista and the reorganization of resources, the Company changed how it manages and operates the business which resulted in the combination of the semiconductor product and software and services into one reporting unit. See related discussions in Note 10 of Notes to Condensed Consolidated Financial Statements. As such, beginning in the first quarter of 2013, the Company assesses the goodwill impairment at the reporting unit level which is at the Company level as a whole. Due to the change in the reporting unit structure, the Company performed a qualitative assessment of the goodwill at the Company level as a whole and concluded that it was more-likely-than-not that the fair value of the reporting unit exceeded the carrying amount as of March 31, 2013. As such, it was not necessary to perform the two-step goodwill impairment test at that time. In assessing the qualitative factors, the Company considered the impact of these key factors: overall financial performance, industry and competitive market environment, market capitalization and stock price. There had been no triggering events since the latest assessment in the first quarter of 2013 to cause an interim impairment test.

Intangible assets, net

	As of September 30, 2013							Weighted average remaining amortization period (years)
	Gross		Accumulated Amortization			Net
	(in thousands)
Existing and core technology—product	$	46,533	$	(38,645	)	$	7,888	1.82
Technology licenses		68,769		(27,331	)		41,438	7.14
Customer contracts and relationships		8,991		(5,889	)		3,102	4.23
Trade name		2,296		(1,721	)		575	1.35
Order backlog		640		(640	)		—	—
Total amortizable intangible assets	$	127,229	$	(74,226	)	$	53,003	6.50

	As of December 31, 2012							Weighted average remaining amortization period (years)
	Gross		Accumulated Amortization			Net
	(in thousands)
Existing and core technology—product	$	47,658	$	(35,326	)	$	12,332	2.39
Technology licenses		66,034		(20,078	)		45,956	7.94
Customer contracts and relationships		8,991		(5,291	)		3,700	4.93
Trade name		2,296		(1,396	)		900	2.10
Order backlog		640		(640	)		—	—
Total amortizable intangible assets	$	125,619	$	(62,731	)	$	62,888	6.57

Amortization expense was $4.3 million and $4.8 million for the three months ended September 30, 2013 and 2012, respectively, and $13.4 million and $13.0 million for the nine months ended September 30, 2013 and 2012, respectively.

 10 

The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2013	$	4,240
2014		14,471
2015		7,854
2016		5,704
2017		4,505
2018 and thereafter		16,229
	$	53,003

7. Restructuring Accrual

In the first quarter of 2012, the Company recorded a restructuring accrual of $0.4 million related to the leased facility in Canada which the Company no longer occupies. The lease will expire in March 2014.

In connection with a workforce reduction during the first quarter of 2013, the Company incurred $1.4 million in expense primarily related to severance and other related benefits.

A summary of the accrued restructuring liabilities including related activities during the nine months ended September 30, 2013, is as follows:

	Severance and other benefits			Excess Facility Related Cost			Total
	(in thousands)
Balance at December 31, 2012	$	—		$	262		$	262
Additions		1,371			—			1,371
Cash payments and other non-cash adjustments		(1,371	)		(155	)		(1,526	)
Balance at September 30, 2013 (current)	$	—		$	107		$	107

8. Equity

Equity Incentive Plans

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the nine months ended September 30, 2013:

	Number of Shares Outstanding			Weighted Average Exercise Price
Balance as of December 31, 2012		4,197,704		$	16.83
Options granted		242,375			37.15
Options exercised		(658,374	)		14.45
Options cancelled and forfeited		(144,982	)		33.86
Balance as of September 30, 2013		3,636,723		$	17.94

No stock options were granted during the three months ended September 30, 2013. The fair value of each employee option grant for the three months ended September 30, 2012 and nine months ended September 30, 2013 and 2012 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended  September 30,		Nine Months Ended  September 30,
	2013	2012	2013	2012
Risk-free interest rate	—	1.55%	0.32% to 1.04%	0.57% to 1.55%
Expected life	—	4.53 years	3.77 to 4.53 years	4.08 to 4.53 years
Dividend yield	—	0%	0%	0%
Volatility	—	57.3%	45.82 to 49.6%	51.3% to 57.3%

 11 

The estimated weighted-average grant date fair value of options granted was $13.03 per share for the three months ended September 30, 2012 and $14.91 and $14.79 per share for the nine months ended September 30, 2013 and 2012.

As of September 30, 2013, there is $6.8 million of unrecognized compensation costs, net of estimated forfeitures, related to stock options granted under the Company’s 2007 Equity Incentive Plan and 2001 Stock Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.28 years.

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the nine months ended September 30, 2013:

	Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Balance as of December 31, 2012		1,823,563		$	33.17
Granted		1,019,420			36.17
Issued and released		(673,424	)		32.24
Cancelled and forfeited		(282,993	)		32.18
Balance as of September 30, 2013		1,886,556		$	35.27

For restricted stock units, or RSUs, stock-based compensation expense is calculated based on the market price of the Company’s common stock on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recorded on a straight-line basis, over the vesting period.

As of September 30, 2013, there was $53.6 million of unrecognized compensation costs, net of estimated forfeitures related to RSUs granted under the Company’s 2007 Equity Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.55 years.

Stock-Based Compensation

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2013		2012		2013		2012
	(in thousands)
Cost of revenue	$	216	$	471	$	655	$	1,539
Research and development		4,899		4,259		13,682		12,761
Sales, general and administrative		3,686		4,243		11,431		14,473
	$	8,801	$	8,973	$	25,768	$	28,773

The total stock-based compensation cost capitalized as part of inventory as of September 30, 2013 and December 31, 2012 was not significant.

Changes in equity

A reconciliation of the changes in equity for the nine months ended September 30, 2013 is presented below:

	Attributable to the Company			Attributable to non-controlling interest			Total equity
	(in thousands)
Balance at December 31, 2012	$	244,092		$	(1,030	)	$	243,062
Common stock issued in connection with exercises of stock options		9,528			—			9,528
Stock-based compensation		25,847			—			25,847
Net loss		(3,152	)		(8,025	)		(11,177	)
Balance at September 30, 2013	$	276,315		$	(9,055	)	$	267,260

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9. Income Taxes

The quarterly tax provision for (benefit from) income taxes is based on the estimated annual effective tax rate, plus any discrete items. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for (benefit from) income taxes and the effective tax rates for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in thousands)
Income (loss) before income taxes	$	1,629		$	(9,844	)	$	(9,360	)	$	(38,887	)
Provision for (benefit from) income taxes		714			(1,719	)		1,817			(5,094	)
Effective tax rate		43.8	%		17.5	%		-19.4	%		13.1	%

The provision for income taxes for the three and nine months ended September 30, 2013 was primarily related to earnings and additional establishment of unrecognized tax benefits in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for the three and nine months ended September 30, 2013 was primarily attributable to the impact of the losses that are not benefited, difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability. The Company has determined that as of September 30, 2013, the variability in the jurisdictional mix of its customers created uncertainty with respect to estimating taxable income in the Cayman business. As such, the results of the Cayman business have been excluded from the computation of the annual effective tax rate and the year-to-date tax provision, which resulted in a higher tax expense than if the Cayman business had not been excluded. The benefit from income taxes for the three and nine months ended September 30, 2012 was primarily related to the year-to-date pre-tax losses and the release of uncertain tax position reserves. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the benefit from income taxes recorded for the three and nine months ended September 30, 2012 was primarily attributable to the impact of the differential in foreign tax rates, non-deductible stock-based compensation charges, and recovery of non-taxable escrow related to the Celestial Semiconductor acquisition.

The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of the Company’s net deferred tax assets during the fourth quarter of 2012, the Company determined that it was more-likely-than-not it would not realize the full value of its federal and state deferred tax assets. As such, the Company determined that as of December 31, 2012, a full valuation allowance is required on its net federal and state deferred tax assets. Adjustments could be required in the future if the Company concludes that it is more-likely-than-not that these net deferred tax assets are recoverable. A release of the valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. The Company continues to monitor the likelihood that it will be able to recover its deferred tax assets. As of September 30, 2013, the Company believes that it is not more likely than not that it will be able to fully realize its United States federal and state deferred tax assets and, as such, the Company continues to provide a full valuation allowance on those deferred tax assets.

As of September 30, 2013 and December 31, 2012, the Company had unrecognized tax benefits for income taxes associated with uncertain tax positions of $14.8 million and $12.7 million, respectively. If all of these unrecognized tax benefits were recognized, $1.3 million would reduce the Company’s effective tax rate. The Company is not anticipating any significant changes in unrecognized tax benefits in the next 12 months.

The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, Japan, India, China and Singapore. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of September 30, 2013, there are no on-going tax audits in the major tax jurisdictions other than India. The India tax audit is for the tax years 2010 and 2011, and the Company does not expect any significant tax adjustments.

On January 2, 2013, the President of the United States of America signed into law The American Taxpayer Relief Act of 2012, or ATRA. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December 31,

 13 

2011. The ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The benefit of the reinstated credit did not impact the income statement in the period of enactment, which is the first quarter of 2013, as the research and development credit carryforwards are offset by a full valuation allowance.

On September 13, 2013, the Treasury Department and the Internal Revenue Service released final regulations and re-proposed regulations (collectively, the “2013 Regulations”) that provide guidance with respect to sections 162(a), 263(a), and 168 of the Internal Revenue Code of 1986.  The 2013 Regulations are generally effective for taxable years beginning on or after January 1, 2014, although earlier adoption is permitted. The Company is aware of these regulations and is currently assessing the potential impact. The Company does not expect any significant impact, especially in light of the full valuation allowance on its federal and state net deferred tax assets as of September 30, 2013.

10. Segment and Geographic Information

Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a) whose operating results are regularly reviewed by the Company’s chief operating decision maker, or CODM, to make decisions about resource allocation and performance and (b) for which discrete financial information is available. The Company’s primary business has been its semiconductor business, which comes from the development and sale of semiconductor products. Prior to fiscal year 2010, the Company was organized as, and operated in, one operating segment. In the fourth quarter of 2009, the Company acquired MontaVista which changed the way the CODM viewed and managed the business and allocated resources. This resulted in the Company to operate in two reporting units which were the same as the reportable segments namely, semiconductor products and software and services beginning first quarter of 2010.

During the first quarter of 2013, the Company sold certain assets and reorganized the software and services unit which resulted in a decrease in the significance of the related business unit to the overall operations of the Company. Due to such decrease in the significance of the software and services unit, the CODM now views, manages and allocates resources across the business as a whole and no longer reviews the discrete financial information for semiconductor products and software and services separately. As a result of this change, the Company manages and operates as one reporting unit which is also the same as the reportable segment beginning in the first quarter of 2013.

The following table is based on the geographic location of the original equipment manufacturers, the contract manufacturers or the distributors who purchased the Company’s products. For sales to the distributors, their geographic location may be different from the geographic locations of the ultimate end customers.

Sales by geography for the periods indicated were as follows:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2013		2012		2013		2012
	(in thousands)
United States	$	22,391	$	18,091	$	69,605	$	51,089
China		20,574		16,757		54,243		48,346
Korea		8,671		3,773		23,311		9,774
Mexico		7,135		2,809		16,700		6,539
Finland		6,051		631		12,117		662
Taiwan		5,822		7,313		18,530		19,635
Japan		2,154		3,741		6,900		8,724
Malaysia		3,877		3,935		10,636		12,099
Other countries		2,449		4,031		10,816		12,243
Total	$	79,124	$	61,081	$	222,858	$	169,111

The following table sets forth long lived assets, which consist primarily of property and equipment, net by geographic regions:

	As of September 30, 2013		As of December 31, 2012
	(in thousands)
United States	$	21,744	$	27,678
All other countries		4,032		3,014
Total	$	25,776	$	30,692

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11. Commitments and Contingencies

The Company is not currently a party to any legal proceedings and outcome of which, if determined adversely to the Company, would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

During the second quarter of 2013, a customer of MontaVista sent a claim letter to the Company requesting an amount they believe is due related to an automotive business services agreement between the customer and MontaVista. The Company has disputed this claim, but it engaged in discussions with the customer to resolve the matter. The Company recorded $1.3 million accrual to cover a potential contractual settlement payment to the customer within sales, general and administrative expenses in the second quarter of 2013. In October 2013, the Company and the customer entered into a settlement and general release claim agreement, and the Company paid the $1.3 million.

The Company leases its facilities under non-cancelable operating leases, which contain renewal options and escalation clauses, and expire on various dates ending in November 2020. The Company also acquires certain assets under capital leases.

The capital lease and technology license obligations include future cash payments payable primarily for license agreements with various outside vendors. For license agreements which qualify under capital lease and where installment payments extend beyond one year, the present value of the future installment payments are capitalized and included as part of intangible assets or property and equipment which is amortized over the estimated useful lives of the related licenses.

Minimum commitments under non-cancelable operating and capital lease agreements, excluding the accrued restructuring liability (See Note 7 of the Condensed Consolidated Financial Statements) as of September 30, 2013 are as follows:

	Capital lease and technology license obligations		Operating leases		Total
	(in thousands)
Remainder of 2013	$	5,436	$	1,034	$	6,470
2014		11,817		4,683		16,500
2015		9,258		4,117		13,375
2016		5,150		4,227		9,377
2017		—		4,247		4,247
2018 thereafter		—		8,959		8,959
	$	31,661	$	27,267	$	58,928
Less: Interest component (3.75% annual rate)		1,638
Present value of minimum lease payment		30,023
Current portion of the obligations	$	11,755
Long-term portion of obligations	$	18,268

Rent expense incurred under operating leases was $1.3 million and $1.4 million for the three months ended September 30, 2013 and 2012, respectively, and $3.7 million and $4.2 million for the nine months ended September 30, 2013 and 2012, respectively.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments over two years. Furthermore, the Company entered into an agreement with the VIE and third party vendor, whereby the Company guaranteed the payment of the test equipment in the event the VIE defaults such payment obligation. The equipment is expected to be delivered in the fourth quarter of 2013. As such, the related asset and liability has not been reflected in the balance sheets as of September 30, 2013.  

In September 2013, the Company signed a purchase agreement of $5.5 million with a third party vendor to purchase any combination of core software licenses as specified in the agreement under a flexible spending program with a minimum annual spending of $2.75 million each for two years.

In November 2013, the Company signed a new lease agreement (the “2345 Lease”) with a landlord to lease approximately 55,440 sq. ft. in the first 12 months and 110,881 sq. ft. thereafter in a building located adjacent to the Company’s principal office in San Jose, California. The lease term is 8.0 years commencing on the earlier of October 1, 2014 or the date the Company begins to conduct its business within any portion of the leased facility and ending on ninety six (96) months thereafter. The base monthly rate to lease the facility is $0.12 million for the first 12 months and $0.25 million for months thirteen through twenty-four and increase incrementally by approximately 3% annually through end of the lease term. Further, the Company entered into an amendment to the

 15 

lease agreement related to the building in San Jose, California where the Company’s principal offices are located to extend the lease term for the period from March 1, 2019 to expiration date of the 2345 Lease.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.

The information in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “estimate,” “project,” “predict,” “potential,” “continue,” “strategy,” “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expression intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

OCTEON ^®, OCTEON^® Plus^TM, OCTEON Fusion^®, FusionStack^TM, NITROX^®, NEURON^TM, Celestial^TM , ECONA^®, PureVu^® and WiVu^TM are trademarks or registered trademarks of Cavium, Inc.

Overview

We are a provider of highly integrated semiconductor processors that enable intelligent processing for networking, communications, storage, wireless, security, video and connected home and office applications. Our product allows our customers to develop networking, wireless, storage and electronic equipment that is application-aware and content-aware and securely processes voice, video and data traffic at high speeds. Our products are systems on a chip, or SoCs, which incorporate single or multiple processor cores, a highly integrated architecture and customizable software that is based on a broad range of standard operating systems. We focus our resources on the design, sales and marketing of our products, and outsource the manufacturing of our products.

From our incorporation in 2000 through 2003, we were primarily engaged in the design and development of our first processor family, NITROX, which we began shipping commercially in 2003. In 2004, we introduced and commenced commercial shipments of NITROX Soho. In 2006, we commenced our first commercial shipments of our OCTEON family of multi-core MIPS64 processors. We introduced a number of new products within all three of these product families in 2006. In 2007 we introduced our new line of OCTEON based storage services processors designed to address the specific needs in the storage market, as well as other new products in the OCTEON and NITROX families. In 2008, we expanded our OCTEON and NITROX product families with new products including wireless services processors to address the needs for wireless infrastructure equipment. In 2009, we announced the OCTEON II Internet Application Processor, or IAP, family multi-core MIPS64 processors, with one to 32 cores to address next generation networking applications support converged voice, video, data mobile traffic and services. In 2010, we announced the next generation NITROX III, a processor family with 16 to 64-cores that delivers security and compression processors for application delivery, cloud computing and wide area network optimization. In 2011, we introduced NEURON, a new search processor product family that targets a wide range of high performance, L2-L4 network search applications in enterprise and service provider infrastructure equipment. In 2011, we also introduced another new product family, the OCTEON Fusion, a single chip SoCs with up to 6x MIPS64 cores and up to 8x LTE/3G baseband DSP cores which enable macro base station class features for small cell base stations. In 2012, we introduced OCTEON III, Cavium’s 48-core 2.5GHz multi-core processor family that can deliver up to 100Gbps of application processing, up to 120GHz of 64-bit compute processing per chip and can be connected in multi-chip configurations. In August 2012, we announced Project Thunder, the development of a new family of 64-bit ARMv8 scalable multi-core processors for cloud and datacenter applications. We expect that this processor family will integrate high-performance computer, networking, security, and storage along with targeted workload application acceleration and high-speed industry standard IOs.

In August 2008, we acquired substantially all of the assets of Star Communications, Inc. With the acquisition of Star, we added the Star ARM-based processors to our portfolio to address connected home and office applications and introduced our ECONA line of dual-core ARM processors that address a variety of connected home and office applications.

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In December 2008, we acquired W&W Communications, Inc. This acquisition launched us into the video processor market with our PureVu product line. These products address the need for video processing in wireless displays, teleconferencing, gaming and other applications.

In December 2009, we acquired MontaVista Software, Inc. This acquisition complemented our broad portfolio of multi-core processors to deliver integrated and optimized embedded solutions to the market.

In October 2010, we acquired Celestial Systems, Inc. With the acquisition of Celestial Systems, we gained additional professional services such as Digital Media product development and Android commercialization and support.

In January 2011, we completed the acquisition of substantially all of the assets and assumed certain liabilities of Wavesat Inc. This acquisition added multicore wireless digital system processing to our embedded processor product line.

In March 2011, we completed the acquisition of substantially all of the assets and assumed certain liabilities of Celestial Semiconductor, Ltd. With the acquisition of Celestial Semiconductor, we added capabilities to enable a processor family targeted for the large and growing market of converged media, gateway and wireless display applications.

Since inception, we have invested heavily in new product development and our net revenue has grown from $7.4 million in 2004 to $235.5 million in 2012 driven primarily by demand in the enterprise network and data center markets and increased demand in the broadband and consumer markets. We expect sales of our products for use in the enterprise network and data center markets to continue to represent a significant portion of our revenue in the foreseeable future, however, we do expect growth in the broadband and consumer as well as the access and servicer provider markets.

We primarily sell our products to OEMs, either directly or through their contract manufacturers. Contract manufacturers purchase our products only when an OEM incorporates our product into the OEM’s product, not as commercial off-the-shelf products. Our customers’ products are complex and require significant time to define, design and ramp to volume production. Accordingly, our sales cycle is long. This cycle begins with our technical marketing, sales and field application engineers engaging with our customers’ system designers and management, which is typically a multi-month process. If we are successful, a customer will decide to incorporate our product in its product, which we refer to as a design win. Because the sales cycles for our products are long, we incur expenses to develop and sell our products, regardless of whether we achieve the design win and well in advance of generating revenue, if any, from those expenditures. We do not have long-term purchase commitments from any of our customers, as sales of our products are generally made under individual purchase orders. However, once one of our products is incorporated into a customer’s design, it is likely to remain designed in for the life cycle of the product. We believe this to be the case because a redesign would generally be time consuming and expensive. We have experienced revenue growth due to an increase in the number of our products, an expansion of our customer base, an increase in the number of average design wins within any one customer and an increase in the average revenue per design win.

We also earn revenue from the sale of software subscriptions of embedded Linux operating system, related development tools, support and professional services. The net revenue for our software and services operations are primarily derived from the sale of time-based software licenses, software maintenance and support, and from professional services arrangements and training.

Key Business Metrics

Design Wins. We closely monitor design wins by customer and end market on a periodic basis. We consider design wins to be a key ingredient in our future success, although the revenue generated by each design win can vary significantly. Our long-term sales expectations are based on internal forecasts from specific customer design wins based upon the expected time to market for end customer products deploying our products and associated revenue potential.

Pricing and Margins. Pricing and margins depend on the features of the products we provide to our customers. In general, products with more complex configurations and higher performance tend to be priced higher and have higher gross margins. These configurations tend to be used in high performance applications that are focused on the enterprise network, data center, and access and service provider markets. We tend to experience price decreases over the life cycle of our products, which can vary by market and application. In general, we experience less pricing volatility with customers that sell to the enterprise and data center markets.

Sales Volume. A typical design win can generate a wide range of sales volumes for our products, depending on the end market demand for our customers’ products. This can depend on several factors, including the reputation, market penetration, the size of the end market that the product addresses, and the marketing and sales effectiveness of our customer. In general, our customers with greater market penetration and better branding tend to develop products that generate larger volumes over the product life cycle. In addition, some markets generate large volumes if the end market product is adopted by the mass market.

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Customer Product Life Cycle. We typically commence commercial shipments from nine months to three years following a design win. Once our product is in production, revenue from a particular customer may continue for several years. We estimate our customers’ product life cycles based on the customer, type of product and end market. In general, products that go into the enterprise network and data center take longer to reach volume production but tend to have longer lives. Products for other markets, such as broadband and consumer, tend to ramp relatively quickly, but generally have shorter life cycles. We estimate these life cycles based on our management’s experience with providers of networking equipment and the semiconductor market as a whole.

Results of Operations

Our net revenue, cost of revenue, gross profit and gross margin for the periods presented were:

	Three Months Ended September 30,											Nine Months Ended September 30,
	2013			2012			change			%		2013			2012			change			%
	(in thousands)											(in thousands)
Net revenue	$	79,124		$	61,081		$	18,043		29.5	%	$	222,858		$	169,111		$	53,747			31.8	%
Cost of revenue		28,516			24,796			3,720		15.0	%		85,620			77,553			8,067			10.4	%
Gross Profit	$	50,608		$	36,285		$	14,323		39.5	%	$	137,238		$	91,558		$	45,680			49.9	%
Gross Margin		64.0	%		59.4	%		4.6	%				61.6	%		54.1	%		7.4	%

Net Revenue. Our net revenue consists primarily of sales of our semiconductor products to providers of networking equipment and their contract manufacturers and distributors. Initial sales of our products for a new design are usually made directly to providers of networking equipment as they design and develop their product. Once their design enters production, they often outsource their manufacturing to contract manufacturers that purchase our products directly from us or from our distributors. We price our products based on market and competitive conditions and periodically reduce the price of our products, as market and competitive conditions change, and as manufacturing costs are reduced. We do not experience different margins on direct sales to providers of networking equipment and indirect sales through contract manufacturers because in all cases we negotiate product pricing directly with the providers of networking equipment. To date, substantially all of our revenue has been denominated in U.S. dollars.

Two customers together accounted for 29.3% and 28.6% of our net revenue for the three and nine months ended September 30, 2013, respectively. One customer accounted for 24.2% and 27.0% of our net revenue for the three and nine months ended September 30, 2012, respectively. No other customer accounted for more than 10% of our revenues for the three and nine months ended September 30, 2013 and 2012.

Revenue and costs relating to sales to distributors are deferred if we grant more than limited rights of returns and price credits or if we cannot reasonably estimate the level of returns and credits issuable. We have an existing agreement with a distributor to distribute our products primarily in the United States. Given the terms of the distribution agreement, for sales to this distributor, we defer revenue and costs until products are sold to its end customers. For the three months ended September 30, 2013 and 2012, 6.7% and 5.6%, respectively, and for the nine months ended September 30, 2013 and 2012, 6.5% and 5.6%, respectively, of our net revenues were from products sold by this distributor. Revenue recognition depends on notification from this distributor that product has been sold to its end customers.

We use our distributors, other than the distributor discussed above, primarily to support international sale logistics in Asia, including importation and credit management. Total net revenue through these distributors accounted for 22.4% and 26.0% of net revenue for the three months ended September 30, 2013 and 2012, respectively and 29.0% and 27.3% for the nine months ended September 30, 2013 and 2012, respectively. The inventory at these distributors at the end of the period may fluctuate from time to time mainly due to the OEM production ramps or new customer demands. While we have purchase agreements with our distributors, the distributors do not have long-term contracts with any of the equipment providers. Our distributor agreements limit the distributor’s ability to return product up to a portion of purchases in the preceding quarter. Given our experience, along with our distributors’ limited contractual return rights, we believe we can reasonably estimate expected returns from our distributors. Accordingly, we recognize sales through distributors at the time of shipment, reduced by our estimate of expected returns.

Our net revenue increased by $18.0 million or 29.5% in the three months ended September 30, 2013 and $53.7 million or 31.8% in the nine months ended September 30, 2013 compared to the same periods in 2012. The increase in net revenue was attributable mainly to the increase in sales in our enterprise network; data center and access and service provider markets, combined of $18.3 million and $55.9 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The increase was partially offset by the decrease in sales in our broadband and consumer market of $0.3 million and $2.2 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The overall increase in sales in our enterprise networks; data center; and access and service provider markets and the decrease in sales of our broadband and consumer marker were mainly due to the fluctuation in demand for our products in those respective markets, as a result of the timing of our customers’ volume production of our design wins.

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The following table is based on the geographic location of our customers including the original equipment manufacturers, contract manufacturers or the distributors who purchased our products and services. For sales to our distributors, their geographic location may be different from the geographic locations of the ultimate end customers. Sales by geography for the periods presented were:

	Three Months Ended  September 30,				Nine Months Ended  September 30,
	2013		2012		2013		2012
	(in thousands)
United States	$	22,391	$	18,091	$	69,605	$	51,089
China		20,574		16,757		54,243		48,346
Korea		8,671		3,773		23,311		9,774
Mexico		7,135		2,809		16,700		6,539
Finland		6,051		631		12,117		662
Taiwan		5,822		7,313		18,530		19,635
Japan		2,154		3,741		6,900		8,724
Malaysia		3,877		3,935		10,636		12,099
Other countries		2,449		4,031		10,816		12,243
Total	$	79,124	$	61,081	$	222,858	$	169,111

Cost of Revenue and Gross Margin. We outsource wafer fabrication, assembly and test functions of our products. A significant portion of our cost of revenue consists of payments for the purchase of wafers and for assembly and test services, amortization of acquired intangibles and amortization related to capitalized mask costs. To a lesser extent, cost of revenue includes expenses relating to our internal operations that manage our contractors, stock-based compensation, the cost of shipping and logistics, royalties, inventory valuation expenses for excess and obsolete inventories, warranty costs and changes in product cost due to changes in sort, assembly and test yields. In general, our cost of revenue associated with a particular product declines over time as a result of yield improvements, primarily associated with design and test enhancements.

We use third-party foundries and assembly and test contractors, which are primarily located in Asia, to manufacture, assemble and test our semiconductor products. We purchase processed wafers on a per wafer basis from our fabrication suppliers, which are currently Taiwan Semiconductor Manufacturing Company, with the remaining manufacturing outsourced to Samsung Electronics, Global Foundries, and Fujitsu Microelectronics. We also outsource the sort, assembly, final testing and other processing of our product to third-party contractors, primarily ASE Electronics in Taiwan, Malaysia and Singapore, as well as ISE Labs, Inc., in the United States. We negotiate wafer fabrication on a purchase order basis. There are no long-term agreements with any of these third-party contractors. A significant disruption in the operations of one or more of these third-party contractors would impact the production of our products for a substantial period of time, which could have a material adverse effect on our business, financial condition and results of operations.

Our gross margin has been and will continue to be affected by a variety of factors, including the product mix, average sales prices of our products, the amortization expense associated with the acquired intangible assets, the timing of cost reductions for fabricated wafers and assembly and test service costs, inventory valuation charges, the cost of fabrication masks that are capitalized and amortized, and the timing and changes in sort, assembly and test yields. Overall gross margin is impacted by the mix between higher performance, higher margin products and services and lower performance, lower margin products and services. In addition, we typically experience lower yields and higher associated costs on new products, which improve as production volumes increase.

Gross margin increased from 59.4% in the three months ended September 30, 2012 to 64.0% in the three months ended September 30, 2013, an increase of 4.6% and increased from 54.1% in the nine months ended September 20, 2012 to 61.6% in the nine months ended September 30, 2013, an increase of 7.4%. The increase in the overall gross margin was mainly due to overall increases in revenue and shifts of product sales mix of our semiconductor products as we sold more of our higher performance products, which yield higher gross margins compared to our lower performance products. In addition, during the first quarter of 2012, we wrote-down certain Celestial product inventories of approximately $4.8 million which resulted to a lower gross margin in the nine months ended September 30, 2012. During the second quarter of 2013, we incurred a $3.9 million inventory write-down associated with discontinued consumer products. This inventory write-down partially offset the increases in the gross margin for the nine months ended September 30, 2013 compared to the same period in 2012 as discussed above.

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Research and Development Expenses. Research and development expenses primarily include personnel costs, engineering design development software and hardware tools, allocated facilities expenses and depreciation of equipment used in research and development, and stock-based compensation.

Total research and development expenses for the periods presented were:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2013			2012			change			%			2013			2012			change			%
	(in thousands)												(in thousands)
Research and development expenses	$	33,630		$	26,185		$	7,445			28.4	%	$	98,469		$	79,366		$	19,103			24.1	%
Percent of total net revenue		42.5	%		42.9	%		-0.4	%					44.2	%		46.9	%		-2.7	%

Research and development expenses increased by $7.4 million or 28.4% in the three months ended September 30, 2013 and $19.1 million or 24.1% in the nine months ended September 30, 2013 compared to the same periods in 2012. Research and development expense in the three and nine months ended September 30, 2013 included $4.5 million and $11.6 million, respectively, from a variable interest entity, or VIE. The remaining research and development expense increased by $2.9 million or 11.2% and $7.5 million or 9.4% in the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The increase was mainly due to increase in salaries and employee benefits of $2.3 million and $3.8 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012 mainly due to the increase in research and development headcount. Depreciation and amortization expense also increased by $0.1 million and $2.3 million in the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, as a result of an increase in purchased technology licenses used for research and development projects. The other increase of $0.5 million and $1.4 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012 was due to the increase in stock-based compensation and related taxes, facilities expense, design tools and other miscellaneous research and development, as a result of the increase in research and development activities to support the development of our new products. Research and development headcount was 594 at September 30, 2013 compared to 557 at September 30, 2012.

Sales, General and Administrative Expenses. Sales, general and administrative expenses primarily include personnel costs, accounting and legal fees, information systems, sales commissions, trade shows, marketing programs, depreciation, allocated facilities expenses and stock-based compensation.

Total sales, general and administrative costs for the periods presented were:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2013			2012			change			%			2013			2012			change			%
	(in thousands)												(in thousands)
Sales, general and administrative expenses	$	14,833		$	19,213		$	(4,380	)		-22.8	%	$	46,217		$	50,186		$	(3,969	)		-7.9	%
Percent of total net revenue		18.7	%		31.5	%		-12.7	%					20.7	%		29.7	%		-8.9	%

Sales, general and administrative expenses decreased by $4.4 million or 22.8% in the three months ended September 30, 2013 and $4.0 million or 7.9% in the nine months ended September 30, 2013, compared to the same periods in 2012. Salaries and employee benefits and stock-based compensation and related taxes, combined, decreased by $1.4 million and $6.5 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012, due to the decrease in headcount, reduced number of option and restricted stock unit grants and timing of when severance and other related benefit costs were incurred. For the three and nine months ended September 30, 2012, we recorded a charge of $2.7 million loss on disposition of certain consumer product assets. For the three months ended September 30, 2013, we recorded a credit of $0.3 million associated with the installment payment received related to the disposition of such certain consumer product assets. For the nine months ended September 30, 2013, we recorded credits of $1.5 million, associated with the gain on sale of held for sale assets recognized in the first quarter of 2013 of $0.7 million and installment payments received in the first, second and third quarter of 2013 for the sale of certain consumer product assets of $0.8 million. The decreases in sales and general expenses for the nine months ended September 30, 2013 compared to the same period in 2012 as discussed above were partially offset by lower expense in the nine months ended September 30, 2012 resulted from a credit associated with the proceeds from settlement of an escrow claim of $4.4 million from the acquisition of Celestial Semiconductor in the first quarter of 2012. In addition, during the second quarter of 2013, we recorded a contractual settlement payable to a customer of MontaVista of approximately $1.3 million. Other sales, general and administrative expenses remained flat for the three months ended September 30, 2013 and increased by $1.0 million for the nine months ended September 30, 2013, compared to the same periods in 2012, mainly due to the increase in outside services, facilities expense and marketing related expenses. Sales, general and administrative headcount was 160 at September 30, 2013 compared to 170 at September 30, 2012.

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Other income (expense), net. Other income (expense), net primarily includes interest income on cash and cash equivalents, foreign currency gains and losses, financing expenses and interest expense associated with capital lease and technology license obligations.

Other expense, net for the periods presented were:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2013			2012			change			%			2013			2012			change			%
	(in thousands)												(in thousands)
Interest expense	$	(390	)	$	(11	)	$	(379	)		3445.5	%	$	(1,107	)	$	(65	)	$	(1,042	)		1603.1	%
Other, net		(126	)		(720	)		594			-82.5	%		(805	)		(828	)		23			-2.8	%
Total other expense, net	$	(516	)	$	(731	)	$	215			-29.4	%	$	(1,912	)	$	(893	)	$	(1,019	)		114.1	%

Other expense, net, decreased in the three months ended September 30, 2013 and increased in the nine months ended September 30, 2013, compared to the same periods in 2012, as a result of higher interest expense associated with long-term capital and technology license obligations and higher foreign exchange losses resulting from balance sheet remeasurement. These increases was partially offset by our portion of net loss of the VIE of $0.8 million which was recorded under other, net in the three and nine months ended September 30, 2012.

Provision for (benefit from) Income Taxes. For the three and nine months ended September 30, 2013 and 2012, the provision for (benefit from) income taxes was based on our estimated annual effective tax rate, plus any discrete items, and taking into account valuation allowance, as necessary, in compliance with applicable guidance. We update our estimate of our annual effective tax rate at the end of each quarterly period. Our estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and our interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for (benefit from) income taxes and the effective tax rates for the respective periods presented:

	Three Months Ended September30,												Nine Months Ended September 30,
	2013			2012			change			%			2013			2012			change			%
	(in thousands)												(in thousands)
Income (loss) before income taxes	$	1,629		$	(9,844	)	$	11,473			116.5	%	$	(9,360	)	$	(38,887	)	$	29,527			75.9	%
Provision for (benefit from)   income taxes		714			(1,719	)		2,433			141.5	%		1,817			(5,094	)		6,911			135.7	%
Effective tax rate		43.8	%		17.5	%		26.4	%					-19.4	%		13.1	%		-32.5	%

The provision for income taxes for the three and nine months ended September 30, 2013 was primarily related to earnings and additional establishment of unrecognized tax benefits in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the provision for income taxes recorded for the three and nine months ended September 30, 2013 was primarily attributable to the impact of losses that are not benefited, the difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability. We determined that as of September 30, 2013, the variability in the jurisdictional mix of our customers created uncertainty with respect to estimating taxable income in our Cayman business.  As such, the results of the Cayman business have been excluded from the computation of the annual effective tax rate and the year-to-date tax provision, which resulted in a higher tax expense than if the Cayman business had not been excluded. The benefit from income taxes for the three and nine months ended September 30, 2012 was primarily related to the year-to-date pre-tax losses and the release of uncertain tax position reserves. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the benefit from income taxes recorded for the three and nine months ended September 30, 2012 was primarily attributable to the impact of the differential in foreign tax rates, non-deductible stock-based compensation charges, and recovery of non-taxable escrow related to the Celestial Semiconductor acquisition.

Liquidity and Capital Resources

Following is a summary of our working capital and cash and cash equivalents as of September 30, 2013 and December 31, 2012:

	As of September 30, 2013		As of December 31, 2012
	(in thousands)
Working capital	$	139,084	$	109,682
Cash and cash equivalents		112,960		76,784

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Following is a summary of our cash flows from operating activities, investing activities and financing activities for the periods presented:

	Nine Months Ended  September 30,
	2013			2012
	(in thousands)
Net cash provided by operating activities	$	38,270		$	20,500
Net cash used in investing activities		(4,996	)		(15,453	)
Net cash provided by (used in) financing activities		2,902			(982	)

Cash Flows from Operating Activities

Net cash flows from operating activities were $38.3 million in the nine months ended September 30, 2013 compared to $20.5 million in the nine months ended September 30, 2012, an increase of $17.8 million. Total cash inflow from net loss, net of non-cash items in the nine months ended September 30, 2013 was $40.2 million compared to $15.7 million in the nine months ended September 30, 2012. The increase resulted mainly from higher net revenue which generated higher income from operations. Changes in assets and liabilities resulted in net cash outflow of $1.9 million in the nine months ended September 30, 2013 compared to a cash inflow of $4.8 million in the nine months ended September 30, 2012. The significant changes in assets and liabilities in the nine months ended September 30, 2013 were higher accounts receivable resulted from higher revenue, lower inventories due to the timing of inventory build-up, lower deferred revenue resulted from lower subscription licenses and professional services billings to customers and higher accounts payable due to the timing of payments to the vendors. The significant changes in the assets and liabilities for the nine months ended September 30, 2012 were mainly higher accounts payable due to the timing of payments to the vendors, higher deferred revenue due to the timing of subscription licenses and professional service billings to customers, lower accounts receivable due to timing of collections from customers and higher inventory mainly due to the timing of inventory build-up.

Cash Flows from Investing Activities

Net cash used in investing activities in the nine months ended September 30, 2013 was $5.0 million compared to $15.5 million in the nine months ended September 30, 2012. Net cash used in investing activities in the nine months ended September 30, 2013 resulted from the cash payments made to purchase intangible assets of $3.6 million and property and equipment of $5.5 million, which was partially offset by the cash proceeds received related to the sale of certain assets of MontaVista of $3.4 million and proceeds received from the disposition of certain consumer product assets of $0.8 million. Net cash used in investing activities in the nine months ended September 30, 2012 resulted from cash payments made to purchase property and equipment of $11.3 million and intangible assets of $4.2 million.

Cash Flows from Financing Activities

Net cash provided by financing activities in the nine months ended September 30, 2013 was $2.9 million compared to net cash used in financing activities in the three months ended September 30, 2012 of $1.0 million. Net cash provided by financing activities in the nine months ended September 30, 2013 resulted mainly from the proceeds received from issuance of common stock upon exercise of options of $9.5 million, cash received for convertible notes of the VIE from third-party investors of $6.0 million and tax withholdings for stock option exercises on behalf of employees of $0.7 million, which were partially offset by the principal payments of capital lease and technology license obligations of $13.4 million. Net cash used in financing activities in the nine months ended September 30, 2012 resulted from principal payments of capital lease and technology license obligations of $7.6 million, partially offset by the proceeds received from issuance of common stock upon exercise of options of $6.6 million.

Capital Resources

Cash equivalents consist primarily of an investment in a money market fund. We believe that our $113.0 million of cash and cash equivalents at September 30, 2013, and expected cash flow from operations, if any, will be sufficient to fund our projected operating requirements for at least 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our engineering, sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products and the continuing market acceptance of our products. Although we currently are not a party to any agreement with respect to potential material investments in, or acquisitions of, complementary businesses, services or technologies, other than disclosed in Note 5 of Notes to Condensed Consolidated Financial Statements, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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Indemnities

In the ordinary course of business, we have entered into agreements with customers that include indemnity provisions. Based on historical experience and information known as of September 30, 2013, we believe our exposure related to the above indemnities at September 30, 2013, is not material. We also enter into indemnification agreements with our officers and directors and our certificate of incorporation and bylaws include similar indemnification obligations to our officers and directors. It is not possible to determine the amount of our liability related to these indemnification agreements and obligations to our officers and directors due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations

The following table describes our commitments to settle contractual obligations in cash as of September 30, 2013:

	Payments Due By Period
	Total		Remainder of 2013		1 to 3 Years		3 to 5 Years		More Than 5 Years
	(in thousands)
Operating lease obligations	$	27,267	$	1,034	$	8,800	$	8,474	$	8,959
Capital lease and technology license obligations		31,661		5,436		21,075		5,150		—
Total	$	58,928	$	6,470	$	29,875	$	13,624	$	8,959

As of September 30, 2013, the liability for uncertain tax positions was $1.3 million. The timing of any payments which could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing of payment cannot be estimated.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments over two years. The equipment is expected to be delivered in the fourth quarter of 2013. As such, the related asset and liability has not been reflected in the balance sheets as of September 30, 2013.  

During the second quarter of 2013, a customer of MontaVista sent a claim letter to us requesting an amount they believe is due related to an automotive business services agreement between the customer and MontaVista. We have disputed this claim, but engaged in discussions with the customer to resolve the matter. We recorded approximately $1.3 million accrual to cover a potential contractual settlement payment to the customer within sales, general and administrative expenses in the second quarter of 2013. In October 2013, we entered into a settlement and general release claim agreement with the customer of MontaVista and paid the $1.3 million.

In September 2013, we signed a purchase agreement of $5.5 million with a third party vendor to purchase any combination of core software licenses as specified in the agreement under a flexible spending program with a minimum annual spending of $2.75 million each for two years.

In November 2013, we signed a new lease agreement (“2345 Lease”) with a landlord to lease approximately 55,440 sq. ft. in the first 12 months and 110,881 sq. ft. thereafter in a building located adjacent to our principal office in San Jose, California. The lease term is 8.0 years commencing on the earlier of October 1, 2014 or the date we begin to conduct our business within any portion of the leased facility and ending on ninety six (96) months thereafter. The base monthly rate to lease the facility is $0.12 million for the first 12 months and $0.25million for months thirteen through twenty-four and increase incrementally by approximately 3% annually through end of the lease term. Further, we entered into an amendment to the lease agreement related to the building in San Jose, California where our principal offices are located to extend the lease term for the period from March 1, 2019 to expiration date of the 2345 Lease.

In addition, we have other obligations for goods and services entered into in the normal course of business. These obligations, however, are either not enforceable or legally binding or are subject to change based on our business decisions.

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Critical Accounting Policies and Estimates

The preparation of our financial statements and accompanying disclosures in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The SEC has defined a company’s critical accounting policies as policies that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our most critical accounting policies and estimates to be as follows: (1) revenue recognition; (2) stock-based compensation; (3) inventory valuation; (4) accounting for income taxes; (5) mask costs; (6) business combinations and (7) goodwill and purchased intangible assets. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information not presently available. Actual results may differ significantly from these estimates if the assumptions, judgments and conditions upon which they are based turn out to be inaccurate. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2012 filed on February 28, 2013.

Recent Accounting Pronouncements

Please refer to the recent accounting pronouncements listed in Note 1 of Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

During the nine months ended September 30, 2013, there were no material changes to our quantitative and qualitative disclosures about market risk related to our investment activities as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on February 28, 2013.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of September 30, 2013. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

This information is included in Note 11 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.

Item 1A. Risk Factors

The following risks and uncertainties may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under “Item 1A. Risk Factors” included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2013.

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Risks Related to Our Business and Industry

*We have sustained losses in our last five quarters, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.

We incurred a net loss for the quarter ended December 31, 2011, and for each of the quarters since then through the quarter ended June 30, 2013. As of September 30, 2013, our accumulated deficit was $157.2 million. We expect to make significant expenditures related to the development of our products and expansion of our business, including research and development and sales and administrative expenses. As a public company, we also incur significant legal, accounting and other expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that may require additional expenditures. As a result of these expenditures, we may need to generate substantially increased revenue to achieve profitability. Our revenue growth trend in 2012 and for the first three quarters of 2013 may not be sustainable. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur losses in the future.

We expect our operating results to fluctuate, which could adversely affect the price of our common stock.

We expect our revenues and expense levels to vary in the future, making it difficult to predict our future operating results. In particular, we experience variability in demand for our products as our customers manage their product introduction dates and their inventories. Given the current global economic uncertainty, the demand for our products may be more varied and difficult to ascertain in a timely and efficient manner.

Factors that could cause our results to fluctuate include, among other things:

· fluctuations in demand, sales cycles, product mix and prices for our products;

· the variability in lead time between the time when a customer begins to design in one of our products and the time when the customer’s end system goes into production and they begin purchasing our products;

· the forecasting, scheduling, rescheduling or cancellation of orders by our customers;

· the timing of our new product introductions;

· our dependence on a few significant customers, which may vary the size of their orders;

· our ability to retain, recruit and hire key executives, technical personnel and other employees in the positions and numbers, and with the experience and capabilities that we need;

· our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

· changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and product quality and reliability;

· the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;

· the timing of announcements by our competitors or us;

· future accounting pronouncements and changes in accounting policies;

· volatility in our stock price, which may lead to higher stock compensation expenses;

· general economic and political conditions in the countries in which we operate or our products are sold or used;

· costs associated with litigation, especially related to intellectual property; and

· productivity and growth of our sales and marketing force.

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations, and therefore our stock price.

We may have difficulty accurately predicting our future revenues for the purpose of appropriately budgeting and adjusting our expenses, which could adversely affect our operating results.

The dynamic and rapidly evolving market in which we sell our products, our dependence on a limited number of customers, as well as numerous other factors beyond our control, including general market conditions, impede our ability to forecast quarterly and annual revenues accurately. As a result, we could experience budgeting and cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which could make it difficult for us to attain and maintain profitability and could increase the volatility of the market price of our common stock.

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We face intense competition and expect competition to increase in the future, which could reduce our revenues, gross margin and/or customer base.

The market for our products is highly competitive and we expect competition to intensify in the future. This competition could make it more difficult for us to sell our products, and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share or expected market share, any of which would likely seriously harm our business, operating results and financial condition. For instance, semiconductor products have a history of declining prices as the cost of production is reduced. However, if market prices decrease faster than product costs, gross and operating margins can be adversely affected. Currently, we face competition from a number of established companies, including Broadcom Corporation, Freescale Semiconductor, Inc., Intel Corporation and Marvell Technology Group Ltd. In addition, in the video capture, process and display market segments we consider our competition to be companies that provide video encode and decode solutions, including Broadcom and Realtek Semiconductor Corp.

A few of our current competitors operate their own fabrication facilities and have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features.

We expect increased competition from other established and emerging companies both domestically and internationally. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. In the future, further development by our competitors, and development by our potential competitors, could cause our products to become obsolete. Our ability to compete depends on a number of factors, including:

· our success in identifying new and emerging markets, applications and technologies and developing products for these markets;

· our products’ performance and cost effectiveness relative to that of our competitors’ products;

· our ability to deliver products in large volume on a timely basis at a competitive price;

· our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

· our ability to recruit design and application engineers and sales and marketing personnel; and

· our ability to protect our intellectual property.

In addition, we cannot assure you that existing customers or potential customers will not develop their own products, purchase competitive products or acquire companies that use alternative methods to enable networking, communication or security applications to facilitate network-aware processing in their systems. Any of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial condition.

Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse changes in our product order mix and demand for our customers’ products. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we project customer requirements to be less than the demand that materializes, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. In the past, we have had customers dramatically increase their requested production quantities with little or no advance notice. Either underestimating or overestimating demand could lead to insufficient, excess or obsolete inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.

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As our business has grown to both customers located in the United States as well as customers located outside of the United States, we have become increasingly subject to the risks arising from adverse changes in both the domestic and global economic and political conditions. If economic growth in the United States and other countries’ economies continues to slow, the demand for our customer’s products could decline, which would then decrease demand for our products. Furthermore, if economic conditions in the countries into which our customers sell their products continue to deteriorate, some of our customers may decide to postpone or delay some of their development programs, which would then delay their need to purchase our products. This could result in a reduction in sales of our products or in a reduction in the growth of our product sales. Any of these events would likely harm investors’ view of our business, financial condition, and results of operations.

*We receive a substantial portion of our revenues from a limited number of customers, and the loss of, or a significant reduction in, orders from one or a few of our major customers would adversely affect our operations and financial condition.

We receive a substantial portion of our revenues from a limited number of customers. We received an aggregate of approximately 50% and 47% of our net revenues from our top five customers for the nine months ended September 30, 2013 and 2012, respectively. We received approximately 18% and 27% of our net revenue from Cisco for the nine months ended September 30, 2013 and 2012, respectively. We anticipate that we will continue to be dependent on a limited number of customers for a significant portion of our revenues in the immediate future and that the portion of our revenues attributable to some of these customers may increase in the future. However, we may not be able to maintain or increase sales to some of our top customers for a variety of reasons, including the following:

· our agreements with our customers do not require them to purchase a minimum quantity of our products;

· some of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty; and

· many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products.

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

In addition, our relationships with some customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer some customers favorable prices on our products. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our business, financial condition, and results of operations.

The average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our revenues and gross profits.

Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis with higher selling prices or gross profits, or increasing our sales volumes. Additionally, because we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities, and our costs may even increase, which could also reduce our margins.

We may be unsuccessful in developing and selling new products or in penetrating new markets.

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We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depend on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to our competitors. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as a variety of specific implementation factors, including:

· timely and efficient completion of process design and transfer to manufacturing, assembly and test processes;

· the quality, performance and reliability of the product; and

· effective marketing, sales and service.

If we fail to introduce new products that meet the demand of our customers or penetrate new markets in which we expend significant resources, our revenues will likely decrease over time and our financial condition could suffer. Additionally, if we concentrate resources on a new market that does not prove profitable or sustainable, our financial condition could decline.

Fluctuations in the mix of products sold may adversely affect our financial results.

Because of the wide price differences among our processors, the mix and types of performance capabilities of processors sold affect the average selling price of our products and have a substantial impact on our revenue. Generally, sales of higher performance products have higher gross margins than sales of lower performance products. We currently offer both higher and lower performance products in our NITROX, OCTEON, ECONA, NEURON, Celestial and PureVu product families. The product mix was relatively constant throughout 2010 and 2011; however, in 2012, the product mix shifted slightly towards the sale of our lower performance products. If the sales mix shifts towards lower performance, lower margin products, our overall gross margins will be negatively affected. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product, and as a result can negatively impact our financial results.

The semiconductor and communications industries have historically experienced significant fluctuations with prolonged downturns, which could impact our operating results, financial condition and cash flows

The semiconductor industry has historically exhibited cyclical behavior, which at various times has included significant downturns in customer demand, including in late 2008 through 2009. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. Furthermore, the semiconductor industry has periodically experienced periods of increased demand and production constraints. If this happens in the future, we may not be able to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient wafer, assembly and test resources from our subcontract manufacturers. Any factor adversely affecting the semiconductor industry in general, or the particular segments of the industry that our products target, may adversely affect our ability to generate revenue and could negatively impact our operating results.

The communications industry has, in the past, experienced pronounced downturns, and these cycles may continue in the future. To respond to a downturn, many networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their inventories and take a cautious approach to acquiring our products, which would have a significant negative impact on our business. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition. In the future, any of these trends may also cause our operating results to fluctuate significantly from year to year, which may increase the volatility of the price of our stock.

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Our products must meet exact specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.

Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. If defects and failures occur in our products during or after the design phase, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers.

We rely on our customers to design our products into their systems, and the nature of the design process requires us to incur expenses prior to customer commitments to use our products or recognizing revenues associated with those expenses which may adversely affect our financial results.

One of our primary focuses is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ products. We devote significant time and resources in working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs and these bid selection processes can be lengthy. If a customer’s system designer initially chooses a competitor’s product, it becomes significantly more difficult for us to sell our products for use in that system because changing suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure to win a competitive bid can result in our foregoing revenues from a given customer’s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. Our ability to compete in the future will depend, in large part, on our ability to design products to ensure compliance with our customers’ and potential customers’ specifications. We expect to invest significant time and resources and to incur significant expenses to design our products to ensure compliance with relevant specifications.

We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their applications. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. Even if our customers’ system designers select our products, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred.

The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:

· our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their designs;

· it can take from nine months to three years from the time our products are selected to commence commercial shipments; and

· our customers may experience changed market conditions or product development issues.

The resources devoted to product development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory if we have produced product in anticipation of expected demand. We may spend resources on the development of products that our customers may not adopt. If we incur significant expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.

Additionally, even if system designers use our products in their systems, we cannot assure you that these systems will be commercially successful or that we will receive significant revenue from the sales of processors for those systems. As a result, we may be unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.

If we do not manage the risks associated with our large professional service contracts properly, our revenue and customer base could be adversely affected.

The pricing and other terms of some of our larger professional services agreements require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, could make these agreements less profitable or unprofitable, which would have an adverse effect on the profit margin of our software

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and services business and adversely affect our operating results. In addition, changes in costs or a delay in connection with the performance of our large professional service agreements may harm our relationships with these customers.

Because a significant portion of our software and licenses revenues is derived from subscription-based software licenses, we are dependent upon the ability of our customers to develop and penetrate new markets successfully, and to develop new products for existing markets.

Our subscription-based license revenues depend both upon our ability to successfully negotiate license agreements with our customers and, in turn, upon our customers’ successful commercialization of their underlying products. As our open source business grows, we may not be able to rely on receiving per unit fees from our customers. For our open source business, we may instead need to rely on other fees to compensate for the subscription-based license fees that we have traditionally received for our proprietary products. Also, we derive significant revenues from customers that develop products in highly competitive and technologically complex markets such as the internet infrastructure, server and storage, digital consumer, aerospace and defense, industrial control, medical equipment, gaming, and office automation. If these customers sell fewer products or otherwise face significant economic difficulties, particularly in the current global economic recession, our software and license revenues may decline.

In the event one of our distributor arrangements terminates, it could lead to a loss of revenues and possible product returns.

A portion of our sales is made through third-party distribution agreements. Termination of a distributor relationship, either by us or by the distributor, could result in a temporary loss of revenues until a replacement distributor can be established to service the affected end-user customers, or a permanent loss of revenues if no replacement can be established. We may not be successful in finding suitable alternative distributors on satisfactory terms or at all and this could adversely affect our ability to sell in some locations or to some end-user customers. Additionally, if we terminate our relationship with a distributor, we may be obligated to repurchase unsold products. We record a reserve for estimated returns and price credits. If actual returns and credits exceed our estimates, our operating results could be harmed.

We rely on our ecosystem partners to enhance our product offerings and our inability to continue to develop or maintain these relationships in the future would harm our ability to remain competitive.

We have developed relationships with third parties, which we refer to as ecosystem partners, which provide operating systems, tool support, reference designs and other services designed for specific uses with our SoCs. We believe that these relationships enhance our customers’ ability to get their products to market quickly. If we are unable to continue to develop or maintain these relationships, we may not be able to enhance our customers’ ability to commercialize their products in a timely fashion and our ability to remain competitive would be harmed, which would negatively impact our ability to generate revenue and our operating results.

The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical, management or sales and marketing talent could impair our ability to grow our business.

We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled managerial, engineering, sales and marketing personnel. The loss of any key employees or the inability to attract, retain or motivate qualified personnel, including engineers and sales and marketing personnel could delay the development and introduction of, and harm our ability to sell our products which would materially and adversely affect our business, financial condition and results of operations. For instance, if any of these individuals were to leave our company unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for and while any successor is integrated into our business and operations.

There is currently a shortage of qualified technical personnel with significant experience in the design, development, manufacturing, marketing and sales of integrated circuits. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacture of multi-core networking processors, and competition for these engineers is intense. Our key technical personnel represent a significant asset and serve as the source of our technological and product innovations. We may not be successful in attracting, retaining and motivating sufficient numbers of technical personnel to support our anticipated growth.

To date, we have relied primarily on our direct marketing and sales force to drive new customer design wins and to sell our products. Because we are looking to expand our customer base and grow our sales to existing customers, we will need to hire additional qualified sales personnel in the near term and beyond if we are to achieve revenue growth. The competition for qualified marketing and sales personnel in our industry, and particularly in Silicon Valley, is very intense. If we are unable to hire, train, deploy and manage qualified sales personnel in a timely manner, our ability to grow our business will be impaired. In addition, if we are unable to retain our existing sales personnel, our ability to maintain or grow our current level of revenues will be adversely affected. Further, if we are unable to integrate and retain personnel acquired through our various acquisitions, we may not be able to fully capitalize on such acquisitions.

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We rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If the value of the stock awards does not appreciate as measured by the performance of the price of our common stock or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our business, financial condition and results of operations.

Some of our operations and a significant portion of our customers and contract manufacturers are located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.

We have international sales offices and research and development facilities and we conduct, and expect to continue to conduct, a significant amount of our business with companies located outside the United States, particularly in Asia and Europe. Even customers based in the United States often use contract manufacturers based in Asia to manufacture their systems, and it is the contract manufacturers that purchase products directly from us. As a result of our international focus, we face numerous challenges, including:

· increased complexity and costs of managing international operations;

· longer and more difficult collection of receivables;

· difficulties in enforcing contracts generally;

· geopolitical and economic instability and military conflicts;

· limited protection of our intellectual property and other assets;

· compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

· trade and foreign exchange restrictions and higher tariffs;

· travel restrictions;

· timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;

· foreign currency exchange fluctuations relating to our international operating activities;

· transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities or telecommunications providers;

· difficulties in staffing international operations;

· heightened risk of terrorism;

· local business and cultural factors that differ from our normal standards and practices;

· differing employment practices and labor issues;

· regional health issues and natural disasters; and

· work stoppages.

We are subject to governmental export and import controls that may adversely affect our business.

We and our customers are subject to various import and export laws and regulations. Government export regulations apply to the encryption or other features contained in some of our products. Although our processes and procedures are designed to maintain compliance, we cannot assure you that we have been or will be at all times in complete compliance with these laws and regulations. If we fail to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at foreign foundries or ship these products to some customers, or we may incur penalties or fines and civil and criminal liabilities or other sanctions. In addition, changes in import or export laws and regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products or cause decreased use of our products by customers with international operations, each of which would adversely affect our business and results of operations.

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New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission has adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements will require companies to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.

We outsource our wafer fabrication, assembly, testing, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, assembly, testing, warehousing and shipping. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. We do not have any long-term supply agreements with our manufacturing suppliers. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.

The fabrication of integrated circuits is a complex and technically demanding process. Our foundries could, from time to time, experience manufacturing defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. In addition, our manufacturing processes with our foundries are unique and not within the customary manufacturing processes of these foundries, which may lead to manufacturing defects, reduced manufacturing yields and/or increases in manufacturing costs. Poor yields from our foundries, or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, harm our financial results and result in financial or other damages to our customers. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

In addition, a significant portion of our sales are to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, financial condition and results of operations.

Our products are manufactured at a limited number of locations and if we experience manufacturing problems at a particular location, we could experience a delay in obtaining our manufactured products, which could harm our business and reputation.

Although we use several independent foundries to manufacture substantially all of our semiconductor products, most of our components are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, we could experience significant delays in securing sufficient supplies of those components from other sources. Converting or transferring manufacturing from a primary location or supplier to a backup fabrication facility could be expensive and could take one to two quarters. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. We cannot assure you that any of our existing or new foundries will be able to produce integrated circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices. These and other related factors could impair our ability to meet our customers’ needs and have a material and adverse effect on our operating results.

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If we experience delays or loss of manufacturing availability when demand is high, we would experience a delay in obtaining our manufactured products, which could harm our business and reputation.

We have no long-term supply contracts with the foundries with which we work. Availability of foundry capacity has in the recent past been reduced due to strong demand. The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. Foundry capacity may not be available when we need it or at reasonable prices which could cause us to be unable to meet customer needs, delay shipments, because a production delay or stoppage for our customers, result in a decline in our sales and harm our financial results. Further, some of our competitors may be better financed than we are, may have long-term agreements with our main foundries and may induce our foundries to reallocate capacity to those customers. This reallocation could impair our ability to secure the supply of components that we need.

To secure sufficient foundry capacity when demand is high and mitigate the risks described in the foregoing paragraph, we may enter into various arrangements with suppliers that could be costly and harm our operating results, such as nonrefundable deposits with or loans to foundries in exchange for capacity commitments and contracts that commit us to purchase specified quantities of integrated circuits over extended periods. We may not be able to make any such arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may be expensive and could harm our financial results.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business experiences ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, may not be able to be passed on to our customers and we may experience reduced gross margins and operating profit. We do not have any long-term supply agreements with our manufacturing suppliers and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

*Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and nondisclosure agreements and other methods, to protect our proprietary technologies and know-how. The failure of our patents and other intellectual property protections to adequately protect our technology might make it easier for our competitors to offer similar products or technologies, which would harm our business. We have been issued 53 patents in the United States and 27 patents in foreign countries and have an additional 109 patent applications pending in the United States and 42 patent applications pending in foreign countries as of September 30, 2013. Even if the pending patent applications are granted, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be opposed, contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

We enter into confidentiality agreements with our employees, consultants and strategic partners. We also control access to and distribution of our technologies, documentation and other proprietary information. However, internal or external parties may copy, disclose, obtain or use our proprietary information without our authorization. Further, current or former employees or third parties may attempt to misappropriate our proprietary information.

Monitoring unauthorized use of our intellectual property and the intellectual property of our customers and strategic partners is difficult and costly. It is possible that unauthorized use of our intellectual property may have occurred or may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property.

Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, financial condition, and results of operations. We may in the future need to initiate infringement claims or litigation to defend or enforce our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive, time consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

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A breach of our security systems may have a material adverse effect on our business.

Our security systems are designed to maintain the physical security of our facilities and protect our customers’, suppliers’ and employees’ confidential information. However, we are also dependent on a number of third-party “cloud-based” service providers of critical corporate infrastructure services relating to, among other things, human resources, electronic communication services and some finance functions, and we are, of necessity, dependent on the security systems of these providers. Accidental or willful security breaches or other unauthorized access by third parties to our facilities, our information systems or the systems of our cloud-based service providers or the existence of computer viruses in our or their data or software could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Any theft or misuse of this information could result in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of this information, any of which could have a material adverse effect on our business, profitability and financial condition. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. From time to time we receive communications that allege we have infringed specified patents, trade secrets or other intellectual property rights owned by others. Any of these allegations, regardless of merit, could cause us to incur significant costs in responding to, defending and resolving these allegations. Any lawsuits resulting from these allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

· stop selling products or using technology that contain the allegedly infringing intellectual property;

· lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

· incur significant legal expenses;

· pay substantial damages to a third-party if we are found to be infringing;

· redesign those products that contain the allegedly infringing intellectual property; or

· attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

Any significant impairment of our intellectual property rights from any litigation we face could harm our business and our ability to compete.

Our customers have in the past and may in the future also become the target of allegations of infringement or litigation relating to the patent and other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our licenses or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages relating to claims of intellectual property infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, litigation could disrupt the businesses of our customers, which in turn could hurt our relationships with our customers and cause the sale of our products to decrease. We cannot assure you that claims for indemnification will not be made or that if made, the claims would not have a material adverse effect on our business, operating results or financial conditions.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our independent registered public accounting firm to evaluate and assess the effectiveness of our internal control over financial reporting. These Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. In the future, we may discover areas of our internal controls that need improvement. If our independent registered public accounting firm or we discover a material weakness, the disclosure of that fact, even if quickly remediated, could reduce the market’s confidence in our financial statements and harm our stock price. We may not be able to effectively and timely implement necessary control changes and

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employee training to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. Our rapid growth in recent years, including through numerous acquisitions and our possible future expansion through acquisitions, present challenges to maintain the internal control and disclosure control standards applicable to public companies. If we fail to maintain effective internal controls, we could be subject to regulatory scrutiny and sanctions and investors could lose confidence in the accuracy and completeness of our financial reports.

Our acquisition, disposition and investment strategies may result in unanticipated accounting charges or otherwise adversely affect our business, financial condition and results of operations.

Since May 2008, we have acquired two companies and acquired assets of, and assumed liabilities of, five other companies. During 2012, we made advances to a third-party company, which was considered a variable interest entity, for convertible notes receivable. We expect that we will in the future continue to acquire companies or assets of companies or invest in third-party companies that we believe to be complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In connection with any such future acquisitions or investments, we may need to use a significant portion of our available cash, issue additional equity securities that would dilute current stockholders’ percentage ownership and incur substantial debt or contingent liabilities. These actions could adversely impact our operating results and the market price of our common stock. In addition, acquisitions of companies exposes us to risks, including:

· difficulties may occur in assimilating and integrating the operations, personnel, technologies, and products of acquired companies or businesses;

· key personnel of an acquired company may decide not to work for us;

· to the extent we acquire a company with existing products; those products may have lower gross margins than our customary products, which could adversely affect our gross margin and operating results;

· if an acquired company also has inventory that we assume, we will be required to write up the carrying value of that inventory to fair value, and when that inventory is sold, the gross margins for those products will be reduced and our gross margins for that period would be negatively affected; and

· the purchase price of any acquired businesses may exceed the current fair values of the net tangible assets of the acquired businesses, in which case we would be required to record material amounts of goodwill, and acquired in-process research and development charges and other intangible assets, which could result in significant impairment and acquired in-process research and development charges and amortization expense in future periods, which charges, in addition to the results of operations of the acquired businesses and potential restructuring costs associated with an acquisition, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any acquisitions might have on our operating or financial results.

We rely on third-party technologies for the development of our products and our inability to use these technologies in the future would harm our ability to remain competitive.

We rely on third parties for technologies that are integrated into our products, such as wafer fabrication and assembly and test technologies used by our contract manufacturers, as well as licensed MIPS and ARM architecture technologies. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed, which could harm our business, financial condition and results of operations. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

Our open source business could be seriously harmed by the outcome of lawsuits challenging the use and distribution of Linux-based software products.

We rely on Linux system software as the basis of our software products. Several lawsuits have been filed challenging the right to use and/or distribute Linux system software and software applications based on Linux. Although we are not a party to or directly involved in any of the lawsuits relating to Linux, we expect that further lawsuits could be filed against Linux in the future which would challenge the use and distribution of our Linux-based software products. It is impossible to estimate or anticipate all of the financial or other impacts the results of these litigation matters could have on our business. Success by a plaintiff in one or more of these lawsuits could have a material adverse effect on our open source business.

Legal uncertainty surrounding the use and distribution of open source software may cause the market for Linux-based products to disappear, fail to further develop or fail to develop at a rate sufficient to sustain our business.

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The majority of our open source software products are licensed from third parties under the General Public License, or GPL, and similar open source licenses. There remains some significant confusion among our customers about the scope of their obligations and rights with respect to using and distributing Linux-based products. One element of this confusion is whether the GPL and other open source licenses require customers to (i) make all of the source code for their products available to the public, and/or (ii) license all of the code underlying such products under an open source license. There is little or no legal precedent for interpreting the terms of the GPL and similar open source licenses, including the determination of which types of programs or products would be considered derived works and thus potentially subject to the terms of such open source licenses. If this confusion remains, increases or is prolonged by litigation, the market for Linux-based products may disappear, fail to further develop or fail to develop at a rate sufficient to sustain our open source business.

Our open source business depends on Linux developers to continue to improve Linux and Linux-based applications that are incorporated into our open source products.

Our ability to release major upgrades of MontaVista Linux is largely dependent upon the release of new versions of the Linux kernel. The Linux kernel is the heart of the Linux system software. Linus Torvalds and a small group of engineers are primarily responsible for the development, evolution and maintenance of the Linux kernel. In addition, other individuals and small groups of developers are largely responsible for Linux programs tailored to specific tasks or computer architectures. If Mr. Torvalds or other key developers fail to further develop the Linux kernel or other programs on which we rely, we will need to either develop them ourselves or rely on another party for development. This development effort could be costly and time consuming, and could delay or entirely prevent our open source product release and upgrade schedule.

We may be unsuccessful in marketing our open source products because we encounter widespread negative perceptions about Linux and open source software in general.

Some people still incorrectly believe that anyone who writes a software program that runs on Linux will necessarily need to publicly disclose the source code for that software. If a potential customer believes their source code will need to be made public if they use our open source product, they may be less likely to purchase our open source product. We devote substantial time and attention helping potential customers understands the legal implications of using our open source products, including that fact that in most instances, applications developed to run on Linux may be distributed under a proprietary license. In many cases, we are required to address these issues at different levels across an organization (such as at the engineering, managerial and executive levels), which can be very time consuming. We are sometimes unsuccessful at convincing a potential customer that using Linux-based system software will not have negative consequences for that customer. Furthermore, many potential customers believe that they should not be required to pay for our open source products, since our open-source products are based on open source (also sometimes called “free”) software. They believe that open source products are all publicly available at no charge. There is also the misconception that distributors of Linux software cannot offer warranties or indemnifications with respect to Linux software. Each of these customers’ fears or misperceptions could cause us to lose potential orders or cause our customers to delay purchase decisions, which could significantly lengthen our sales cycle. These misperceptions could cause the market for Linux-based products to disappear, fail to further develop, or fail to develop at a rate sufficient to sustain our open source business.

Our open source software may contain errors or defects that could delay introduction of new products, result in costly remedial expenditures or cause disputes with customers.

Most of the open source software that we sell and distribute is developed by third parties with whom we have no business relationship, including thousands of individual software programmers. To successfully release our open source products, we must assemble and test software developed by thousands of disparate sources. Despite our efforts, errors have been and may continue to be found in our open source products. If errors are discovered, we may not be able to successfully correct them in a timely manner or at all. Errors and failures in our open source products could result in a loss of, or delay in, market acceptance of our open-source products and could damage our reputation and our ability to convince commercial users of the benefits of Linux-based systems software and other open source software products. In addition, we may need to make significant expenditures of capital resources to reduce errors and failures.

We face intense competition related to our open source products, and expect competition to increase in the future, which could reduce our open source-related revenue and customer base.

The market for Linux-based systems software is highly competitive, and we expect competition to intensify in the future. We consider the primary competitors for our MontaVista software products to be Wind River Systems, Inc., a subsidiary of Intel Corporation and, to a lesser extent, Canonical Programming, Inc. and Mentor Graphics Corporation. In addition, potential customers for our open source products may believe that they can build their own open source product cheaper or more efficiently than purchasing our products.

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In addition to competitors in the business of distributing a commercial Linux-based operating system, we face competition from some hardware companies who offer Linux-based operating systems and related software components at little or no charge. We also face competition from Linux-based software distributions provided by new and emerging consortiums and software stacks such as Meego, Linaro, Moblin and Android. And because, apart from such hardware vendors and consortiums, there is a large Linux code base generally available at no charge, certain customers or potential customers have made, and will continue to make, efforts to develop their own Linux-based operating system without purchasing or otherwise obtaining it from a third-party vendor. To the extent that the quality and availability of non-commercial Linux-based operating system software continues to improve, it could have a material adverse effect on our ability to sell open source software.

Our third-party contractors are concentrated primarily in Asia, an area subject to earthquake and other risks. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our products.

Substantially all of our products are manufactured by third-party contractors located in Taiwan and to a lesser extent manufactured by third-party contractors located in Japan, Malaysia and Korea. The risk of an earthquake in any of those countries or elsewhere in Asia is significant due to the proximity of major earthquake fault lines to the facilities of our foundries and assembly and test subcontractors. For example, several major earthquakes have occurred in Taiwan and Japan since our incorporation in 2000, the most recent being the major earthquake and tsunami that occurred in March 2011 in Japan. Although our third-party contractors did not suffer any significant damage as a result of these most recent earthquakes, the occurrence of additional earthquakes, other natural disasters or other events causing closures could result in the disruption of our foundry or assembly and test capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our products until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third-party vendor. We may not be able to obtain alternate capacity on favorable terms, if at all.

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

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify our designs to work with the manufacturing processes of our foundries. We periodically evaluate the benefits, on a product-by-product basis, of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and expenses as we continue to transition our products to new processes. We are dependent on our relationships with our foundry contractors to transition to new processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry contractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third-party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis.

We may need to raise additional capital, which might not be available or which, if available, may be on terms that are not favorable to use.

We believe our existing cash and cash equivalent balances and cash expected to be generated from our operations will be sufficient to meet our working capital, capital expenditures and other needs for at least the next 12 months. In the future, we may seek to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we issue equity securities to raise additional funds, the ownership percentage of our stockholders would be reduced, and the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we borrow money, we may incur significant interest charges, which could harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, operating results and financial condition.

We may incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. During the year ended December 31, 2012, we recorded goodwill and intangible asset impairment charges of $27.7 million and $5.6 million, respectively.

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Significant negative industry or economic trends, including a significant decline in the market price of our common stock, reduced estimates of future cash flows for our reporting units or disruptions to our business could lead to an impairment charge of our long-lived assets, including goodwill and other intangible assets.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. If our actual results, or the plans and estimates used in future impairment analyses are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from results. Additionally, if our analysis results in impairment to our goodwill, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our business, financial condition and results of operations.

The complexity of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could materially affect our financial results for a given period.

Although we use standardized agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-element license and services transactions. As we increase our transactions to more complex multi-element transactions, negotiation of mutually acceptable terms and conditions may require us to defer recognition of revenue on such licenses. We believe that we are in compliance with the guidance as provided under multiple element arrangements; however, bigger and more complex, multi-element transactions may require additional accounting analysis to account for them accurately. Errors in such analysis in any period could lead to unanticipated changes in our revenue accounting practices and may affect the timing of revenue recognition, which could adversely affect our financial results. If we later discover that we have interpreted and applied revenue recognition rules differently than prescribed by generally accepted accounting principles in the U.S., we could be required to devote significant management resources, and incur the expense associated with an audit, restatement or other examination of our financial statements.

Our future effective tax rates could be affected by the allocation of our income among different geographic regions, which could affect our future operating results, financial condition and cash flows.

As a global company, we are subject to taxation in the United States and various other countries and states. Significant judgment is required to determine and estimate worldwide tax liabilities. We may further expand our international operations and staff to better support our international markets. As a result, we anticipate that our consolidated pre-tax income will be subject to tax at relatively lower tax rates when compared to the United States federal statutory tax rate. Further, because we have established valuation allowance against our deferred tax assets in the United States, combined with lower foreign tax rates, our effective income tax rate is expected to be lower than the United States federal statutory rate. Our future effective income tax rates could be adversely affected if tax authorities were to successfully challenge our international tax structure or if the relative mix of United States and international income changes for any reason, or United States or foreign tax laws were to change. Accordingly, there can be no assurance that our income tax rate will continue to be less than the United States federal statutory rate.

Any significant change in our future effective tax rates could adversely impact our consolidated financial position, results of operations and cash flows. Our future effective tax rates may be adversely affected by a number of factors including:

· changes in tax laws in the countries in which we operate or the interpretation of such laws;

· increase in expenses not deductible for tax purposes;

· changes in share-based compensation expense;

· change in the mix of income among different taxing jurisdictions;

· audit examinations with adverse outcomes;

· changes in generally accepted accounting principles; and

· our ability to use tax attributes such as research and development tax credits and net operating losses.

Although we reserve for uncertain tax positions, including related penalties and interest, the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to record additional income tax expense or establish an additional valuation allowance, which could materially impact our financial position and results of operations. (See Note 9 of the Notes to Consolidated Financial Statements).

Changes in valuation allowance of deferred tax assets may affect our future operating results

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We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more-likely-than-not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax planning strategies. On a periodic basis we evaluate our deferred tax asset balance for realizability. To the extent we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized, we will increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

We assessed that it was more-likely-than-not that we will not realize our federal and state deferred tax assets based on the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets. Accordingly, we recorded a valuation allowance on our federal and state deferred tax assets during the fourth quarter of 2012.

Risks Related to our Common Stock

The market price of our common stock may be volatile, which could cause the value of your investment to decline.

The trading prices of the securities of technology companies have been highly volatile. Further, our common stock has a limited trading history. Since our initial public offering in May 2007 through September 2013, our stock price has fluctuated from a low of $7.61 to a high of $47.60. We cannot predict the extent to which the trading market will continue to develop or how liquid the market may become. The trading price of our common stock is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

· quarterly variations in our results of operations or those of our competitors;

· general economic conditions and slow or negative growth of related markets;

· announcements by us or our competitors of design wins, acquisitions, new products, significant contracts, commercial relationships or capital commitments;

· our ability to develop and market new and enhanced products on a timely basis;

· commencement of, or our involvement in, litigation;

· disruption to our operations;

· the emergence of new sales channels in which we are unable to compete effectively;

· any major change in our board of directors or management;

· changes in financial estimates including our ability to meet our future revenue and operating profit or loss projections;

· changes in governmental regulations; and

· changes in earnings estimates or recommendations by securities analysts.

Furthermore, the stock market in general, and the market for semiconductor and other technology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance. These trading price fluctuations may also make it more difficult for us to use our common stock as a means to make acquisitions or to use options to purchase our common stock to attract and retain employees. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Delaware law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

· the division of our board of directors into three classes;

· the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or due to the resignation or departure of an existing board member;

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· the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

· the requirement for the advance notice of nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

· the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

· the ability of the board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of our common stock;

· the elimination of the rights of stockholders to call a special meeting of stockholders and to take action by written consent in lieu of a meeting;

· the required approval of at least 66 2/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the inability of stockholders to take action by written consent in lieu of a meeting; and

· the required approval of at least a majority of the shares entitled to vote at an election of directors to remove directors without cause.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts, could reduce the price that investors are willing to pay for shares of our common stock in the future and could potentially result in the market price being lower than they would without these provisions.

Item 5. Other Information

Lease Agreement

On November 1, 2013, we entered into a lease (the “2345 Lease”) with SI 37, LLC (“Landlord”), whereby we agreed to lease a total of approximately 110,881 square feet (the “Premises”) located at 2345 N. First Street, San Jose, California, which is adjacent to our principal offices.

The 2345 Lease term is for eight years, commencing on the earlier of October 1, 2014 or the date that we begin conducting business within any portion of the Premises, and ending ninety six (96) months thereafter. We have two successive five-year options to extend the term of the 2345 Lease at the then-current fair market rental rate for the Premises, as determined pursuant to the provisions of the 2345 Lease.

For the first twelve months of the 2345 Lease term, the monthly base rent shall be $121,968. For months thirteen through twenty-four of the 2345 Lease term, the monthly base rent shall be $251,256.  Thereafter, the monthly base rent under the 2345 Lease will increase incrementally by approximately 3% annually. Under the 2345 Lease, the Company will pay the Landlord certain operating expenses related to the Premises.

The foregoing summary is qualified in its entirety by reference to the 2345 Lease. A copy of the 2345 Lease is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q. The 2345 Lease has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company.

Lease Amendment

On November 1, 2013, we entered into an amendment (the “Amendment”) to the Lease Agreement, dated March 17, 2011, with Landlord for the premises located at 2315 N. First Street, San Jose, California (the “2315 Lease”).  The Amendment extends the term of the 2315 Lease to be the same as the 2345 Lease, and sets forth the base rent for the period from March 1, 2019 to the termination date, among other things.  

The foregoing summary is qualified in its entirety by reference to the Amendment. A copy of the Amendment is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q. The Amendment has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the Company.

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Item 6. Exhibits

See the Exhibit Index which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated here by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			CAVIUM, INC.
Date:	November 4, 2013	By:	/S/ ARTHUR D. CHADWICK
			Arthur D. Chadwick
			Chief Financial Officer and Vice President of Finance and Administration

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EXHIBIT INDEX

Exhibit Number	Description
3.1	Restated Certificate of Incorporation of the Registrant (1)
3.2	Amended and Restated Bylaws of the Registrant(2)
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Form of the Registrant’s Common Stock Certificate (3)
10.1	Lease Agreement dated November 1, 2013 between the Registrant and SI 37, LLC
10.2	First Amendment to the Lease Agreement dated November 1, 2013 between the Registrant and SI 37, LLC
31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali, President and Chief Executive Officer
31.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Arthur D. Chadwick, Chief Financial Officer
32.1*	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali, President and Chief Executive Officer and Arthur D. Chadwick, Chief Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
(1)	Filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (No. 001-33435), filed with the SEC on June 20, 2011, and incorporated herein by reference.
(2)	Filed as Exhibit 3.5 to the Registrant’s registration statement on Form S-1/A (No. 333-140660), filed with the SEC on April 13, 2007, as amended, and incorporated herein by reference.
(3)	Filed as Exhibit 4.2 to the Registrant’s registration statement on Form S-1/A (No. 333-140660), filed with the SEC on April 24, 2007, as amended, and incorporated herein by reference.
†	Management contract or compensatory plan or arrangement.
*	This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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EX-10

Exhibit 10.1

Lease between
SI 37, LLC and Cavium, Inc.
(2345 N. First)

1. PARTIES:

THIS LEASE, is entered into on this 1st day of November, 2013, (“Effective Date”) between SI 37, LLC, a California Limited Liability Company, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA  95014 and Cavium, Inc., a Delaware Corporation, whose address is 2315 N. First Street, San Jose, California, hereinafter called respectively Landlord and Tenant. Landlord and Tenant are collectively referred to in this Lease as the “Parties”.

2. PREMISES:

Landlord hereby leases to Tenant, and Tenant hires from Landlord that certain building (the “Building”) situated in the City of San Jose, County of Santa Clara, State of California, commonly known and designated as 2345 N. First Street (the “Premises”).  For purposes of this Lease, the Building is deemed to contain One Hundred Ten Thousand Eight Hundred Eighty One (110,881) rentable square feet and is located generally as shown on Exhibit “A” attached hereto.  Subject to compliance with the rules and regulations promulgated by Landlord from time to time for the Project (if any), Tenant shall be permitted to have access to the entire Premises 24 hours per day, 7 days a week unless such access is prohibited, limited or restricted by any governmental law, ordinance, rule or regulation, damage or destruction or condemnation or due to an emergency.

Tenant shall also have the right to use Tenant’s Allocable Share of parking spaces within the Project (defined below) on a nonexclusive basis with other tenants and users of the Project, and the nonexclusive right to use all other exterior areas designated by Landlord from time to time as common area (“Common Area”) including but not limited to landscaping, sidewalks, service areas and other common facilities. Landlord agrees not to grant parking rights in the Project to any tenants or users of other properties owned by Landlord outside of the Project, it being agree that Project parking shall be solely for the benefit of the Project, subject however to use by Landlord and Landlord’s agents, employees, contractors, consultants and other representatives in the exercise of Landlord’s rights or performance of Landlord’s obligations under this Lease.  Tenant’s Allocable Share of parking spaces under this Lease as of the Effective Date is three hundred sixty three (363). The Building and Common Area are situated within a project site shared with 1 additional building owned by Landlord commonly known as 2315 N. First Street, San Jose, California (the “Adjacent Building”), as outlined in Exhibit “A” attached hereto (“Project”). The Adjacent Building is leased by Tenant, as successor in interest by merger to Cavium Networks, Inc., a Delaware corporation (“Cavium Networks”), pursuant to that certain lease dated as of March 17, 2011 between Landlord and Cavium Networks (the “Adjacent Building Lease”). Concurrently with the execution and delivery of this Lease, Tenant shall execute and deliver to Landlord an amendment to the Adjacent Building Lease in the form agreed to by Landlord and Tenant (the “Adjacent Building Lease Amendment”).  Notwithstanding the Effective Date inserted in the introductory paragraph of this Lease above, this Lease shall not become effective until this Lease and the Adjacent Building Lease Amendment have been fully executed by Landlord and Tenant.    

3. USE:

A. Permitted Uses:

Tenant shall use the Premises as permitted under applicable zoning laws only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord:  Office, research and development, marketing, light manufacturing, ancillary storage and other incidental uses. With respect to the Building, Tenant shall use only the number of parking spaces allocated to Tenant under this Lease.  All commercial trucks and delivery vehicles shall (i) be parked at the rear of the Building, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Project, and (iii) permitted to remain within the Project only so long as is reasonably necessary to complete the loading and unloading.  Landlord reserves the right to impose such additional rules and regulations as Landlord deems reasonably necessary to operate the Project in a manner which protects the quiet enjoyment of all tenants in the Project provided that such rules and regulations do not materially and adversely affect Tenant’s rights

- 1 -

or increase Tenant’s obligations under this Lease.  Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any Laws (as defined in Section 7.C below).

B. Uses Prohibited:

Tenant shall not commit or suffer to be committed on the Premises or any portion of the Project any waste, nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant or user of in the Project, nor allow any sale by auction or any other use of the Premises for an unlawful purpose. Tenant shall not (i) damage or overload the electrical, mechanical or plumbing systems of the Premises, (ii) attach, hang or suspend anything from the ceiling, walls or columns of the Building in excess of the load limits for which such ceiling, walls or columns are designed, or set any load on the floor in excess of the load limits for which such floors are designed, or (iii) generate dust, fumes or waste products which create a fire or health hazard or damage the Premises or any portion of the Project, including without limitation the soils or ground water in or around the Project.  No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature, or any waste materials, refuse, scrap or debris, shall be stored upon or permitted to remain on any portion of the Premises outside of the Building by Tenant or Tenant’s Agents (defined below) without Landlord’s prior approval, which approval may be withheld in its sole and absolute discretion.  

C. Advertisements and Signs:

Tenant shall not place or permit to be placed, in, upon or about the Premises any signs not approved by the city and other governing authority having jurisdiction.  Tenant will not place or permit to be placed upon the Premises any signs, advertisements or notices without the written consent of Landlord as to type, size, design, lettering, coloring and location, which consent will not be unreasonably withheld.  Any sign placed on the Premises shall be removed by Tenant, at its sole cost, prior to the expiration or sooner termination of the Lease, and Tenant shall repair, at its sole cost, any damage or injury to the Premises caused thereby, and if not so removed, then Landlord may have same so removed at Tenant’s expense.

Tenant shall install, in accordance with Landlord’s signage criteria and applicable Laws, at Tenant’s expense, (A) Tenant’s name at the entrance to the Premises, (B) Tenant’s name on any exterior Common Area sign monuments (including the exterior fountain sign monument), subject to this paragraph below, and (C) Tenant’s name on the exterior of the Building, in a design and location mutually agreeable to the Parties.  As it relates to Tenant’s sign on the exterior Common Area sign monuments, Tenant shall be entitled to Tenant’s Allocable Share of signage space upon each monument, which during any period that Tenant leases only the Building (and not the Adjacent Building) shall be in the right hand side of the monument (as you face the monument).  During any period that Tenant leases both the Building (pursuant to this Lease) and the Adjacent Building (pursuant to the Adjacent Building Lease) (and thus has a combined allocable share under both leases of one hundred percent (100%)) Tenant shall have the right to install a single sign utilizing all of the signage space on the exterior Common Area sign monuments if Tenant so elects. All signs placed in the Project by or for Tenant shall comply with all recorded documents affecting the Premises, and applicable laws, ordinances, guidelines, rules and regulations of the City of San Jose.  Any sign placed in the Project by or for Tenant shall be removed by Tenant, at its sole cost, prior to the expiration or sooner termination of the Lease, and Tenant shall repair, at its sole cost, any damage or injury to the Project caused thereby, and if not so removed, then Landlord may have same so removed at Tenant’s expense.  

D. Covenants, Conditions and Restrictions:

This Lease is subject to the effect of (i) any covenants, conditions, restrictions, easements, mortgages or deeds of trust, ground leases, rights of way of record and any other matters or documents of record; and (ii) any zoning laws of the city, county and state where the Building is situated (collectively referred to herein as “Restrictions”) and Tenant will conform to and will not violate the terms of any such Restrictions.  

E. Sustainability Requirements:

As used in this Lease, “Sustainability Requirements” means any and all Laws relating to any “green building” or other environmental sustainability practices and requirements now or hereafter in effect or imposed by any governmental authority or applicable Laws from time to time (“Sustainability Requirements”).  Without limiting the scope of any Sustainability Requirements that may be in effect from time to time, Tenant acknowledges that Sustainability Requirements may address whole-building or premises operations, construction issues, maintenance issues and other

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issues, including without limitation requirements relating to:  chemical use; indoor air quality; energy and water efficiency; recycling programs; interior and exterior maintenance programs; systems upgrades to meet green or sustainable building energy, water, air quality, and lighting performance standards; construction methods and procedures; material purchases; disposal of garbage, trash, rubbish and other refuse and waste; and the use of proven energy and carbon reduction measures. Neither Tenant nor Tenant’s Agents shall use or operate the Premises in a manner that will cause any part of the Project to be in non-compliance with any Sustainability Requirements in effect from time to time.

4. TERM AND RENTAL:

A. Term; Base Monthly Rent:

The Lease term (“Lease Term”) shall be for Ninety Six (96) months, commencing on the earlier of (i) October 1, 2014, or (ii) the date that Tenant begins to conduct its business within any portion of the Premises (“Commencement Date”), and ending ninety six (96) months thereafter (“Expiration Date”). Upon determination of the Commencement Date and Expiration Date, Landlord and Tenant shall memorialize the actual Commencement Date and Expiration Date in writing promptly following request by one of the Parties to the other of the Parties. Notwithstanding the Parties’ agreement that the Lease Term begins on the Commencement Date, this Lease and all of the obligations of Landlord and Tenant shall be binding and in full force and effect from and after the Effective Date.  

Landlord agrees to allow Tenant access to the Premises from and after full execution of this Lease, for design and installation of Tenant’s furniture, fixtures, cabling, equipment and Tenant Improvements, including installation and operation of servers that serve both the Building and the Adjacent Building; provided, that such early access by Tenant shall in no way materially interfere with or cause delays in the completion of Landlord’s Work.  Any such early access or occupancy by Tenant shall be subject to the terms and conditions of this Lease (including, without limitation, any required insurance coverage) except that Tenant shall not be required to pay Base Monthly Rent or Reimbursable Operating Costs during or with respect to such early access period, unless and until Tenant begins to conduct its business within any portion of the Premises. From and after the date that Tenant first enters the Premises to begin any demolition, construction or installation work, Tenant shall reimburse Landlord not later than ten (10) business days after demand, for all utilities consumed at the Premises.  Entry to the Premises before the Commencement Date merely to measure the space or design its Tenant Improvements, without any demolition, construction or installation work having commenced, shall not trigger the obligation of Tenant to pay for utilities consumed in the Premises before the Commencement Date. Entry to the Premises before the Commencement Date for the purpose of designing or constructing its Tenant Improvements, installing its furniture, fixtures, cabling or equipment or otherwise preparing the Premises for occupancy (including the installation and operation of servers within the server room existing in the Premises as of the Effective Date, which servers may serve both the Building and the Adjacent Building) shall not constitute the conduct of Tenant’s business within the Premises.

In addition to all other sums payable by Tenant under this Lease, Tenant shall pay as base monthly rent (“Base Monthly Rent”) for the Premises the following amounts in accordance with the following schedule:

Month	Base Monthly Rent
1-12*	$	121,968.00
13-24	$	251,256.00
25-36	$	258,794.00
37-48	$	266,558.00
49-60	$	274,555.00
61-72	$	282,791.00
73-84	$	291,275.00
85-96	$	300,013.00

*Base Monthly Rent and Reimbursable Operating Costs shall be computed for the first twelve (12) months based on 55,440 rentable square feet unless and until Tenant has begun to occupy more than 55,440 rentable square feet in the Building for the conduct of its business during those first twelve (12) months, at which time Base Monthly Rent shall increase to Two Hundred Forty Three Thousand Nine Hundred Thirty Eight Dollars and Twenty Cents ($243,938.20) for the balance of such twelve (12) month period and Tenant shall in addition be required to pay Tenant’s Allocable Share of

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Reimbursable Operating Costs for the balance of such twelve (12) month period computed based on One Hundred Ten Thousand Eight Hundred Eighty One (110,881) rentable square feet.

Notwithstanding the foregoing, if the first day of the Lease Term is not the first day of the calendar month, then the first (1^st) month of the Lease Term shall be deemed to consist of the first partial calendar month and the first full calendar month of the Lease Term. Base Monthly Rent shall be due in advance on or before the first day of each calendar month during the Lease Term.  All sums payable by Tenant under this Lease shall be paid to Landlord in lawful money of the United States of America, without offset or deduction and except as otherwise expressly provided in this Lease without prior notice or demand, at the address specified in Section 1 of this Lease or at such place or places as may be designated in writing by Landlord during the Lease Term.  Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment based on the number of days in the partial calendar month; provided that if this Lease terminates due to Tenant’s default, Tenant shall not be relieved of the obligation to pay future accruing rent, and the provisions of Section 13 shall control.  Concurrently with Tenant’s execution of this Lease, Tenant shall pay to Landlord the sum of One Hundred Twenty One Thousand Nine Hundred Sixty Eight Dollars ($121,968) as a deposit to be applied on the Commencement Date against the Base Monthly Rent due for the first month of the Lease Term.

B. Late Charge:

Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain.  Such costs include but are not limited to:  administrative, processing, accounting, and late charges which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage, or trust deed covering the Premises.  Accordingly, if any installment of Base Monthly Rent or other sum due from Tenant shall not be received by Landlord or its designee within five (5) days after it is due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount, which late charge shall be due and payable on the same date that the overdue amount was due. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant, excluding interest and attorneys fees and costs.  If any Base Monthly Rent or other sum due from Tenant remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the Agreed Interest Rate (defined in Section 13.B) from the date such amount became due until paid.  Acceptance by Landlord of such late charge shall not constitute a waiver of Tenant’s default with respect to such overdue amount nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.  In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Monthly Rent, then the Base Monthly Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any amount due under this Lease.

5. INTENTIONALLY DELETED

6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:

A. Landlord’s Work

Landlord shall deliver the Premises to Tenant on the Effective Date to allow Tenant to commence its space planning and Tenant Improvements work.  If at the time of such delivery the roof is not water tight, or the  HVAC system, doors, plumbing, electrical, life safety system, cafeteria equipment, elevator and lighting existing as of the Effective Date is not in good working order, or the Building is not ADA compliant, then Landlord shall cause any defects or deficiencies in such conditions to be corrected at Landlord’s sole cost and expense (and not as a Reimbursable Operating Cost), provided, that (i) Tenant gives written notice of such defect or deficiency to Landlord not later than ninety (90) days following the date that Tenant first begins any demolition, construction or installation work at the Premises, other than installation of its servers in the server room existing in the Building as of the Effective Date, and (ii) such defect or deficiency is not caused by Tenant, Tenant’s Agents or any Tenant Improvements or Alterations (the work required of Landlord pursuant to this Section 6.A being “Landlord’s Work”).

Except as otherwise specifically provided in this Lease, the Premises shall be delivered to Tenant, and Tenant shall accept such delivery, in its then “AS IS, WITH ALL FAULTS” condition, without representation or warranty of any kind,

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express or implied, other than any which may be expressly contained in this Lease, and with no obligation on the part of Landlord to perform any other work (other than such work as this Lease expressly states must be performed by Landlord during the Lease Term).

B. Tenant Improvements:

Landlord shall have no obligation to perform tenant improvement work with respect to the Premises, provided however that Landlord shall be required to perform Landlord’s Work described in Section 6.A above.  All initial tenant improvements which Tenant desires to install in the Building (the “Tenant Improvements”) shall be constructed by Tenant in accordance with plans and specification approved by Landlord and the requirements of this Section 6.B and Article 7 below, at Tenant’s sole cost (except as provided in Section 6.C below).  The process for approval and disapproval of Tenant’s plans and specifications for the Tenant Improvements is described in Section 7.A below. Any supplemental HVAC system installed as part of the Tenant Improvements shall be in locations and installed in a manner reasonably acceptable to Landlord.  In addition, subject to approval of all governmental authorities and to Landlord’s reasonable approval as to design and location, Tenant would have the right to install satellite dish(es) and antennas on the roof of the Building,  provided that (i) such installation shall be performed by a licensed contractor in a good and workmanlike manner, and in a manner that does not invalidate any roof related warranties, and (ii) such dishes and antennas shall be screened in a manner reasonably acceptable to Landlord.

The Tenant Improvements shall not be removed or altered by Tenant except as provided in Section 6.D and Article 7 below.  Tenant shall have the right to depreciate and claim and collect any investment tax credits for the Tenant Improvements and Work Allowance Improvements during the Lease Term to the extent paid for by sources other than the Work Allowance.  Tenant shall not have the right to depreciate or claim or collect any investment tax credits for the Tenant Improvements or Work Allowance Improvements during the Lease Term to the extent paid for by the Work Allowance. Upon expiration of the Lease Term or any earlier termination of the Lease, the Tenant Improvements shall become the property of Landlord and shall remain upon and be surrendered with the Premises, and title thereto shall automatically vest in Landlord without any payment therefore, except to the extent Tenant is required to remove them pursuant to other provisions of this Lease. Tenant shall pay all costs associated with the Tenant Improvements, subject to Section 6.C below.  

C. Work Allowance:

Subject to the terms and conditions of this Section below, Landlord agrees to provide Tenant a work allowance to be utilized by Tenant in accordance with this Lease to reimburse Tenant for certain costs of designing and constructing the Tenant Improvements, to pay for cubicles and furniture for the Premises, and to perform Alterations (as defined in the Adjacent Building Lease) in the Adjacent Building (“Work Allowance Improvements”) in the amount of One Million One Hundred Eight Thousand Eight Hundred Ten Dollars  ($1,108,810) (the “Work Allowance”).  The cost of the Work Allowance Improvements for which the Work Allowance may be utilized by Tenant (“Work Allowance Costs”) shall consist of only the following to the extent actually paid by Tenant to its unaffiliated third party general contractor (“Tenant’s General Contractor”), architects, designers and suppliers for the Work Allowance Improvements:  the fees of Tenant’s General Contractor, architects, designers and suppliers, materials, labor and other construction costs, cost of cubicles and furniture (including wiring and installation), permit fees, signage fees and costs, construction taxes or other costs imposed by governmental authorities related to the Work Allowance Improvements.  The Work Allowance shall be paid by Landlord to Tenant as payments for the Work Allowance Costs become due to Tenant’s General Contractor, architects, designers and suppliers in accordance with this Section 6.C below. During the course of design and construction of the Work Allowance  Improvements, but not more than once in any calendar month, Tenant shall deliver to Landlord the following (the “Disbursement Documentation”):  (i) a written request for disbursement, setting forth the amount requested for disbursement (“Disbursement Request”); (ii) a schedule of values allocating costs to the various portions of the Work Allowance Improvements for which disbursement is sought, in form and content reasonably satisfactory to Landlord, and which shall substantiate that the full amount requested for disbursement has been expended by Tenant for those Work Allowance Improvements for which the Work Allowance may be utilized; (iii) proof of payment or evidence of costs incurred of all amounts owed to the applicable third party, in form reasonably acceptable to Landlord, (iv) conditional lien releases, in a form and content reasonably satisfactory to Landlord, from Tenant’s General Contractor, and all subcontractors, material suppliers and other persons or entities providing work or materials with respect any work for which the current Disbursement Request relates, (v) unconditional lien releases, in a form and content reasonably satisfactory to Landlord, from Tenant’s General Contractor, and all subcontractors, material suppliers

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and other persons or entities providing work or materials with respect to any work for which prior disbursements were made from the Work Allowance, to the extent not already delivered to Landlord; and (v) invoices, vouchers, statements, affidavits and/or other documents in a form reasonably acceptable to Landlord which substantiate and justify the disbursement requested. Within ten (10) business days after Landlord’s receipt of the above items Landlord shall pay directly to Tenant an amount equal to the lesser of the undisbursed portion of the Work Allowance or the amount requested for disbursement, until such time as Landlord has expended the full amount of the Work Allowance.

If following completion of the Work Allowance Improvements and payment of Landlord’s share of Work Allowance Costs in accordance with this Section 6.C above there are any un-disbursed Work Allowance funds, Tenant shall not be entitled to any further disbursements of such funds and shall not be entitled to any  credit with respect to such funds. If any portion of the Work Allowance remains un-disbursed as of the date that is thirty six (36) months after the Effective Date, then as to those remaining funds for which the required Disbursement Documentation has not been submitted to Landlord, Tenant shall not be entitled to any further disbursements of such funds and shall not be entitled to any credit with respect to such funds. All Work Allowance Costs shall be fully documented to and subject to reasonable verification by Landlord. Notwithstanding the foregoing Landlord shall not be required make any disbursements of the Work Allowance during any period when Tenant is in default under this Lease beyond any applicable cure period expressly granted in this Lease, and such period of default shall not operate to extend the thirty six (36)  month period described in this Section 6.C above.  

D. Condition Upon Surrender:

Tenant further agrees on the expiration or sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, excepting normal wear and tear, damage by casualty and maintenance, repair and replacement obligations that are the responsibility of Landlord hereunder.  In this regard, “normal wear and tear” shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of the best standards for maintenance, repair, replacement, and janitorial practices, and does not include items of neglected or deferred maintenance.  In any event, Tenant shall cause the following to be done prior to the Expiration Date or sooner termination of this Lease: (i) all interior walls shall be paint-ready, (ii) all tiled floors shall be cleaned and waxed, (iii) all carpets (other than those beyond their useful lives) shall be cleaned and shampooed, (iv) all broken, marred, stained or nonconforming acoustical ceiling tiles shall be replaced, (v) all cabling placed above the ceiling by Tenant or Tenant’s contractors shall be removed, (vi) all windows shall be washed, (vii) the HVAC system shall be serviced by a reputable and licensed service firm and left in “good operating condition and repair”, which condition shall be so certified by such firm, and (viii) the plumbing and electrical systems and lighting shall be placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses). On or before the Expiration Date or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises. All property and trade fixtures not so removed shall be deemed as abandoned by Tenant.  Cubicles and furniture paid in whole or in part by the Work Allowance shall not be considered the personal property or trade fixtures of Tenant. Tenant shall ascertain from Landlord and Landlord shall inform Tenant, at the time Landlord grants its consent to any Alteration (as defined in Section 7 below) to be made by Tenant, whether Landlord desires to have any Alterations made by Tenant removed and the Premises or any parts thereof restored to a standard open office plan with materials and finishes consistent with the other open office areas of the Premises, or to cause Tenant to surrender all Alterations in place to Landlord.  If Landlord fails to specify, at the time of its consent, whether any Alteration is to be removed upon the Expiration Date, then Landlord shall be deemed to have required its removal, unless otherwise specified in writing to Tenant.  If Landlord does require removal, Tenant shall, at Tenant’s sole cost and expense, remove such Alterations as Landlord requires and shall repair and restore said Premises or such parts thereof before the Expiration Date or sooner termination of this Lease.  Such repair and restoration shall include causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal, repair and restoration to the extent such compliance is necessitated by the removal, repair and restoration work.  

E. Failure to Surrender:

If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by Section 6.D and other provisions of this Lease, Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord, and hold Landlord and Landlord’s trustees, beneficiaries, shareholders, directors, officers, members, employees, partners, affiliates, agents, successors and assigns (collectively “Landlord Related Parties”) harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without

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limitation reasonable attorneys fees) resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay and costs incurred by Landlord in returning the Premises to the required condition, plus interest thereon at the Agreed Interest Rate. If Tenant remains in possession of the Premises after the Expiration Date or sooner termination of this Lease without Landlord’s consent, such hold over shall not constitute a renewal or extension of the Lease Term, Tenant’s continued possession shall be on the basis of a tenancy at sufferance, and Tenant shall be liable to Landlord for the reasonable rental value of the Premises (which shall in no event be less than one hundred fifty percent (150%) of the Base Monthly Rent due in the month preceding the earlier termination or Expiration Date, as applicable) plus all other amounts payable by Tenant under this Lease. In addition, if Tenant holds over without Landlord’s consent, Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord, and hold Landlord and the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) resulting from delay by Tenant in timely surrendering the Premises. If Tenant holds over after the Expiration Date or sooner termination of this Lease with Landlord’s consent, such holding over shall be construed as a month to month tenancy, at one hundred fifty percent (150%) of the Base Monthly Rent for the month preceding expiration or sooner termination of this Lease in addition to all other rent due under this Lease, and shall otherwise be on the terms and conditions of this Lease, except those provisions relating to the Lease Term and any options to extend or renew, which provisions shall be of no further force and effect. This provision shall survive the termination or expiration of the Lease.

7. ALTERATIONS & ADDITIONS:

A. General Provisions:

Tenant shall not make, or suffer to be made, any alteration or addition to the Premises (“Alterations”), or any part thereof, without obtaining Landlord’s prior written consent, not to be unreasonably withheld, conditioned or delayed; provided, however, that Tenant shall be permitted to make Alterations, following ten (10) business days notice to Landlord, but without Landlord’s prior consent, to the extent that such Alterations (i) do not affect the Building systems or equipment, (ii) are not visible from the exterior of the Building, and (iii) cost less than $50,000.00 for a particular job of work and less than $250,000.00 per year in the aggregate.  All Work Allowance Improvements within the Building and satellite dishes and antennas installed on the roof of the Building by Tenant shall also constitute “Alterations” under this Lease. With respect to any Alterations for which Landlord’s consent is required, Tenant shall deliver to Landlord the proposed architectural and structural plans for all such Alterations at least ten (10) business days prior to the start of construction.  If such Alterations affect the structure of the Building, Tenant additionally agrees to reimburse Landlord its reasonable out-of-pocket costs incurred in reviewing Tenant’s plans, not to exceed $1,500.00.  Landlord’s failure to grant or withhold its consent to any Alterations within ten (10) business days after receipt of any applicable plans therefor (including architectural and structural plans if appropriate), shall be deemed to constitute Landlord’s disapproval of same; provided, however that if after such ten (10) business day period Tenant delivers another written notice to Landlord requesting consent to the proposed Alterations, such notice states that it is a second notice as to which if Landlord does not respond within ten (10) business days Landlord will be deemed to have granted its consent, and Landlord has confirmed to Tenant that Landlord received such second notice and the previously submitted plans and specifications, then if Landlord fails to respond to Tenant within ten (10) business days after delivery of the second notice and Landlord’s confirmation of receipt Landlord shall be deemed to have consented to the proposed Alterations. After obtaining Landlord’s consent, Tenant shall not proceed to make such Alterations (a) until Tenant has obtained all required governmental approvals and permits, and (b) if such Alterations cost in excess of $50,000.00, then, upon Landlord’s request, provides Landlord reasonable security, in form reasonably approved by Landlord, to protect Landlord against mechanics’ lien claims.  Tenant agrees to provide Landlord (i) not less than twenty (20) days prior written notice of the anticipated and actual start-date of the work, (ii) a complete set of half-size (15” X 21”) vellum as-built drawings, and (iii) a certificate of occupancy for the work upon completion of the Alterations.  All Alterations shall be constructed by a licensed general contractor in compliance with all applicable Laws including, without limitation, all building codes, Sustainability Requirements and the Americans with Disabilities Act of 1990 as amended from time to time.  Upon the Expiration Date or sooner termination of this Lease, all Alterations, except movable furniture not paid for with any portion of the Work Allowance and trade fixtures, shall become a part of the realty and belong to Landlord but shall nevertheless be subject to removal by Tenant as provided in Section 6.D. Alterations which are not deemed as trade fixtures include without limitation heating, lighting, electrical systems, air conditioning, walls, carpeting, or any installation which has become an integral part of the Premises, and any cubicles or furniture paid for in whole or in part with the Work Allowance.  All Alterations shall be maintained, replaced or repaired by Tenant at its sole cost and expense. In no event shall Landlord’s approval of, or consent to, any contractor, Alterations, or any plans, specifications

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and drawings for any Alterations constitute a representation or warranty by Landlord of (i) the accuracy or completeness of the plans, specifications, drawings and Alterations or the absence of design defects or construction flaws therein, or the qualification of any person or entity, or (ii) compliance with applicable Laws, and Tenant agrees that Landlord shall incur no liability by reason of such approval or consent.  Once any Alterations begin, Tenant shall diligently and continuously pursue their completion.  

B. Free From Liens:

Tenant shall keep the Premises free from all liens arising out of work performed, materials furnished, or obligations incurred by Tenant or claimed to have been performed for or furnished to Tenant.  In the event Tenant fails to discharge any such lien within ten (10) business days after receiving notice of the filing, Landlord shall immediately be entitled to discharge the lien at Tenant’s expense and all resulting costs incurred by Landlord, including attorney’s fees shall be due immediately from Tenant as additional rent.

C. Compliance With Governmental Regulations:

The term Laws or Governmental Regulations shall include all federal, state, county, city or governmental agency laws, statutes, ordinances, codes, standards, rules, requirements, regulations, Sustainability Requirements or orders now in force or hereafter enacted, promulgated, or issued.  The term also includes government measures regulating or enforcing public access, traffic mitigation, occupational, health, or safety standards for employers, employees, landlords, or tenants. Tenant, at Tenant’s sole expense will comply with all such Governmental Regulations applicable to the Premises or the Tenant’s use of the Premises and shall make all repairs, replacements, alterations, or improvements necessary to comply with said Governmental Regulations.  The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant (whether Landlord be a party thereto or not) that Tenant has violated any such law, regulation or other requirement in its use of the Premises shall be conclusive of that fact as between Landlord and Tenant. Tenant’s obligations pursuant to this Section 7.C shall include, without limitation, maintaining and restoring the Premises and making structural and nonstructural alterations and additions to the Premises, Building and Common Area in compliance and conformity with all Laws and recorded documents to the extent required because of Tenant’s particular use of the Premises or any work or Alteration made by or on behalf of Tenant during the Lease Term.  The foregoing shall include, without limitation, compliance with and improvements required by the Americans With Disabilities Act or any similar Laws, as they may be amended from time to time.  Landlord’s approval of any Alteration or other act by Tenant shall not be deemed to be a representation by Landlord that said Alteration or act complies with applicable Laws, and Tenant shall remain solely responsible for said compliance.  Notwithstanding the foregoing provisions of this Section 7.C, Landlord will be responsible for causing the Premises, the Building and the Common Areas, to comply with applicable Laws and Government Regulations as of the Commencement Date.

D. Insurance Requirements:

Tenant shall maintain during the course of construction of its Alterations, at its sole cost and expense, builders’ risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its contractors procure and maintain in full force and effect during the course of construction a “broad form” commercial general liability and property damage policy of insurance naming Landlord, Tenant, any property manager designated by Landlord and Landlord’s lenders as additional insureds.  The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than One Million Dollars ($1,000,000.00) per occurrence and One Million Dollars ($1,000,000.00) annual aggregate, and shall contain a severability of interest clause or a cross liability endorsement.  If Commercial General Liability Insurance or other form with a general aggregate limit is used, either the general aggregate limit shall apply separately to this project/location or the general aggregate limit shall be twice the required occurrence limit.

8. MAINTENANCE OF PREMISES:

A. Landlord’s Obligations:

Landlord, at its sole cost and expense (and not as a Reimbursable Operating Cost), shall maintain in good condition, order, and repair, and replace as and when necessary, the structural components of the Building including the foundation,

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exterior load bearing walls and roof structure, except that the cost to repair any damage caused by Tenant or Tenant’s Agents shall be paid for by Tenant to the extent the cost of repair is not fully paid to Landlord from available insurance proceeds.  In addition, if through no fault of Tenant or Tenant’s Agents the cost to repair the roof of the Building in any calendar year of the Lease Term exceeds Five Thousand Dollars ($5,000) (prorated for partial calendar years during the Lease Term), then Landlord may elect either (i) to make the repairs, with the cost in excess of Five Thousand Dollars ($5,000) in a calendar year (prorated for partial calendar years during the Lease Term) to be paid by Landlord at its sole cost and expense (and not as a Reimbursable Operating Cost), or (ii) to replace the old rood with the new rood at Landlord’s sole cost and expense (and not as a Reimbursable Operating Cost).

Landlord shall also operate, manage and maintain (including, without limitation, contracting for regular maintenance and service), and replace as and when necessary, (i) the Common Area in such manner reasonably determined by Landlord, (ii) the parking lot and all underground utility facilities servicing the Premises, (iii) all waterscape, landscaping and shrubbery, and (iv) exterior window washing; and to the extent Tenant elects not to maintain and repair, and replace as and when necessary, the following: (1) the Building’s automatic fire extinguisher equipment, (2) elevator equipment, and (3) the Building’s roof membrane system.  The cost of the foregoing, to the extent undertaken by Landlord, shall be part of Reimbursable Operating Costs (defined in Section 8.D).

B. Tenant’s Obligations:

Tenant shall clean, maintain, repair and replace when necessary the Building and every part thereof, except to the extent Landlord is required by Section 8.A. to maintain the same or undertake the following as Reimbursable Operating Costs (as defined in Section 8.D below), through regular inspections and servicing, including but not limited to the following: (i) all plumbing and sewage facilities serving the Premises, (ii) all heating ventilating and air conditioning facilities and equipment serving the Premises, (iii) all fixtures, interior walls, floors, carpets and ceilings, (iv) all windows, door entrances, plate glass and glazing systems including caulking, and skylights (other than exterior window washing), and (v) all electrical facilities and equipment. All wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements.   \With respect to item (ii) above, Tenant shall provide Landlord a copy of a service contract between Tenant and a licensed service contractor providing for periodic maintenance of all such systems or equipment in conformance with the manufacturer’s recommendations.  Tenant shall provide Landlord a copy of such preventive maintenance contracts and paid invoices for the recommended work if requested by Landlord. To the extent that any item in (i) through (v) above is determined by Landlord to be for the benefit of more than one (1) tenant or occupant of the Building or Project, Landlord shall assume the obligation to clean, maintain, repair and replace the same as Reimbursable Operating Costs (as defined in Section 8.D below) and Tenant shall have no obligation to clean, maintain, repair or replace such item.  Tenant shall arrange for and pay directly for regular janitorial service for the Premises.  

C. Obligations Regarding Reimbursable Operating Costs:

In addition to the direct payment by Tenant of expenses as provided in Section 8.B, 9, 10 and 11 of this Lease, Tenant agrees to reimburse Landlord for Tenant’s Allocable Share (as defined in Section 8.E below) of Reimbursable Operating Costs (as defined in Section 8.D below) resulting from Landlord payment of expenses related to the Building or Project which are not otherwise paid by Tenant directly.  Landlord shall have the right to periodically  provide Tenant with a written estimate of Reimbursable Operating Costs for the next twelve (12) months and Tenant shall thereafter, until Landlord revises such estimate, pay to Landlord as additional rental, along with its Base Monthly Rent, one twelfth of Tenant’s Allocable Share of the Reimbursable Operating Costs as estimated by Landlord.  Within ninety (90) days after the end of each calendar year during the Term Landlord shall deliver to Tenant a statement (“Annual Statement”) in which Landlord shall set forth the actual expenditures for Reimbursable Operating Costs for such calendar year and Tenant’s Allocable Share thereof.  The Annual Statement shall be certified by an authorized officer of Landlord to be correct.   If the Annual Statement shows that Tenant’s payments of estimated Reimbursable Operating Costs exceeded Tenant’s actual obligation in respect of such calendar year, Landlord shall accompany said Annual Statement with a payment to Tenant of the amount of such excess.  If the Annual Statement shows that Tenant’s payments of estimated Reimbursable Operating Costs were less than its actual obligation in respect of such calendar year, Tenant shall pay said difference to Landlord within thirty (30) days of Tenant’s receipt of the Annual Statement.

Provided no event of default exists hereunder and Tenant has timely paid the amount set forth in the applicable Annual Statement, Tenant, through an independent certified public accounting firm hired by Tenant on a non-contingent

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fee basis, shall have the right, during regular business hours, at the management office for the Project, and after giving at least thirty (30) days’ advance written notice to Landlord, to commence to have Landlord’s books and records related to Reimbursable Operating Costs for the subject Lease year reviewed.  Any review of a particular Lease year’s Reimbursable Operating Costs must be completed within ninety (90) days after Tenant’s receipt of the applicable Annual Statement.  In the event the results of the review of records reveals that Tenant was overcharged with respect to Reimbursable Operating Costs for the preceding Lease year, then Tenant shall be credited the overage applicable to Tenant against Tenant’s subsequent installment of rent or other payments due to Landlord under the Lease.  In the event that such results show that Tenant has underpaid its obligations for a preceding period, the amount of such underpayment shall be paid by Tenant to Landlord within thirty (30) days of such determination.  All costs and expenses of any such review shall be paid by Tenant; provided, however, that if the amount of Reimbursable Operating Costs were overstated by Landlord by more than ten percent (10%), Landlord shall reimburse Tenant for the commercially reasonable, out of pocket expense incurred by Tenant in connection with Tenant’s review.

D. Reimbursable Operating Costs:

For purposes of calculating Tenant’s Allocable Share of Building and Project costs, the term “Reimbursable Operating Costs” is defined as all costs and expenses which are incurred by Landlord in connection with ownership and operation of the Building or the Project in which the Premises are located, together with such additional facilities as may be determined by Landlord to be reasonably desirable or necessary to the ownership and operation of the Building and/or Project, except to the extent this Lease expressly states that they are Landlord’s sole cost and expense.  All costs and expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied (with accruals appropriate to Landlord’s business).  Reimbursable  Operating Costs shall include, but not be limited to, the following to the extent the obligation therefor is not that of Tenant under the provisions of Section 8.B above:  (i) common area utilities, including water, power, telephone, heating, lighting, air conditioning, ventilating, and Building utilities to the extent not separately metered; (ii) common area maintenance and service agreements for the Building and/or Project and the equipment therein, including without limitation, common area janitorial services, alarm and security services, exterior window cleaning, and maintenance of the sidewalks, landscaping, waterscape, roof membrane, parking areas, driveways, service areas, mechanical rooms, elevators, and the building exterior; (iii) insurance premiums and costs, including without limitation, the premiums and cost of fire, casualty and liability coverage and rental abatement and, if required by Landlord’s Mortgagee (defined below) or elected by Tenant, earthquake insurance applicable to the Building or Project; (iv) repairs, replacements and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties other than as Reimbursable Operating Costs, and repairs or alterations attributable solely to tenants of the Building or Project other than Tenant); (v) all real estate taxes and assessment installments or other impositions or charges which may be levied on the Building or Project, upon the occupancy of the Building or Project and including any substitute or additional charges which may be imposed during, or applicable to the Lease Term including real estate tax increases due to a sale, transfer or other change of ownership of the Building or Project, as such taxes are levied or appear on the City and County tax bills and assessment rolls, but excluding the actual transfer tax; (vi) costs of complying with Sustainability Requirements; (vii) deductibles under insurance policies, up to $50,000 (or such other commercially reasonable amount); (viii) capital expenditures, which shall be amortized over their useful lives as reasonably determined by Landlord, together with interest on the unpaid portion of such expenditure at the Agreed Interest Rate; and any of items (i) through (vi) in Section 8.B above to the extent Landlord has elected to assume with respect thereto the obligations for cleaning, maintenance, repair and/or replacement.  

Notwithstanding the foregoing, Reimbursable Operating Costs hereunder shall not include: (1) charges for electricity, water or other utilities or services and applicable taxes to the extent Tenant is obligated to pay the same directly pursuant to other provisions of this Lease, or to the extent any other tenant, occupant, person or other party directly reimburses Landlord (other than as a Reimbursable Operating Cost or on the basis of its proportionate share thereof); (2) commissions, concessions, allowances, tenant improvements, advertising and other expenses incurred in connection with preparing, staging and leasing space in the Project; (3) depreciation and costs required to be capitalized in accordance with generally accepted accounting practices, except for amortization of capital costs as provided above; (4) costs for which reimbursement is received from Landlord’s insurer, under warranty, by condemnation or by other third party; (5) ground rental payments or payments of mortgage fees, interest and/or principal; (6) the cost of initial design and construction of the Project and repair of defects associated therewith; (7) costs, fines or penalties incurred due to a violation by Landlord of any applicable Law or a violation of any other tenant leases at the Project; (8) any cost representing an amount paid to a person, firm, corporation or other entity controlled by or related to Landlord to the extent materially in excess of the

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amount which would have been paid in an arms-length negotiation under then-current market conditions; (9) Landlord’s general overhead except to the extent reasonably attributable and allocated, if appropriate, to the operation and management of the Project; (10) costs of acquiring and securing sculptures, paintings and other works of art; (11) charitable or political contributions; (12) bad debt loss, rent loss, or reserves for bad debts or rent loss; (13) the costs of abating or removing Hazardous Materials (defined below) that (A) existed at the Premises or Project prior to the Commencement Date, (B) migrated thereon after the Commencement Date due to no fault of Tenant or any of Tenant’s Agents, or (C) were brought to the Premises or Project by Landlord or any Landlord Related Party (defined below); (14) costs and expenses which this Lease expressly states are Landlord’s sole cost and expense; and (15) legal fees and costs incurred in connection with the negotiation of leases or disputes with other tenants of the Project, a violation of law by Landlord or Landlord’s agents, employees or contractors, or the sale, transfer, financing or re-financing of the Project.

Landlord shall have no obligation to provide guard services or other security measures for the benefit of the Project.  Tenant assumes all responsibility for the protection of Tenant and Tenant’s Agents from acts of third parties; provided, however, that nothing contained herein shall prevent Landlord, at its sole option, from providing security measures for the Project.  This is a “Net” Lease, meaning that Base Monthly Rent is paid to Landlord absolutely net of all costs and expenses, except only those costs which this Lease expressly states shall be paid by Landlord at Landlord’s sole cost.  The provision for payment of Reimbursable Operating Costs by means of monthly payment of Tenant’s Allocable Share of Building and/or Project Costs is intended to pass on to Tenant and reimburse Landlord for all costs of operating and managing the Building and/or Project, other than those costs which this Lease expressly states shall be paid by Landlord at Landlord’s sole cost. If less than one hundred percent of the Building and  other Project buildings is leased at any time during the Lease Term, Landlord shall adjust Reimbursable Operating Costs to equal Landlord’s reasonable estimate of what Reimbursable Operating Costs would be had one hundred percent (100%) of the Building and the other Project buildings been leased.

E. Tenant’s Allocable Share:

For purposes of prorating Reimbursable Operating Costs which Tenant shall pay, Tenant’s Allocable Share of Reimbursable Operating Costs shall be computed by multiplying the Reimbursable Operating Costs by a fraction, the numerator of which is the rentable square footage of the Premises and the denominator of which is either (i) the total rentable square footage of the Building if the service or cost is allocable only to the Building, or (ii) the total rentable square footage of the buildings in the Project if the service or cost is allocable to the entire Project, or (iii) the total rentable square footage of the premises of those tenant’s or occupants that Landlord determines to be benefiting from such service or facility.  Tenant’s obligation to share in Reimbursable Operating Costs shall be adjusted to reflect the Lease Commencement and Expiration Dates and is subject to recalculation in the event of expansion or contraction of the rentable square footage of the Building or Project.  Notwithstanding the foregoing or anything else to the contrary contained in the Lease, for purposes of calculating the Reimbursable Operating Costs, the rentable square footage of the Premises shall be deemed to be 55,440 for months 1-12 of the Lease Term (unless and until during such twelve (12) month period Tenant occupies more than 55,440 rentable square feet in the Building for the conduct of its business, in which event Tenant’s Allocable Share shall be based on 110,881 rentable square feet thereafter), and then 110,881 for the remainder of the Lease Term.

F. Waiver of Liability:

Failure by Landlord to perform any defined services required of Landlord pursuant to this Lease, or any cessation thereof, when such failure is caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character or by any other cause, similar or dissimilar, shall not render Landlord liable to Tenant in any respect, including damages to either person or property, nor be construed as an eviction of Tenant, nor cause an abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof.  Should any equipment or machinery utilized in supplying the services listed herein as being Landlord’s obligation break down or for any cause cease to function properly, upon receipt of written notice from Tenant of any deficiency or failure of any services, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no right to terminate this Lease and shall have no claim for rebate of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom.  Tenant waives the provisions of California Civil Code Sections 1941 and 1942 concerning the Landlord’s obligation of tenantability and Tenant’s right to make repairs and deduct the cost of such repairs from the rent, and any similar Law now or hereafter in effect.  Landlord shall not be liable for a loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing, or its failure to furnish, any of the foregoing.

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9. INSURANCE:

A. Tenant’s Use:

Tenant shall not use or permit the Premises, or any part thereof, to be used for any purpose other than that for which the Premises are hereby leased; and no use of the Premises shall be made or permitted, nor acts done, which will cause an increase in premiums or a cancellation of any insurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept, or used in or about the Premises, any article prohibited by the standard form of fire insurance policies.  Tenant shall, at its sole cost, comply with all requirements of any insurance company or organization necessary for the maintenance of reasonable fire and public liability insurance covering the Premises and appurtenances.  

B. Landlord’s Insurance:

Landlord agrees to purchase and keep in force All Risk and fire insurance in an amount equal to the replacement cost of the Building excluding any improvements made by Tenant not typically required for office uses (“Specialized Tenant Improvements”) or Alterations as determined by Landlord’s insurance company’s appraisers. In addition, if required by its Mortgagee or if Tenant elects, Landlord may elect to purchase insurance coverage for perils including earthquake, flood and/or terrorist acts, in amounts and with deductibles reasonably determined by Landlord and acceptable to Mortgagee and Tenant. Landlord may also maintain a policy of (i) commercial general liability insurance insuring Landlord (and such others designated by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises or Project in an amount as Landlord determines is reasonably necessary for its protection, and (ii) rental loss insurance covering a twelve (12) month period. Tenant agrees to pay Landlord as additional rent, within ten (10) business days after written invoice to Tenant, Tenant’s Allocable Share of the amount of any deductible under such policy, provided that if damage is confined to the Premises, Tenant shall pay the entire deductible to Landlord; provided, however, Tenant’s portion of any deductible shall not exceed $50,000 (or such other commercially reasonable amount).  It is understood and agreed that Tenant’s obligation under this Section 9.B will be prorated to reflect the Lease Commencement and Expiration Dates.

C. Tenant’s Insurance:

Tenant agrees, at its sole cost, to insure its personal property, trade fixtures, Specialized Tenant Improvements and Alterations against damage for their full replacement value (without depreciation).  Said insurance shall provide All Risk and fire coverage equal to the replacement cost of said property.  The property insurance provided by Tenant as required by this paragraph shall be carried in favor of Landlord and Tenant as their respective interests may appear and shall provide that any loss to Alterations shall be adjusted with and be payable to both Landlord and Tenant.  Tenant shall deliver a copy of the policy and renewal certificate to Landlord.  Tenant agrees, at its sole cost, to obtain and maintain throughout the Lease Term Commercial General Liability insurance for occurrences within the Project with a combined single limit of not less than Five Million Dollars ($5,000,000.00) and worker’s compensation insurance with limits as required by Law.  Tenant’s liability insurance shall be primary insurance containing a cross-liability endorsement, and shall provide coverage on an “occurrence” rather than on a “claims made” basis.  All such insurance shall provide for severability of interests; shall provide that an act or omission of one of the named (additional) insureds shall not reduce or avoid coverage to the other named (additional insureds).  Tenant shall name Landlord and Landlord’s lenders as additional insureds and shall deliver a copy of the policies and renewal certificates to Landlord.  All insurance policies required under this Section 9.C shall provide for thirty (30) days’ prior written notice to Landlord of any cancellation, termination, or reduction in coverage.  Notwithstanding the above, Landlord retains the right to have Tenant provide other forms of insurance which may be reasonably required to cover future risks.

D. Waiver:

Landlord and Tenant hereby waive all tort, contract or other rights each may have against the other on account of any loss or damage sustained by Landlord or Tenant, as the case may be, or to the Premises or its contents, which may arise from any risk covered by their respective insurance policies (or which would have been covered had such insurance policies been maintained in accordance with this Lease) as set forth above; provided that such waiver shall be effective only to the extent permitted by the insurance covering such loss.  The Parties shall each obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against Landlord or Tenant, as the case may be.

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10. TAXES:

Tenant shall be liable for and shall pay as additional rent, prior to delinquency, all taxes and assessments levied against Tenant’s personal property and trade or business fixtures.  All real estate taxes shall be prorated to reflect the Lease Commencement and Expiration Dates.  If, at any time during the Lease Term a tax, excise on rents, business license tax or any other tax, however described, is levied or assessed against Landlord as a substitute or addition, in whole or in part, for taxes assessed or imposed on land or buildings, Tenant shall pay and discharge its pro rata share of such tax or excise on rents or other tax before it becomes delinquent; except that this provision is not intended to cover net income taxes, documentary stamp or transfer tax, inheritance, gift or estate tax imposed upon Landlord.  In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that Tenant cannot pay and discharge its pro rata share of such tax on behalf of Landlord, then at Landlord’s sole election, Landlord may demand from Tenant, as additional rent, the exact amount of such tax and Tenant shall pay such increase.

11. UTILITIES:

Tenant shall arrange for and pay directly to the providing utility all water, gas, electric, telephone, and other utilities supplied to the Premises.  Landlord shall not be liable for loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing or the utility company’s failure to furnish utilities to the Premises or any other portion of the Project, and in such event Tenant shall not be entitled to abatement or reduction of any portion of Base Monthly Rent or any other amount payable under this Lease.

Notwithstanding the foregoing, if all or a material portion of the Premises is made untenantable or inaccessible for more than five (5) consecutive business days, after notice from Tenant to Landlord, by a service interruption caused by the gross negligence or willful misconduct of Landlord or Landlord’s agents or employees, then, as Tenant’s sole remedy, Base Monthly Rent shall abate for the period beginning on the day immediately following such 5-business-day period and ending on the day such service interruption ends, but only in proportion to the percentage of the rentable square footage of the Premises made untenantable or inaccessible.

12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:

A. Use of Hazardous Materials:

Without the prior written consent of Landlord, neither Tenant, nor any subtenant of the Premises (of any tier in the chain of title) or any of Tenant’s or such subtenant’s agents, employees, representatives, affiliates, architects, contractors (including without limitation subcontractors of all tiers), suppliers, vendors, subtenants, licensees or invitees  (collectively “Tenant’s Agents”), shall cause or permit any Hazardous Materials, as defined below, to be generated, brought onto, used, stored, created, released or disposed of in or about the Premises or Project, except that Tenant may use and store small quantities of common household cleaners and office supplies on the Premises provided such use and storage is in strict compliance with all Environmental Laws, as defined below.  

As used herein, the term “Hazardous Materials” shall mean any and all substances, materials or wastes (whether liquid, solid or gaseous), which are a pollutant or contaminant, or which are hazardous, toxic, ignitable, reactive, corrosive, dangerous, harmful or injurious, or which present a risk to public health or the environment, or which are or may become regulated by or under the authority of any Environmental Laws, as defined below, including, without limitation, asbestos or asbestos containing materials, petroleum products, pesticides, polychlorinated biphenyls, flammable explosives, radioactive materials and urea formaldehyde.  As used herein, the term “Environmental Laws” shall mean any present or future federal, state or local Laws, whether common law, statute, rule, regulation or ordinance, judgment, order, or other governmental restriction, guideline, listing or requirement, relating to the environment or any Hazardous Materials, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42  U.S.C. §9601 et seq., the Resource Conservation and Recovery Act of 1976, 42  U.S.C. §6901 et seq., and applicable provisions of the California Health and Safety Code and the California Water Code, all as heretofore or hereafter may be amended from time to time.  As used in this Section 12, the phrase “by anyone else at the Premises with the permission of Tenant” assumes that Tenant has used commercially reasonable efforts to secure the Premises from trespassers and intruders.

In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the Hazardous Materials to be brought onto the Premises, measures to be taken for storage and disposal thereof, and safety measures to be employed

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to prevent pollution or contamination of the air, soil, surface and ground water.  Landlord’s approval may be withheld in its reasonable judgment.  In the event Landlord consents to Tenant’s use of Hazardous Materials on the Premises or such consent is not required, Tenant represents and warrants that it shall comply with all Governmental Regulations applicable to Hazardous Materials including doing the following:  (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal Laws and provide Landlord a copy of any such reports or agency inspections; (ii) obtain and provide Landlord copies of all necessary permits required for the use and handling of Hazardous Materials on the Premises; (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards; (iv) surrender the Premises and Project free from any and all Hazardous Materials generated, brought, used, stored, created, released, or disposed of by Tenant or Tenant’s Agents or by anyone else at the Premises with the permission of Tenant (other than Landlord or Landlord’s agents, employees or contractors) coming onto the Premises; and (v) properly close the facility with regard to Hazardous Materials including the removal or decontamination of any process piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials and obtaining a closure certificate from the local administering agency prior to the Expiration Date or sooner termination of this Lease.

B. Tenant’s Indemnity Regarding Hazardous Materials:

Tenant shall, at its sole cost and expense and with counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord and the Landlord Related Parties from and against any and all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) incurred or suffered arising from generating, bringing, using, storing, creating, releasing or disposing of Hazardous Materials in or about the Premises or Project by Tenant or Tenant’s Agents, or by anyone else coming onto the Premises with the permission of Tenant (other than Landlord or Landlord’s agents, employees and contractors), or the violation of any Governmental Regulation or Environmental Laws by Tenant or Tenant’s Agents or by anyone else coming onto the Premises with the permission of Tenant (other than Landlord or Landlord’s agents, employees or contractors).  This indemnification, defense and hold harmless obligation applies whether or not the concentrations of any such Hazardous Materials exceed applicable maximum contaminant or action levels or any governmental agency has issued a cleanup order.  Tenant’s indemnification, defense, and hold harmless obligations include, without limitation, the following:  (i) claims, liabilities, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under present or future Laws, including Environmental Laws; (ii) claims, liabilities, costs or expenses pertaining to the assessment and identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source; (iii) losses attributable to diminution in the value of the Premises, Building or Project (iv) loss or restriction of use of rentable space in the Building or Project; and (v) all other liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders or judgments), damages (including consequential and punitive damages), and costs (including attorney, consultant, and expert fees and expenses) resulting from the release or violation.  This Section 12.B shall survive the expiration or termination of this Lease.

Notwithstanding anything to the contrary contained in the foregoing, Tenant shall have no liability or responsibility with respect to Hazardous Materials (a) present at or about the Premises, Building or Project prior to the Commencement Date and not introduced by Tenant or Tenant’s Agents, (b) that emanate onto the Premises, Building or Project from outside thereof that are not the responsibility of Tenant or Tenant’s Agents under this Section 12, or (c) that are introduced to the Premises, Building or Project by Landlord, any Landlord Related Party  or other tenants of the Building or Project.  This Section 12.B shall survive the expiration or termination of this Lease.

C. Notice of Release or Violation:

If, during the Lease Term (including any extensions), Tenant becomes aware of (i)  any actual or threatened release of a Hazardous Materials on, under or about the Premises or Project or (ii)  any inquiry, investigation, proceeding, claim, notice or order by any private or public person or entity regarding the presence of Hazardous Materials on, under or about the Premises or Project, including without limitation alleged violations of Environmental Laws by Tenant or Tenant’s Agents, Tenant shall give Landlord written notice of the release or investigation within five (5) days after learning of it and shall simultaneously and thereafter furnish Landlord with copies of any claims, notices of violation, reports, or other writings received by Tenant concerning the release or investigation.  In the event of an actual release of Hazardous Materials, Tenant shall also give Landlord immediate verbal notice of such release.  In the event of any release on or into

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the Premises or any portion of the Project or into the soil or ground water under the Premises, the Building or the Project of any Hazardous Materials used, treated, stored or disposed of by Tenant or Tenant’s Agents or by anyone else at the Premises or Project with the permission of Tenant (other than Landlord or Landlord’s agents, employees or contractors) coming onto the Premises, Tenant agrees to comply, at its sole cost, with all laws, regulations, ordinances and orders of any federal, state or local agency relating to the monitoring or remediation of such Hazardous Materials.  In the event of any such release of Hazardous Materials Tenant shall immediately give verbal and follow-up written notice of the release to Landlord, and Tenant agrees to meet and confer with Landlord and any lender designated by Landlord to attempt to eliminate and mitigate any financial exposure to such lender and resultant exposure to Landlord under California Code of Civil Procedure Section 736(b) as a result of such release, and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical uses to which the Project has and continues to be used, the risks to public health posed by the release, the then available technology and the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and all applicable Laws.  Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under 12.B of this Lease to indemnify, defend and hold Landlord and the Landlord Related Parties harmless.  Tenant shall provide Landlord prompt written notice of Tenant’s monitoring, cleanup and remedial steps.   In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant’s obligation to Landlord under this Section 12.C concerning the level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to this Lease.

D. Remediation Obligations:

In the event of any release on, under or about the Premises or the Project of any Hazardous Materials generated, brought onto, used, stored, created or disposed of by Tenant or Tenant’s Agents or by anyone else at the Premises or Project with the permission of Tenant (other than Landlord or Landlord’s agents, employees or contractors) coming onto the Premises, Tenant shall, at its sole cost, promptly take all necessary and appropriate actions, in compliance with applicable Environmental Laws, to remove or remediate such Hazardous Materials, whether or not any governmental agency has issued a cleanup order, so as to return the Premises and Project to the condition that existed before the introduction of such Hazardous Materials.  Tenant shall obtain Landlord’s written consent prior to implementing any proposed removal or remedial action, provided, however, that Tenant shall be entitled to respond immediately to an emergency without first obtaining Landlord’s written consent.  Nothing in the preceding sentence shall in any way eliminate, modify or reduce the obligation of Tenant under 12.B of this Lease to indemnify, defend and hold Landlord and the Landlord Related Parties harmless.

E. Environmental Monitoring:

Landlord and its agents shall have the right to inspect, investigate, sample and monitor the Premises, including any air, soil, water, ground water, or to conduct any other sampling or testing, digging, drilling or analysis, to determine whether Tenant is complying with the terms of this Section 12.  If Landlord discovers that Tenant is not in compliance with the terms of this Section 12, any costs incurred by Landlord in determining Tenant’s non compliance, including attorneys’, consultants’ and experts’ fees, shall be due and payable by Tenant to Landlord within five (5) days following Landlord’s written demand therefor.

13. TENANT’S DEFAULT

A. Events of Default

The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant:  (i) Tenant’s failure to pay the Base Monthly Rent or any other payment due under this Lease (including additional rent) by the date such amount is due, which failure continues for five (5) days past due, (ii) the abandonment or vacation of the Premises by Tenant in excess of thirty (30) consecutive days; (iii) a default by the tenant under the Adjacent Building Lease, beyond any applicable cure period expressly set forth in the Adjacent Building Lease, without the necessity for additional notice or cure under this Lease; (iv) Tenant’s failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30) days after written notice from Landlord, provided, however, that if the nature of the default is such that it cannot reasonably be cured within such thirty (30) day period, Tenant shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion

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not later than ninety (90) days after such written notice is delivered to Tenant, except that if this Lease expressly provides that no notice or cure is required for a breach or default to exist then such thirty (30) day or longer notice and cure period shall not apply; (v) Tenant’s making of any general assignment for the benefit of creditors; (vi) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days after the filing); (vii) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; (viii) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged within thirty (30) days; or (ix)  the occurrence of any other event described as a default elsewhere in this Lease or any amendment thereto regardless of whether such event is defined as a material default and breach of this Lease in this Section 13.

B. Remedies:

In the event of any default by Tenant, then in addition to other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate.  In the event Landlord elects to so terminate this Lease, Landlord may recover from Tenant all the following:  (i) the worth at time of award of any unpaid rent which had been earned at the time of such termination; (ii) the worth at time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform its obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom; including the following:  (x) expenses for repairing, altering or remodeling the Premises for purposes of reletting, (y) broker’s fees, advertising costs or other expenses of reletting the Premises, and (z) costs of carrying the Premises such as taxes, insurance premiums, utilities and security precautions; and (v) at Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted by applicable California law.  The term “rent”, as used in this Lease, is defined as the minimum monthly installments of Base Monthly Rent and all other sums required to be paid by Tenant pursuant to this Lease, all such other sums being deemed as additional rent due hereunder.  As used in  (i) and (ii) above, “worth at the time of award” shall be computed by allowing interest at a rate equal to the greater of the following (the “Agreed Interest Rate”) (i) the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum, as of the twenty-fifty (25th) day of the month immediately preceding Tenant’s default, on advances to member banks under Section 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended, or (ii) ten percent (10%) per annum.  As used in (iii) above, “worth at the time of award” shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent.  Furthermore, in the event of a default as described in clause (v), (vi), (vii) or (viii) in Section 13.A above, Landlord reserves the right to compensation for all damages and costs incurred by Landlord as a result of Tenant’s default, including without limitation those based upon a tort claim or contractual claim, and without any cap other than that imposed by the United States Bankruptcy Code (as amended, and as interpreted by case law, the “Code”) with respect to rent, as defined in the Code.  Tenant hereby waives the protection of any limitation in the Code imposed upon such damages to the extent such waiver is enforceable under the Code. Any obligation Landlord may have to mitigate damages upon a termination due to Tenant’s default shall not include the obligation to relet the Premises if Landlord has other comparable available space within the Building or Project.

C. Right to Re-enter:

In the event of any such default by Tenant, Landlord shall have the right, after terminating this Lease, to re-enter the Premises and remove all persons and property in accordance with applicable law.  Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant, and disposed of by Landlord, in any manner permitted by law.

D. Continuation of Lease:

If Landlord does not elect to terminate this Lease as provided in Section 13.B above, then the provisions of California Civil Code Section 1951.4, (Landlord may continue the Lease in effect after Tenant’s breach and abandonment and

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recover rent as it becomes due if Tenant has a right to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply, this Lease shall continue in effect, and Landlord may enforce all of its rights and remedies under this Lease, including without limitation, the right to recover payment of rent as it becomes due.

E. No Termination:

Neither efforts by Landlord to mitigate damages caused by a breach or default of Tenant, nor acts of maintenance or preservation or efforts to relet the Premises shall constitute an election by Landlord to terminate the Lease or a termination of Tenant’s right to possession of the Premises.

F. Non-Waiver:

Landlord may accept Tenant’s payments without waiving any rights under this Lease, including rights under a previously served notice of default. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed as other than payment on account of the amount due.  If Landlord accepts payments after serving a notice of default, Landlord may nevertheless commence and pursue an action to enforce rights and remedies under the previously served notice of default without giving Tenant any further notice or demand.  Furthermore, the Landlord’s acceptance of rent from the Tenant when the Tenant is holding over without express written consent does not convert Tenant’s tenancy from a tenancy at sufferance to a month to month tenancy. No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy for the violation of that provision, even if that violation continues or is repeated.  Any waiver by Landlord of any provision of this Lease must be in writing.  Such waiver shall affect only the provision specified and only for the time and in the manner stated in the writing. No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver thereof by Landlord.  No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date.  Only written notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises.  Landlord’s consent to or approval of any act by Tenant which requires Landlord’s consent or approvals shall not be deemed to waive or render unnecessary Landlord’s consent to or approval of any subsequent act by Tenant.  The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenants

G. Performance by Landlord:

If Tenant fails to perform any obligation required under this Lease or by Laws, Landlord in its sole and absolute discretion may, without notice, without waiving any rights or remedies and without releasing Tenant from its obligations hereunder, perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance, including interest at the Agreed Interest Rate within ten (10) days of Landlord’s written notice for such payment.

14. LANDLORD’S  LIABILITY:

A. Limitation on Landlord’s Liability:

In the event of Landlord’s failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure or commence to cure such failure prior to any claim for breach or resultant damages, provided, however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Landlord shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion.  In addition, upon any such failure by Landlord, Tenant shall give notice by registered or certified mail to any person or entity with a security interest in the Premises (“Mortgagee”) that has provided Tenant with notice of its interest in the Premises, and shall provide Mortgagee a reasonable opportunity to cure such failure, including such time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effectuate a cure.  Tenant agrees that each of the Mortgagees to whom this Lease has been assigned is an express third-party beneficiary hereof.  Tenant waives any right under California Civil Code Section 1950.7 or any other present or future law to the collection of any payment or deposit from Mortgagee or any purchaser at a foreclosure sale of Mortgagee’s interest unless Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. Tenant further waives any right to terminate this Lease and

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to vacate the Premises on Landlord’s default under this Lease.  Tenant’s sole remedy on Landlord’s default is an action for damages or injunctive or declaratory relief; provided, however, Landlord and the Landlord Related Parties shall not be liable to Tenant for any consequential damages suffered or incurred by Tenant on account of Landlord’s default including, without limitation, on account of lost profits or the interruption of Tenant’s business.  Tenant hereby agrees that Landlord shall not be liable for injury to Tenant’s business or any loss of income therefrom or for damage to the goods, wares, merchandise, or other property of Tenant, Tenant’s employees, invitees, customers, or any other person in or about the Premises or the Project, nor shall Landlord be liable for injury to the person of Tenant, Tenant’s employees, agents, contractors, or any other person in or about the Premises or Project, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction, or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Project or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant.  Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, occupant, or user of the Project, nor from the failure of Landlord to enforce the provisions of any other lease of the Project.

B. Limitation on Tenant’s Recourse:

If Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form of business entity, then the obligations of Landlord shall not constitute personal obligations of the Landlord Related Parties.  Tenant shall have recourse only to the interest of Landlord in the Premises for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of Landlord for the satisfaction of such obligations.

C. Indemnification of Landlord:

As a material part of the consideration rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises or Project, from any cause arising at any time to the fullest extent permitted by law, and, except to the extent due to the negligence or willful misconduct of Landlord or any Landlord Related Party, Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord and the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) incurred or suffered arising from the use or occupancy of the Premises or any part of the Project by Tenant or Tenant’s Agents, the acts or omissions of Tenant or Tenant’s Agents, Tenant’s breach of this Lease, or any damage or injury to person or property from any cause, including but not limited to the use or occupancy of the Premises or any part of the Project by Tenant or Tenant’s Agents, the acts or omissions of Tenant or Tenant’s Agents, Tenant’s breach of this Lease or from the failure of Tenant to keep the Premises in good condition and repair as herein provided.  Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant or Tenant’s Agents, Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord) and hold Landlord and the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) incurred in connection with such litigation.

15. DESTRUCTION OF PREMISES:

A. Landlord’s Obligation to Restore:

In the event of damage or destruction of the Premises during the Lease Term Landlord, and Tenant to the extent of its Specialized Tenant Improvements and Alterations, shall repair the same to a similar condition to that which existed prior to such damage or destruction.  Such damage or destruction shall not annul or void this Lease; however, Tenant shall be entitled to a proportionate reduction of Base Monthly Rent while repairs are being made, such proportionate reduction to be based upon the extent to which the repairs interfere with Tenant’s business in the Premises, as reasonably determined by Tenant. In no event shall Landlord be required to replace or restore Alterations, Specialized Tenant Improvements or Tenant’s trade fixtures or personal property.  Tenant shall be obligated to replace and restore all Specialized Tenant Improvements and Alterations.

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B. Limitations on Landlord’s Restoration Obligation:

Notwithstanding the provisions of Section 15.A above, Landlord shall have no obligation to repair or restore the Premises if any of the following occur:  (i) if Landlord reasonably estimates the repairs cannot be made in one hundred eighty (180) days from the date of receipt of all governmental approvals necessary under applicable Laws of State, Federal, County or Municipal authorities, as reasonably determined by Landlord, (ii) if the holder of the first deed of trust or mortgage encumbering the Building elects not to permit the insurance proceeds payable upon damage or destruction to be used for such repair or restoration, (iii) the damage or destruction is not fully covered by the insurance maintained by Landlord, (iv) the damage or destruction occurs in the last twenty four (24) months of the Lease Term, (v) Tenant is in default pursuant to the provisions of Section 13 above, or (vi) Tenant has vacated the Premises for more than ninety (90) days.  In any such event Landlord may elect either to (i) complete the repair or restoration, or (ii) terminate this Lease by providing Tenant written notice of its election within sixty (60) days following the damage or destruction.    If Landlord elects to repair or restore, this Lease shall continue in full force and effect.  Tenant hereby waives the benefits and rights provided to Tenant by the provisions of Civil Code Sections 1932 and 1933, or any similar Law now or hereafter in effect.

Notwithstanding the foregoing, Tenant shall have the option to terminate this Lease:  (i) if Landlord reasonably estimates the repairs cannot be made in one hundred eighty (180) days from the date of damage or destruction, or (ii) the damage or destruction occurs in the last twenty four (24) months of the Lease Term.  In any such event, Tenant may terminate this Lease by providing Landlord written notice of its election within fifteen (15) days following (a) with respect to the preceding clause (i), receipt of Landlord’s repair estimate, or (b) with respect to the preceding clause (ii), the damage or destruction.

16. CONDEMNATION:

If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the day before title vests in the condemnor or purchaser (“Vesting Date”) and Base Monthly Rent payable hereunder shall be adjusted so that Tenant is required to pay for the remainder of the Lease Term only such portion of Base Monthly Rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking, as reasonably determined by Landlord.  Further, in the event of such partial taking, Landlord shall have the option to terminate this Lease as of the Vesting Date.  If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall terminate on the Vesting Date.  If part or all of the Premises be taken, all compensation awarded upon such taking shall go to Landlord, and Tenant shall have no claim thereto; except Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for the unamortized cost of any Specialized Tenant Improvements and Alterations, or for Tenant’s moving costs.  Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130 and any similar Law now or hereafter in effect, and the provisions of this Section 16 shall govern in the case of a taking.

17. ASSIGNMENT OR SUBLEASE:

A. Consent by Landlord:

Except as specifically provided in Section 17.E below, Tenant may not voluntarily, involuntarily or by operation of law, assign, sell or otherwise transfer all or any part of Tenant’s interest in this Lease or in the Premises, cause or permit any part of the Premises to be sublet, occupied or used by anyone other than Tenant, or permit any person to succeed to any interest in this Lease or the Premises (all of the foregoing being a “Transfer”) without the express written consent of Landlord, not to be unreasonably withheld.  In the event Tenant desires to effectuate a Transfer, Tenant shall deliver to Landlord (i) executed counterparts of any agreement and of all ancillary agreements with the proposed transferee, (ii) current financial statements of the transferee covering the preceding three years, (iii) the nature of the proposed transferee’s business to be carried on in the Premises, (iv) a statement outlining all consideration to be given on account of the Transfer, and (v) a current financial statement of Tenant.  Landlord may condition its approval of any Transfer on receipt of a certification from both Tenant and the proposed transferee of all consideration to be paid to Tenant in connection with such Transfer.  At Landlord’s request, Tenant shall also provide additional information reasonably required by Landlord to determine whether it will consent to the proposed Transfer.  Landlord shall have a ten (10) day period following receipt of all the foregoing within which to notify Tenant in writing that Landlord elects to: (i) permit Tenant to Transfer such space to the named transferee on the terms and conditions set forth in the notice; or (ii) refuse

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consent.  If Landlord should fail to notify Tenant in writing of such election within the 10-day period, Landlord shall be deemed to have elected option (i) above.  Landlord’s consent to the proposed Transfer shall not be unreasonably withheld, provided and upon the condition that: (i) the proposed transferee is engaged in a business that is limited to the use expressly permitted under this Lease; (ii) the proposed transferee is a company with sufficient financial worth and management ability to undertake the financial obligation of this Lease and Landlord has been furnished with reasonable proof thereof; (iii) the proposed transfer agreement, if it is a sublease, conforms to the requirements of Section 17.I below or if it is an assignment, is in a form reasonably satisfactory to Landlord; (iv) the proposed Transfer will not result in there being greater than two (2) subtenants or other occupants (not including employees) within the Premises at any time during the Lease Term; (v) Tenant reimburses Landlord on demand for any costs that may be incurred by Landlord in connection with said Transfer, including the costs of making investigations as to the acceptability of the proposed transferee and legal costs incurred in connection with the granting or denial of any requested consent, not to exceed $1,500.00; and (vi) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to Landlord.  In the event all or any one of the foregoing conditions are not satisfied (without limiting other factors that may be considered or conditions that may be imposed by Landlord in connection with a requested Transfer), Landlord shall be considered to have acted reasonably if it withholds its consent. Tenant shall not hypothecate, mortgage, pledge or otherwise encumber Tenant’s interest in this Lease or the Premises or otherwise use the Lease as a security device in any manner without the consent of Landlord, (all of the foregoing being an “Hypothecation”) which consent Landlord may withhold in its reasonable discretion. Tenant shall reimburse Landlord on demand for any costs that may be incurred by Landlord in connection with an Hypothecation, including legal costs incurred in connection with the granting or denial of any requested consent, not to exceed $1,500.00.  Landlord’s consent to one or more Transfers or Hypothecations shall not operate to waive Tenant’s obligation to obtain Landlord’s consent to other Transfers or Hypothecations nor constitute consent to an assignment or other Transfer following foreclosure of any permitted lien, mortgage or other encumbrance.  If Tenant is a corporation, limited liability company, unincorporated association, partnership or other legal entity, the sale, assignment, cancellation, surrender, exchange, conversion or any other transfer or hypothecation of any stock, membership or other ownership interest in such entity (whether occurring at one time or over a period of time) in the aggregate of more than fifty percent (50%) (determined cumulatively) shall be deemed an assignment of this Lease; in the case of a partnership, any withdrawal or substitution (whether occurring at one time or over a period of time) of any partners owning fifty percent (50%) or more (cumulatively) of the partnership, or the dissolution of the partnership shall be deemed an assignment of this Lease; provided that, subject to Section 17.D below the foregoing provisions of this sentence shall not apply to (i) a transfer set forth in Section 17.E below, (ii) a transfer of stock in a corporation whose stock is, or as a result of such transfer becomes, publicly traded on a public stock exchange , or (iii) transfer of stock or other ownership interest in connection with a bonafide financing or capitalization for the benefit of Tenant.  If Tenant is an entity, any sale of all or substantially all of its assets shall be deemed an assignment of this Lease, except as set forth in Section 17.E below. If Tenant is a corporation whose stock is not publicly traded on a public stock exchange, any dissolution, merger, consolidation or reorganization of Tenant shall be deemed a Transfer, except as set forth in Section 17.E below.  Tenant acknowledges and agrees that the provision of this Section 17 are not unreasonable standards or conditions for purposes of Section 1951.4 of the California Civil Code, as amended from time to time, under bankruptcy laws, or for any other purpose.

Notwithstanding this Section 17.A above, but subject to this paragraph below, so long as Cavium, Inc., a Delaware corporation, is the Tenant under this Lease, Tenant shall have the right to permit the occupancy of the Building by the employees of any of Tenant’s customers or service providers, provided that (i) such individuals (individually a “Business Related Occupant”, and collectively the “Business Related Occupants”) shall not occupy a separately demised portion of the Building (other than open air cubicles), and no demising walls shall be constructed within the Building to separate any of the Business Related Occupants from other occupants of the Building; (ii) such occupancy is not in connection with any assignment or sublease; (iii) such occupancy is not a subterfuge by Tenant to avoid its obligations under this Lease or the restrictions on Transfers pursuant to this Section 18; (iv) no rent or other consideration shall be charged by Tenant with respect to such occupancy; (v) the Business Related Occupants do not occupy, in the aggregate at any given time, more than fifteen percent (15%) of the rentable square footage of the Building; (vi) such occupancy shall otherwise be subject to all of the terms and conditions of this Lease; (vii) Tenant shall be liable for violations by any of the Business Related Occupants of the terms and conditions of this Lease; and (viii) Tenant shall remain fully responsible and liable for the performance of all of the obligations of the Tenant under the Lease.  In no event shall the Business Related Occupants have any rights under this Lease. A breach or violation of this Lease by a Business Related Occupant which is not cured within any cure period expressly granted by this Lease shall constitute an Event of Default by Tenant under this Lease.  The failure of any Business Related Occupant to vacate the Premises prior to the expiration or termination of this Lease shall be deemed a holding over by Tenant without Landlord’s consent.  If the right to occupy granted by Tenant to any of

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the Business Related Occupants is evidenced by a written agreement, Tenant shall deliver a copy of such agreement to Landlord prior to allowing such Business Related Occupant to occupy any portion of the Premises.

B. Assignment or Subletting Consideration:

Landlord and Tenant hereby agree that Fifty percent (50%) of any rent or other economic consideration (including without limitation,  payments for trade fixtures and personal property in excess of the fair market value thereof, stock, warrants, and options) in excess of the Base Monthly Rent payable hereunder (after deducting therefrom Reasonable Transfer Costs (defined below)) (i) realized by Tenant in connection with any Transfer by Tenant, and/or (ii) realized by a subtenant or any other person or entity (other than Tenant) (any such subtenant, person or entity being a “Subsequent Transferor”) in connection with a sublease, assignment or other Transfer by such Subsequent Transferor, shall be paid by Tenant to Landlord promptly after such amounts are paid to Tenant or a Subsequent Transferor, regardless of the amount of subrent the Subsequent Transferor pays to Tenant or any prior Subsequent Transferor.  The foregoing shall not apply to a Permitted Transfer.  As used in this Section 17.B, “Reasonable Transfer Costs” shall mean the following costs, to the extent reasonably incurred in connection with the Transfer in question:  (i) advertising costs and brokerage commissions payable to unaffiliated third parties, and (ii) tenant improvement and legal costs incurred solely in connection with such Transfer.  In the case of a Transfer other than an assignment of Tenant’s entire interest in the Lease and Premises, Reasonable Transfer Costs shall be amortized on a straight line basis, without interest, over the initial term of the Transfer.  Tenant’s obligation to pay over Landlord’s portion of the consideration constitutes an obligation for additional rent hereunder.  The above provisions relating to Landlord’s right to terminate the Lease and relating to the allocation of excess rent are independently negotiated terms of the Lease which constitute a material inducement for the Landlord to enter into the Lease, and are agreed by the Parties to be commercially reasonable.  No Transfer by Tenant shall relieve it of any obligation under this Lease.  Any Transfer which conflicts with the provisions of this Lease shall be voidable by Landlord at any time following such Transfer.  

C. No Release:

Any Transfer shall be made only if and shall not be effective until the transferee shall execute, acknowledge, and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the transferee shall assume all the obligations of this Lease on the part of Tenant to be performed or observed to the extent of the interest being transferred and shall be subject to all the covenants, agreements, terms, provisions and conditions in this Lease to the extent applicable to the interest being transferred.  Notwithstanding any  Transfer and the acceptance of rent or other sums by Landlord from any transferee, Tenant and any guarantor shall remain fully liable for the payment of Base Monthly Rent and additional rent due, and to become due hereunder, for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any transferee or any other person claiming under or through any transferee that shall be in violation of any of the terms and conditions of this Lease, and any such violation shall be deemed a violation by Tenant.  Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord and  the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) resulting from any claims that may be made against Landlord by the proposed transferee or by any real estate brokers or other persons claiming compensation in connection with the proposed Transfer.

D. Reorganization of Tenant:

Notwithstanding any other provision of this Lease, the provisions of this Section 17.D shall apply if Tenant is a publicly-held corporation and: (i) there is a dissolution, merger, consolidation, or other reorganization of or affecting Tenant, where Tenant is not the surviving corporation, or there is a sale of all or substantially all of the assets of Tenant, or (ii) there is a sale, cancellation, surrender, exchange, conversion or any other transfer of stock involving or consisting of more than fifty percent (50%) of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding and entitled to vote for the election of directors, or there is any merger, consolidation or other reorganization of or affecting Tenant, whether the foregoing occurs in a single transaction or in multiple steps, and after any one or more of such events Tenant’s stock is no longer publicly traded. In a transaction under clause (i) of this Section 17.D, the surviving or acquiring corporation or entity (“Surviving Entity”) shall promptly execute and deliver to Landlord an agreement in form reasonably satisfactory to Landlord under which the Surviving Entity assumes the obligations of Tenant hereunder. In a transaction or series of transactions under clause (ii) of this Section 17.D, the entities which as a

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result of such transaction(s) own a greater than fifty percent (50%) interest in Tenant (including, without limitation as a result of a reverse triangular merger or a triangular merger) (collectively the “Acquiring Entity”) shall promptly execute and deliver to Landlord a guaranty of lease in form reasonably satisfactory to Landlord under which the Acquiring Entity guarantees the full payment and performance of the obligations of Tenant under the Lease (“Lease Guaranty”). The foregoing notwithstanding, in the event the Surviving Entity or Acquiring Entity is itself not a publicly-traded corporation, but is instead the subsidiary of a publicly-traded corporation (or a subsidiary of a subsidiary of a publicly-traded corporation, or a subsidiary in a chain of entities in which one or more parent corporations are publicly traded), then each publicly-traded parent corporation in such chain shall be required to execute and deliver to Landlord the Lease Guaranty. In addition, in the event that after such acquisition Tenant no longer prepares audited financial statements, then in addition to the financial statements required to be delivered by Tenant hereunder, the entity required to execute the Lease Guaranty shall provide Landlord its audited financial statements at the times and in the manner required of Tenant hereunder. It is the intent of the parties that after such any transaction or series of transactions described in this Section 17.D, Landlord shall be entitled to rely on the creditworthiness of publicly-traded corporations and to receive audited financial information from publicly-traded corporations.

E. Permitted Transfers

Provided that Tenant otherwise complies with the provisions of this Section 17, except the provision requiring prior consent, but otherwise including without limitation the provisions of Section 17.D, Tenant may enter into any of the following Transfers (a “Permitted Transfer”) without Landlord’s prior consent, and Landlord shall not be entitled to terminate the Lease or to receive any part of any subrent resulting therefrom that would otherwise be due pursuant to Sections 17.A and 17.B.  Tenant may sublease all or part of the Premises or assign its interest in this Lease to (i) any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease by means of an ownership interest of more than fifty percent (50%); (ii) a corporation which results from a merger, consolidation or other reorganization in which Tenant is not the surviving corporation, so long as the surviving corporation has a net worth at the time of such assignment or sublease that is equal to or greater than the net worth of Tenant immediately prior to such transaction; and (iii) a corporation which purchases or otherwise acquires all or substantially all of the assets of Tenant so long as such acquiring corporation has a net worth at the time of such assignment or sublease that is equal to or greater than the net worth of Tenant immediately prior to such transaction.

F. Effect of Default:

In the event of Tenant’s default, Tenant hereby assigns all amounts due to Tenant from any Transfer as security for performance of Tenant’s obligations under this Lease, and Landlord as assignee of Tenant, or a receiver for Tenant appointed on Landlord’s application, may collect such amounts and apply it toward Tenant’s obligations under this Lease, except that Tenant may collect such amounts unless a default occurs as described in Section 13 above. Landlord’s collection of any amounts due from a Transfer shall not constitute an acceptance by Landlord of attornment by any subtenants, and upon Tenant’s default Landlord shall have all rights provided by this Lease and applicable Laws, including without limitation terminating this Lease and any or all occupants’ rights to possession of the Premises as Landlord shall determine in Landlord’s sole and absolute discretion. A termination of the Lease due to Tenant’s default shall not automatically terminate a Transfer then in existence; rather at Landlord’s election (1) such Transfer shall survive the Lease termination, (2) the transferee shall attorn to Landlord, and (3) Landlord shall undertake the obligations of Tenant under the transfer agreement; except that Landlord shall not be liable for prepaid rent, security deposits or other defaults of Tenant to the transferee, or for any acts or omissions of Tenant and Tenant’s Agents.

G. Conveyance by Landlord:

In the event of any transfer of Landlord’s interest in this Lease, the Landlord herein named (and in case of any subsequent transfer, the then transferor) shall be automatically freed and relieved from and after the date of such transfer of all liability for the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided, however, that any funds in the hands of Landlord or the then transferor at the time of such transfer, in which Tenant has an interest shall be turned over to the transferee and any amount then due and payable to Tenant by Landlord or the then transferor under any provision of this Lease shall be paid to Tenant; and provided, further, that upon any such transfer, the transferee shall be deemed to have assumed, subject to the limitations of this Section 17 above all of the agreements, covenants and conditions in this Lease to be performed from and after the transfer on the part of Landlord, it being intended hereby that the covenants and obligations contained in this Lease to be

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performed on the part of Landlord shall, subject as aforesaid, be binding on each Landlord, its successors and assigns, only during its period of ownership.

H. Successors and Assigns:

Subject to the provisions this Section 17, the covenants and conditions of this Lease shall apply to and bind the heirs, successors, executors, administrators and assigns of all Parties hereto; and all parties hereto comprising Tenant shall be jointly and severally liable hereunder.

I. Sublease Requirements:

With respect to any permitted sublet of the Premises by Tenant to an approved Subtenant (“Subtenant”), the sublet transaction shall be evidenced by a written sublease between Tenant and Subtenant (the “Sublease”).  The Sublease shall comply with the following requirements:  (i) The form of the Sublease and the terms and conditions thereof shall be subject to Landlord’s approval which shall not be withheld unreasonably; (ii) The Sublease shall provide that it is subject to and shall incorporate by reference all of the terms and conditions of this Lease, except those terms and conditions relating to Rent, Additional Rent, and any other amount due under this Lease; (iii) The Sublease shall provide that the Subtenant shall have no right to exercise any option or other right granted to Tenant in this Lease, unless the Sublease resulted from a Permitted Transfer; (iv) The Sublease shall contain a mutual waiver of subrogation among the subtenant, Tenant and Landlord, and each shall require it’s insurance policies to acknowledge such waiver of subrogation; (v) The Sublease shall provide that all requirements of the Lease applicable to subleases shall be applicable to sub-subleases; (vi) The Sublease shall require Subtenant, acting through Tenant, to obtain Landlord’s prior written approval, not to be unreasonably withheld, to any alteration to the Premises to the same extent Tenant is required by this Lease to obtain such consent; (vii) The Sublease shall require Subtenant to send Landlord copies of any and all material notices concerning the Premises that Subtenant is obligated to provide to Tenant and Tenant to send Landlord copies of any and all material notices concerning the Premises that Tenant is obligated to provide to Subtenant; (viii) The Sublease shall provide that, at Landlord’s option, the Sublease shall not terminate in the event that this Lease terminates and shall require Subtenant to execute an attornment agreement if Landlord, in its sole and absolute discretion, shall elect to have the Sublease continue beyond the date of termination of this Lease; and (ix) The Sublease shall require the Subtenant to agree that on receipt of notice from Landlord that Tenant has defaulted, Subtenant shall pay all sums due under the Sublease to Landlord.

18. OPTION TO EXTEND THE LEASE TERM:

A. Grant and Exercise of Option:

Landlord grants to Tenant, subject to the terms and conditions set forth in this Section 18 Two (2) options (each an “Option” and collectively the “Options”) to extend the Lease Term for an additional term (each an “Option Term”).  Each Option Term shall be for a period of Sixty (60) months and shall be exercised, if at all, by written notice to Landlord no earlier than eighteen (18) months prior to the date the Lease Term would expire but for such exercise but no later than twelve (12) months prior to the date the Lease Term would expire but for such exercise, time being of the essence for the giving of such notice.  Notwithstanding the foregoing, in order for Tenant’s exercise of an Option under this Lease to be effective, the tenant under the Adjacent Building Lease must concurrently exercise its corresponding option to extend the term of the Adjacent Building Lease.  If Tenant exercises an Option, all of the terms, covenants and conditions of this Lease shall apply except for the grant of additional Options pursuant to this Section 18, provided that Base Monthly Rent for the Premises payable by Tenant during the Option Term shall be the greater of (i) the Base Monthly Rent applicable to the period immediately prior to the commencement of the Option Term, or (ii) one hundred percent (100%) of the Fair Market Rental as hereinafter defined.  Notwithstanding anything herein to the contrary, (i) if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease or the tenant under the Adjacent Building Lease is in monetary or material non-monetary default under any of terms, covenants or conditions of the Adjacent Building Lease, or (ii) if Tenant does not have the financial ability to meet its obligations under this Lease, or the tenant under the Adjacent Building Lease does not have the financial ability to meet its obligations under the Adjacent Building Lease, as reasonably determined by Landlord, either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term, then Landlord shall have, in addition to all of Landlord’s other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the Lease Term shall not be extended pursuant to this Section 18.A.  As used herein, the term “Fair Market Rental” is defined as the rental and all other monetary payments, including any abatements, escalations and adjustments

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thereto (including without limitation Consumer Price Indexing) that Landlord could obtain during the Option Term from a third party desiring to lease the Premises, based upon the (i) current use and other potential uses of the Premises, as determined by the rents (as may be abated) then obtainable for renewals of leases of space comparable in age and quality to the Premises in the same real estate submarket as the Building and (ii) the credit standing and financial stature of the Tenant.  

B. Determination of Fair Market Rental:

If Tenant exercises an Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental for the Option Term within thirty (30) days following the date of exercise.  If Tenant disputes Landlord’s determination of Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after delivery to Tenant of Landlord’s notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date, or that Tenant disagrees with Landlord’s determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section 18.C below. If Tenant does not timely send Landlord a notice as provided in the previous sentence, Landlord’s determination of Fair Market Rental shall be used in computing the Base Monthly Rent payable by Tenant during the Option Term pursuant to Section 18.A above.  If Tenant elects to resolve the disagreement as provided in Section 18.C below and such procedures are not concluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord the Base Monthly Rent as determined by Landlord (taking into account the Fair Market Rental as determined by Landlord) in the manner provided above pending resolution of such dispute.  If the Base Monthly Rent as finally determined pursuant to Section 18.C is greater than Landlord’s determination, Tenant shall pay Landlord the difference between the amount paid by Tenant and the Base Monthly Rent as so determined in Section 18.C within thirty (30) days after such determination.  If the Base Monthly Rent as finally determined in Section 18.C is less than Landlord’s determination, the difference between the amount paid by Tenant and the Base Monthly Rent as so determined in Section 18.C shall be credited against the next installments of Base Monthly Rent due from Tenant to Landlord hereunder.

C. Resolution of a Disagreement over the Fair Market Rental:

Any disagreement regarding Fair Market Rental shall be resolved as follows:  Within thirty (30) days after Tenant’s response to Landlord’s notice setting forth the Fair Market Rental, Landlord and Tenant shall meet at a mutually agreeable time and place, in an attempt to resolve the disagreement.  If within the 30-day consultation period referred to above, Landlord and Tenant cannot reach agreement as to Fair Market Rental, each party shall select one appraiser to determine Fair Market Rental.  Each such appraiser shall arrive at a determination of Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the 30-day consultation period described above.  If only one appraisal is submitted within the requisite time period, it shall be deemed as Fair Market Rental.  If both appraisals are submitted within such time period and the two appraisals so submitted differ by less than ten percent (10%) of the higher appraisal, the average of the two shall be deemed as Fair Market Rental.  If the two appraisals differ by more than 5% of the higher appraisal, the appraisers shall immediately select a third appraiser who shall, within thirty (30) days after his selection, make and submit to Landlord and Tenant a determination as to whether Tenant’s appraiser’s determination or Landlord’s appraiser’s determination is the Fair Market Rental.  All appraisers specified pursuant to this Section 18.C shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising office and industrial properties in the Santa Clara Valley.  Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser.

D. Personal to Tenant:

All Options provided to Tenant in this Lease are personal and granted to Cavium, Inc., a Delaware corporation (and it Permitted Transferees) and are not exercisable by any third party (other than a Permitted Transferee) should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord’s sole and absolute discretion.  In the event Tenant has multiple options to extend this Lease, a later Option to extend the Lease cannot be exercised unless the prior Option has been properly exercised and the Option Term for that exercised prior Option has commenced.

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19. GENERAL PROVISIONS:

A. Attorney’s Fees:

In the event a suit or alternative form of dispute resolution is brought for the possession of the Premises, for the recovery of any sum due hereunder, to interpret the Lease, or because of the breach of any other covenant herein; then the losing party shall pay to the prevailing party reasonable attorney’s fees and costs incurred in connection with such proceeding, including the expense of expert witnesses, depositions and court testimony.  The prevailing party shall also be entitled to recover all costs and expenses including reasonable attorney’s fees incurred in enforcing any judgment or award against the other party.  The foregoing provision relating to post-judgment costs is severable from all other provisions of this Lease.

B. Authority of Parties:

If Tenant is a corporation, partnership or other entity, Tenant represents and warrants that Tenant is duly formed and in good standing, that each individual signing this Lease is duly authorized to execute and deliver this Lease on behalf of Tenant and to bind Tenant to this Lease in accordance with Tenant’s governing documents, and that this Lease is binding upon Tenant in accordance with its terms.  At Landlord’s request, Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, of the authorizations described in this Section 19.B.

If Landlord is a corporation, partnership or other entity, Landlord represents and warrants that Landlord is duly formed and in good standing, that each individual signing this Lease is duly authorized to execute and deliver this Lease on behalf of Landlord and to bind Landlord to this Lease in accordance with Landlord’s governing documents, and that this Lease is binding upon Landlord in accordance with its terms.  

C. Brokers:

Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Cornish and Carey Commercial Newmark Knight Frank (“Tenant’s Broker”) and Tenant agrees to indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord and the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) asserted by any other broker or finder claiming through Tenant. Landlord shall pay Tenant’s Broker a leasing commission in connection with this Lease pursuant to a separate written agreement between Landlord and Tenant’s Broker.

Landlord represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Tenant’s Broker, and Landlord agrees to indemnify, defend with counsel reasonably acceptable to Tenant and hold Tenant and Tenant’s Agents harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) asserted by any other broker or finder claiming through Landlord.

D. Choice of Law:

This Lease shall be governed by and construed in accordance with California law.   Venue for all court proceedings or alternative forms of dispute resolution proceedings shall be Santa Clara County, California.

E. ARBITRATION OF DISPUTES:

LANDLORD AND TENANT AND ANY OTHER PARTY THAT MAY BECOME A PARTY TO THIS LEASE OR BE DEEMED A PARTY TO THIS LEASE, AND THEIR RESPECTIVE SUCCESSORS, ASSIGNS AND SUBTENANTS, AGREE THAT, EXCEPT FOR ANY CLAIM BY LANDLORD FOR (I) UNLAWFUL DETAINER, (II) TENANT’S FAILURE TO PAY THE BASE MONTHLY RENT, OR (III) WITHIN THE JURISDICTION OF THE SMALL CLAIMS COURT (WHICH SMALL CLAIMS COURT SHALL BE THE SOLE COURT OF COMPETENT JURISDICTION FOR SUCH SMALL CLAIMS MATTER), ANY CONTROVERSY, DISPUTE, OR CLAIM OF WHATEVER NATURE ARISING OUT OF, IN CONNECTION WITH OR IN RELATION TO THE INTERPRETATION, PERFORMANCE OR BREACH OF THIS LEASE, INCLUDING ANY CLAIM BASED ON CONTRACT, TORT, OR STATUTE, SHALL BE RESOLVED AT THE REQUEST OF ANY PARTY TO THIS

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LEASE, OR THEIR RESPECTIVE SUCCESSORS, ASSIGNS AND SUBTENANTS, THROUGH DISPUTE RESOLUTION PROCESS ADMINISTERED BY J.A.M.S. OR ANOTHER JUDICIAL MEDIATION SERVICE MUTUALLY ACCEPTABLE TO THE PARTIES LOCATED IN SANTA CLARA COUNTY, CALIFORNIA. THE DISPUTE RESOLUTION PROCESS SHALL CONSIST OF A FINAL AND BINDING ARBITRATION ADMINISTERED BY AND IN ACCORDANCE WITH THE THEN EXISTING RULES AND PRACTICES OF J.A.M.S. OR OTHER JUDICIAL MEDIATION SERVICE SELECTED, AND JUDGMENT UPON ANY AWARD RENDERED BY THE ARBITRATOR(S) MAY BE ENTERED BY ANY STATE OR FEDERAL COURT HAVING JURISDICTION THEREOF AS PROVIDED BY CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1280 ET. SEQ, AS SAID STATUTES THEN APPEAR, INCLUDING ANY AMENDMENTS TO SAID STATUTES OR SUCCESSORS TO SAID STATUTES OR AMENDED STATUTES, EXCEPT THAT IN NO EVENT SHALL THE PARTIES BE ENTITLED TO PROPOUND INTERROGATORIES OR REQUESTS FOR ADMISSIONS DURING THE ARBITRATION PROCESS. THE ARBITRATOR SHALL BE A RETIRED JUDGE OR A LICENSED CALIFORNIA ATTORNEY. THE VENUE FOR ANY SUCH ARBITRATION SHALL BE IN SANTA CLARA COUNTY, CALIFORNIA.

NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THIS “ARBITRATION OF DISPUTES” PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL.  BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THIS “ARBITRATION OF DISPUTES” PROVISION.  IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THIS “ARBITRATION OF DISPUTES” PROVISION TO NEUTRAL ARBITRATION.

Landlord: /s/ JMS      Tenant:  /s/ VP

F. Entire Agreement:

This Lease and the exhibits attached hereto contain all of the agreements and conditions made between the Parties hereto and may not be modified orally or in any other manner other than by written agreement signed by all parties hereto or their respective successors in interest.  This Lease supersedes and revokes all previous negotiations, letters of intent, lease proposals, brochures, agreements, representations, promises, warranties, and understandings, whether oral or in writing, between the parties or their respective representatives or any other person purporting to represent Landlord or Tenant.

G. Entry by Landlord:

Upon prior notice to Tenant (except in case of emergency, where no prior notice shall be required) and subject to Tenant’s reasonable security regulations, Tenant shall permit Landlord and Landlord’s agents to enter into and upon the Premises at all reasonable times, and without any rent abatement or reduction or any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned, for the following purposes:  (i) inspecting and maintaining the Premises; (ii) making repairs, alterations or additions to the Premises; (iii) erecting additional building(s) and improvements on the land where the Premises are situated or on adjacent land owned by Landlord; (iv) performing any obligations of Landlord under the Lease including remediation of Hazardous Materials if determined to be the responsibility of Landlord, (v) posting and keeping posted thereon notices of non responsibility for any construction, alteration or repair thereof, as required or permitted by any law, and (vi) placing “For Sale” signs, and showing the Premises to Landlord’s existing or potential successors, purchasers and lenders.  Tenant shall permit Landlord and Landlord’s agents, (i) at any time Tenant vacates the Premises (other than in connection with a Permitted Transfer or a sublease of the entire Premises) and (ii) at any time within nine (9) months prior to the Expiration Date (or at any time during the Lease Term that Tenant is in default hereunder), to place upon the Premises or within the exterior Common Areas “For Lease” signs, and exhibit the Premises to real estate brokers and prospective tenants at reasonable hours.  At

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any time when Tenant does not rent all rentable space in the Project Landlord shall have the right to place “For Lease” signs within the exterior Common Areas fronting North First Street. In addition, at any time within nine (9) months prior to the Expiration Date (or at any time during the Lease Term that Tenant is in default hereunder), Landlord shall have the right to place “For Lease” signs within the exterior Common Areas.

H. Estoppel Certificates:

At any time during the Lease Term, Tenant shall, within seven (7) business days following written notice from Landlord, execute and deliver to Landlord a written statement certifying, if true, the following:  (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on Landlord’s part hereunder (or specifying such defaults if they are claimed); and (iv) such other information as Landlord may reasonably request.  Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of Landlord’s interest in the Premises.  Tenant’s failure to deliver such statement within such time shall be conclusive upon the Tenant that this Lease is in full force and effect without modification, except as may be represented by Landlord, and that there are no uncured defaults in Landlord’s performance.  Tenant agrees to provide, within five (5) days of Landlord’s request, Tenant’s most recent three (3) years of audited (or if audited is unavailable, certified) financial statements for Landlord’s use in financing or sale of the Premises or Landlord’s interest therein.

I. Exhibits:

All exhibits referred to are attached to this Lease and incorporated by reference.

J. Interest:

All rent due hereunder, if not paid when due, shall bear interest at the Agreed Interest Rate.  This provision shall survive the expiration or sooner termination of the Lease.  Despite any other provision of this Lease, the total liability for interest payments shall not exceed the limits, if any, imposed by the usury laws of the State of California.  Any interest paid in excess of those limits shall be refunded to Tenant by application of the amount of excess interest paid against any sums outstanding in any order that Landlord requires.  If the amount of excess interest paid exceeds the sums outstanding, the portion exceeding those sums shall be refunded in cash to Tenant by Landlord.  To ascertain whether any interest payable exceeds the limits imposed, any non-principal payment (including late charges) shall be considered to the extent permitted by law to be an expense, fee or premium rather than interest.

K. Modifications Required by Lender:

If any lender of Landlord or ground lessor of the Premises requires a modification of this Lease that will not increase Tenant’s cost or expense or materially or adversely change Tenant’s rights and obligations, this Lease shall be so modified and Tenant shall execute whatever documents are required and deliver them to Landlord within ten (10) days after the request.

L. No Presumption Against Drafter:

Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by both Parties; and that in any controversy, dispute, or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be no inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof.

M. Notices:

All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, return receipt requested, or by personal delivery addressed to the party to be notified at the address for such party specified in Section 1 above of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days prior notice to the notifying party.  When this Lease requires service of a notice, that notice shall be deemed to constitute and satisfy the requirements of any equivalent or similar statutory notice, including any notices required by Code of Civil Procedure Section 1161 or any similar or successor statute.

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N. Property Management:

In addition, Tenant agrees to pay Landlord along with the expenses to be reimbursed by Tenant a monthly fee for management services rendered by either Landlord or a third party manager engaged by Landlord (which may be a party affiliated with Landlord), in the amount of three percent (3%) of the Base Monthly Rent.

O. Rent:

All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as “additional rent”, shall be deemed as rent.

P. Representations:

Except for the provisions of this Lease, Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations, warranties or promises with respect to the Premises or Project or with respect to present or future rents, expenses, operations, tenancies or any other matter.  Except as herein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose.

Q. Rights and Remedies:

Subject to Section 13 above, all rights and remedies hereunder are cumulative and not alternative to the extent permitted by law, and are in addition to all other rights and remedies in law and in equity.

R. Severability:

If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term.

S. Submission of Lease:

Submission of this document for examination or signature by the Parties does not constitute an option or offer to lease the Premises on the terms in this document or a reservation of the Premises in favor of Tenant.  This document is not effective as a lease or otherwise until executed and delivered by both Landlord and Tenant.

T. Subordination:

This Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of trust (collectively “Encumbrances”) which may now affect the Premises, to any covenants, conditions or restrictions of record, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance (“Holder”) require that this Lease be prior and superior thereto, within ten (10) business days after written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver all documents or instruments, in the form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes.  Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that with respect to Encumbrances created after the Effective Date, in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, Holder agrees to recognize Tenant’s rights under this Lease as long as Tenant is not then in default and continues to pay Base Monthly Rent and additional rent and observes and performs all required provisions of this Lease. Within ten (10) business days after Landlord’s written request, Tenant shall execute any documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance; provided the same include the above referenced acknowledgement and non-disturbance.  If Tenant fails to do so, then in addition to such failure constituting a default by Tenant, it shall be deemed that this Lease is so subordinated to such Encumbrance. Notwithstanding anything to the contrary in this Section 19.T, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance.

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Landlord shall use its best efforts to obtain, not later than forty five (45) days after the Effective Date from the Holder of the ground lease and deed of trust  encumbering the Premises as of the Effective Date a recognition and nondisturbance agreement (which may also provide for subordination as provided in this Section 19.T above) which (i) provides that this Lease shall not be terminated so long as Tenant is not in default under this Lease beyond applicable notice and cure periods, and (ii) so long as the Lease remains in full force and effect, recognizes all of Tenant’s rights under the Lease and requires such Holder to be bound by Landlord’s obligations under this Lease to the extent such obligations accrue after the termination of the underlying ground lease (as to the Holder under a ground lease) or during the period of the deed of trust beneficiary’s fee ownership of the Premises (as to a Holder under the deed of trust), subject however to commercially reasonable exclusions (such as, without limitation, Landlord’s obligation relating to the Work Allowance), and contains other commercially reasonable provisions requested by such Holder.

U. Survival of Indemnities:

All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive the expiration or sooner termination of the Lease.

V. Time:

Time is of the essence hereunder.

W. Transportation Demand Management Programs:

Should a government agency or municipality require Landlord to institute TDM (Transportation Demand Management) facilities and/or programs, Tenant agrees that the cost of TDM imposed facilities and programs required on the Premises, including but not limited to employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid by Tenant.  Further, any ongoing costs or expenses associated with a TDM program which are required for the Premises and not provided by Tenant, such as an on-site TDM coordinator, shall be provided by Landlord with such costs being included as additional rent and reimbursed to Landlord by Tenant within thirty (30) days after demand. If TDM facilities and programs are instituted on a Project wide basis, Tenant shall pay its allocable share of such costs in accordance with Section 8.E above.  

X. Waiver of Right to Jury Trial:

To the extent then authorized by law as of the time of any actual litigation between them and to the extent not already encompassed within the various agreements to arbitrate otherwise contained herein,  and as an alternative to arbitration should arbitration for any reason not be enforced, Landlord and Tenant waive their respective rights to trial by jury of any contract or tort claim, counterclaim, cross-complaint, or cause of action in any action, proceeding, or hearing brought by either party against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, or Tenant’s use or occupancy of the Premises, including any claim of injury or damage or the enforcement of any remedy under any current or future law, statute, regulation, code, or ordinance.

Y. General:

The captions and section headings of this Lease are for convenience of reference only, and shall not be used to limit, extend or interpret the meaning of any part of this Lease.  This Lease may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document.  Signatures and initials to this Lease created by the signer by electronic means and/or transmitted by telecopy or other electronic transmission shall be valid and effective to bind the party so signing.  Each party agrees to promptly deliver an execution original to this Lease with its actual signature and initials to the other party, but a failure to do so shall not affect the enforceability of this Lease, it being expressly agreed that each party to this Lease shall be bound by its own electronically created and/or telecopied or electronically transmitted signature and initials and shall accept the electronically created and/or telecopied or electronically transmitted signature and initials of the other party to this Lease. All agreements by Tenant contained in this Lease, whether expressed as covenants or conditions, shall be construed to be both covenants and conditions, conferring upon Landlord, in the event of a breach thereof, the right to terminate this Lease.

- 29 -

Z. Construction Related Accessibility Standards:

In accordance with California Civil Code Section 1938, Landlord hereby notifies Tenant that except to the extent performed by or known to Tenant neither the Premises, nor the Project within which it is located has been inspected by a Certified Access Specialist (CASp).

   

- 30 -

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written.

Landlord:
SI 37, LLC,
a California limited liability company
By:		Sobrato Interests 1,
		a California limited partnership
Its:		Sole Member
			By:	Sobrato Development Companies, LLC,
			a California limited liability company
			Its:		General Partner
						By:	/s/ John Michale Sobrato
						John Michael Sobrato
						Its: Manager
Tenant:
Cavium, Inc.,
a Delaware Corporation
By:	/s/ Vince Pangrazio
	Vince Pangrazio, SVP and General Counsel

- 31 -

EXHIBIT “A” – Premises & Building

   

- i -

TABLE OF CONTENTS

Page

1.	PARTIES:		1
2.	PREMISES:		1
3.	USE:		1
	A.	Permitted Uses:	1
	B.	Uses Prohibited:	2
	C.	Advertisements and Signs:	2
	D.	Covenants, Conditions and Restrictions:	2
	E.	Sustainability Requirements:	2
4.	TERM AND RENTAL:		3
	A.	Term; Base Monthly Rent:	3
	B.	Late Charge:	4
5.	INTENTIONALLY DELETED		4
6.	ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:		4
	A.	Landlord’s Work	4
	B.	Tenant Improvements:	4
	C.	Work Allowance:	5
	D.	Condition Upon Surrender:	6
	E.	Failure to Surrender:	6
7.	ALTERATIONS & ADDITIONS:		7
	A.	General Provisions:	7
	B.	Free From Liens:	7
	C.	Compliance With Governmental Regulations:	8
	D.	Insurance Requirements:	8
8.	MAINTENANCE OF PREMISES:		8
	A.	Landlord’s Obligations:	8
	B.	Tenant’s Obligations:	9
	C.	Obligations Regarding Reimbursable Operating Costs:	9
	D.	Reimbursable Operating Costs:	10
	E.	Tenant’s Allocable Share:	11
	F.	Waiver of Liability:	11
9.	INSURANCE:		11
	A.	Tenant’s Use:	11
	B.	Landlord’s Insurance:	12
	C.	Tenant’s Insurance:	12
	D.	Waiver:	12
10.	TAXES:		12
11.	UTILITIES:		13
12.	TOXIC WASTE AND ENVIRONMENTAL DAMAGE:		13
	A.	Use of Hazardous Materials:	13
	B.	Tenant’s Indemnity Regarding Hazardous Materials:	14
	C.	Notice of Release or Violation:	14
	D.	Remediation Obligations:	15
	E.	Environmental Monitoring:	15

- ii -

13.	TENANT’S DEFAULT		15
	A.	Events of Default	15
	B.	Remedies:	16
	C.	Right to Re-enter:	16
	D.	Continuation of Lease:	16
	E.	No Termination:	16
	F.	Non-Waiver:	17
	G.	Performance by Landlord:	17
14.	LANDLORD’S  LIABILITY:		17
	A.	Limitation on Landlord’s Liability:	17
	B.	Limitation on Tenant’s Recourse:	18
	C.	Indemnification of Landlord:	18
15.	DESTRUCTION OF PREMISES:		18
	A.	Landlord’s Obligation to Restore:	18
	B.	Limitations on Landlord’s Restoration Obligation:	18
16.	CONDEMNATION:		19
17.	ASSIGNMENT OR SUBLEASE:		19
	A.	Consent by Landlord:	19
	B.	Assignment or Subletting Consideration:	20
	C.	No Release:	21
	D.	Reorganization of Tenant:	21
	E.	Permitted Transfers	22
	F.	Effect of Default:	22
	G.	Conveyance by Landlord:	22
	H.	Successors and Assigns:	22
	I.	Sublease Requirements:	22
18.	OPTION TO EXTEND THE LEASE TERM:		23
	A.	Grant and Exercise of Option:	23
	B.	Determination of Fair Market Rental:	23
	C.	Resolution of a Disagreement over the Fair Market Rental:	24
	D.	Personal to Tenant:	24
19.	GENERAL PROVISIONS:		24
	A.	Attorney’s Fees:	24
	B.	Authority of Parties:	24
	C.	Brokers:	25
	D.	Choice of Law:	25
	E.	ARBITRATION OF DISPUTES:	25
	F.	Entire Agreement:	26
	G.	Entry by Landlord:	26
	H.	Estoppel Certificates:	26
	I.	Exhibits:	26
	J.	Interest:	26
	K.	Modifications Required by Lender:	27
	L.	No Presumption Against Drafter:	27
	M.	Notices:	27
	N.	Property Management:	27
	O.	Rent:	27
	P.	Representations:	27
	Q.	Rights and Remedies:	27
	R.	Severability:	27

- iii -

	S.	Submission of Lease:	27
	T.	Subordination:	27
	U.	Survival of Indemnities:	28
	V.	Time:	28
	W.	Transportation Demand Management Programs:	28
	X.	Waiver of Right to Jury Trial:	28
	Y.	General:	28
	Z.	Construction Related Accessibility Standards:	29
EXHIBIT “A” – Premises & Building			-i-

   

- iv -

EX-10

Exhibit 10.2

FIRST AMENDMENT TO LEASE

(2315 N. First)

THIS FIRST AMENDMENT TO LEASE (this “Amendment”) is dated for reference purposes as of November 1, 2013 by and between SI 37, LLC, a California limited liability company (“Landlord”) and Cavium, Inc., a Delaware corporation (“Tenant”).  Landlord and Tenant may each be referred to in this Amendment individually as a “Party”, and collectively as the “Parties.”

RECITALS

A.  Landlord and Tenant (as successor in interest by merger to Cavium Networks, Inc., a Delaware corporation (“Cavium Networks”)) are the landlord and tenant, respectively, under that certain lease originally entered into between Landlord and Cavium Networks dated as of March 17, 2011 (the “Original Lease”) for those premises located at 2315 N. First Street, San Jose, California more particularly described below (the “Premises”).

B.  Concurrently with the execution of this Amendment, Landlord and Tenant are entering into that certain lease (the “2345 Lease”) for the other building in the Project commonly known as 2345 N. First Street, San Jose, California (the “2345 Building”).

E.  The Parties desire to amend the Original Lease on the terms and conditions set forth in this Amendment.  

NOW, THEREFORE, Landlord and Tenant, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows:

1.Definitions.  All capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Original Lease.

2.Amendment Effective Date.  This Amendment shall become effective when this Amendment and the 2345 Lease have both been signed by Landlord and Tenant (the date of full execution of this Amendment and the 2345 Lease by Landlord and Tenant being the “Amendment Effective Date”). From and after the Amendment Effective Date, as used in the Original Lease and this Amendment “Lease” shall mean the Original Lease as amended by this Amendment.  

3. Premises and Common Area.  The parties hereby clarify that the Premises leased pursuant to the Original Lease is the Building and the historical structure described in the Original Lease, and that the parking allocated to Tenant under the Lease is part of the Project’s Common Area, as to which Tenant has a use right, subject to the terms and conditions of the Lease. The second (2nd) paragraph of Section 2 of the Original Lease is hereby revised to read in its entirety as follows:

“Tenant shall also have the right to use Tenant’s Allocable Share of parking spaces within the Project (defined below) on a nonexclusive basis with other tenants and users of the Project, and the nonexclusive right to use all other exterior areas designated by Landlord from time to time as common area (“Common Area”) including but not limited to landscaping, sidewalks, service areas and other common facilities. Landlord agrees not to grant parking rights in the Project to any tenants or users of other properties owned by Landlord outside of the Project, it being agree that Project parking shall be solely for the benefit of the Project, subject however to use by Landlord and Landlord’s agents, employees, contractors, consultants and other representatives in the exercise of Landlord’s rights or performance of Landlord’s obligations under this Lease.  Tenant’s Allocable Share of parking spaces under this Lease as of the Effective Date is three hundred seventy four (374). The Building and Common Area are situated within a project site shared with the 2345 Building, as outlined in Exhibit “A” attached hereto (“Project”). Unless expressly provided otherwise, the term Premises as used herein shall include the Landlord’s Work (defined in Section 6.A below).

4. Permitted Uses.  The second (2nd) sentence of Section 3.A of the Original Lease is hereby revised to read as follows:  “With respect to the Building, Tenant shall use only the number of parking spaces allocated to Tenant under this Lease.”  The fourth (4th) sentence of Section 3.A of the Original Lease is hereby revised to read as follows:  “Landlord reserves the right to impose such additional rules and regulations as Landlord deems reasonably necessary to operate the Project in a manner which protects the quiet enjoyment of all tenants in the Project provided that such rules and regulations do not materially and adversely affect Tenant’s rights or increase Tenant’s obligations under this Lease.”

 1 

5. Advertisements and Signs.  The second (2nd) paragraph of Section 3.C of the Lease is hereby revised to read in its entirety as follows:  

“Tenant shall install, in accordance with Landlord’s signage criteria and applicable Laws, at Tenant’s expense, (A) Tenant’s name at the entrance to the Premises, (B) Tenant’s name on any exterior Common Area sign monuments (including the exterior fountain sign monument), subject to this paragraph below, and (C) Tenant’s name on the exterior of the Building, in a design and location mutually agreeable to the Parties.  As it relates to Tenant’s sign on the exterior Common Area sign monuments, Tenant shall be entitled to Tenant’s Allocable Share of signage space upon each monument, which during any period that Tenant leases only the Building (and not the 2345 Building) shall be in the left hand side of the monument (as you face the monument).  During any period that Tenant leases both the Building (pursuant to this Lease) and the 2345 Building (pursuant to the 2345 Lease) (and thus has a combined allocable share under both leases of one hundred percent (100%)) Tenant shall have the right to install a single sign utilizing all of the signage space on the exterior Common Area sign monuments if Tenant so elects. All signs placed in the Project by or for Tenant shall comply with all recorded documents affecting the Premises, and applicable laws, ordinances, guidelines, rules and regulations of the City of San Jose.   Any sign placed in the Project by or for Tenant shall be removed by Tenant, at its sole cost, prior to the expiration or sooner termination of the Lease, and Tenant shall repair, at its sole cost, any damage or injury to the Project caused thereby, and if not so removed, then Landlord may have same so removed at Tenant’s expense.”

6. Lease Term; Base Monthly Rent.  

The initial ninety three (93) month Lease Term for the Premises is hereby extended to expire concurrently with the expiration of the initial ninety six (96) month term of the 2345 Lease.  From and after the Amendment Effective Date, “Expiration Date” as used in the Lease shall mean the expiration date of the initial ninety six (96) month term of the 2345 Lease.  Upon determination of the new Expiration Date, Landlord and Tenant shall memorialize the actual new Expiration Date in writing promptly following request by one of the Parties to the other of the Parties.

Base Monthly Rent due for under the Lease until February 28, 2019 shall continue to be paid in accordance with the Base Monthly Rent schedule set forth in Section 4.A of the Original Lease.  Base Monthly Rent due for the Premises for the period commencing on March 1, 2019 and ending on the new Expiration Date described in this Amendment Section 6 above shall be as follows:

Period	Base Monthly Rent
March 1, 2019-February 29, 2020	Two Hundred Fifty One Thousand Dollars ($251,000)
March 1, 2020- February 28, 2021	Two Hundred Fifty Eight Thousand Dollars Five Hundred Thirty One Dollars ($258,531)
March 1, 2021-February 28, 2022	Two Sixty Six Thousand Two Hundred Eighty Seven Dollars ($266,287)
March 1, 2022-new Expiration Date	Two Hundred Seventy Four Thousand Two Hundred Seventy Five Dollars ($274,275)

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7. Satellite Dishes and Antennas.  Subject to approval of all governmental authorities and to Landlord’s reasonable approval as to design and location, Tenant would have the right to install satellite dish(es) and antennas on the roof of the Building (which shall constitute Alterations subject to Section 7 of the Original Lease, as amended by this Amendment),  provided that (i) such installation shall be performed by a licensed contractor in a good and workmanlike manner, and in a manner that does not invalidate any roof related warranties, and (ii) such dishes and antennas shall be screened in a manner reasonably acceptable to Landlord.

8.Work Allowance Under 2345 Lease.  Landlord is agreeing to provide Tenant a work allowance under the 2345 Lease (the “Work Allowance”) which Tenant is allowed to use for certain tenant improvements, work stations and furniture for the 2345 Building as well as for Alterations under this Lease (collectively, the “Work Allowance Improvements”) as more particularly described in the 2345 Lease.  The Work Allowance shall be used by Tenant strictly in accordance with the terms and conditions of the 2345 Lease.  If following completion of the Work Allowance Improvements and payment of Landlord’s share of Work Allowance Costs (as defined in the 2345 Lease) in accordance with Section 6.C of the 2345 Lease there are any un-disbursed Work Allowance funds, Tenant shall not be entitled to any further disbursements of such funds and shall not be entitled to any credit with respect to such funds. If any portion of the Work Allowance remains un-disbursed as of the date that is thirty six (36) months after the Amendment Effective Date, then as to those remaining funds for which the required Disbursement Documentation (as defined in the 2345 Lease) has not been submitted to Landlord under the 2345 Lease, Tenant shall not be entitled to any further disbursements of such funds and shall not be entitled to any credit with respect to such funds. All Work Allowance Costs shall be fully documented to and subject to reasonable verification by Landlord. Landlord shall not be required make any disbursements of the Work Allowance during any period when Tenant is in default under this Lease beyond any applicable cure period expressly granted in this Lease, and such period of default shall not operate to extend the thirty six (36)  month period described in this Amendment Section 8 above.  Tenant shall not have the right to depreciate and claim and collect any investment tax credits for the Alterations to the extent paid for with Work Allowance funds.  

9.Construction Related Accessibility Standards.  In accordance with California Civil Code Section 1938, Landlord hereby notifies Tenant that, except to the extent performed by or known to Tenant, neither the Premises nor the Project within which it is located has been inspected by a Certified Access Specialist (CASp).

10.Alterations.  The reference to “fifteen (15) days” in the second (2nd) sentence of Section 7.A of the Original Lease is hereby replaced with “ten (10) business days”.  The following is hereby added after the third (3rd) sentence of Section 7.A of the Original Lease:  

“Landlord’s failure to grant or withhold its consent to any Alterations within ten (10) business days after receipt of any applicable plans therefor (including architectural and structural plans if appropriate), shall be deemed to constitute Landlord’s disapproval of same; provided, however that if after such ten (10) business day period Tenant delivers another written notice to Landlord requesting consent to the proposed Alterations, such notice states that it is a second notice as to which if Landlord does not respond within ten (10) business days Landlord will be deemed to have granted its consent, and Landlord has confirmed to Tenant that Landlord received such second notice and the previously submitted plans and specifications, then if Landlord fails to respond to Tenant within ten (10) business days after delivery of the second notice and Landlord’s confirmation of receipt Landlord shall be deemed to have consented to the proposed Alterations.”  

10.Maintenance of Premises (Landlord’s Obligations).  In the first (1^st) sentence of Section 8.A of the Original Lease, “(and not as a Reimbursable Operating Cost)” is hereby added after “at its sole cost and expense”. In addition, if through no fault of Tenant or Tenant’s Agents the cost to repair the roof of the Building in any calendar year of the Lease Term exceeds Five Thousand One Hundred Dollars ($5,100) (prorated for partial calendar years during the Lease Term), then Landlord may elect either (i) to make the repairs, with the cost in excess of Five Thousand One Hundred Dollars ($5,100) in a calendar year (prorated for partial calendar years during the Lease Term) to be paid by Landlord at its sole cost and expense (and not as a Reimbursable Operating Cost), or (ii) to replace the old roof with a new roof, the cost of which shall be a Reimbursable Operating Cost amortized as a capital expenditure pursuant to Section 8.D of the Original Lease.

11.Reimbursable Operating Costs.  In Section 8.D of the Original Lease, “,except to the extent this Lease expressly states that they are Landlord’s sole cost and expense” is hereby added at the end of the first (1^st) sentence.  At the end of the second (2^nd) paragraph of Section 8.D of the Original Lease, “and (14) legal fees and costs incurred in connection with the negotiation of leases or disputes with other tenants of the Project, a violation of law by Landlord or Landlord’s agents, employees or contractors, or the sale, transfer, financing or re-financing of the Project” is hereby amended to read “(14) costs and expenses which this Lease expressly states are Landlord’s sole cost and expense; and (15) legal fees and costs incurred in connection with the negotiation of leases or disputes with other tenants of the Project, a violation of law by Landlord or Landlord’s agents, employees or contractors, or the sale, transfer, financing or re-financing of the Project”.

 3 

12.Waiver of Liability.  In the first (1^st) sentence of Section 8.F of the Original Lease, “required of Landlord pursuant to this Lease” is here added after “defined services”.  In the second (2^nd) sentence of Section 8.F of the Original Lease, “as being Landlord’s obligation” is hereby added after “services listed herein”.

13. Tenant’s Indemnity Regarding Hazardous Material.  In the first (1^st) sentence of Section 12.B of the Original Lease, “permission nof Tenant” is hereby corrected to read “permission of Tenant”.

14.Default of Tenant.  In Section 13.A of the Original Lease, item (iii) is hereby revised to read as follows:  

“(iii) Tenant’s failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30) days after written notice from Landlord, provided, however, that if the nature of the default is such that it cannot reasonably be cured within such thirty (30) day period, Tenant shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion not later than ninety (90) days after such written notice is delivered to Tenant, except that if this Lease expressly provides that no notice or cure is required for a breach or default to exist then such thirty (30) day or longer notice and cure period shall not apply;”.

In addition to the defaults described in Section 13.A of the Original Lease, the following shall also constitute a material default and breach of the Lease by Tenant:  a default by the tenant under the 2345 Lease, beyond any applicable cure period expressly set forth in the 2345 Lease, without the necessity for additional notice or cure under this Lease. Section 13.H, titled “Habitual Default” is hereby deleted.

15.Assignment or Sublease (Consent by Landlord).  The following paragraph is hereby added to Section 17.A:

“Notwithstanding this Section 17.A above, but subject to this paragraph below, so long as Cavium, Inc., a Delaware corporation, is the Tenant under this Lease, Tenant shall have the right to permit the occupancy of the Building by the employees of any of Tenant’s customers or service providers, provided that (i) such individuals (individually a “Business Related Occupant”, and collectively the “Business Related Occupants”) shall not occupy a separately demised portion of the Building (other than open air cubicles), and no demising walls shall be constructed within the Building to separate any of the Business Related Occupants from other occupants of the Building; (ii) such occupancy is not in connection with any assignment or sublease; (iii) such occupancy is not a subterfuge by Tenant to avoid its obligations under this Lease or the restrictions on Transfers pursuant to this Section 18; (iv) no rent or other consideration shall be charged by Tenant with respect to such occupancy; (v) the Business Related Occupants do not occupy, in the aggregate at any given time, more than fifteen percent (15%) of the rentable square footage of the Building; (vi) such occupancy shall otherwise be subject to all of the terms and conditions of this Lease; (vii) Tenant shall be liable for violations by any of the Business Related Occupants of the terms and conditions of this Lease; and (viii) Tenant shall remain fully responsible and liable for the performance of all of the obligations of the Tenant under the Lease.  In no event shall the Business Related Occupants have any rights under this Lease. A breach or violation of this Lease by a Business Related Occupant which is not cured within any cure period expressly granted by this Lease shall constitute an Event of Default by Tenant under this Lease.  The failure of any Business Related Occupant to vacate the Premises prior to the expiration or termination of this Lease shall be deemed a holding over by Tenant without Landlord’s consent.  If the right to occupy granted by Tenant to any of the Business Related Occupants is evidenced by a written agreement, Tenant shall deliver a copy of such agreement to Landlord prior to allowing such Business Related Occupant to occupy any portion of the Premises.”

 4 

16.Option To Extend.  In addition to all other terms and conditions set forth in Section 18 of the Original Lease, in order for Tenant’s exercise of an Option under this Lease to be effective, the tenant under the 2345 Lease must concurrently exercise its corresponding option to extend the term of the 2345 Lease. Notwithstanding anything in the Lease to the contrary, (i) if the tenant under the 2345 Lease is in monetary or material non-monetary default under any of terms, covenants or conditions of the 2345 Lease, or (ii) if the tenant under the 2345 Lease does not have the financial ability to meet its obligations under the 2345 Lease, as reasonably determined by Landlord, either at the time such tenant exercises its corresponding option or at any time thereafter prior to the commencement date of the applicable Option Term, then Landlord shall have, in addition to all of Landlord’s other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the Lease Term shall not be extended pursuant to Section 18.A of the Original Lease.  Section 18.B of the Original Lease is hereby amended to read in its entirety as follows:

“B. Determination of Fair Market Rental:

If Tenant exercises an Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental for the Option Term within thirty (30) days following the date of exercise.  If Tenant disputes Landlord’s determination of Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after delivery to Tenant of Landlord’s notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date, or that Tenant disagrees with Landlord’s determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section 18.C below. If Tenant does not timely send Landlord a notice as provided in the previous sentence, Landlord’s determination of Fair Market Rental shall be used in computing the Base Monthly Rent payable by Tenant during the Option Term pursuant to Section 18.A above.  If Tenant elects to resolve the disagreement as provided in Section 18.C below and such procedures are not concluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord the Base Monthly Rent as determined by Landlord (taking into account the Fair Market Rental as determined by Landlord) in the manner provided above pending the resolution of such dispute.  If the Base Monthly Rent as finally determined pursuant to Section 18.C is greater than Landlord’s determination, Tenant shall pay Landlord the difference between the amount paid by Tenant and the Base Monthly Rent as so determined in Section 18.C within thirty (30) days after such determination.  If the Base Monthly Rent as finally determined in Section 18.C is less than Landlord’s determination, the difference between the amount paid by Tenant and the Base Monthly Rent as so determined in Section 18.C shall be credited against the next installments of Base Monthly Rent due from Tenant to Landlord hereunder.”

17.Brokers.  Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Amendment other than Cornish and Carey Commercial Newmark Knight Frank (“Tenant’s Broker”) and Tenant agrees to indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord and the Landlord Related Parties harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) asserted by any other broker or finder claiming through Tenant. Landlord shall pay Tenant’s Broker a leasing commission in connection with this Amendment pursuant to a separate written agreement between Landlord and Tenant’s Broker.

Landlord represents it has not utilized or contacted a real estate broker or finder with respect to this Amendment other than Tenant’s Broker, and Landlord agrees to indemnify, defend with counsel reasonably acceptable to Tenant and hold Tenant and Tenant’s Agents harmless from and against all claims, liabilities, obligations, penalties, fines, actions, losses, damages, costs or expenses (including without limitation reasonable attorneys fees) asserted by any other broker or finder claiming through Landlord.

18.Entry by Landlord.  In the last sentence of Section 19.G of the Original Lease, the reference to “nine (12) months” is revised to read “nine (9) months”.

19.Subordination. In the second (2^nd) to last sentence of Section 19.T of the Original Lease “non-distburbance” is revised to read “non-disturbance”.  Landlord shall use its best efforts to obtain, not later than forty five (45) days after the Amendment Effective Date, from the Holder of the ground lease and deed of trust  encumbering the Premises as of the Amendment Effective Date, a recognition and nondisturbance agreement (which may also provide for subordination as provided in Section 19.T of the Original Lease) which (i) provides that the Lease shall not be terminated so long as Tenant is not in default under the Lease beyond applicable notice and cure periods, and (ii) so long as the Lease remains in full force and effect, recognizes all of Tenant’s rights under the Lease and requires such Holder to be bound by Landlord’s obligations under the Lease to the extent such obligations accrue after the termination of the underlying ground lease (as to the Holder under a ground lease) or during the period of the deed of trust beneficiary’s fee ownership of the Premises (as to a Holder under the deed of trust), subject however to commercially reasonable exclusions (such as, without limitation, Landlord’s obligation relating to the Work Allowance), and contains other commercially reasonable provisions requested by such Holder.  

 5 

20.Effect of Amendment.  Except as otherwise revised by this Amendment, all terms and conditions of the Original Lease shall remain unchanged and in full force and effect.  To the extent of any conflict between the terms of this Amendment and the terms of the Original Lease, the terms of this Amendment shall control. This Amendment may be executed in counterparts, each of which shall be deemed an original, and together shall constitute one and the same document.  Signatures to this Amendment created by the signer by electronic means and/or transmitted by telecopy or other electronic transmission shall be treated as original signatures and shall be valid and effective to bind the party so signing. The caption and section headings of this Amendment are inserted for convenience of reference only and shall in no way define, describe or limit the scope or intent of this Amendment or any of its provisions.

IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly executed and delivered in their name and on their behalf as of the dates set forth below.

LANDLORD:				TENANT:
SI 37, LLC,				CAVIUM, INC., a Delaware corporation
a California limited liability company
By:	Sobrato Interests 1,
	a California limited partnership			By:	/s/ Vince Pangrazio
Its:	Sole Member				Vince Pangrazio, SVP and General Counsel
	By:	Sobrato Development Companies, LLC,
		a California limited liability company		Dated:	November 1, 2013
	Its:	General Partner
		By:	/s/ John Michael
			John Michael Sobrato
		Its:	Manager
Dated:	November 1, 2013

           

 6 

EX-31

Exhibit 31.1

CERTIFICATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Syed B. Ali, certify that:

1.	I have reviewed this Form 10-Q of Cavium, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2013	By:	/s/ SYED B. ALI
		Syed B. Ali
		President, Chief Executive Officer and
		Director (Principal Executive Officer)

EX-31

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur D. Chadwick, certify that:

1.	I have reviewed this Form 10-Q of Cavium, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2013	By:	/s/ ARTHUR D. CHADWICK
		Arthur D. Chadwick
		Chief Financial Officer, Vice President of Finance and Administration (Principal Financial officer)

EX-32

Exhibit 32.1

STATEMENT OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Syed B. Ali, Chief Executive Officer of Cavium, Inc. (the “Company”), and Arthur D. Chadwick, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

(1) The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 (the “Periodic Report”), to which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act;

and

(2) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 4th day of November 2013.

/s/ SYED B. ALI	/s/ ARTHUR D. CHADWICK
Syed B. Ali	Arthur D. Chadwick
President, Chief Executive Officer and	Chief Financial Officer, Vice President of Finance and
Director	Administration
(Principal Executive Officer)	(Principal Financial Officer)

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Cavium, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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Organization and Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2013

Organization

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November21, 2000 and was reincorporated in the state of Delaware effective February6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or USGAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. Intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with USGAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by USGAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No.001-33435) on file with the SEC for the year ended December31, 2012.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at September30, 2013, and the condensed consolidated results of its operations for the three and nine months ended September30, 2013 and 2012, and condensed consolidated statements of cash flows for the nine months ended September30, 2013 and 2012. The results of operations for the three and nine months ended September30, 2013 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December31, 2012. There had been no material changes to these accounting policies.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued a new accounting guidance relating to the financial statement presentation of unrecognized tax benefits. The new update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company does not expect that this new guidance to have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.

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Condensed Consolidated Statements Of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Net revenue	$ 79,124	$ 61,081	$ 222,858	$ 169,111
Cost of revenue	28,516	24,796	85,620	77,553
Gross profit	50,608	36,285	137,238	91,558
Operating expenses:
Research and development	33,630	26,185	98,469	79,366
Sales, general and administrative	14,833	19,213	46,217	50,186
Total operating expenses	48,463	45,398	144,686	129,552
Income (loss) from operations	2,145	(9,113)	(7,448)	(37,994)
Other expense, net:
Interest expense	(390)	(11)	(1,107)	(65)
Other, net	(126)	(720)	(805)	(828)
Total other expense, net	(516)	(731)	(1,912)	(893)
Income (loss) before income taxes	1,629	(9,844)	(9,360)	(38,887)
Provision for (benefit from) income taxes	714	(1,719)	1,817	(5,094)
Net income (loss)	915	(8,125)	(11,177)	(33,793)
Net loss attributable to non-controlling interest	(3,421)		(8,025)
Net income (loss) attributable to the Company	$ 4,336	$ (8,125)	$ (3,152)	$ (33,793)
Earnings per share attributable to the Company:
Net income (loss) per common share, basic	$ 0.08	$ (0.16)	$ (0.06)	$ (0.68)
Shares used in computing basic net income (loss) per common share	51,772	50,060	51,425	49,684
Net income (loss) per common share, diluted	$ 0.08	$ (0.16)	$ (0.06)	$ (0.68)
Shares used in computing diluted net income (loss) per common share	53,492	50,060	51,425	49,684

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Business Combinations and Divestitures

9 Months Ended

Sep. 30, 2013

Business Combinations and Divestitures

5. Business Combinations and Divestitures

Variable Interest Entity

In May 2012, the Company entered into a secured note purchase agreement with a VIE to provide cash advances. As of September30, 2013, the Company had made cash advances of $4.0 million under three convertible notes receivable which mature between December31, 2013 and August31, 2014. In addition, a third-party company and third party investors (“non-controlling interest”) had made cash advances of $5.0 million and $6.0 million, respectively, under twelve convertible notes receivable which mature between December31, 2013 and August31, 2014. Certain of the convertible notes are collateralized by a lien on the VIE’s assets. Pursuant to the convertible notes, in the event of a qualified equity financing of the VIE, the outstanding principal balance plus the accrued interest of the convertible notes would be automatically converted into preferred stock of the VIE. The Company has a purchase option to acquire the assets of the VIE at a price specified in the secured note purchase agreement. The option to purchase expires on December31, 2013, provided the VIE has met certain milestones specified in the secured note purchase agreement. If the certain milestones have not been met by December31, 2013, the expiration shall be the date that is the earlier of 30 days after the VIE meets the specified milestones or July31, 2014. The Company has concluded that it is the primary beneficiary of the VIE due to the Company’s involvement with the VIE and the purchase option to acquire the assets of the VIE. As such, the Company has included the accounts of the VIE in the condensed consolidated financial statements. The significant components of the VIE’s financial statements included in the Company’s condensed consolidated financial statements as of September30, 2013 include cash of $1.8 million; property and equipment and intangible assets of $1.0 million; accounts payable of $2.9 million; notes payable of $11.0 million and non-controlling interest of $9.0 million. For the three and nine months ended September30, 2013, the Company’s portion of the net loss of the VIE was $1.3 million and $4.1 million, respectively. For the three and nine months ended September 30, 2012, the Company’s portion of the net loss of the VIE was $0.8 million.

Disposition of Certain Consumer Product Assets

In September 2012, the Company completed the sale of certain consumer product assets to a third party company. The consumer product assets that were sold originated from the acquisition of Star Semiconductor Corporation in fiscal year 2008 and had been further developed by the Company. Under an asset purchase agreement, the Company agreed to transfer certain assets such as property and equipment and intangible assets to the third party company for an aggregate cash consideration of $2.4 million, payable in installments starting from January 10, 2013 through January 10, 2015. The Company determined that the payment terms were not fixed and determinable and as such the Company treated this transaction as disposition of assets and will recognize the future payments as a credit to sales, general and administrative expenses when the payments are due. The carrying value of the assets related to the sale of $2.7 million was recognized as a loss on disposition of certain consumer product assets within sales, general and administrative expenses during the third quarter of 2012. During the three and nine months ended September 30, 2013, the Company received total installment cash consideration of $0.3 million and $0.8 million, respectively, which were recognized as credits within sales, general and administrative expenses.

Sale of Held for Sale Assets

In January 2013, the Company completed the sale of certain assets to a third-party company. The assets sold originated from the acquisition of MontaVista Software, Inc. in fiscal year 2009. Under the asset purchase agreement, the Company agreed to transfer certain assets for an aggregate cash consideration of $3.3 million. The carrying value of the assets held for sale was approximately $2.6 million, consisting of a portion of goodwill of $2.2 million and the remaining related to the carrying costs of the transferred property and equipment and intangible assets. These assets were classified as assets held for sale in the consolidated balance sheets as of December31, 2012. The difference between the sale consideration and the carrying value of the assets held for sale of $0.7 million was recognized as a gain on sale of held for sale assets within sales, general and administrative expenses during the first quarter of 2013.

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Segment And Geographic Information (Tables)

9 Months Ended

Sep. 30, 2013

Sales by Geography

Sales by geography for the periods indicated were as follows:

	ThreeMonthsEnded September 30,				NineMonthsEnded September 30,
	2013		2012		2013		2012
	(in thousands)
United States	$	22,391	$	18,091	$	69,605	$	51,089
China		20,574		16,757		54,243		48,346
Korea		8,671		3,773		23,311		9,774
Mexico		7,135		2,809		16,700		6,539
Finland		6,051		631		12,117		662
Taiwan		5,822		7,313		18,530		19,635
Japan		2,154		3,741		6,900		8,724
Malaysia		3,877		3,935		10,636		12,099
Other countries		2,449		4,031		10,816		12,243
Total	$	79,124	$	61,081	$	222,858	$	169,111

Long Lived Assets

The following table sets forth long lived assets, which consist primarily of property and equipment, net by geographic regions:

	As of September30,2013		As of December31,2012
	(in thousands)
United States	$	21,744	$	27,678
All other countries		4,032		3,014
Total	$	25,776	$	30,692

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Net Income (Loss) Per Common Share (Tables)

9 Months Ended

Sep. 30, 2013

Basic and Diluted Net Loss Per Common Share

The following table sets forth the computation of net income (loss) per share:

	ThreeMonthsEnded September30,						NineMonthsEnded September30,
	2013		2012			2013				2012
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	4,336	$	(8,125	)	$		(3,152	)	$	(33,793	)
Weighted average common shares outstanding—basic		51,772		50,060				51,425			49,684
Dilutive effect of employee stock plans		1,720		—				—			—
Weighted average common shares outstanding—diluted		53,492		50,060				51,425			49,684
Net income (loss) per common share, basic	$	0.08	$	(0.16	)	$		(0.06	)	$	(0.68	)
Net income (loss) per common share, diluted	$	0.08	$	(0.16	)	$		(0.06	)	$	(0.68	)

Summary of Outstanding Options and Restricted Stock Units Excluded from Computation of Diluted Net Loss Per Common Share

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	ThreeMonthsEnded September30,				NineMonthsEnded September30,
	2013		2012		2013		2012
	(in thousands)
Options to purchase common stock		727		4,346		3,637		4,346
Restricted stock units		1		2,040		1,887		2,040

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Income Taxes (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Disclosure Income Taxes Narrative Detail [Line Items]
Unrecognized tax benefits for income taxes	$ 14.8	$ 12.7
Unrecognized tax benefit that would impact effective tax rate	$ 1.3

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Goodwill and Intangible Assets, Net (Narrative) (Detail) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Goodwill And Intangible Assets [Line Items]
Goodwill	$ 71,478,000	$ 71,478,000		$ 71,478,000
Goodwill impairment charge		27,700,000
Amortization expense	4,300,000		4,800,000	13,400,000	13,000,000
Software and Services
Goodwill And Intangible Assets [Line Items]
Goodwill		15,200,000
Semiconductor products
Goodwill And Intangible Assets [Line Items]
Goodwill		$ 56,300,000

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Net Income (Loss) Per Common Share (Summary of Outstanding Options and Restricted Stock Units Excluded from Computation of Diluted Net Income (Loss) Per Common Share) (Detail) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Options to purchase common stock
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income (loss) per common share	727	4,346	3,637	4,346
Restricted stock units
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income (loss) per common share	1	2,040	1,887	2,040

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Net Income (Loss) Per Common Share (Basic and Diluted Net Income (Loss) Per Common Share) (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Disclosure Net Loss Per Common Share Basic And Diluted Net Loss Per Common Share Detail [Line Items]
Net income (loss) attributable to the Company	$ 4,336	$ (8,125)	$ (3,152)	$ (33,793)
Weighted average common shares outstanding—basic	51,772	50,060	51,425	49,684
Dilutive effect of employee stock plans	1,720
Weighted average common shares outstanding—diluted	53,492	50,060	51,425	49,684
Net income (loss) per common share, basic	$ 0.08	$ (0.16)	$ (0.06)	$ (0.68)
Net income (loss) per common share, diluted	$ 0.08	$ (0.16)	$ (0.06)	$ (0.68)

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Equity (Narrative) (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Estimated weighted-average grant date fair value of options granted	$ 13.03	$ 14.91	$ 14.79
2007 Equity Incentive Plan and 2001 Stock Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation cost, net of estimated forfeitures		$ 6.8
Unrecognized compensation cost expected to be recognized over weighted average period (in years)		2 years 3 months 11 days
Two Thousand And Seven Equity And Two Thousand And One Stock Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized compensation cost, net of estimated forfeitures		$ 53.6
Unrecognized compensation cost expected to be recognized over weighted average period (in years)		2 years 6 months 18 days

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Balance Sheet Components (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended			9 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Disclosure Balance Sheet Components Narrative Detail [Line Items]
Depreciation and amortization expense	$ 4.4		$ 3.8	$ 13.2	$ 10.3
Capital lease and certain financing arrangements	12.1			12.1		16.8
Amortization expense related to assets under capital lease and certain financing arrangements	1.6		1.2	4.8	3.3
Inventory write-down		$ 3.9

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Restructuring Accrual (Narrative) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Restructuring Cost And Reserve [Line Items]
Additional restructuring accrual	$ 1.4	$ 0.4
Lease expiration period		Mar. 31, 2014

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Segment and Geographic Information (Sales by Geography) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Segment Reporting Information [Line Items]
Total Sales	$ 79,124	$ 61,081	$ 222,858	$ 169,111
United States
Segment Reporting Information [Line Items]
Total Sales	22,391	18,091	69,605	51,089
China
Segment Reporting Information [Line Items]
Total Sales	20,574	16,757	54,243	48,346
Korea
Segment Reporting Information [Line Items]
Total Sales	8,671	3,773	23,311	9,774
Mexico
Segment Reporting Information [Line Items]
Total Sales	7,135	2,809	16,700	6,539
Finland
Segment Reporting Information [Line Items]
Total Sales	6,051	631	12,117	662
Taiwan
Segment Reporting Information [Line Items]
Total Sales	5,822	7,313	18,530	19,635
Japan
Segment Reporting Information [Line Items]
Total Sales	2,154	3,741	6,900	8,724
Malaysia
Segment Reporting Information [Line Items]
Total Sales	3,877	3,935	10,636	12,099
Other Countries
Segment Reporting Information [Line Items]
Total Sales	$ 2,449	$ 4,031	$ 10,816	$ 12,243

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Balance Sheet Components (Other Accrued Expenses and Other Current Liabilities) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Payables and Accruals [Abstract]
Accrued compensation and related benefits	$ 4,843		$ 4,458
Professional fees	1,593		1,067
Contractual settlement payable	1,250	1,250
Restructuring related payables	107		210
Income tax payable	47		467
Other	1,914		2,478
Accrued expenses and other current liabilities	$ 9,754		$ 8,680

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Equity (Summary of Activity of Restricted Stock) (Detail) (Two Thousand And Seven Equity Incentive Plan, USD $)	9 Months Ended
	Sep. 30, 2013
Two Thousand And Seven Equity Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares, Beginning balance	1,823,563
Number of Shares, Granted	1,019,420
Number of Shares, Issued and released	(673,424)
Number of Shares, Cancelled and forfeited	(282,993)
Number of Shares, Ending balance	1,886,556
Weighted-Average Grant Date Fair Value Per Share, Beginning balance	$ 33.17
Weighted-Average Grant Date Fair Value Per Share, Granted	$ 36.17
Weighted-Average Grant Date Fair Value Per Share, Issued and released	$ 32.24
Weighted-Average Grant Date Fair Value Per Share, Cancelled and forfeited	$ 32.18
Weighted-Average Grant Date Fair Value Per Share, Ending balance	$ 35.27

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Commitments And Contingencies (Tables)

9 Months Ended

Sep. 30, 2013

Minimum Commitments Under Non-Cancelable Capital and Operating Lease Agreements

Minimum commitments under non-cancelable operating and capital lease agreements, excluding the accrued restructuring liability (See Note 7 of the Condensed Consolidated Financial Statements) as of September30, 2013 are as follows:

	Capitalleaseand technologylicense obligations		Operatingleases		Total
	(in thousands)
Remainder of 2013	$	5,436	$	1,034	$	6,470
2014		11,817		4,683		16,500
2015		9,258		4,117		13,375
2016		5,150		4,227		9,377
2017		—		4,247		4,247
2018 thereafter		—		8,959		8,959
	$	31,661	$	27,267	$	58,928
Less: Interest component (3.75% annual rate)		1,638
Present value of minimum lease payment		30,023
Current portion of the obligations	$	11,755
Long-term portion of obligations	$	18,268

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Organization and Basis of Presentation

9 Months Ended

Sep. 30, 2013

Organization and Basis of Presentation

1. Organization and Basis of Presentation

Organization

Cavium, Inc., (the “Company”), was incorporated in the state of California on November21, 2000 and was reincorporated in the state of Delaware effective February6, 2007. The Company designs, develops and markets semiconductor processors for intelligent and secure networks.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Cavium, Inc., its wholly owned subsidiaries, and a variable interest entity, or VIE, of which the Company is the primary beneficiary. Under the accounting principles generally accepted in the United States of America, or USGAAP, a VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. See Note 5 of Notes to Condensed Consolidated Financial Statements for detailed discussions of the VIE. Intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared in accordance with USGAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by USGAAP for annual financial statements. For further information, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (File No.001-33435) on file with the SEC for the year ended December31, 2012.

The condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to state fairly the Company’s condensed consolidated financial position at September30, 2013, and the condensed consolidated results of its operations for the three and nine months ended September30, 2013 and 2012, and condensed consolidated statements of cash flows for the nine months ended September30, 2013 and 2012. The results of operations for the three and nine months ended September30, 2013 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated balance sheet at December31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December31, 2012. There had been no material changes to these accounting policies.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued a new accounting guidance relating to the financial statement presentation of unrecognized tax benefits. The new update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for the Company on January 1, 2014 and it should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company does not expect that this new guidance to have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Measurements

3. Fair Value Measurements

At September 30, 2013 and December31, 2012, all of the Company’s investments were classified as cash equivalents and are comprised of an investment in a money market fund. In accordance with the guidance for fair value measurements and disclosures, the Company determined the fair value hierarchy of its money market fund as Level 1, which approximated $72.2 million and $50.2 million as of September 30, 2013 and December31, 2012, respectively. The carrying amount of the Company’s accounts receivable, accounts payable and accrued expenses approximate fair value due to their short term maturities. Notes payable are carried at cost which approximates fair value based on current interest rates available to the Company and are a Level 2 measurement. There are no other financial assets and liabilities that require Level 2 or Level 3 fair value hierarchy measurements and disclosures.

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Goodwill and Intangible Assets, Net

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets, Net

6.Goodwill and Intangible Assets, Net

Goodwill

The carrying amount of goodwill at September30, 2013 was $71.5 million, unchanged from the balance at December31, 2012.

The Company reviews goodwill for impairment annually at the beginning of its fourth calendar quarter and whenever events or changes in circumstances that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. For the most recent annual goodwill impairment analysis performed during the fourth quarter of 2012, the Company had two reporting units, namely, semiconductor product unit and software and services unit. The result of the most recent annual impairment test showed that goodwill impairment does not exist in its semiconductor product reporting unit due to a significant excess of the fair value over the carrying value of the reporting unit. The Company however determined that goodwill impairment existed in its software and services reporting unit as a result of the most recent annual goodwill impairment assessment. As such, the Company recorded a $27.7 million goodwill impairment charge in the fourth quarter of 2012. The carrying amount of the goodwill at December31, 2012 was $56.3 million in the semiconductor products reporting unit and $15.2 million in the software and services reporting unit.

During the first quarter of 2013, due to the sale of certain assets of MontaVista and the reorganization of resources, the Company changed how it manages and operates the business which resulted in the combination of the semiconductor product and software and services into one reporting unit. See related discussions in Note 10 of Notes to Condensed Consolidated Financial Statements. As such, beginning in the first quarter of 2013, the Company assesses the goodwill impairment at the reporting unit level which is at the Company level as a whole. Due to the change in the reporting unit structure, the Company performed a qualitative assessment of the goodwill at the Company level as a whole and concluded that it was more-likely-than-not that the fair value of the reporting unit exceeded the carrying amount as of March31, 2013. As such, it was not necessary to perform the two-step goodwill impairment test at that time. In assessing the qualitative factors, the Company considered the impact of these key factors: overall financial performance, industry and competitive market environment, market capitalization and stock price. There had been no triggering events since the latest assessment in the first quarter of 2013 to cause an interim impairment test.

Intangible assets, net

	As of September 30, 2013										Weightedaverage remainingamortization period(years)
	Gross			Accumulated Amortization				Net
	(in thousands)
Existing and core technology - product	$	46,533	$		(38,645	)	$		7,888	1.82
Technology licenses		68,769			(27,331	)			41,438	7.14
Customer contracts and relationships		8,991			(5,889	)			3,102	4.23
Trade name		2,296			(1,721	)			575	1.35
Order backlog		640			(640	)			—	—
Total amortizable intangible assets	$	127,229	$		(74,226	)	$		53,003	6.50

	As of December31, 2012										Weightedaverage remainingamortization period(years)
	Gross			Accumulated Amortization				Net
	(in thousands)
Existing and core technology - product	$	47,658	$		(35,326	)	$		12,332	2.39
Technology licenses		66,034			(20,078	)			45,956	7.94
Customer contracts and relationships		8,991			(5,291	)			3,700	4.93
Trade name		2,296			(1,396	)			900	2.10
Order backlog		640			(640	)			—	—
Total amortizable intangible assets	$	125,619	$		(62,731	)	$		62,888	6.57

Amortization expense was $4.3 million and $4.8 million for the three months ended September 30, 2013 and 2012, respectively, and $13.4 million and $13.0 million for the nine months ended September 30, 2013 and 2012, respectively.

The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2013	$	4,240
2014		14,471
2015		7,854
2016		5,704
2017		4,505
2018 and thereafter		16,229
	$	53,003

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Balance Sheet Components

9 Months Ended

Sep. 30, 2013

Balance Sheet Components

4.Balance Sheet Components

Inventories

	As of September30,2013		As of December31,2012
	(in thousands)
Work-in-process	$	34,791	$	33,418
Finished goods		7,664		13,090
	$	42,455	$	46,508

During the second quarter of 2013, the Company incurred a $3.9 million inventory write-down associated with discontinued consumer products.

Property and equipment, net

	As of September30,2013			As of December31,2012
	(in thousands)
Mask costs and test equipment	$	37,392		$	32,771
Software, computer and other equipment		38,363			35,563
Furniture, office equipment and leasehold improvements		1,181			1,089
		76,936			69,423
Less: accumulated depreciation and amortization		(51,160	)		(38,731	)
	$	25,776		$	30,692

Depreciation and amortization expense was $4.4 million and $3.8 million for the three months ended September30, 2013 and 2012, respectively, and $13.2 million and $10.3 million for the nine months ended September30, 2013 and 2012, respectively.

The Company leases certain design tools under capital lease and certain financing arrangements which are included in property and equipment, which total cost, net of accumulated amortization amounted to $12.1 and $16.8 million at September30, 2013 and December31, 2012, respectively. Amortization expense related to assets recorded under capital lease and certain financing agreements was $1.6 million and $1.2 million for the three months ended September30, 2013 and 2012, respectively, and $4.8 million and $3.3 million for the nine months ended September30, 2013 and 2012, respectively.

Other accrued expenses and other current liabilities

	As of September30,2013		As of December31,2012
	(in thousands)
Accrued compensation and related benefits	$	4,843	$	4,458
Professional fees		1,593		1,067
Contractual settlement payable		1,250		—
Restructuring related payables		107		210
Income tax payable		47		467
Other		1,914		2,478
	$	9,754	$	8,680

Warranty Accrual

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	ThreeMonthsEnded September30,							NineMonthsEnded September30,
	2013			2012			2013				2012
	(in thousands)
Beginning balance	$	317		$	423		$		440		$	412
Accruals and adjustments		25			113				257			391
Settlements		(68	)		(109	)			(423	)		(376	)
Ending balance	$	274		$	427		$		274		$	427

Deferred revenue

	As of September30,2013		As of December31,2012
	(in thousands)
Services / support and maintenance	$	6,534	$	8,017
Software license / subscription		1,523		2,529
Distributors		2,632		2,398
	$	10,689	$	12,944

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Equity (Summary of Stock Options Granted and Outstanding) (Detail) (2007 Equity Incentive Plan and 2001 Stock Incentive Plan, USD $)	9 Months Ended
	Sep. 30, 2013
2007 Equity Incentive Plan and 2001 Stock Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares Outstanding, Beginning balance	4,197,704
Number of Shares Outstanding, Options granted	242,375
Number of Shares Outstanding, Options exercised	(658,374)
Number of Shares Outstanding, Options cancelled and forfeited	(144,982)
Number of Shares Outstanding, Ending balance	3,636,723
Weighted Average Exercise Price, Beginning balance	$ 16.83
Weighted Average Exercise Price, Options granted	$ 37.15
Weighted Average Exercise Price, Options exercised	$ 14.45
Weighted Average Exercise Price, Options cancelled and forfeited	$ 33.86
Weighted Average Exercise Price, Ending balance	$ 17.94

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Fair Value Measurements (Narrative) (Detail) (Fair Value, Inputs, Level 1, USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Fair Value, Inputs, Level 1
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Cash equivalents	$ 72.2	$ 50.2

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Balance Sheet Components (Product Warranty Liability) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Commitments and Contingencies Disclosure [Abstract]
Beginning balance	$ 317	$ 423	$ 440	$ 412
Accruals and adjustments	25	113	257	391
Settlements	(68)	(109)	(423)	(376)
Ending balance	$ 274	$ 427	$ 274	$ 427

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Goodwill and Intangible Assets, Net (Estimated Future Amortization Expense from Amortizable Intangible Assets) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Disclosure Goodwill And Intangible Assets Net Estimated Future Amortization Expense From Amortizable Intangible Assets Detail [Line Items]
Remainder of 2013	$ 4,240
2014	14,471
2015	7,854
2016	5,704
2017	4,505
2018 and thereafter	16,229
Finite-lived intangible assets, Net	$ 53,003	$ 62,888

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Segment and Geographic Information (Long Lived Assets) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Segment Reporting Information [Line Items]
Property and equipment, net	$ 25,776	$ 30,692
United States
Segment Reporting Information [Line Items]
Property and equipment, net	21,744	27,678
All Other Countries
Segment Reporting Information [Line Items]
Property and equipment, net	$ 4,032	$ 3,014

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Equity (Reconciliation of Changes in Equity) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Changes In Stockholders Equity [Line Items]
Equity Attributable to the Company, Balance beginning			$ 244,092
Attributable to non-controlling interest, Balance beginning			(1,030)
Total Equity, Balance beginning			243,062
Common stock issued in connection with exercises of stock options			9,528	6,647
Stock-based compensation			25,847
Net income (loss) attributable to the Company	4,336	(8,125)	(3,152)	(33,793)
Net loss Attributable to non-controlling interest	(3,421)		(8,025)
Net loss	915	(8,125)	(11,177)	(33,793)
Equity Attributable to the Company, Balance Ending	276,315		276,315
Attributable to non-controlling interest, Balance Ending	(9,055)		(9,055)
Total Equity Balance, Ending	267,260		267,260
Equity Attributable To Parent
Changes In Stockholders Equity [Line Items]
Common stock issued in connection with exercises of stock options			9,528
Stock-based compensation			$ 25,847

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Allowances for accounts receivable	$ 951	$ 991
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	51,962,790	50,630,991
Common stock, shares outstanding	51,962,790	50,630,991

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Taxes

9. Income Taxes

The quarterly tax provision for (benefit from) income taxes is based on the estimated annual effective tax rate, plus any discrete items. The Company updates its estimate of its annual effective tax rate at the end of each quarterly period. The estimate takes into account estimations of annual pre-tax income, the geographic mix of pre-tax income and interpretations of tax laws and the possible outcomes of current and future audits.

The following table presents the provision for (benefit from) income taxes and the effective tax rates for the three and nine months ended September30, 2013 and 2012:

	ThreeMonthsEnded September30,							NineMonthsEnded September30,
	2013			2012				2013				2012
	(in thousands)
Income (loss) before income taxes	$	1,629		$	(9,844	)		$	(9,360	)		$	(38,887	)
Provision for (benefit from) income taxes		714			(1,719	)			1,817				(5,094	)
Effective tax rate		43.8	%		17.5		%		-  19.4		%		13.1		%

The provision for income taxes for the three and nine months ended September30, 2013 was primarily related to earnings and additional establishment of unrecognized tax benefits in foreign jurisdictions. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the provision for income taxes recorded for the three and nine months ended September30, 2013 was primarily attributable to the impact of the losses that are not benefited, difference in foreign tax rates and increase in indefinite lived intangible related deferred tax liability. The Company has determined that as of September 30, 2013, the variability in the jurisdictional mix of its customers created uncertainty with respect to estimating taxable income in the Cayman business. As such, the results of the Cayman business have been excluded from the computation of the annual effective tax rate and the year-to-date tax provision, which resulted in a higher tax expense than if the Cayman business had not been excluded. The benefit from income taxes for the three and nine months ended September30, 2012 was primarily related to the year-to-date pre-tax losses and the release of uncertain tax position reserves. The difference between the provision for or benefit from income taxes that would be derived by applying the statutory rate to the Company’s loss before income taxes and the benefit from income taxes recorded for the three and nine months ended September30, 2012 was primarily attributable to the impact of the differential in foreign tax rates, non-deductible stock-based compensation charges, and recovery of non-taxable escrow related to the Celestial Semiconductor acquisition.

The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of the Company’s net deferred tax assets during the fourth quarter of 2012, the Company determined that it was more-likely-than-not it would not realize the full value of its federal and state deferred tax assets. As such, the Company determined that as of December31, 2012, a full valuation allowance is required on its net federal and state deferred tax assets. Adjustments could be required in the future if the Company concludes that it is more-likely-than-not that these net deferred tax assets are recoverable. A release of the valuation allowance could have the effect of decreasing the income tax provision in the period the valuation allowance is released. The Company continues to monitor the likelihood that it will be able to recover its deferred tax assets. As of September30, 2013, the Company believes that it is not more likely than not that it will be able to fully realize its United States federal and state deferred tax assets and, as such, the Company continues to provide a full valuation allowance on those deferred tax assets.

As of September30, 2013 and December31, 2012, the Company had unrecognized tax benefits for income taxes associated with uncertain tax positions of $14.8 million and $12.7 million, respectively. If all of these unrecognized tax benefits were recognized, $1.3 million would reduce the Company’s effective tax rate. The Company is not anticipating any significant changes in unrecognized tax benefits in the next 12 months.

The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, Japan, India, China and Singapore. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of September30, 2013, there are no on-going tax audits in the major tax jurisdictions other than India. The India tax audit is for the tax years 2010 and 2011, and the Company does not expect any significant tax adjustments.

On January2, 2013, the President of the United States of America signed into law The American Taxpayer Relief Act of 2012, or ATRA. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts incurred through December31, 2011. The ATRA extends the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and includes amounts incurred after 2011. The benefit of the reinstated credit did not impact the income statement in the period of enactment, which is the first quarter of 2013, as the research and development credit carryforwards are offset by a full valuation allowance.

On September 13, 2013, the Treasury Department and the Internal Revenue Service released final regulations and re-proposed regulations (collectively, the “2013 Regulations”) that provide guidance with respect to sections 162(a), 263(a), and 168 of the Internal Revenue Code of 1986.  The 2013 Regulations are generally effective for taxable years beginning on or after January 1, 2014, although earlier adoption is permitted. The Company is aware of these regulations and is currently assessing the potential impact. The Company does not expect any significant impact, especially in light of the full valuation allowance on its federal and state net deferred tax assets as of September 30, 2013.

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Condensed Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net loss	$ (11,177)	$ (33,793)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation expense	25,768	28,773
Depreciation and amortization	26,589	23,298
Deferred income taxes	552	(5,479)
Gain on sale of held for sale assets	(747)
Loss on disposal of property and equipment		178
(Gain) loss on disposition of certain consumer product assets	(750)	2,728
Changes in assets and liabilities:
Accounts receivable, net	(12,937)	4,875
Inventories	4,147	(2,414)
Prepaid expenses and other current assets	915	(802)
Other assets	52	404
Accounts payable	6,202	2,265
Deferred revenue	(2,254)	2,662
Accrued expenses and other current and non-current liabilities	1,910	(2,195)
Net cash provided by operating activities	38,270	20,500
Cash flows from investing activities:
Purchases of property and equipment	(5,528)	(11,300)
Purchases of intangible assets	(3,568)	(4,153)
Proceeds received from sale of held for sale assets	3,350
Proceeds received from disposition of certain consumer product assets	750
Net cash used in investing activities	(4,996)	(15,453)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of options	9,528	6,647
Principal payment of capital lease and technology license obligations	(13,369)	(7,629)
Notes payable of the VIE to non-controlling interest	6,000
Tax withholdings for stock option exercises on behalf of employees	743
Net cash provided by (used in) financing activities	2,902	(982)
Net increase in cash and cash equivalents	36,176	4,065
Cash and cash equivalents, beginning of period	76,784	63,225
Cash and cash equivalents, end of period	112,960	67,290
Supplemental disclosure of cash flows from investing activities
Property and equipment and intangible assets acquired included in accounts payable and other accrued expense and other current liabilities	2,272	382
Supplemental disclosure of cash flow from financing activities:
Property and equipment and intangible assets acquired included in capital lease and technology license obligations	$ 313	$ 23,794

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Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 112,960	$ 76,784
Accounts receivable, net of allowances of $951 and $991, respectively	46,504	33,567
Inventories	42,455	46,508
Prepaid expenses and other current assets	4,255	4,865
Assets held for sale		2,609
Deferred tax assets	112	568
Total current assets	206,286	164,901
Property and equipment, net	25,776	30,692
Intangible assets, net	53,003	62,888
Goodwill	71,478	71,478
Deferred tax assets, net of current portion	60	449
Other assets	1,044	1,096
Total assets	357,647	331,504
Current liabilities:
Accounts payable	23,992	16,083
Other accrued expenses and other current liabilities	9,754	8,680
Deferred revenue	10,689	12,944
Notes payable	11,012	1,012
Capital lease and technology license obligations	11,755	16,500
Total current liabilities	67,202	55,219
Notes payable, net of current portion		4,000
Capital lease and technology license obligations, net of current portion	18,268	24,832
Deferred tax liability	2,128	2,421
Other non-current liabilities	2,789	1,970
Total liabilities	90,387	88,442
Commitments and contingencies (Note 11)
Equity
Common stock, par value $0.001: 200,000,000 shares authorized; 51,578,640 and 50,630,991 shares issued and outstanding, respectively	52	51
Additional paid-in capital	433,507	398,133
Accumulated deficit	(157,244)	(154,092)
Total stockholders’ equity attributable to the Company	276,315	244,092
Non-controlling interest	(9,055)	(1,030)
Total equity	267,260	243,062
Total liabilities and equity	$ 357,647	$ 331,504

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Commitments and Contingencies (Minimum Commitments Under Non-Cancelable Capital and Operating Lease Agreements) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Capital Leased Assets [Line Items]
Remainder of 2013	$ 6,470
2014	16,500
2015	13,375
2016	9,377
2017	4,247
2018 thereafter	8,959
Total	58,928
Current portion of the obligations	11,755	16,500
Long-term portion of obligations	18,268	24,832
Interest component	3.75%
Capital Lease And Technology License Obligations
Capital Leased Assets [Line Items]
Remainder of 2013	5,436
2014	11,817
2015	9,258
2016	5,150
Total	31,661
Less: Interest component (3.75% annual rate)	1,638
Present value of minimum lease payment	30,023
Operating Leases
Capital Leased Assets [Line Items]
Remainder of 2013	1,034
2014	4,683
2015	4,117
2016	4,227
2017	4,247
2018 thereafter	8,959
Total	$ 27,267

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Balance Sheet Components (Inventories) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Inventory Disclosure [Abstract]
Work-in-process	$ 34,791	$ 33,418
Finished goods	7,664	13,090
Inventories	$ 42,455	$ 46,508

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2013

Provisions for (Benefit from) Income Taxes and Effective Tax Rates

The following table presents the provision for (benefit from) income taxes and the effective tax rates for the three and nine months ended September30, 2013 and 2012:

	ThreeMonthsEnded September30,							NineMonthsEnded September30,
	2013			2012				2013				2012
	(in thousands)
Income (loss) before income taxes	$	1,629		$	(9,844	)		$	(9,360	)		$	(38,887	)
Provision for (benefit from) income taxes		714			(1,719	)			1,817				(5,094	)
Effective tax rate		43.8	%		17.5		%		-  19.4		%		13.1		%

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Equity (Detail of Stock-Based Compensation Expense) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 8,801	$ 8,973	$ 25,768	$ 28,773
Cost of revenue
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	216	471	655	1,539
Research and development
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	4,899	4,259	13,682	12,761
Sales, general and administrative
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 3,686	$ 4,243	$ 11,431	$ 14,473

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Restructuring Accrual (Accrued Restructuring Liabilities Including Related Activities) (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year	$ 262
Additions	1,371
Cash payments and other non-cash adjustments	(1,526)
Accrued restructuring at end of the year	107
Severance and other benefits
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year
Additions	1,371
Cash payments and other non-cash adjustments	(1,371)
Accrued restructuring at end of the year
Excess Facility Related Costs
Restructuring Cost And Reserve [Line Items]
Accrued restructuring at beginning of the year	262
Additions
Cash payments and other non-cash adjustments	(155)
Accrued restructuring at end of the year	$ 107

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Business Combinations and Divestitures (Detail) (USD $)	1 Months Ended	3 Months Ended		9 Months Ended			9 Months Ended		3 Months Ended		9 Months Ended
	Jan. 31, 2013	Sep. 30, 2013	Mar. 31, 2013	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Sep. 30, 2013 Attributable to non-controlling interest	Sep. 30, 2013 Third party investor	Sep. 30, 2013 Variable interest entity	Sep. 30, 2012 Variable interest entity	Sep. 30, 2013 Variable interest entity	Sep. 30, 2012 Variable interest entity
Business Acquisition [Line Items]
Convertible notes receivable				$ 4,000,000			$ 5,000,000	$ 6,000,000
Variable Interest Entity, cash									1,800,000		1,800,000
Variable Interest Entity, property and equipment and intangible assets									1,000,000		1,000,000
Variable Interest Entity, accounts payable									2,900,000		2,900,000
Variable Interest Entity, notes payable									11,000,000		11,000,000
Variable Interest Entity, portion of net loss									1,300,000	800,000	4,100,000	800,000
Variable Interest Entity, non-controlling interest		9,055,000		9,055,000		1,030,000
Aggregate cash consideration on disposition of certain consumer product assets					2,400,000
Total installment cash consideration on disposition of certain consumer product assets		300,000		800,000
(Gain) loss on disposition of certain consumer product assets				(750,000)	2,728,000
Cash consideration	3,300,000
Net book value of assets held for sale	2,600,000
Portion of goodwill in carrying value of assets held for sale	2,200,000
Gain on sale of held for sale assets			$ 700,000	$ 747,000

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Goodwill and Intangible Assets, Net (Intangible Assets, Net) (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	$ 127,229	$ 125,619
Finite-lived intangible assets, Accumulated Amortization	(74,226)	(62,731)
Finite-lived intangible assets, Net	53,003	62,888
Weighted average remaining amortization period (years)	6 years 6 months	6 years 6 months 26 days
Existing and core technology - product
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	46,533	47,658
Finite-lived intangible assets, Accumulated Amortization	(38,645)	(35,326)
Finite-lived intangible assets, Net	7,888	12,332
Weighted average remaining amortization period (years)	1 year 9 months 26 days	2 years 4 months 21 days
Technology licenses
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	68,769	66,034
Finite-lived intangible assets, Accumulated Amortization	(27,331)	(20,078)
Finite-lived intangible assets, Net	41,438	45,956
Weighted average remaining amortization period (years)	7 years 1 month 21 days	7 years 11 months 9 days
Customer contracts and relationships
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	8,991	8,991
Finite-lived intangible assets, Accumulated Amortization	(5,889)	(5,291)
Finite-lived intangible assets, Net	3,102	3,700
Weighted average remaining amortization period (years)	4 years 2 months 23 days	4 years 11 months 5 days
Trade name
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	2,296	2,296
Finite-lived intangible assets, Accumulated Amortization	(1,721)	(1,396)
Finite-lived intangible assets, Net	575	900
Weighted average remaining amortization period (years)	1 year 4 months 6 days	2 years 1 month 6 days
Order backlog
Finite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, Gross	640	640
Finite-lived intangible assets, Accumulated Amortization	(640)	(640)
Finite-lived intangible assets, Net
Weighted average remaining amortization period (years)

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Equity

9 Months Ended

Sep. 30, 2013

Equity

8. Equity

Equity Incentive Plans

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the nine months ended September30, 2013:

	NumberofShares Outstanding			WeightedAverage ExercisePrice
Balance as of December31, 2012		4,197,704		$	16.83
Options granted		242,375			37.15
Options exercised		(658,374	)		14.45
Options cancelled and forfeited		(144,982	)		33.86
Balance as of September30, 2013		3,636,723		$	17.94

No stock options were granted during the three months ended September 30, 2013. The fair value of each employee option grant for the three months ended September 30, 2012 and nine months ended September30, 2013 and 2012 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013	2012		2013			2012
Risk-free interest rate	—	1.55	%	0.32% to 1.04%			0.57% to 1.55%
Expected life	—	4.53years		3.77 to 4.53years			4.08 to 4.53years
Dividend yield	—	0	%	0	%		0	%
Volatility	—	57.3	%	45.82 to 49.6%			51.3% to 57.3%

The estimated weighted-average grant date fair value of options granted was $13.03 per share for the three months ended September30, 2012 and $14.91 and $14.79 per share for the nine months ended September30, 2013 and 2012.

As of September30, 2013, there is $6.8million of unrecognized compensation costs, net of estimated forfeitures, related to stock options granted under the Company’s 2007 Equity Incentive Plan and 2001 Stock Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.28years.

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the nine months ended September30, 2013:

	NumberofShares			Weighted-Average GrantDateFair ValuePerShare
Balance as of December31, 2012		1,823,563		$	33.17
Granted		1,019,420			36.17
Issued and released		(673,424	)		32.24
Cancelled and forfeited		(282,993	)		32.18
Balance as of September30, 2013		1,886,556		$	35.27

For restricted stock units, or RSUs, stock-based compensation expense is calculated based on the market price of the Company’s common stock on the date of grant, multiplied by the number of RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recorded on a straight-line basis, over the vesting period.

As of September30, 2013, there was $53.6 million of unrecognized compensation costs, net of estimated forfeitures related to RSUs granted under the Company’s 2007 Equity Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.55 years.

Stock-Based Compensation

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013		2012		2013			2012
	(in thousands)
Cost of revenue	$	216	$	471	$		655	$	1,539
Research and development		4,899		4,259			13,682		12,761
Sales, general and administrative		3,686		4,243			11,431		14,473
	$	8,801	$	8,973	$		25,768	$	28,773

The total stock-based compensation cost capitalized as part of inventory as of September30, 2013 and December31, 2012 was not significant.

Changes in equity

A reconciliation of the changes in equity for the nine months ended September30, 2013 is presented below:

	Attributableto theCompany				Attributableto non-controlling interest				Total equity
	(in thousands)
Balance at December31, 2012	$	244,092		$		(1,030	)	$		243,062
Common stock issued in connection with exercises of stock options		9,528				—				9,528
Stock-based compensation		25,847				—				25,847
Net loss		(3,152	)			(8,025	)			(11,177	)
Balance at September30, 2013	$	276,315		$		(9,055	)	$		267,260

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Balance Sheet Components (Property and Equipment, Net) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 76,936	$ 69,423
Less: accumulated depreciation and amortization	(51,160)	(38,731)
Property and equipment, net	25,776	30,692
Mask costs and test equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	37,392	32,771
Software, computer and other equipment
Property Plant And Equipment [Line Items]
Property and equipment, gross	38,363	35,563
Furniture, office equipment and leasehold improvements
Property Plant And Equipment [Line Items]
Property and equipment, gross	$ 1,181	$ 1,089

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Equity (Assumptions of Fair Value of Employee Option Grant Using Black-Scholes Option Pricing Model) (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Risk-free interest rate		1.55%
Risk-free interest rate, minimum			0.32%	0.57%
Risk-free interest rate, maximum			1.04%	1.55%
Expected life, years		4 years 6 months 11 days
Dividend yield		0.00%	0.00%	0.00%
Volatility		57.30%
Volatility, minimum			45.82%	51.30%
Volatility, maximum			49.60%	57.30%
Minimum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected life, years			3 years 9 months 7 days	4 years 29 days
Maximum
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Expected life, years			4 years 6 months 11 days	4 years 6 months 11 days

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies

11. Commitments and Contingencies

The Company is not currently a party to any legal proceedings and outcome of which, if determined adversely to the Company, would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

During the second quarter of 2013, a customer of MontaVista sent a claim letter to the Company requesting an amount they believe is due related to an automotive business services agreement between the customer and MontaVista. The Company has disputed this claim, butit engaged in discussions with the customer to resolve the matter. The Company recorded $1.3 million accrual to cover a potential contractual settlement payment to the customer within sales, general and administrative expenses inthe second quarter of 2013.In October 2013, the Company and the customer entered into a settlement andgeneral release claim agreement, and the Company paidthe $1.3 million.

The Company leases its facilities under non-cancelable operating leases, which contain renewal options and escalation clauses, and expire on various dates ending in November 2020. The Company also acquires certain assets under capital leases.

The capital lease and technology license obligations include future cash payments payable primarily for license agreements with various outside vendors. For license agreements which qualify under capital lease and where installment payments extend beyond one year, the present value of the future installment payments are capitalized and included as part of intangible assets or property and equipment which is amortized over the estimated useful lives of the related licenses.

Minimum commitments under non-cancelable operating and capital lease agreements, excluding the accrued restructuring liability (See Note 7 of the Condensed Consolidated Financial Statements) as of September30, 2013 are as follows:

	Capitalleaseand technologylicense obligations		Operatingleases		Total
	(in thousands)
Remainder of 2013	$	5,436	$	1,034	$	6,470
2014		11,817		4,683		16,500
2015		9,258		4,117		13,375
2016		5,150		4,227		9,377
2017		—		4,247		4,247
2018 thereafter		—		8,959		8,959
	$	31,661	$	27,267	$	58,928
Less: Interest component (3.75% annual rate)		1,638
Present value of minimum lease payment		30,023
Current portion of the obligations	$	11,755
Long-term portion of obligations	$	18,268

Rent expense incurred under operating leases was $1.3 million and $1.4 million for the three months ended September30, 2013 and 2012, respectively, and $3.7 million and $4.2 million for the nine months ended September30, 2013 and 2012, respectively.

In September 2013, the VIE entered into a purchase agreement with a third party vendor to purchase certain test equipment amounting to $6.1 million, payable in installments overtwo years. Furthermore, the Company entered into an agreement with the VIE and third party vendor, whereby the Company guaranteed the payment of the test equipment in the event the VIE defaults such payment obligation. The equipment is expected to be delivered in the fourth quarter of 2013. As such, the related asset and liability has not been reflected in the balance sheets as of September 30, 2013. 

In September 2013, the Company signed a purchase agreement of $5.5 million with a third party vendor to purchase any combination of core software licenses as specified in the agreement under a flexible spending program with a minimum annual spending of $2.75 million each for two years.

In November 2013, the Company signed a new lease agreement (the “2345 Lease”) with a landlord to lease approximately 55,440 sq. ft. in the first 12 months and 110,881 sq. ft. thereafter in a building located adjacent to the Company’s principal office in San Jose, California. The lease term is 8.0 years commencing on the earlier of October 1, 2014 or the date the Company begins to conduct its business within any portion of the leased facility and ending on ninetysix (96) months thereafter. The base monthly rate to lease the facility is $0.12million for the first 12 months and $0.25 million for months thirteen through twenty-four and increase incrementally by approximately 3% annually through end of the lease term.Further, the Company entered into an amendment to the lease agreement related to the building in San Jose, California where the Company’s principal offices are located to extend the lease term for the period from March 1, 2019 to expiration date of the 2345 Lease.

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Restructuring Accrual

9 Months Ended

Sep. 30, 2013

Restructuring Accrual

7. Restructuring Accrual

In the first quarter of 2012, the Company recorded a restructuring accrual of $0.4 million related to the leased facility in Canada which the Company no longer occupies. The lease will expire in March 2014.

In connection with a workforce reduction during the first quarter of 2013, the Company incurred $1.4 million in expense primarily related to severance and other related benefits.

A summary of the accrued restructuring liabilities including related activities during the nine months ended September30, 2013, is as follows:

	Severance andother benefits			Excess Facility RelatedCost			Total
	(in thousands)
Balance at December 31, 2012	$	—		$	262		$	262
Additions		1,371			—			1,371
Cash payments and other non-cash adjustments		(1,371	)		(155	)		(1,526	)
Balance at September30, 2013 (current)	$	—		$	107		$	107

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Net Income (Loss) Per Common Share

9 Months Ended

Sep. 30, 2013

Net Income (Loss) Per Common Share

2. Net Income (Loss) Per Common Share

The following table sets forth the computation of net income (loss) per share:

	ThreeMonthsEnded September30,						NineMonthsEnded September30,
	2013		2012			2013				2012
	(in thousands, except per share data)
Net income (loss) attributable to the Company	$	4,336	$	(8,125	)	$		(3,152	)	$	(33,793	)
Weighted average common shares outstanding—basic		51,772		50,060				51,425			49,684
Dilutive effect of employee stock plans		1,720		—				—			—
Weighted average common shares outstanding—diluted		53,492		50,060				51,425			49,684
Net income (loss) per common share, basic	$	0.08	$	(0.16	)	$		(0.06	)	$	(0.68	)
Net income (loss) per common share, diluted	$	0.08	$	(0.16	)	$		(0.06	)	$	(0.68	)

The following outstanding options and restricted stock units were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have had an anti-dilutive effect:

	ThreeMonthsEnded September30,				NineMonthsEnded September30,
	2013		2012		2013		2012
	(in thousands)
Options to purchase common stock		727		4,346		3,637		4,346
Restricted stock units		1		2,040		1,887		2,040

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Commitments and Contingencies (Narrative) (Detail) (USD $)	3 Months Ended			9 Months Ended			9 Months Ended	1 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Mar. 31, 2012	Sep. 30, 2013	Sep. 30, 2012	Jun. 30, 2013	Sep. 30, 2013 Variable Interest Entity, Primary Beneficiary	Oct. 31, 2013 Subsequent Event	Nov. 30, 2013 Subsequent Event 2345 Lease	Nov. 30, 2013 Subsequent Event San Jose California	Nov. 30, 2013 Subsequent Event First Twelve Months 2345 Lease sqft	Nov. 30, 2013 Subsequent Event Thereafter 2345 Lease sqft	Nov. 30, 2013 Subsequent Event Thirteen through twenty four months 2345 Lease
Disclosure Commitments And Contingencies Narrative Detail [Line Items]
Potential contractual settlement	$ 1,250,000			$ 1,250,000		$ 1,250,000
Payment for settlement payment								1,250,000
Operating leases, rent expense	1,300,000	1,400,000		3,700,000	4,200,000
Long-term Purchase Commitment, Amount				5,500,000			6,100,000
Settlement Agreement Payment Frequency Installment Period							2 years
Long-term purchase commitment minimum annual spending amount				2,750,000
Long-term purchase commitment, year of maturity				P2Y
Area of leased property											55,440	110,881
Lease term									8 years
Lease start date									Oct. 01, 2014
Lease expiration period									96 months
Lease expiration period			Mar. 31, 2014							Mar. 01, 2019
Lease agreement monthly payment											$ 120,000		$ 250,000
Annual increase in lease rate									3.00%

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Income Taxes (Provision for (Benefit from) Income Taxes and Effective Tax Rates) (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Disclosure Income Taxes Provision For Benefit From Income Taxes And Effective Tax Rates Detail [Line Items]
Income (loss) before income taxes	$ 1,629	$ (9,844)	$ (9,360)	$ (38,887)
Provision for (benefit from) income taxes	$ 714	$ (1,719)	$ 1,817	$ (5,094)
Effective tax rate	43.80%	17.50%	(19.40%)	13.10%

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Balance Sheet Components (Deferred Revenue) (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Deferred Revenue Arrangement [Line Items]
Deferred revenue	$ 10,689	$ 12,944
Service / Support and Maintenance
Deferred Revenue Arrangement [Line Items]
Deferred revenue	6,534	8,017
Software License / Subscription
Deferred Revenue Arrangement [Line Items]
Deferred revenue	1,523	2,529
Distributors
Deferred Revenue Arrangement [Line Items]
Deferred revenue	$ 2,632	$ 2,398

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Balance Sheet Components (Tables)

9 Months Ended

Sep. 30, 2013

Inventories

Inventories

	As of September30,2013		As of December31,2012
	(in thousands)
Work-in-process	$	34,791	$	33,418
Finished goods		7,664		13,090
	$	42,455	$	46,508

Property and Equipment, Net

Property and equipment, net

	As of September30,2013			As of December31,2012
	(in thousands)
Mask costs and test equipment	$	37,392		$	32,771
Software, computer and other equipment		38,363			35,563
Furniture, office equipment and leasehold improvements		1,181			1,089
		76,936			69,423
Less: accumulated depreciation and amortization		(51,160	)		(38,731	)
	$	25,776		$	30,692

Other Accrued Expenses And Other Current Liabilities

Other accrued expenses and other current liabilities

	As of September30,2013		As of December31,2012
	(in thousands)
Accrued compensation and related benefits	$	4,843	$	4,458
Professional fees		1,593		1,067
Contractual settlement payable		1,250		—
Restructuring related payables		107		210
Income tax payable		47		467
Other		1,914		2,478
	$	9,754	$	8,680

Product Warranty Liability

The following table presents a reconciliation of the warranty liability, which is included within other accrued expenses and other current liabilities above:

	ThreeMonthsEnded September30,							NineMonthsEnded September30,
	2013			2012			2013				2012
	(in thousands)
Beginning balance	$	317		$	423		$		440		$	412
Accruals and adjustments		25			113				257			391
Settlements		(68	)		(109	)			(423	)		(376	)
Ending balance	$	274		$	427		$		274		$	427

Deferred Revenue

Deferred revenue

	As of September30,2013		As of December31,2012
	(in thousands)
Services / support and maintenance	$	6,534	$	8,017
Software license / subscription		1,523		2,529
Distributors		2,632		2,398
	$	10,689	$	12,944

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Segment And Geographic Information

9 Months Ended

Sep. 30, 2013

Segment and Geographic Information

10. Segment and Geographic Information

Operating segments are based on components of the Company that engage in business activity that earn revenue and incur expenses and (a)whose operating results are regularly reviewed by the Company’s chief operating decision maker, or CODM, to make decisions about resource allocation and performance and (b)for which discrete financial information is available. The Company’s primary business has been its semiconductor business, which comes from the development and sale of semiconductor products. Prior to fiscal year 2010, the Company was organized as, and operated in, one operating segment.In the fourth quarter of 2009, the Company acquired MontaVista which changed the way the CODM viewed and managed the business and allocated resources.This resulted in the Company to operate in two reporting units which were the same as the reportable segments namely, semiconductor products and software and services beginning first quarter of 2010.

During the first quarter of 2013, the Company sold certain assets and reorganized the software and services unit which resulted in a decrease in the significance of the related business unit to the overall operations of the Company.Due to such decrease in the significance of the software and services unit, the CODM now views, manages and allocates resources across the business as a whole and no longer reviews the discrete financial information for semiconductor products and software and services separately. As a result of this change, the Company manages and operates as one reporting unit which is also the same as the reportable segment beginning in the first quarter of 2013.

The following table is based on the geographic location of the original equipment manufacturers, the contract manufacturers or the distributors who purchased the Company’s products. For sales to the distributors, their geographic location may be different from the geographic locations of the ultimate end customers.

Sales by geography for the periods indicated were as follows:

	ThreeMonthsEnded September 30,				NineMonthsEnded September 30,
	2013		2012		2013		2012
	(in thousands)
United States	$	22,391	$	18,091	$	69,605	$	51,089
China		20,574		16,757		54,243		48,346
Korea		8,671		3,773		23,311		9,774
Mexico		7,135		2,809		16,700		6,539
Finland		6,051		631		12,117		662
Taiwan		5,822		7,313		18,530		19,635
Japan		2,154		3,741		6,900		8,724
Malaysia		3,877		3,935		10,636		12,099
Other countries		2,449		4,031		10,816		12,243
Total	$	79,124	$	61,081	$	222,858	$	169,111

The following table sets forth long lived assets, which consist primarily of property and equipment, net by geographic regions:

	As of September30,2013		As of December31,2012
	(in thousands)
United States	$	21,744	$	27,678
All other countries		4,032		3,014
Total	$	25,776	$	30,692

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Equity (Tables)

9 Months Ended

Sep. 30, 2013

Summary of Stock Options Granted and Outstanding

The following table summarizes the details related to stock options granted and outstanding under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan for the nine months ended September30, 2013:

	NumberofShares Outstanding			WeightedAverage ExercisePrice
Balance as of December31, 2012		4,197,704		$	16.83
Options granted		242,375			37.15
Options exercised		(658,374	)		14.45
Options cancelled and forfeited		(144,982	)		33.86
Balance as of September30, 2013		3,636,723		$	17.94

Assumptions of Fair Value of Employee Option Grant Using Black-Scholes Option Pricing Model

No stock options were granted during the three months ended September 30, 2013. The fair value of each employee option grant for the three months ended September 30, 2012 and nine months ended September30, 2013 and 2012 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013	2012		2013			2012
Risk-free interest rate	—	1.55	%	0.32% to 1.04%			0.57% to 1.55%
Expected life	—	4.53years		3.77 to 4.53years			4.08 to 4.53years
Dividend yield	—	0	%	0	%		0	%
Volatility	—	57.3	%	45.82 to 49.6%			51.3% to 57.3%

Summary of Activity of Restricted Stock

The following table summarizes the details related to restricted stock units, or RSUs, granted and outstanding under the 2007 Equity Incentive Plan for the nine months ended September30, 2013:

	NumberofShares			Weighted-Average GrantDateFair ValuePerShare
Balance as of December31, 2012		1,823,563		$	33.17
Granted		1,019,420			36.17
Issued and released		(673,424	)		32.24
Cancelled and forfeited		(282,993	)		32.18
Balance as of September30, 2013		1,886,556		$	35.27

Detail of Stock-Based Compensation Expense

The following table presents the detail of stock-based compensation expense amounts included in the condensed consolidated statement of operations for each of the periods presented:

	ThreeMonthsEnded September30,					NineMonthsEnded September30,
	2013		2012		2013			2012
	(in thousands)
Cost of revenue	$	216	$	471	$		655	$	1,539
Research and development		4,899		4,259			13,682		12,761
Sales, general and administrative		3,686		4,243			11,431		14,473
	$	8,801	$	8,973	$		25,768	$	28,773

Reconciliation of Changes in Equity

A reconciliation of the changes in equity for the nine months ended September30, 2013 is presented below:

	Attributableto theCompany				Attributableto non-controlling interest				Total equity
	(in thousands)
Balance at December31, 2012	$	244,092		$		(1,030	)	$		243,062
Common stock issued in connection with exercises of stock options		9,528				—				9,528
Stock-based compensation		25,847				—				25,847
Net loss		(3,152	)			(8,025	)			(11,177	)
Balance at September30, 2013	$	276,315		$		(9,055	)	$		267,260

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Goodwill and Intangible Assets, Net (Tables)

9 Months Ended

Sep. 30, 2013

Intangible Assets, Net

Intangible assets, net

	As of September 30, 2013										Weightedaverage remainingamortization period(years)
	Gross			Accumulated Amortization				Net
	(in thousands)
Existing and core technology - product	$	46,533	$		(38,645	)	$		7,888	1.82
Technology licenses		68,769			(27,331	)			41,438	7.14
Customer contracts and relationships		8,991			(5,889	)			3,102	4.23
Trade name		2,296			(1,721	)			575	1.35
Order backlog		640			(640	)			—	—
Total amortizable intangible assets	$	127,229	$		(74,226	)	$		53,003	6.50

	As of December31, 2012										Weightedaverage remainingamortization period(years)
	Gross			Accumulated Amortization				Net
	(in thousands)
Existing and core technology - product	$	47,658	$		(35,326	)	$		12,332	2.39
Technology licenses		66,034			(20,078	)			45,956	7.94
Customer contracts and relationships		8,991			(5,291	)			3,700	4.93
Trade name		2,296			(1,396	)			900	2.10
Order backlog		640			(640	)			—	—
Total amortizable intangible assets	$	125,619	$		(62,731	)	$		62,888	6.57

Estimated Future Amortization Expense From Amortizable Intangible Assets

The estimated future amortization expense from amortizable intangible assets is as follows (in thousands):

Remainder of 2013	$	4,240
2014		14,471
2015		7,854
2016		5,704
2017		4,505
2018 and thereafter		16,229
	$	53,003

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Document and Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 01, 2013
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3
Trading Symbol	CAVM
Entity Registrant Name	CAVIUM, INC.
Entity Central Index Key	0001175609
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		51,986,742

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Restructuring Accrual (Tables)

9 Months Ended

Sep. 30, 2013

Accrued Restructuring Liabilities Including Related Activities

A summary of the accrued restructuring liabilities including related activities during the nine months ended September30, 2013, is as follows:

	Severance andother benefits			Excess Facility RelatedCost			Total
	(in thousands)
Balance at December 31, 2012	$	—		$	262		$	262
Additions		1,371			—			1,371
Cash payments and other non-cash adjustments		(1,371	)		(155	)		(1,526	)
Balance at September30, 2013 (current)	$	—		$	107		$	107