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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER: 0-16617
ALTERA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
77-0016691
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
101 INNOVATION DRIVE, SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 544-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
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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 [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3,832,950,273 AS OF FEBRUARY
28, 1998, BASED UPON THE CLOSING SALE PRICE ON THE NASDAQ NATIONAL MARKET FOR
THAT DATE.
THERE WERE 88,905,459 SHARES OF THE REGISTRANT'S COMMON STOCK ISSUED AND
OUTSTANDING AS OF FEBRUARY 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
ITEMS 5, 6, 7 AND 8 OF PART II INCORPORATE INFORMATION BY REFERENCE FROM
THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
ITEMS 11, 12 AND 13 OF PART III INCORPORATE INFORMATION BY REFERENCE FROM
THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 13,
1998.
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Except for the historical information presented, the matters discussed in
this Form 10-K include forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result of risk factors that
include, but are not limited to, those discussed under the caption "Future
Results" under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's 1997 Annual Report to Stockholders,
which is incorporated by reference in this Form 10-K and is included in Exhibit
13.1 hereto, as well as factors discussed elsewhere in this Form 10-K.
PART I
ITEM 1. BUSINESS.
GENERAL
Altera Corporation ("Altera" or the "Company") designs, manufactures and
markets programmable logic devices ("PLDs") and associated development tools.
Programmable logic devices are semiconductor integrated circuits ("chips" or
"ICs") that offer on-site programmability to customers using the Company's
proprietary software, which operates on personal computers and engineering
workstations. Founded in 1983, Altera was the first supplier of programmable
logic devices and is currently a global leader in this market. The Company
offers a broad line of CMOS programmable logic devices that address high-speed,
high-density and lower power applications. The Company's products serve a wide
range of markets, including telecommunications, data communications, computers
and industrial applications.
In 1997, the Company moved to new headquarters located at 101 Innovation
Drive, San Jose, California 95134. The Company also reincorporated as a Delaware
corporation during 1997.
STRATEGY
Programmable logic is one segment of the Complementary Metal Oxide
Semiconductor ("CMOS") logic market, other segments of which include gate
arrays, standard logic, full custom devices, cell-based ICs (also referred to as
standard cells) and other forms of logic ICs, including chipsets. In a broad
sense, all of these devices are indirectly competitive as they generally may be
used in the same types of applications in electronic products. However,
differences in cost, performance, density, flexibility and ease of use dictate
the extent to which they may be directly competitive for particular
applications.
Programmable logic's primary advantage is that it allows for quicker design
cycles meeting customers' needs for quick time-to-market. Programmable logic
allows customers to experiment and iterate their designs in a relatively short
amount of time and with minimum cost. In most instances, this is quicker and
easier than achieving a design in a deterministic fashion. This advantage is
amplified by the ability to have working silicon at the time the design is
finalized.
Another advantage of programmable logic is that, particularly for small
volume applications, it lowers the per unit cost of producing customized
components. While programmable logic inherently consumes more silicon (because
of its generality and on-chip programming overhead), in many cases this cost is
still less than the high fixed costs of layout and mask-making required to
produce a custom IC. The cost advantage is further enhanced by the flexibility
of the inventory and the fact that customization occurs closer to the end
application.
Due to PLD cost decreases through high-volume manufacturing and the use of
emerging process technologies, Altera has been able to introduce new product
families that, as compared with their predecessors, provide more functionality
at about half the price for any given density. These new product families
achieve the integration, density, performance and cost to compete with gate
array solutions. The Company believes that its competitiveness with the gate
array segment in these areas, along with the inherent advantages of programmable
logic discussed above, will enable it to compete for designs traditionally
served by
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gate arrays. In the short term, the lower prices associated with the Company's
new product offerings have slowed and will continue to slow its sales growth.
However, Altera believes that these new product offerings will be important to
sustaining long-term sales growth as they broaden the appeal of programmable
logic. See "-- Competition."
PRODUCTS
Altera sells a wide range of products, with a total of more than 1,000
product options among its PLD families. The Company offers PLDs in two
fundamental technologies: its MAX products which use floating gate process
technology and its FLEX products which use SRAM-based process technology.
Altera's proprietary software, MAX+PLUS II, is capable of programming all its
PLDs. Altera also offers hardware used in programming PLDs.
Devices:
Altera offers a wide range of general-purpose PLD families. Each device
family offers unique features as well as differing density and performance
specifications for implementing particular applications. Some of Altera's major
device families include the following:
MAX 7000: The MAX 7000 device family is one of the fastest high-density
programmable logic families in the industry. Devices in this family range from
600 to 10,000 usable gates and up to 256 I/O pins. The MAX 7000 device family,
which includes MAX 7000E, MAX 7000S and MAX 7000A devices, is fabricated on an
advanced CMOS EEPROM process, providing a high-density, high-speed,
I/O-intensive programmable logic solution. MAX 7000S devices provide several
enhanced features, including support for the JTAG boundary-scan test circuitry
and in-system programmability ("ISP"). ISP functionality allows devices to be
programmed after they are soldered onto the printed circuit board, thereby
minimizing the possibility of lead damage or electrostatic discharge exposure.
MAX 9000: The MAX 9000 device family combines the efficient macrocell
architecture of MAX 7000 devices with the high-performance, predictable
FastTrack Interconnect structure of FLEX devices. Devices in this family range
from 6,000 to 12,000 usable gates and up to 356 I/O pins. The MAX 9000 family is
the densest EPLD family in the industry with up to 560 macrocells. The
EEPROM-based MAX 9000 devices are PCI-compliant and offer non-volatile 5.0-V
ISP.
FLEX 8000: The SRAM-based FLEX 8000 device family uses the Altera patented
FastTrack Interconnect, a continuous routing structure that allows for fast,
predictable interconnect delays. Devices in this family range from 2,500 to
16,000 usable gates and up to 304 I/O pins. FLEX 8000 devices have a 5.0-V
supply voltage and can interface with 3.3-V devices through the MultiVolt I/O
feature. These SRAM-based devices provide low standby power and in-system
reconfigurabilty.
FLEX 6000: Altera's SRAM-based FLEX 6000 family delivers the flexibility
and time-to-market of programmable logic at prices that are competitive with
gate arrays. Devices in this family range from 16,000 to 24,000 usable gates and
up to 256 I/O pins. Featuring the very efficient OptiFLEX architecture, FLEX
6000 devices provide a flexible and cost-effective alternative to gate arrays
for high-volume production. Every feature in the OptiFLEX architecture is
targeted at producing maximum performance and utilization in the smallest
possible die area.
FLEX 10K: Altera's SRAM-based FLEX 10K family offers a combination of
logic and memory on one chip. Devices in this family are planned to range from
10,000 to 250,000 usable gates and up to 600 I/O pins. With these high
densities, the FLEX 10K family is expected to address the increasing levels of
integration needed to accommodate today's complex system-on-a-chip designs. FLEX
10K devices, offered in 2.5-V, 3.3-V and 5.0-V supply voltages, have a unique
embedded architecture made up of both a logic array and an embedded memory
array.
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Development Tools:
The Company's development system software and hardware are used to design
and implement logic designs on its PLDs. Altera's MAX+PLUS II software runs
under the Microsoft Windows 95 and NT operating environments on personal
computers in addition to the UNIX environment on SUN, HP and IBM workstations.
The Company also provides interfaces to many industry standard electronic design
automation ("EDA") tools, including those offered by Cadence Design Systems,
Inc., Mentor Graphics Corporation and Synopsys, Inc. The Company also sells
hardware for programming its PLDs.
MARKETING, SALES AND CUSTOMERS
The Company markets its products in the United States and Canada through a
network of direct sales personnel, independent sales representatives and
electronics distributors. The Company also has domestic sales management offices
in major metropolitan areas throughout the United States. The Company's direct
sales personnel and independent sales representatives focus on major strategic
accounts. Distributors generally focus selling activities on the broad base of
small and medium-size customers.
In the United States, Altera's distributors currently include Arrow
Electronics Inc. and Wyle Electronics (a wholly-owned subsidiary of Raab Karcher
AG). These distributors are responsible for creating customer demand from its
base of customers, providing technical support and other value-added services
and filling customers' orders. From time to time, the Company expects that it
may add or delete distributors from its selling organization as it deems
appropriate to the level of business.
The Company's international business is supported by a network of
distributors throughout Europe and Asia. The Company has representation in every
major European country, Israel, Australia, South America and various countries
throughout the Pacific Rim, including Japan. International sales management
offices are located in the metropolitan areas of Brussels, Hong Kong, Hsinchu
(Taiwan), London, Munich, Ottawa, Paris, Seoul, Stockholm, Tokyo and Turin.
Customer service and support are important aspects of the sales and
marketing of the Company's products. Altera provides several levels of user
support, including applications assistance, design services and customer
training. The Company's applications engineering staff publishes data sheets and
application notes, conducts technical seminars and provides design assistance
via electronic links to the customer's design station. Customer service is
supported with inventory maintained both by Altera and at distributors'
locations to provide short-term delivery of chips.
During each of the last three years, export sales constituted nearly half
of the Company's total sales. Through 1997, almost all export sales were
denominated in U.S. dollars. The Company's export sales are subject to those
risks common to all export activities, including governmental regulation,
possible imposition of tariffs or other trade barriers and currency
fluctuations.
In the year ended December 31, 1997, worldwide sales through distributors
accounted for approximately 90% of total sales. In 1997, the two largest
distributors accounted for 32% and 18% of sales. In 1996, the two largest
distributors accounted for 29% and 15% of sales, whereas in 1995, they each
accounted for 21% and 15% of sales, respectively. No single end customer
accounted for more than 10% of the Company's sales in 1997, 1996 or 1995. Export
sales constituted 45%, 47% and 47% of sales in 1997, 1996 and 1995,
respectively.
COMPETITION
The CMOS Logic Market:
Programmable logic is one segment of the CMOS logic market, other segments
of which include gate arrays, standard logic, full custom devices, cell-based
ICs (also referred to as standard cells) and other forms of logic ICs, including
chipsets. In a broad sense, all of these devices are indirectly competitive as
they generally may be used in the same types of applications in electronic
products. However, differences in cost, performance, density, flexibility and
ease of use dictate the extent to which they may be directly competitive for
particular applications. As PLDs have increased in density and decreased in
cost, they have become more
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directly competitive with gate array products. With the introduction of the
Company's FLEX 10K family of devices, which are the highest density of Altera's
PLDs, and its newer FLEX 6000 devices, which are designed and priced to be very
competitive with lower density gate arrays, the Company seeks to grow its
segment by directly competing with companies in the gate array segment. Many of
the companies in the gate array segment have substantially greater financial,
technical and marketing resources than the Company. Consequently, there can be
no assurance that the Company will be successful in competing in the gate array
segment of the CMOS logic market.
The Programmable Logic Segment:
The principal factors of competition in the programmable logic segment
include the capability of software development tools and system-level functional
programming blocks, product performance and features, quality and reliability,
pricing, technical service and support, the ability to respond rapidly to
technical innovation and customer service. The Company believes it competes
favorably with respect to these factors and that its proprietary device
architecture and its installed base of development systems with proprietary
software may provide some competitive advantage. However, as is true of the
semiconductor industry as a whole, the PLD segment of the CMOS logic market is
intensely competitive and is characterized by rapid technological change, rapid
rates of product obsolescence and price erosion resulting from both product
obsolescence and price competition. All of these factors may influence the
Company's future operating results.
The Company experiences significant direct competition from a number of
other companies which are in the programmable logic segment of the CMOS logic
market. The Company's competition in this market segment is from suppliers of
products that are marketed as either field programmable gate arrays ("FPGAs") or
complex PLDs ("CPLDs").
Companies that currently compete with Altera in its core business may have
proprietary wafer manufacturing ability, preferred vendor status with many of
the Company's customers, extensive marketing power and name recognition, greater
financial resources than those of the Company and other significant advantages
over the Company. Additionally, the semiconductor industry as a whole includes
many large domestic and foreign companies that have substantially greater
financial, technical and marketing resources than the Company. The Company
expects that as the dollar volume of the programmable logic segment grows, the
attractiveness of this segment to larger, more powerful competitors will
continue to increase. Substantial direct or indirect competition could have a
material adverse effect on the Company's future sales and operating results.
MANUFACTURING
The Company does not directly manufacture its silicon wafers. Altera's
wafers are produced using various semiconductor foundry wafer fabrication
service providers. This enables Altera to take advantage of these suppliers'
high volume economies of scale, as well as easy and timely access to advancing
process technology.
Altera presently has its primary wafer supply arrangements with three
semiconductor vendors: Sharp, TSMC and Cypress. The Company may negotiate
additional foundry contracts and establish other sources of wafer supply for its
products as such arrangements become economically useful or technically
necessary. Although there are a number of new state of the art wafer fabrication
facilities currently under construction around the world, semiconductor foundry
capacity can become limited quickly and without much notice. Furthermore, since
only newer fabrication facilities are able to manufacture wafers that
incorporate leading edge technologies, any significant decrease in capacity of
these facilities would have a material adverse effect on the Company's ability
to obtain wafer supply for its newer products. Accordingly, there can be no
assurance that any foundry manufacturing constraints will not pose significant
problems for the Company in the future.
In June 1996, Altera, TSMC and several other partners formed WaferTech LLC,
a joint-venture company, to build and operate a wafer manufacturing plant in
Camas, Washington. In return for a $140.4 million cash investment, Altera
received an 18% equity ownership in the joint-venture company and certain rights
to procure output from the fab at market price. The investment was made in three
installments, the last of which was paid in November 1997. In addition, the
Company has an obligation to guarantee a pro
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rata share of debt incurred by WaferTech up to a maximum of $45 million.
WaferTech is currently seeking to secure a loan facility of up to $350 million.
It is anticipated that WaferTech's initial wafer shipments will occur in the
latter half of 1998. There can be no assurance that WaferTech will remain
sufficiently capitalized or on schedule with its production projections, and
WaferTech's failure to do so could have a material adverse effect on the
Company's future operating results.
The Company also owns a 17% equity interest in Cypress Semiconductor
(Texas) Inc. ("CSTI"), a subsidiary of Cypress Semiconductor Corporation.
Pursuant to the agreements governing this investment, Altera can obtain up to a
certain number of wafers from CSTI. This investment provides Altera with the
option to design and market certain sole-sourced products produced at CSTI. The
Company uses this facility for the manufacture of its older architecture Classic
and MAX 5000 products. Cypress Semiconductor, which has manufacturing and
marketing rights to certain MAX 5000 products, also manufactures its own
products in the CSTI facility.
The Company depends upon its foundry vendors to produce wafers at
acceptable yields and to deliver them to the Company in a timely manner. The
manufacture of advanced CMOS semiconductor wafers is a highly complex process,
and the Company has from time to time experienced difficulties in obtaining
acceptable yields and timely deliveries from its suppliers. Good production
yields are particularly important to the Company's business, including its
ability to meet customers' demand for products and to maintain profit margins.
The manufacture of semiconductor products is sensitive to a wide variety of
factors, including the level of contaminants in the manufacturing environment,
impurities in the materials used and the performance of personnel and equipment.
As is common in the semiconductor industry, the Company has experienced and
expects to experience production yield problems from time to time. Accordingly,
no assurance can be given that the Company will not experience significant
production yield problems with one or more of its product lines. Production
throughput times also vary considerably among the Company's wafer suppliers. The
Company has experienced delays from time to time in processing some of its
products. Any prolonged inability to obtain adequate yields or deliveries could
adversely affect the Company's operating results. The Company expects that, as
is customary in the semiconductor business, in order to maintain or enhance
competitive position, it will continue to convert its fabrication process
arrangements to larger wafer sizes and smaller circuit geometries, to more
advanced process technologies or to new suppliers. Such conversions entail
inherent technological risks that can adversely affect yields, costs and
delivery lead time. In addition, if for any reason the Company were required to
seek alternative sources of supply, shipments could be delayed significantly
while such sources are qualified for volume production, and any significant
delay could have a material adverse effect on the Company's operating results.
After wafer manufacturing is completed, each wafer is electronically sort
tested using a variety of test and handling equipment. Such wafer testing is
accomplished at TSMC, Sharp and the Company's Pilot Line facility in San Jose
(which is used primarily for new product development). This testing is performed
on equipment owned by the Company and consigned to the vendors.
Resulting wafers are shipped to various Asian assembly suppliers, where
good die are separated into individual chips that are then encapsulated in
ceramic or plastic packages. As is the case with the Company's wafer supply
business, the Company employs a number of independent suppliers for assembly
purposes. This enables the Company to take advantage of subcontractor high
volume manufacturing, related cost savings, speed and supply flexibility. It
also provides the Company with timely access to cost-effective advanced process
and package technologies. Altera purchases almost of all its assembly services
from ASE (Malaysia) and ANAM (Korea).
Following assembly, each of the packaged units receives final testing,
marking and final inspection prior to shipment to customers. The Company obtains
almost all of its final test and back end operation services from ASE, ANAM or
ASAT (Hong Kong). Final testing by these assembly suppliers is accomplished
through the use of Altera's proprietary test software and hardware consigned to
such suppliers and of third-party commercial testers. These suppliers also
handle shipment of the products to the Company's customers.
Almost all of the manufacturing, assembly, testing and packaging of
Altera's development system hardware products is done by outside contractors.
Although the Company's wafer fabrication, assembly and
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other subcontractors have not recently experienced any serious work stoppages,
the economic, social and political situations in countries where certain
subcontractors are located are unpredictable and can be volatile. Any prolonged
work stoppages or other inability of the Company to manufacture and assemble its
products would have a material adverse effect on the Company's operating
results. Furthermore, economic risks, such as extreme currency fluctuations,
changes in tax laws, tariff or freight rates, or interruptions in air
transportation, could have a material adverse effect on the Company's operating
results.
BACKLOG
The Company's backlog of released orders as of December 31, 1997 was
approximately $114.0 million as compared to approximately $102.6 million at
December 31, 1996. The Company includes in its backlog OEM customer-released
orders that are requested for delivery within the next six months and
distributor orders requested for delivery within the next three months. The
Company produces standard products which may be shipped from inventory within a
short time after receipt of an order. The Company's business has been
characterized by a high percentage of orders with near-term delivery schedules
(turns orders). At times, due to high demand and supply constraints in certain
products, lead times can lengthen, causing an increase in backlog. However,
orders constituting the Company's current backlog are cancelable without
significant penalty at the option of the purchaser, thereby decreasing backlog
during periods of lower demand. In addition, distributor shipments are subject
to price adjustments. As discussed in the Notes to the Consolidated Financial
Statements in the Company's 1997 Annual Report, portions of which are filed as
Exhibit 13.1 hereto, the Company adopted a new revenue recognition method in the
fourth quarter of 1997 with an effective date of January 1, 1997, which involves
the deferral of revenue recognition on shipments to distributors until the
product is resold to the end customers. Distributor orders accounted for
approximately 90% of the Company's backlog as of December 31, 1997. For all of
these reasons, backlog as of any particular date should not be used as a
predictor of sales for any future period.
RESEARCH AND DEVELOPMENT
The Company's research and development activities have focused primarily on
general-purpose programmable logic devices and on the associated development
software and hardware. The Company has developed these related products in
parallel to provide software support to customers simultaneous with circuit
introduction. As a result of the Company's research and development efforts, it
has introduced a number of new PLD families, such as the FLEX 6000 (which was
introduced in 1997), FLEX 10K, MAX 7000S and MAX 9000 families. The Company has
also redesigned a number of its products, including the FLEX 10KA and MAX 9000
families, to accommodate their manufacture on new wafer fabrication processes.
Additionally, the Company also releases new versions of its proprietary software
on a quarterly basis.
The Company's research and development expenditures in 1997, 1996 and 1995
were $54.4 million, $49.5 million and $33.8 million, respectively. The Company
has not capitalized research and development or software costs to date. The
Company intends to continue to spend substantial amounts on research and
development in order to continue to develop new products and achieve market
acceptance for such products, particularly in light of the industry pattern of
price erosion for mature products and increasing competition within the CMOS
logic market. Even if such goals are accomplished, there can be no assurance
that these products will achieve significant market acceptance. If the Company
were unable to successfully define, develop and introduce competitive new
products, and enhance its existing products, its future operating results would
be adversely affected.
PATENTS AND LICENSES
The Company owns numerous United States patents and has additional pending
United States patent applications on its semiconductor products. The Company
also has technology licensing agreements with AMD, Cypress, Intel and Texas
Instruments giving the Company royalty-free rights to design, manufacture and
package products using certain patents they control.
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Although the Company's patents and patent applications may have value in
discouraging competitive entry into the Company's market segment and the Company
believes that its current licenses will assist it in developing additional
products, there can be no assurance that any valuable new patents will be
granted to the Company, that the Company's patents will provide meaningful
protection from competition or that any additional products will be developed
based on any of the licenses that the Company currently holds. The Company
believes that its future success will depend primarily upon the technical
competence and creative skills of its personnel, rather than on its patents,
licenses or other proprietary rights.
In the future, the Company may decide to incur litigation expenses to
enforce its intellectual property rights against third parties. There is no
assurance that any such litigation would be successful, or that the Company's
patents would be upheld if challenged.
The Company, in the normal course of business, from time to time receives
and makes inquiries with respect to possible patent infringements. As a result
of inquiries received from third parties, it may be necessary or desirable for
the Company to obtain additional licenses relating to one or more of its current
or future products. There can be no assurance that such additional licenses
could be obtained, and, if obtainable, could be obtained on conditions which
would not have a material adverse effect on the Company's operating results. In
addition, if patent litigation ensued, there can be no assurance that these
third parties would not succeed in obtaining significant monetary damages or an
injunction against the manufacture and sale of one or more of the Company's
product families.
EMPLOYEES
As of December 31, 1997, the Company had 1,086 regular employees. The
success of the Company is dependent in large part upon the continued service of
its key management, technical, sales and support employees and on its ability to
continue to attract and retain additional qualified employees. The competition
for such employees is intense and their loss as employees could have an adverse
effect on the Company.
ITEM 2. PROPERTIES.
In July 1997, the Company moved to its new headquarters facility in San
Jose, California. The new campus consists of four interconnected buildings
totaling approximately 500,000 square feet. Design, limited manufacturing,
research, marketing and administrative activities are performed in these
facilities. In June 1995, the Company purchased the approximately 25 acres of
land on which the new campus sits. During 1997, $44.2 million was spent by the
Company on construction of the facility, which was completed in mid-1997. The
Company also leases on a short-term basis office facilities for its domestic and
international sales management offices. The Company believes that its existing
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
In June 1993, Xilinx, Inc. ("Xilinx") brought suit against the Company
seeking monetary damages and injunctive relief based on the Company's alleged
infringement of certain patents held by Xilinx. In June 1993, the Company
brought suit against Xilinx, seeking monetary damages and injunctive relief
based on Xilinx's alleged infringement of certain patents held by the Company.
In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware,
Xilinx's state of incorporation, seeking monetary damages and injunctive relief
based on Xilinx's alleged infringement of one of the Company's patents. In May
1995, Xilinx counterclaimed against the Company in Delaware, asserting defenses
and seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Xilinx. Subsequently, the
Delaware case has been transferred to California. Due to the nature of the
litigation with Xilinx and because the lawsuits are still in the pre-trial
stage, the Company's management cannot estimate the total expense, the possible
loss, if any, or the range of loss that may ultimately be incurred in connection
with the allegations. Management cannot ensure that Xilinx will not succeed in
obtaining significant monetary damages or an injunction against the manufacture
and sale of the Company's MAX 5000, MAX 7000, FLEX 8000 or MAX 9000 families of
products, or succeed in invalidating any of the Company's patents. Although no
assurances can be given as to the results of these cases, based on the present
status, management does not
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believe that any of such results will have a material adverse effect on the
Company's financial condition or results of operations.
In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit against
the Company seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by AMD. In September
1994, Altera answered the complaint asserting that it is licensed to use the
patents which AMD claims are infringed and filed a counterclaim against AMD
alleging infringement of certain patents held by the Company. In October 1997,
upon completion of trials bifurcated from the infringement claims, the Court
ruled that the Company is licensed under all patents asserted by AMD in the
suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due
to the nature of the litigation with AMD, and because AMD has appealed the court
rulings that the Company is licensed under all of the patents asserted by AMD in
the suit, the Company's management cannot estimate the total expense, the
possible loss, if any, or the range of loss that may ultimately be incurred in
connection with the allegations. Management cannot ensure that AMD will not
succeed in obtaining significant monetary damages or an injunction against the
manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000,
FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the
Company's patents remaining in the suit. Although no assurances can be given as
to the results of this case, based on its present status, management does not
believe that any of such results will have material adverse effect on the
Company's financial condition or results of operations.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The textual portion of the section entitled "About Your Investment" and the
section entitled "Corporate Directory" in the Company's 1997 Annual Report to
Stockholders for the year ended December 31, 1997 ("1997 Annual Report") are
incorporated herein by reference.
The Company believes factors such as quarter-to-quarter variances in
financial results, announcements of new products, new orders and order rate
variations by the Company or its competitors could cause the market price of its
Common Stock to fluctuate substantially. In addition, the stock prices for many
high technology companies experience large fluctuations, which are often
unrelated to the operating performance of the specific companies. Broad market
fluctuations, as well as general economic conditions such as a recessionary
period or high interest rates, may adversely affect the market price of the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The section entitled "Selected Consolidated Financial Data/Five-Year
Summary" in the Company's 1997 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The textual portion of the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The section entitled "Market Risk Disclosure" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1997 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP dated January 20, 1998, in the Company's 1997 Annual Report
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
<PAGE> 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Rodney Smith................. 57 Chairman of the Board of Directors, President and
Chief Executive Officer
C. Wendell Bergere........... 52 Vice President, General Counsel and Secretary
Denis Berlan................. 47 Executive Vice President and Chief Operating Officer
Erik Cleage.................. 37 Vice President, Marketing
John R. Fitzhenry............ 48 Vice President, Human Resources
Paul Newhagen(1)(3).......... 48 Director and Vice President, Administration
Nathan Sarkisian............. 39 Vice President, Finance and Chief Financial Officer
Peter Smyth.................. 59 Vice President, Sales
Charles M. Clough............ 69 Director
Michael A. 52 Director
Ellison(1)(2)(3)...........
Robert W. Reed(1)(3)......... 51 Director
William E. Terry(1)(2)....... 64 Director
Deborah Triant............... 48 Director
</TABLE>
- ---------------
(1) Member of Nominating Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. There are no family
relationships between any of the directors or executive officers of the Company.
RODNEY SMITH joined the Company in November 1983 as Chairman of the Board
of Directors, President and Chief Executive Officer. Prior to that time, he held
various management positions with Fairchild Semiconductor Corporation
("Fairchild"), a semiconductor manufacturer.
C. WENDELL BERGERE joined the Company in August 1995 as Vice President,
General Counsel and Secretary. Prior to joining the Company, from 1993 to 1995,
Mr. Bergere was Special Counsel at the law firm of Sheppard, Mullin, Richter &
Hampton. From 1982 to 1993, he was Vice President, General Counsel and Secretary
of The Perkin-Elmer Corporation, a producer of analytical and life science
systems.
DENIS M. BERLAN joined the Company in December 1989 as Vice President,
Product Engineering and was named Vice President, Operations and Product
Engineering in October 1994. In January 1996, he was named Vice President,
Operations. In January 1997, he was named Executive Vice President and Chief
Operating Officer. He was previously employed by Advanced Micro Devices, Inc.
("AMD"), a semiconductor manufacturer, and by Lattice Semiconductor Corporation,
a semiconductor manufacturer, in engineering management capacities.
ERIK CLEAGE joined the Company as International Marketing Manager in
February 1986. He became Director, Japan and Asia Pacific Sales in April 1989,
and was appointed Vice President, Marketing in August 1990. Previously, he was
employed by AMD and Fairchild in various positions.
JOHN R. FITZHENRY joined the Company in May 1995 as Vice President of Human
Resources. From 1983 to May 1995, he was employed by Apple Computer, Inc., a
manufacturer of personal computers, in various human resource management
positions.
PAUL NEWHAGEN, a co-founder of the Company, has served as a director of the
Company since July 1987 and as Vice President of Administration since December
1994. Mr. Newhagen served as Vice President of the
11
<PAGE> 12
Company from November 1992 to February 1993, Secretary from July 1987 to January
1993, Vice President of Finance and Administration from June 1983 to November
1992, and Chief Financial Officer from June 1983 to February 1993. From June
1993 to November 1994, Mr. Newhagen served as a consultant to the Company.
NATHAN SARKISIAN joined the Company in June 1992 as Corporate Controller.
He was appointed Vice President, Finance and Chief Financial Officer in August
1995. Prior to joining the Company, Mr. Sarkisian held various accounting and
financial positions at Fairchild, and at Schlumberger, an oil field services
company.
PETER SMYTH joined the Company in May 1990 as Vice President of Sales.
Prior to joining the Company, Mr. Smyth served as Vice President of Sales at
Precision Monolithics, Inc., a semiconductor manufacturer, and Vice President of
North American Sales at Mostek, a semiconductor manufacturer. Mr. Smyth was also
previously associated with Texas Instruments in a variety of sales and marketing
capacities.
CHARLES M. CLOUGH has served as a director of the Company since August
1997. In August 1997, Mr. Clough retired from his position as Chairman of the
Board of Directors of Wyle Electronics, a distributor of semiconductor products
and computer systems. From 1982 to 1997, Mr. Clough held various management
positions at Wyle Electronics, including President, Chief Executive Officer and
Chairman. Wyle Electronics is one of the Company's authorized distributors in
the United States. Prior to joining Wyle Electronics, he had spent 27 years with
Texas Instruments holding a number of management and executive positions
relating to semiconductor operations, including the head of Bipolar operations,
European Semiconductor group and worldwide marketing.
MICHAEL A. ELLISON has served as a director of the Company since April
1984. Since October 1994, Mr. Ellison has been the Chief Executive Officer of
Steller, Inc., a distributor of electronic parts. Until December 1992, he was a
General Partner at Cable & Howse Ventures, a venture capital investment firm,
and following that a private venture capital investor.
ROBERT W. REED has served as a director of the Company since October 1994.
In 1996, Mr. Reed retired from his position as Senior Vice President of Intel
Corporation, a semiconductor manufacturer. From 1983 to 1991 Mr. Reed was
Intel's Chief Financial Officer.
WILLIAM E. TERRY has served as a director of the Company since August 1994.
Mr. Terry is a former director and Executive Vice President of the
Hewlett-Packard Company, a diversified electronics manufacturing company. At
Hewlett-Packard, he held a number of senior management positions, including
general manager of Hewlett-Packard's Data Products and Instrument Groups, and
subsequently had overall responsibility for the Measurement Systems Sector. He
retired from Hewlett-Packard in November 1993. Mr. Terry also serves as a
director of Key Tronic Corporation.
DEBORAH TRIANT has served as a director of the Company since May 1996. Dr.
Triant is the President and Chief Executive Officer of CheckPoint Software
Technologies, Inc. ("CheckPoint"), an Internet security software company, and a
director of CheckPoint's Israeli parent company, CheckPoint Software
Technologies, Ltd. Prior to joining CheckPoint, Dr. Triant held various
marketing and technical executive positions with Adobe Systems Inc., a computer
software company, Sun Microsystems Inc., a computer networking company, and
Xerox Corp., a diversified electronics manufacturer.
The section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement dated April 9, 1998 filed with the
Securities and Exchange Commission (the "Proxy Statement") is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation" in the Company's Proxy
Statement is incorporated herein by reference.
12
<PAGE> 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Director Compensation" and the section entitled
"Certain Business Relationships" in the Company's Proxy Statement are
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following documents from the Annual Report to Stockholders are
filed as part of this report:
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1997
Consolidated Balance Sheets at December 31, 1997 and December 31,
1996
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1997
Notes to the Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as they are either not required, not
applicable, or the required information is included in the financial
statements or notes thereto.
13
<PAGE> 14
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 Certificate of Incorporation filed with the Delaware
Secretary of State on March 25, 1997 (which became the
Certificate of Incorporation of the Registrant on June 19,
1997).(15)
3.2 By-laws of the Registrant as adopted May 5, 1997 (which
became the By-laws of the Registrant on June 19, 1997).(15)
# 4.1 Specimen copy of certificate for shares of Common Stock of
the Registrant.
4.2 Indenture Agreement dated as of June 15, 1995 by and between
Registrant and the First National Bank of Boston, as
Trustee.(11)
4.3 Form of Convertible Subordinated Note due 2002.(11)
4.4 First Supplemental Indenture dated as of June 19, 1997 to
Indenture dated as of June 15, 1995.(15)
10.1* License Agreement dated as of July 12, 1994 with Intel
Corporation.(9)
10.2* Supply Agreement dated as of July 12, 1994 with Intel
Corporation.(9)
10.3(a)+ 1987 Stock Option Plan, and forms of Incentive and
Nonstatutory Stock Option Agreements, as amended March 22,
1995 and as restated effective May 10, 1995.(12)
10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription
Agreement, as amended May 10, 1995.(12)
10.6* Technology License and Manufacturing Agreement with Cypress
Semiconductor Corporation, dated June 19, 1987.(1)
10.6(a)* Termination Agreement dated November 23, 1993, regarding
Technology License and Manufacturing Agreement with Cypress
Semiconductor Corporation.(7)
10.11 Form of Sales Representative Agreement.(1)
10.22* Advanced Micro Devices, formerly MMI, Settlement Agreement
and associated Series E Preferred Stock Purchase Agreement
and Patent License Agreement, all dated March 31, 1987.(1)
10.25 Product Distribution Agreement with Wyle Electronics
Marketing Group, effective May 16, 1984, as amended.(1)
#10.26 Form of Indemnification Agreement entered into with each of
the Company's officers and directors.
10.30(a)* Amendment No. 2 to Technology License and Manufacturing
Agreement with Texas Instruments Incorporated, dated
effective October 1, 1990.(5)
10.31 Product Distribution Agreement with LEX Electronics, Inc.,
formerly Schweber Electronics Corporation effective December
22, 1988, as amended.(2)
10.31(a) Consent to Assignment of Product Distribution Agreement,
effective September 23, 1991.(6)
10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director
Nonstatutory Stock Option Agreement, as amended January 18,
1995 and as restated effective May 10, 1995.(10)
10.34* Foundry and PROM II.5 Process Technology License Agreement
with Cypress Semiconductor Corporation and Cypress
Semiconductor (Texas) Inc., dated April 24, 1990.(4)
10.34(a)* Amendment Number 1 dated November 23, 1993, regarding
Foundry and PROM II.5 Process Technology License Agreement
with Cypress Semiconductor Corporation and Cypress
Semiconductor (Texas) Inc.(7)
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.35 Master Distribution Agreement with Japan Macnics Corporation
dated June 26, 1986, as amended effective March 18, 1987.(6)
10.37 LSI Products Supply Agreement with Sharp Corporation, dated
October 1, 1993.(7)
10.38+ Altera Corporation Nonqualified Deferred Compensation Plan
and Trust Agreement dated February 1, 1994, and form of
Deferred Compensation Agreement.(7)
10.39 Wafer Supply Agreement dated June 26, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(11)
10.40 Option Agreement dated June 26, 1995 between Registrant and
Taiwan Semiconductor Manufacturing Co., Ltd.(11)
10.41 Memorandum of Intent dated October 1, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(13)
10.42 Amendment No. 1 dated as of October 1, 1995 to Wafer Supply
Agreement dated as of June 26, 1995 by and between
Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.
And to Option Agreement 1 dated as of June 26, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(13)
10.43 Option Agreement 2 dated as of October 1, 1995 by and
between Registrant and Taiwan Semiconductor Manufacturing
Co., Ltd.(13)
10.44 Option Agreement 3 dated as of October 1, 1995 by and
between Registrant and Taiwan Semiconductor Manufacturing
Co., Ltd.(13)
10.45(a)+ 1996 Stock Option Plan.
10.45(b) Form of Stock Option Agreement under 1996 Stock Option
Plan.(13)
10.46 Owner/Contractor Agreement for Construction between
Registrant and Rudolph and Sletten, Inc. dated January 10,
1996.(13)
#10.47 Second Amended and Restated Limited Liability Company
Agreement of Wafertech, LLC, a Delaware limited liability
company, dated as of October 28, 1997.(17)
10.48 Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Co., Ltd., as Seller, and Analog Devices,
Inc., the Registrant and Integrated Silicon Solutions, Inc.,
as Buyers (dated as of June 25, 1996).(14)
10.49 Recission (dated as of June 25, 1996) of Option Agreement 1
dated as of June 26, 1995 by and between the Registrant and
Taiwan Semiconductor Manufacturing Co., Ltd.(14)
10.50 Agreement and Plan of Merger dated June 18, 1997.(15)
11.1 Computation of Earnings per Share.(16)
#13.1 Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (to be deemed filed only to the extent
required by the instructions to Exhibits for Reports on Form
10-K).
#18.1 Letter of Price Waterhouse LLP regarding Change in
Accounting Principle.
#21.1 Subsidiaries of the Registrant.
#23.1 Consent of Price Waterhouse LLP.
#24.1 Power of Attorney (included on page 17).
#27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the registrant's Registration
Statement on Form S-1 (File No. 33-17717), as amended, which became
effective March 29, 1988.
(2) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1988.
15
<PAGE> 16
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1989.
(4) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended March 31, 1990, as amended by a Form 8 filed on July
13, 1990.
(5) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1990.
(6) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1992.
(7) Incorporated by reference to identically numbered exhibits field in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to identically numbered exhibits field in
response to Item 7, "Exhibits," of the registrant's Report on Form 8-K
dated October 15, 1994 and 8-KA dated December 15, 1994.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended September 30, 1994.
(10) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1994.
(11) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1995.
(12) Incorporated by reference to identically numbered exhibits filed in
response to Item 8, "Exhibits," of the registrant's Registration Statement
on Form S-8 (File No. 33-61085), as amended, which became effective July
17, 1995.
(13) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1995.
(14) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1996.
(15) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1997.
(16) Incorporated by reference to Note 3 to the Consolidated Financial
Statements in the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1997.
(17) Exhibits to this document are incorporated by reference to the exhibits to
the identically numbered document filed in response to Item 6(a),
"Exhibits," of the registrant's Report on Form 10-Q for the quarter ended
June 30, 1996.
* Confidential treatment has previously been granted for portions of this
exhibit pursuant to an order of the Commission.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c)
thereof.
# Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to
be signed on its behalf, by the undersigned thereto duly authorized.
ALTERA CORPORATION
By: /s/ NATHAN SARKISIAN
------------------------------------
Nathan Sarkisian
Vice President, Finance and Chief
Financial Officer
March 25, 1998
POWER OF ATTORNEY
Know all persons by these present, that each person whose signature appears
below constitutes and appoints Nathan Sarkisian, his or her attorney-in-fact,
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his or her substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<C> <S> <C>
/s/ RODNEY SMITH President, Chief Executive March 25, 1998
- -------------------------------------------------------- Officer (Principal
Rodney Smith Executive Officer) and
Chairman of the Board of
Directors
/s/ NATHAN SARKISIAN Vice President -- Finance March 25, 1998
- -------------------------------------------------------- and Chief Financial Officer
Nathan Sarkisian (Principal Financial and
Accounting Officer)
/s/ CHARLES M. CLOUGH Director March 25, 1998
- --------------------------------------------------------
Charles M. Clough
/s/ MICHAEL A. ELLISON Director March 25, 1998
- --------------------------------------------------------
Michael A. Ellison
/s/ PAUL NEWHAGEN Director March 25, 1998
- --------------------------------------------------------
Paul Newhagen
/s/ ROBERT W. REED Director March 25, 1998
- --------------------------------------------------------
Robert W. Reed
/s/ WILLIAM E. TERRY Director March 25, 1998
- --------------------------------------------------------
William E. Terry
/s/ DEBORAH TRIANT Director March 25, 1998
- --------------------------------------------------------
Deborah Triant
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation filed with the Delaware
Secretary of State on March 25, 1997 (which became the
Certificate of Incorporation of the Registrant on June 19,
1997).(15)
3.2 By-laws of the Registrant as adopted May 5, 1997 (which
became the By-laws of the Registrant on June 19, 1997).(15)
# 4.1 Specimen copy of certificate for shares of Common Stock of
the Registrant.
4.2 Indenture Agreement dated as of June 15, 1995 by and between
Registrant and the First National Bank of Boston, as
Trustee.(11)
4.3 Form of Convertible Subordinated Note due 2002.(11)
4.4 First Supplemental Indenture dated as of June 19, 1997 to
Indenture dated as of June 15, 1995.(15)
10.1* License Agreement dated as of July 12, 1994 with Intel
Corporation.(9)
10.2* Supply Agreement dated as of July 12, 1994 with Intel
Corporation.(9)
10.3(a)+ 1987 Stock Option Plan, and forms of Incentive and
Nonstatutory Stock Option Agreements, as amended March 22,
1995 and as restated effective May 10, 1995.(12)
10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription
Agreement, as amended May 10, 1995.(12)
10.6* Technology License and Manufacturing Agreement with Cypress
Semiconductor Corporation, dated June 19, 1987.(1)
10.6(a)* Termination Agreement dated November 23, 1993, regarding
Technology License and Manufacturing Agreement with Cypress
Semiconductor Corporation.(7)
10.11 Form of Sales Representative Agreement.(1)
10.22* Advanced Micro Devices, formerly MMI, Settlement Agreement
and associated Series E Preferred Stock Purchase Agreement
and Patent License Agreement, all dated March 31, 1987.(1)
10.25 Product Distribution Agreement with Wyle Electronics
Marketing Group, effective May 16, 1984, as amended.(1)
#10.26 Form of Indemnification Agreement entered into with each of
the Company's officers and directors.
10.30(a)* Amendment No. 2 to Technology License and Manufacturing
Agreement with Texas Instruments Incorporated, dated
effective October 1, 1990.(5)
10.31 Product Distribution Agreement with LEX Electronics, Inc.,
formerly Schweber Electronics Corporation effective December
22, 1988, as amended.(2)
10.31(a) Consent to Assignment of Product Distribution Agreement,
effective September 23, 1991.(6)
10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director
Nonstatutory Stock Option Agreement, as amended January 18,
1995 and as restated effective May 10, 1995.(10)
10.34* Foundry and PROM II.5 Process Technology License Agreement
with Cypress Semiconductor Corporation and Cypress
Semiconductor (Texas) Inc., dated April 24, 1990.(4)
10.34(a)* Amendment Number 1 dated November 23, 1993, regarding
Foundry and PROM II.5 Process Technology License Agreement
with Cypress Semiconductor Corporation and Cypress
Semiconductor (Texas) Inc.(7)
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35 Master Distribution Agreement with Japan Macnics Corporation
dated June 26, 1986, as amended effective March 18, 1987.(6)
10.37 LSI Products Supply Agreement with Sharp Corporation, dated
October 1, 1993.(7)
10.38+ Altera Corporation Nonqualified Deferred Compensation Plan
and Trust Agreement dated February 1, 1994, and form of
Deferred Compensation Agreement.(7)
10.39 Wafer Supply Agreement dated June 26, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(11)
10.40 Option Agreement dated June 26, 1995 between Registrant and
Taiwan Semiconductor Manufacturing Co., Ltd.(11)
10.41 Memorandum of Intent dated October 1, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(13)
10.42 Amendment No. 1 dated as of October 1, 1995 to Wafer Supply
Agreement dated as of June 26, 1995 by and between
Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.
And to Option Agreement 1 dated as of June 26, 1995 between
Registrant and Taiwan Semiconductor Manufacturing Co.,
Ltd.(13)
10.43 Option Agreement 2 dated as of October 1, 1995 by and
between Registrant and Taiwan Semiconductor Manufacturing
Co., Ltd.(13)
10.44 Option Agreement 3 dated as of October 1, 1995 by and
between Registrant and Taiwan Semiconductor Manufacturing
Co., Ltd.(13)
10.45(a)+ 1996 Stock Option Plan.
10.45(b) Form of Stock Option Agreement under 1996 Stock Option
Plan.(13)
10.46 Owner/Contractor Agreement for Construction between
Registrant and Rudolph and Sletten, Inc. dated January 10,
1996.(13)
#10.47 Second Amended and Restated Limited Liability Company
Agreement of Wafertech, LLC, a Delaware limited liability
company, dated as of October 28, 1997.(17)
10.48 Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Co., Ltd., as Seller, and Analog Devices,
Inc., the Registrant and Integrated Silicon Solutions, Inc.,
as Buyers (dated as of June 25, 1996).(14)
10.49 Recission (dated as of June 25, 1996) of Option Agreement 1
dated as of June 26, 1995 by and between the Registrant and
Taiwan Semiconductor Manufacturing Co., Ltd.(14)
10.50 Agreement and Plan of Merger dated June 18, 1997.(15)
11.1 Computation of Earnings per Share.(16)
#13.1 Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (to be deemed filed only to the extent
required by the instructions to Exhibits for Reports on Form
10-K).
#18.1 Letter of Price Waterhouse LLP regarding Change in
Accounting Principle.
#21.1 Subsidiaries of the Registrant.
#23.1 Consent of Price Waterhouse LLP.
#24.1 Power of Attorney (included on page 17).
#27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the registrant's Registration
Statement on Form S-1 (File No. 33-17717), as amended, which became
effective March 29, 1988.
19
<PAGE> 20
(2) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1988.
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1989.
(4) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended March 31, 1990, as amended by a Form 8 filed on July
13, 1990.
(5) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1990.
(6) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1992.
(7) Incorporated by reference to identically numbered exhibits field in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to identically numbered exhibits field in
response to Item 7, "Exhibits," of the registrant's Report on Form 8-K
dated October 15, 1994 and 8-KA dated December 15, 1994.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended September 30, 1994.
(10) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1994.
(11) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1995.
(12) Incorporated by reference to identically numbered exhibits filed in
response to Item 8, "Exhibits," of the registrant's Registration Statement
on Form S-8 (File No. 33-61085), as amended, which became effective July
17, 1995.
(13) Incorporated by reference to identically numbered exhibits filed in
response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K
for the fiscal year ended December 31, 1995.
(14) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1996.
(15) Incorporated by reference to identically numbered exhibits filed in
response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q
for the quarter ended June 30, 1997.
(16) Incorporated by reference to Note 3 to the Consolidated Financial
Statements in the Company's Annual Report to Stockholders for the fiscal
year ended December 31, 1997.
(17) Exhibits to this document are incorporated by reference to the exhibits to
the identically numbered document filed in response to Item 6(a),
"Exhibits," of the registrant's Report on Form 10-Q for the quarter ended
June 30, 1996.
* Confidential treatment has previously been granted for portions of this
exhibit pursuant to an order of the Commission.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c)
thereof.
# Filed herewith.
20
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK [ALTERA LOGO] COMMON STOCK
NUMBER SHARES
[SEAL] [SEAL]
SFU
ALTERA CORPORATION
THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS
TRANSFERABLE IN OF THE STATE OF DELAWARE
BOSTON, MA OR
NEW YORK, NY
THIS CERTIFIES THAT CUSIP 021441 10 0
----------------------------------------
IS THE RECORD
HOLDER OF
----------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$0.001 PAR VALUE, OF
=============================== ALTERA CORPORATION =============================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
-------------------
[SEAL]
/s/ C. WENDELL BERGERE /s/ RODNEY SMITH
---------------------- -----------------------
Secretary President and Chief
Executive Officer
Countersigned and registered:
BANKBOSTON, NA
Transfer Agent and Registrar
By: [SIG]
------------------------------------
Authorized Signature
<PAGE> 2
ALTERA CORPORATION
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF TRAN MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________________
X_______________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
THE SIGNATURE SHOULD BE GUARANTEED BY A
BROKERAGE FIRM OR A FINANCIAL INSTITUTION
THAT IS A MEMBER OF A SECURITIES APPROVED
MEDALLION PROGRAM, SUCH AS SECURITIES
TRANSFER AGENTS MEDALLION PROGRAM (STAMP),
STOCK EXCHANGES MEDALLION PROGRAM (SEMP)
OR NEW YORK STOCK EXCHANGE, INC.,
MEDALLION SIGNATURE PROGRAM (MSP).
<PAGE> 1
EXHIBIT 10.26
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this _____ day of
_______________, 1997 by and between Altera Corporation, a Delaware corporation
(the "Company"), and _________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Third-Party Proceedings. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit, appeal, arbitration, or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Company) by reason of the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, by reason of any action or inaction on the part
of Indemnitee while an officer or director or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself,
Page 1
<PAGE> 2
create a presumption that (i) Indemnitee did not act in good faith and in a
manner which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or (ii) with respect to any criminal action or
proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct
was unlawful.
(b) Proceedings By or in the Right of the Company. The Company
shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding by
or in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement, in each case to the extent
actually and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or proceeding if Indemnitee acted in good faith and in
a manner Indemnitee believed to be in or not opposed to the best interests of
the Company and its shareholders.
2. Expenses: Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all
expenses (including attorneys' fees) incurred by Indemnitee in connection with
the investigation, defense, settlement or appeal of any civil or criminal action
or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually
paid in settlement of any such action or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder shall be
paid by the Company to Indemnitee within twenty (20) days following delivery of
a written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received three (3) business days after the
date postmarked if sent by domestic certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by the Company. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) Procedure. Any indemnification provided for in Section 1
shall be made no later than forty-five (45) days after receipt of the written
request of Indemnitee. If a claim under
Page 2
<PAGE> 3
this Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification, is not
paid in full by the Company within forty-five (45) days after a written request
for payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 13 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action or proceeding in advance of its final disposition)
that Indemnitee has not met the standards of conduct which make it permissible
under applicable law for the Company to indemnify Indemnitee for the amount
claimed but the burden of proving such defense shall be on the Company, and
Indemnitee shall be entitled to receive interim payments of expenses pursuant to
Subsection 2(a) unless and until such defense may be finally adjudicated by
court order or judgment from which no further right of appeal exists. It is the
parties' intention that if the Company contests Indemnitee's right to
indemnification, the question of Indemnitee's right to indemnification shall be
for the court to decide, and neither the failure of the Company (including its
Board of Directors, any committee or subgroup of the Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers, If, at the time of the receipt of a
notice of a claim pursuant to Section 2(b) hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be
obligated under Section 2(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee, which approval
shall not be unreasonably withheld, upon the delivery to Indemnitee of written
notice of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense, and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
Page 3
<PAGE> 4
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's By-laws or by statute, In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
board of directors, an officer or other corporate agent, such changes shall be,
inso facto, within the purview of Indemnitee's rights and Company's obligations,
under this Agreement. In the event of any change in any applicable law, statute,
or rule which narrows the right of a Delaware corporation to indemnify a member
of its Board of Directors, an officer, or other corporate agent, such changes,
to the extent not otherwise required by such law, statute, or rule to be applied
to this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Certificate of Incorporation, its By-laws, any
agreement, any vote of shareholders or disinterested directors, the Delaware
General Corporation Law, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though he may have ceased to serve in such capacity at the time of
any action or other covered proceeding.
4. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
6. Directors' and Officers' Liability Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure
Page 4
<PAGE> 5
the Company's performance of its indemnification obligations under this
Agreement. Among other considerations, the Company will weigh the costs of
obtaining such insurance coverage against the protection afforded by such
coverage. In all policies of directors' and officers' liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
7. Severability. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or
omissions or transactions from which a director may not be indemnified of
liability under the Delaware General Corporation Law.
(b) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties,
Page 5
<PAGE> 6
and amounts paid in settlement) which have been paid directly to Indemnitee by
an insurance carrier under a policy of directors' and officers' liability
insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale of sale
and purchase by Indemnitee of securities of the Company in violation of Section
16(b) of the Securities Exchange Act of 1934, as amended, or any similar
successor statute.
9. Effectiveness of Agreement. This Agreement shall be effective as of the
date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the Company, or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, at the time such act or
omission occurred.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall also include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents, so that if Indemnitee is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, Indemnitee
shall stand in the same position under the provisions of this Agreement with
respect to the resulting or surviving corporation as Indemnitee would have with
respect to such constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect
Page 6
<PAGE> 7
to such action, unless as a part of such action, a court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
as a basis for such action were not made in good faith or were frivolous. In the
event of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
14. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware
without regard to conflict of laws and provisions thereof.
Page 7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ALTERA CORPORATION
--------------------------------------
By: C. Wendell Bergere
Title: Vice President, General
Counsel and Secretary
Address: 101 Innovation Drive
San Jose, CA 95134
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ---------------------------------
- ---------------------------------
- ---------------------------------
(address)
Page 8
<PAGE> 1
EXHIBIT 10.47
SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
WAFERTECH, LLC
A DELAWARE LIMITED LIABILITY COMPANY
DATED AS OF OCTOBER 28, 1997
------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS AND RULES OF CONSTRUCTION........................................1
1.1 DEFINITIONS..................................................................1
1.2 RULES OF CONSTRUCTION.......................................................10
ARTICLE 2 ORGANIZATIONAL MATTERS......................................................10
2.1 FORMATION OF COMPANY........................................................10
2.2 NAME........................................................................10
2.3 FICTITIOUS BUSINESS NAME STATEMENT; OTHER CERTIFICATES......................10
2.4 PRINCIPAL EXECUTIVE OFFICE; OTHER OFFICES...................................11
2.5 AGENTS FOR SERVICE OF PROCESS...............................................11
2.6 BUSINESS AND PURPOSE OF THE COMPANY.........................................11
2.7 TERM OF THE COMPANY.........................................................12
2.8 INITIAL MEMBERS; STATUS OF MEMBERS..........................................12
2.9 LIABILITY OF MEMBERS........................................................12
2.10 COMPETITION; CONFLICT OF INTEREST...........................................12
2.11 BUSINESS PLAN...............................................................13
2.12 MEMBER INTELLECTUAL PROPERTY................................................13
2.13 FORMATION AUTHORIZATION.....................................................15
2.14 REIMBURSEMENT OF TSMC EXPENSES..............................................15
ARTICLE 3 AUTHORIZED CAPITAL; CAPITAL CONTRIBUTIONS...................................15
3.1 AUTHORIZED CAPITAL..........................................................15
3.1 INITIAL CAPITAL CONTRIBUTIONS...............................................16
3.3 ADDITIONAL CAPITAL CONTRIBUTION.............................................17
3.4 CONSEQUENCES OF FAILURE TO CONTRIBUTE.......................................17
3.5 CAPITAL ACCOUNTS............................................................22
3.6 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY; COMPANY LOANS AND
GUARANTEES..................................................................23
3.7 RIGHTS WITH RESPECT TO CAPITAL..............................................24
ARTICLE 4 DISTRIBUTIONS...............................................................25
4.1 CASH AVAILABLE FOR DISTRIBUTION.............................................25
4.2 TAX DISTRIBUTIONS...........................................................26
4.3 DISCRETIONARY DISTRIBUTIONS.................................................26
4.4 AMOUNTS WITHHELD............................................................26
ARTICLE 5 ALLOCATION OF PROFITS AND LOSSES............................................27
5.1 ALLOCATION OF NET PROFIT AND LOSS...........................................27
5.2 RESIDUAL ALLOCATIONS........................................................28
5.3 OTHER ALLOCATION RULES......................................................28
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
5.4 TAX ALLOCATIONS.............................................................28
ARTICLE 6 MANAGEMENT OF THE COMPANY...................................................28
6.1 MANAGEMENT BY DIRECTORS.....................................................28
6.2 NUMBER AND DESIGNATION OF DIRECTORS; OBSERVER OF THIRD PARTY INVESTORS......29
6.3 MEETINGS OF DIRECTORS.......................................................29
6.4 POWERS OF DIRECTORS.........................................................30
6.5 ANNUAL INFORMATIONAL MEETING OF MEMBERS.....................................32
6.6 COMPENSATION COMMITTEE......................................................32
6.7 EXPENSE REIMBURSEMENT.......................................................33
6.8 INSURANCE...................................................................33
6.9 OFFICERS....................................................................33
6.10 MEMBER CONSENTS.............................................................35
6.11 BEST INTEREST OF THE COMPANY................................................35
ARTICLE 7 MEMBER REPRESENTATIONS AND WARRANTIES.......................................35
7.1 NATURE OF MEMBER'S INTEREST.................................................36
7.2 MEMBER REPRESENTATIONS AND WARRANTIES.......................................36
ARTICLE 8 RESTRICTIONS ON TRANSFER; PREEMPTIVE RIGHT; ADMISSION OF NEW MEMBERS;
RIGHT OF FIRST REFUSAL......................................................37
8.1 RESTRICTIONS ON TRANSFER....................................................37
8.2 GENERAL TRANSFER PROVISIONS.................................................38
8.3 PREEMPTIVE RIGHTS...........................................................40
8.4 ADMISSION OF NEW MEMBERS....................................................41
8.5 RIGHT OF FIRST REFUSAL......................................................41
8.6 SPECIAL TRANSFER PROVISION..................................................42
8.7 SPECIAL RIGHT OF MANAGING MEMBERS OTHER THAN TSMC TO PURCHASE...............43
ARTICLE 9 BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS...................................43
9.1 MAINTENANCE OF BOOKS AND RECORDS............................................43
9.2 INSPECTION RIGHTS...........................................................44
9.3 RIGHTS TO RECEIVE COPIES OF DOCUMENTS.......................................45
9.4 BANK ACCOUNTS...............................................................45
9.5 TAX MATTERS HANDLED BY TAX MATTERS PARTNER..................................45
9.6 FEDERAL INCOME TAX ELECTIONS MADE BY TAX MATTERS PARTNER....................46
9.7 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS................................46
ARTICLE 10 EVENT OF DEFAULT; TERMINATION OF MEMBERSHIP.................................46
10.1 EVENT OF DEFAULT............................................................46
10.2 TERMINATION OF MEMBER.......................................................48
10.3 PURCHASE RIGHT..............................................................48
</TABLE>
-ii-
<PAGE> 4
<TABLE>
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10.4 NOTICE OF INTENT TO PURCHASE................................................48
10.5 ELECTION TO PURCHASE LESS THAN ALL OF THE TERMINATED MEMBER'S INTEREST......49
10.6 PAYMENT OF PURCHASE PRICE...................................................49
10.7 CLOSING OF PURCHASE OF TERMINATED MEMBER'S INTEREST.........................50
ARTICLE 11 TERMINATION AND DISSOLUTION.................................................50
11.1 TERMINATION.................................................................50
11.2 DISSOLUTION.................................................................50
11.3 WINDING UP..................................................................51
11.4 DISTRIBUTION OF ASSETS......................................................52
11.5 TIME FOR WINDING UP.........................................................53
11.6 FINAL ACCOUNTING; CERTIFICATES OF CANCELLATION..............................53
ARTICLE 12 INCENTIVE PLANS.............................................................53
12.1 AUTHORIZATION OF INCENTIVE PLANS............................................53
12.2 ADMISSION OF PLAN PARTICIPANTS..............................................53
ARTICLE 13 TSMC LAND OPTION; NEW VENTURE RIGHTS........................................54
13.1 LAND OPTION.................................................................54
13.2 NEW FAB VENTURE RIGHT OF FIRST REFUSAL......................................54
13.3 FURTHER ASSURANCES..........................................................54
ARTICLE 14 CHANGE OR CONVERSION TO A GENERAL CORPORATION...............................54
14.1 MERGER OR CONSOLIDATION TO A GENERAL CORPORATION............................54
14.2 REGISTRATION RIGHTS.........................................................55
14.3 VOTING ARRANGEMENTS.........................................................55
14.4 OPTIONS.....................................................................55
ARTICLE 15 STANDARD OF CARE; INDEMNIFICATION...........................................57
15.1 STANDARD OF CARE............................................................57
15.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS................57
15.3 EXPENSES....................................................................57
15.4 INDEMNIFICATION RIGHTS NON-EXCLUSIVE........................................58
15.5 ERRORS AND OMISSIONS INSURANCE..............................................58
15.6 ASSETS OF THE COMPANY.......................................................58
ARTICLE 16 AMENDMENTS..................................................................58
16.1 AMENDMENT, ETC. OF LIMITED LIABILITY COMPANY AGREEMENT......................58
16.2 AMENDMENT, ETC..............................................................58
ARTICLE 17 CONDITIONS PRECEDENT........................................................58
17.1 CONDITIONS TO MEMBERS' PERFORMANCE..........................................58
17.2 CONDITIONS TO TSMC'S PERFORMANCE............................................59
</TABLE>
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17.3 CONDITIONS TO ADI'S PERFORMANCE.............................................59
17.4 CONDITIONS TO ALTERA'S PERFORMANCE..........................................60
17.5 CONDITIONS TO ISSI'S PERFORMANCE............................................60
17.6 CONDITIONS TO THE THIRD PARTY INVESTORS' PERFORMANCE........................60
ARTICLE 18 CONFIDENTIALITY.............................................................61
18.1 EXCHANGE OF INFORMATION AND NONDISCLOSURE...................................61
18.2 CONFIDENTIALITY AGREEMENTS FOR VISITORS AND EMPLOYEES.......................61
18.3 THIRD PARTY REQUEST FOR INFORMATION.........................................61
18.4 REPORTING LOSS, THEFT OR MISAPPROPRIATION...................................62
18.5 BREACH OF CONFIDENTIALITY...................................................62
ARTICLE 19 ANCILLARY AGREEMENTS........................................................62
19.1 EXECUTION AND DELIVERY......................................................62
19.2 TERMINATION OF MANUFACTURING AGREEMENT; FUTURE PURCHASE AGREEMENT...........63
ARTICLE 20 DISPUTE RESOLUTION; ARBITRATION.............................................63
20.1 NEGOTIATION BETWEEN EXECUTIVES..............................................63
20.2 MEDIATION...................................................................63
20.3 CLAIMS SUBJECT TO ARBITRATION...............................................64
ARTICLE 21 LIMITATION ON DAMAGES; CONTRACTUAL LIMITATIONS PERIOD.......................66
21.1 LIMITATION ON DAMAGES.......................................................66
21.2 CONTRACTUAL LIMITATIONS PERIOD..............................................67
ARTICLE 22 FORCE MAJEURE...............................................................67
22.1 FORCE MAJEURE...............................................................67
22.2 NOTIFICATION................................................................67
22.3 RESPONSE TO FORCE MAJEURE...................................................67
22.4 LIMITATIONS ON APPLICABILITY OF FORCE MAJEURE...............................68
ARTICLE 23 GENERAL PROVISIONS..........................................................68
23.1 SEVERABILITY................................................................68
23.2 NEUTRAL INTERPRETATION; WAIVER..............................................68
23.3 NOTICES.....................................................................68
23.4 TIME OF THE ESSENCE.........................................................69
23.5 GOVERNING LAW...............................................................69
23.6 ENTIRE AGREEMENT............................................................69
23.7 WAIVER......................................................................69
23.8 COOPERATION.................................................................69
23.9 COUNTERPARTS................................................................69
23.10 EXHIBITS AND SCHEDULES......................................................69
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23.11 ATTORNEYS' FEES.............................................................69
23.12 DATE OF PERFORMANCE.........................................................70
23.13 SURVIVAL....................................................................70
23.14 SURVIVAL OF RIGHTS..........................................................70
23.15 THIRD-PARTY BENEFICIARIES...................................................70
23.16 PARTITION...................................................................70
23.17 GOVERNING LANGUAGE OF AGREEMENT.............................................70
23.18 CONSENT TO JURISDICTION AND SERVICE OF PROCESS..............................70
23.19 LIQUIDATED DAMAGES..........................................................71
23.20 AUTHORIZED REPRESENTATIVES..................................................71
23.21 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE...........................72
23.22 WAIVER OF CONFLICT OF INTEREST..............................................72
23.23 AMENDMENT AND RESTATEMENT...................................................72
</TABLE>
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LIST OF EXHIBITS
Exhibit A - Capital Contributions
Exhibit B - Certificate of Formation
Exhibit C - Confidentiality Agreements
(1) Visitor Confidentiality Agreement
(2) Employee Invention Assignment and Confidentiality Agreement
Exhibit D - Description of Real Property
Exhibit E - Possible Future Restructuring
Exhibit F - Future Purchase Agreement
Exhibit G Allocation Rules
Exhibit H Senior Executive Incentive Plan
Exhibit I Employee Incentive Plan
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SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
WAFERTECH, LLC
THIS SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
(the "Agreement") is dated as of October 28, 1997 by and among TSMC Development,
Inc., a Delaware corporation ("TSMC"), Analog Devices, Inc., a Massachusetts
corporation ("ADI"), Altera Corporation, a Delaware corporation ("ALTERA"),
Integrated Silicon Solutions, Inc., a Delaware corporation ("ISSI") and each of
the other Persons identified on the signature page hereof as a Member (as
hereinafter defined) hereunder.
WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors (as
hereinafter defined) as of June 25, 1996 (the "EFFECTIVE DATE") formed a limited
liability company organized under the laws of the State of Delaware in the
United States of America, pursuant to that certain Limited Liability Company
Agreement by and among TSMC, ADI, Altera, ISSI and the Third Party Investors,
dated as of June 25, 1996 (the "ORIGINAL AGREEMENT"), the purpose of which is to
construct a foundry which shall provide foundry services for the manufacture of
IC wafers in accordance with the terms of this Agreement.
WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors as of
August 9, 1996 amended and restated the Original Agreement.
WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors wish to
further amend and restate the Original Agreement as herein amended and restated;
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration had and received, each of the
parties hereto agrees as follows:
ARTICLE 1
DEFINITIONS AND RULES OF CONSTRUCTION
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement, the following words and expressions shall have the meanings set forth
below:
1.1.1 "AAA" means the American Arbitration Association.
1.1.2 "ACT" means the Delaware Limited Liability Company Act set
forth in Title 6, Sections 18-101 through 18-1109 of the Delaware Code, as
amended from time to time. Any reference to the Act shall automatically include
a reference to any subsequent or successor limited liability company law in
Delaware.
<PAGE> 9
1.1.3 "ADDITIONAL CAPITAL CONTRIBUTION" is defined in Section
3.2.
1.1.4 "ADVANCED PROCESS AGREEMENT" means that certain Advanced
Process License Agreement dated as of April 10, 1996, between TSMC and TSMC
International Investment Ltd., a British Virgin Islands corporation ("TSMC
IIL"), whereby TSMC has been granted a license to certain future processes and
know-how of TSMC IIL which Advanced Process Agreement has been assigned by TSMC
to the Company as described in Section 3.1.1.
1.1.5 "AFFILIATE" means, when used with reference to a specified
Person:
(i) With respect to any corporation, limited liability
company, partnership or other business enterprise: (a) which owns or controls,
directly or indirectly, fifty percent (50%) or more of the voting rights with
respect to the election of directors or managers, or which has practical control
directly or indirectly, of any party to this Agreement; (b) of which fifty
percent (50%) or more of the voting rights with respect to the election of
directors or managers is owned or controlled, directly or indirectly, by, or
which is under the practical control directly or indirectly of, any party to
this Agreement; or (c) of which fifty percent (50%) or more of the total voting
rights with respect to the election of directors or managers is owned or
controlled, directly or indirectly, by, or which is under the practical control
directly or indirectly of, any corporation, limited liability company,
partnership or other business enterprise qualifying under subsections (a) or (b)
above; and
(ii) With respect to any natural person, any relative of
such Person or such Person's spouse, whether by blood, marriage or adoption.
1.1.6 "AGREEMENT" means this Amended and Restated Limited
Liability Company Agreement, including all Exhibits (which are hereby
incorporated into and made a part of this Agreement by this reference), as
originally executed and as amended from time to time, as the context requires.
1.1.7 "APPROVAL OF MEMBERS HOLDING A MAJORITY IN PERCENTAGE
INTEREST" means the written consent by, or approval at a meeting of Preferred
Members by, a Preferred Member singularly owning, or Preferred Members
collectively owning, more than fifty percent (50%) of the Percentage Interests
owned by all of the Preferred Members.
1.1.8 "APPROVAL OF MEMBERS HOLDING NOT LESS THAN 71% IN
PERCENTAGE INTEREST" OR "APPROVED BY MEMBERS HOLDING NOT LESS THAN 71% IN
PERCENTAGE INTEREST" means the written consent by, or approval at a meeting of
Preferred Members by, Preferred Members owning 71% or more of the Percentage
Interests owned by all of the Preferred Members.
1.1.9 "APPROVAL OF MEMBERS HOLDING NOT LESS THAN 87% IN
PERCENTAGE INTEREST" means the written consent by, or approval at a meeting of
Preferred Members by, Preferred Members owning 87% or more of the Percentage
Interests owned by all of the Preferred Members.
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1.1.10 "ANCILLARY AGREEMENTS" mean (i) the Confidentiality
Agreements, (ii) the Manufacturing Agreement, (iii) the Technology License and
Assistance Agreement, (iv) the Advanced Process Agreement, (v) the Assignments
of each of the Manufacturing Agreement, the Technology License and Assistance
Agreement and the Advanced Process Agreement, (vi) the Registration Rights
Agreement, (vii) the Purchase Agreement, (viii) the TSMC Land Option and (ix)
the Future Purchase Agreement.
1.1.11 "BOARD OF DIRECTORS" is defined in Section 6.1.
1.1.12 "BUSINESS DAY" means a day on which banking institutions
are open for business in Seattle, Washington and San Jose, California other than
a Saturday or Sunday.
1.1.13 "BUSINESS PLAN" is defined in Section 2.11.
1.1.14 "CAPITAL ACCOUNT" is defined in Section 3.5.
1.1.15 "CAPITAL CONTRIBUTION" means the total amount of cash and
the agreed fair market value (net of liabilities) of other property contributed
to the Company by a particular Member, as contemplated in Section 3.2, plus any
subsequent contributions of cash and the agreed fair market value (net of
liabilities) of any other property subsequently contributed to the Company by
that Member as an Additional Capital Contribution.
1.1.16 "CASH AVAILABLE FOR DISTRIBUTION" is defined in Section
4.1.2.
1.1.17 "CERTIFICATE OF FORMATION" means the certificate to be
filed with the Office of the Delaware Secretary of State for the purpose of
forming the Company, attached hereto as Exhibit B.
1.1.18 "CODE" means the Internal Revenue Code of 1986, as amended
(or any corresponding provision or provisions of any succeeding law).
1.1.19 "COMMON MEMBER" means any Member who owns Common Shares.
1.1.20 "COMMON SHARES" means one or more of the 13.5 million
shares authorized by Section 3.1 and having the rights and privileges as stated
in Section 3.1.1.
1.1.21 "COMPANY" means WaferTech, LLC.
1.1.22 "COMPANY LOANS" means any loans or advances made by any
Member to the Company as contemplated in Section 3.6.2.
1.1.23 "CONFIDENTIAL INFORMATION" means confidential or secret
information, including information protected under the Confidentiality
Agreements or confidential or secret information protected under any of the
Ancillary Agreements, including but not limited to Trade
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and Industrial Secrets (as defined in the Technology License and Assistance
Agreement) and Proprietary Information (as defined in the Manufacturing
Agreement).
1.1.24 "CONFIDENTIALITY AGREEMENTS" mean that certain Member's
Confidentiality Agreement dated May 25, 1996 executed by the Company and each
Member and the Visitor Confidentiality Agreements executed by the Company and
each Visitor (as provided in Article 18) substantially in the form attached
hereto as Exhibit C(1).
1.1.25 "DEFAULTING MEMBER" means (1) a Preferred Member who fails
to make such Preferred Member's Second Part Capital Contribution or Third Part
Capital Contribution hereunder or an Additional Capital Contribution under the
circumstances described in Section 3.4.2.2, and (2) a Member who otherwise
breaches this Agreement in a manner that constitutes an Event of Default.
1.1.26 "DELAWARE CORPORATION" is defined in Section 14.1.
1.1.27 "DEPRECIATION" means, for each Fiscal Year, an amount
equal to the depreciation, amortization, or other cost recovery deduction
allowable as determined for book purposes under GAAP.
1.1.28 "DILUTION EVENT" means an event resulting in reduction of
a Member's Percentage Interest in the Company as contemplated in Section 3.4.2.1
or Section 3.6.4 of this Agreement if the Additional Capital Contribution or
guaranteed debt which the Member did not provide or guarantee, as the case may
be, was used for purposes other than the completion of the Foundry in accordance
with the Business Plan.
1.1.29 "DIRECTOR" is defined in Section 6.2.1, and includes
voting and nonvoting Directors.
1.1.30 "DISSOLUTION DATE" shall mean the first date on which one
of the events set forth in Section 11.2 shall occur.
1.1.31 "ECONOMIC INTEREST" means a Person's right to share in the
Net Profit, Net Loss or similar items of, and to receive distributions from, the
Company, resulting from the assignment or other transfer of Preferred or Common
Shares where the assignee or transferee thereof is not admitted as a Member
pursuant to Article 8. An Economic Interest does not include any other rights of
a Member including, without limitation, the right to vote or to participate in
the management of the Company, or, except as provided in Sections 9.2 and 9.3,
any right to information concerning the business and affairs of the Company.
1.1.32 "EVENT OF DEFAULT" is defined in Section 10.1.
1.1.33 "FISCAL YEAR" means each twelve (12) month period
commencing January 1 and through and including December 31 and including as the
first Fiscal Year, the period from the Effective Date to and including December
31, 1996.
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1.1.34 "FORCE MAJEURE" means any one or more of the following:
acts of war declared or undeclared, nationalization, expropriation, civil unrest
or other public disturbance, fire, storm, floods, typhoon, tidal wave,
hurricane, cyclone or other severe weather conditions, earthquake, or other Acts
of God, legal restraints, governmental or like interference, judicial action,
accidental damage to equipment, as well as any other cause outside the
reasonable control of a Member. "Force Majeure" also includes the failure to
obtain such license(s) and other approvals, including export licenses, as are
required by United States law or other applicable law for the equipment,
technical information, software, technology and Proven Products to be provided
pursuant to the terms of this Agreement, the Technology License and Assistance
Agreement or the Advanced Process Agreement.
1.1.35 "FUTURE PURCHASE AGREEMENT" is defined in Section 19.2.
1.1.36 "FOUNDRY" is defined in Section 2.6.1.
1.1.37 "GAAP" means generally accepted accounting principles in
the United States of America.
1.1.38 "GOVERNMENTAL INTERVENTION" means (i) any action taken by
any government or agency thereof, subsequent to the formation of the Company,
which is material and adverse to any Member, or (ii) any recommendations by any
government or agency thereof to the Members or any of them individually,
requiring directly or indirectly, formally or informally, alteration or
modification of any term or condition of this Agreement or of the Ancillary
Agreements, or of the performance of the Members under this Agreement or the
Ancillary Agreements in a manner which is material and adverse to one Member.
1.1.39 "IC" means integrated circuit.
1.1.40 "INCENTIVE PLAN" means the Senior Executive Incentive Plan
and Employee Incentive Plan and includes any other incentive plan (1) approved
by the Board of Directors and (2) Approved by Members holding not less than 71%
in Percentage Interest.
1.1.41"INDEMNITEE" is defined in Section 15.1 hereof.
1.1.42 "INITIAL CAPITAL CONTRIBUTION" means the Capital
Contribution of a Member as of the date hereof. "TOTAL INITIAL CAPITAL
CONTRIBUTION" means the sum of the "Initial Capital Contributions," of all of
the Members, as of the date hereof.
1.1.43 "INTELLECTUAL PROPERTY RIGHTS" means (a) all patent rights
and all right, title and interest in and to all letters patent and applications
for letters patent, and all other government-issued or -granted indicia of
invention ownership, including any reissue, division, term extensions,
continuation or continuation-in-part applications; (b) all copyrights and all
other literary property and author rights, and all right, title and interest in
and to all copyrights, copyright registrations, certificates of copyrights and
copyrighted interests; (c) all trademarks,
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trade names and service marks, and all rights, title and interest in and to all
applications, certifications and registrations therefor; (d) all mask work
rights, mask work applications, and mask work registrations; (e) all rights,
title and interest in and to all trade secrets and trade secret rights; and (f)
any licenses or license rights with respect to the foregoing.
1.1.44 "INTEREST" means either (i) a Membership Interest, or (ii)
an Economic Interest, as the case may be. Each Member's Interest shall be
represented by Common and Preferred Shares; provided, however, that the
Company's stock records shall in the absence of manifest error be conclusive as
to any Member's ownership of Common and Preferred Shares. At such time as any
Interest of any Member is changed, the appropriate number of Shares held by such
Member shall also be deemed transferred to reflect such change. Subject to the
requirements of Article 8 with respect to transfers of Interests, the Company
shall issue additional Share certificates to the Members to reflect ownership of
additional Shares and shall, upon surrender of Share certificates or delivery of
an affidavit of lost certificate together with appropriate indemnity, issue new
Share certificates to reflect transfers, reductions or other adjustments to the
ownership of Shares.
1.1.45 "IPO" means an underwritten initial public offering of
securities made pursuant to an effective Registration Statement under the
Securities Act of 1933, as amended, and the Rules and Regulations of the
Securities and Exchange Commission thereunder.
1.1.46 "LAND" is defined in Section 1.1.78.
1.1.47 "MANAGING MEMBERS" means TSMC, ADI, Altera and ISSI.
1.1.48 "MANUFACTURING AGREEMENT" means that certain Manufacturing
Agreement dated as of February 16, 1996, by and between TSMC and Taiwan
Semiconductor Manufacturing Co. Ltd. of Taiwan ("TSMC Taiwan"), pursuant to
which TSMC Taiwan has agreed to purchase all IC wafers manufactured by TSMC for
the time and on the terms therein specified, which Manufacturing Agreement has
been assigned by TSMC to the Company as described in Section 3.1.1.
1.1.49 "MEMBER" means a Person who:
(i) Has been admitted to the Company as a member in
accordance with the Certificate of Formation or this Agreement, or an assignee
of an Interest who has become a Member pursuant to Article 8, or has exercised
an Option granted pursuant to Article 12 and has complied in all respects with
the requirements for exercising such Option; and
(ii) Has not resigned, withdrawn or been expelled as a
Member or, if other than an individual, been dissolved.
Reference to a "Member" shall be to any one of the Members. Reference to
an "Initial Member" shall be to any one of the Members who are such on the
Effective Date.
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1.1.50 "MEMBERSHIP INTEREST" means ownership by a Member of (i)
one or more Preferred Shares; or (ii) one or more Common Shares.
1.1.51 "NET PROFIT" and "NET LOSS" mean, for each Fiscal Year or
other period, an amount equal to the Company's taxable income or loss for such
year or period, as the case may be, determined in accordance with Code Section
703(a) (for this purpose, all items of income, gain, loss or deduction required
to be stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(i) Any income of the Company that is exempt from U.S.
federal income tax and not otherwise taken into account in computing Net Profit
or Net Loss shall be added to such taxable income or loss;
(ii) Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken
into account in computing Net Profit or Net Loss shall be subtracted from such
taxable income or loss;
(iii) Gain or loss resulting from any disposition of
Property with respect to which gain or loss is recognized for U.S. Federal
income tax purposes shall be computed in accordance with the Section 704(b)
Regulations by reference to the book basis and fair market value of the Property
disposed of, notwithstanding that the adjusted tax basis of such Property
differs from its book basis and fair market value;
(iv) In lieu of depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account depreciation as determined for book purposes
in accordance with the Section 704(b) Regulations for such Fiscal Year or other
period; and
(v) Notwithstanding any other provision of this
subsection, any items of income, gain, loss or deduction which are specifically
allocated to any Member shall not be taken into account in computing Net Profit
or Net Loss.
1.1.52 "NON-DEFAULTING MEMBERS" means each Preferred Member who
has made such Member's Second Part Capital Contribution or Third Part Capital
Contribution or an Additional Capital Contribution under the circumstances
described in Section 3.4.2.2 hereunder, and is not otherwise in breach of this
Agreement in a manner that constitutes an Event of Default.
1.1.53 "OFFERING NOTICE" is defined in Section 8.5.1
1.1.54 "OFFICER" means an officer of the Company.
1.1.55 "OPTION" means a stock option granted pursuant to an
Incentive Plan.
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1.1.56 "PERCENTAGE INTEREST" means the Interest of a Member or
the holder of an Economic Interest in the Company, expressed as a percentage of
the Interests of all of the Members and holders of an Economic Interest. The
Percentage Interests shall initially be as set forth on Exhibit A and shall be
adjusted from time to time as herein provided. Notwithstanding the foregoing,
however, for the purpose only of determining the Percentage Interest required
for any vote or approval, including, but not limited to, the approvals
contemplated by Sections 3.6.1, 6.4.2, 6.4.3, 8.1.1, 8.1.2, 11.2 and Article 16,
the Percentage Interest shall be calculated without counting the Common Shares
and without giving effect to the issuance of options or grant of any equity
interest in the Company pursuant to any Incentive Plan.
1.1.57 "PERSON" means a natural person, partnership (whether
general or limited), limited liability company, trust, estate, association,
corporation, custodian, nominee or any other individual or entity in its own or
any representative capacity, in each case whether domestic or foreign.
1.1.58 "PREFERRED MEMBER" means any Member who owns Preferred
Shares.
1.1.59 "PREFERRED SHARES" means one or more of the 225 million
shares authorized by Section 3.1 and having the rights and privileges as stated
in Section 3.1.2.
1.1.60 "PRODUCTS" is defined in the Manufacturing Agreement.
1.1.61 "PROHIBITED PERSON" means a Person (i) who is in the
business of providing foundry services (other than TSMC or any Affiliate
thereof, and other than as permitted pursuant to the last two sentences of
Section 2.10.1), or (ii) whose admission as a Member could reasonably be
economically inimical to the interests of the Company or to any Member. The
Board of Directors and the Members pursuant to Section 6.4.2 shall determine who
is a Prohibited Person.
1.1.62 "PROPERTY" means the assets of the Company, both tangible
and intangible, or any portion thereof.
1.1.63 "PROJECT" is defined in Section 2.6.1.
1.1.64 "PROVEN PRODUCTS" is defined in the Manufacturing
Agreement.
1.1.65 "PURCHASE AGREEMENT" means that certain Purchase Agreement
dated as of the Effective Date by and between TSMC Taiwan, Altera, ADI and ISSI,
pursuant to which each of Altera, ADI and ISSI commit to purchase a designated
amount of IC wafers from TSMC Taiwan.
1.1.66 "REGISTRATION RIGHTS AGREEMENT" means the Registration
Rights Agreement dated as of the Effective Date by, between and among the
Company and each Member.
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1.1.67 "REGULATIONS" means the U.S. Federal income tax
regulations promulgated by the Treasury Department under the Code, as such
regulations may be amended from time to time. All references herein to a
specific Section of the Regulations shall be deemed also to refer to any
corresponding provisions of succeeding Regulations.
1.1.68 "REMAINING MEMBER" is defined in Section 10.2.3.
1.1.69 "SECRETARY OF STATE" means the Office of the Secretary of
State of the State of Delaware.
1.1.70 "SECTION 704(B) REGULATIONS" means the final or temporary
income tax regulations under Section 704(b) of the Code relating to the
determination of a partner's distributive share of partnership income, gain,
loss, deduction or credit (or item thereof), and to the extent not inconsistent
with any final or temporary regulations, any outstanding proposed income tax
regulations under Section 704(b) of the Code. All references to Section 704(b)
Regulations shall be deemed also to refer to any corresponding provisions of any
succeeding regulations to such Section 704(b) of the Code.
1.1.71 "SELLING MEMBER" is defined in Section 8.5.1.
1.1.72 "TAX MATTERS PARTNER" means the person designated as such
in Section 9.5.
1.1.73 "TECHNOLOGY LICENSE AND ASSISTANCE AGREEMENT" means that
certain Technology License and Assistance Agreement dated as of February 20,
1996, by and between TSMC Technology, Inc. and TSMC, providing for TSMC
Technology, Inc. to provide certain services to TSMC and granting a license to
use certain technology to TSMC, which Technology License and Assistance
Agreement has been assigned by TSMC to the Company as described in Section
3.1.1.
1.1.74 "TERMINATED MEMBER" is defined in Section 10.2.3.
1.1.75 "THIRD PARTY INVESTORS" means the persons signing this
Agreement other than TSMC, ADI, ALTERA, ISSI and participants in the Incentive
Plans who become Members.
1.1.76 "TRANSFER" is defined in Section 8.1.1.
1.1.77 "TSMC LAND OPTION" means that certain Option Agreement
dated as of the Effective Date between the Company and TSMC whereby the Company
granted an option to TSMC to purchase all or part of the Land (as defined
therein), hereinafter the "Land".
1.1.78 "UNPAID CAPITAL PREFERENCE" means, with respect to any
Preferred Member, such Member's Capital Contribution reduced by distributions to
such Member pursuant to Section 4.3.1 hereof.
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1.1.79 "WASHINGTON ACT" means the Washington Limited Liability
Act, codified at Title 25, Chapter 25.15 of the Revised Code of Washington. Any
reference to the Washington Act shall automatically include a reference to any
subsequent or successor limited liability law in Washington.
1.2 RULES OF CONSTRUCTION. For purposes of this Agreement:
1.2.1 GENERAL. Unless the context otherwise requires, (i) "or" is
not exclusive; (ii) words in the singular include the plural and vice versa;
(iii) words in the masculine include the feminine and neuter and vice versa; and
(iv) words such as "herein," "hereinafter," "hereto," "hereby," and "hereunder,"
when used in this Agreement, refer to this Agreement as a whole, unless the
context otherwise requires.
1.2.2 ARTICLES AND SECTIONS; HEADINGS. References to Articles and
Sections are to Articles and Sections of this Agreement unless stated otherwise.
Article and Section headings used in this Agreement are for convenience of
reference only and shall not be used in construing or interpreting this
Agreement.
1.2.3 OTHER AGREEMENTS. References herein to any agreement,
schedule or other instrument, including, without limitation, any other Ancillary
Agreement shall, unless the context otherwise requires (or the definition
thereof otherwise specifies), be deemed references to the same as it may from
time to time be amended, modified or extended.
ARTICLE 2
ORGANIZATIONAL MATTERS
2.1 FORMATION OF COMPANY. The parties have formed the Company pursuant
to the provisions of the Act by filing the Certificate of Formation with the
Secretary of State.
2.2 NAME. The name of the Company is "WaferTech, LLC".
2.3 FICTITIOUS BUSINESS NAME STATEMENT; OTHER CERTIFICATES. The
Directors have registered the Company as a foreign limited liability company in
the State of Washington and shall from time to time register the Company as a
foreign limited liability company and file on behalf of the Company such
fictitious or trade name statements or certificates in such other jurisdictions
and offices as the Directors consider necessary, convenient or appropriate. From
time to time, the Directors shall file such certificates of amendment,
certificates of cancellation, or other certificates as the Directors reasonably
deem necessary, convenient or appropriate under the Act, under the Washington
Act or under the laws of any jurisdiction in which the Company is doing business
to establish and continue the Company as a limited liability company or to
protect the limited liability of the Members.
2.4 PRINCIPAL EXECUTIVE OFFICE; OTHER OFFICES. The Company shall
maintain its principal executive office, which shall be its principal place of
business in the
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State of Washington, at Camas, or any other location determined by the
Directors. The Company shall also maintain a registered office in Delaware,
which shall be at the business office of the Company's agent for service of
process in Delaware. The Company may maintain such other offices as determined
by the Directors.
2.5 AGENTS FOR SERVICE OF PROCESS. The name and address of the Company's
agent for service of process in Washington is the Corporation Service Company,
c/o 600 First Avenue, Suite 500, Seattle, Washington 98104. The name and address
of the Company's agent for service of process in Delaware is The Corporation
Service Company, 1013 Centre Road, Wilmington, Delaware 19805.
2.6 BUSINESS AND PURPOSE OF THE COMPANY.
2.6.1 GENERAL CHARACTER OF BUSINESS. The general character of the
business to be conducted by the Company shall be to provide foundry services for
the manufacture of IC wafers in North America to meet the specifications of the
purchasers of such IC wafers in accordance with the terms and conditions of this
Agreement and the Ancillary Agreements. In addition, the Company may provide
testing services, tooling services, ASIC design services, computer assisted
design services, maintain a design library, or provide other related services
for integrated circuits. The Company shall purchase, develop and improve a
portion of certain real property located in Camas, Washington that is the
subject of option agreements for the benefit of TSMC, as described in Exhibit D
hereto (which, subject to the TSMC Land Option, is referred to herein as the
"REAL PROPERTY"). The Company shall construct and manage a foundry, or "FAB"
(the "FOUNDRY") on the Real Property, subject to the TSMC Land Option, to
manufacture and produce IC wafers (subsumed in the definition of "PROVEN
PRODUCTS") (collectively, the "PROJECT") and to conduct any other activities,
operations or business (including the borrowing of money, the encumbering of the
Company's assets for security and the entry into contracts) directly and
reasonably related to the Project and its use and development. In accordance
with Section 3.1.1, TSMC has assigned the Manufacturing Agreement to the
Company, so that during the Manufacturing Agreement's term, TSMC Taiwan shall
have an obligation to purchase not less than 85% of Calculated Installed
Capacity (as defined in the Manufacturing Agreement) but shall have a right to
purchase up to 100% of Calculated Installed Capacity and TSMC has assigned the
Technology License and Assistance Agreement and Advanced Process Agreement to
the Company so that specified technical services and technology shall be
provided to the Company. The Managing Members shall order and take or pay for
Products from TSMC Taiwan as contemplated in the Purchase Agreement. The
Managing Members shall cause the Company to conduct the business of the Company
in compliance with all material laws and regulations.
2.6.2 OTHER PURPOSES. Subject to Section 2.6.1, the Company may
carry on any lawful business, purpose or activity, in accordance with this
Agreement, but the Company shall not engage in the business of granting policies
of insurance or assuming insurance risks or banking. The Company shall possess
and may exercise all the powers and privileges granted by the Act or by any
other law or by this Agreement, together with any powers incidental thereto, so
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far as such powers and privileges are necessary or convenient to the conduct,
promotion or attainment of the business, purposes or activities of the Company
as set forth in Section 2.6.1.
2.7 TERM OF THE COMPANY. The Company was established and commenced on
the Effective Date. The Company shall dissolve on the Dissolution Date.
Notwithstanding the foregoing, the Company may be dissolved prior to the
Dissolution Date as provided in this Agreement or pursuant to the Act.
2.8 INITIAL MEMBERS; STATUS OF MEMBERS.
2.8.1 INITIAL MEMBERS. The Initial Members shall be those
Persons listed as Members on Exhibit A.
2.8.2 STATUS OF MEMBERS. The Initial Members and any additional
or substituted Members shall be "members" of the Company, as that term is used
in the Act, subject to the terms and provisions of this Agreement. The Managing
Members shall have authority as specified herein.
2.9 LIABILITY OF MEMBERS. No Member shall be obligated personally for
any debt, obligation or liability of the Company, whether arising in contract,
tort or otherwise, solely by reason of being a Member.
2.10 COMPETITION; CONFLICT OF INTEREST.
2.10.1 MEMBER COMPETITION. Subject to the provisions of the
Confidentiality Agreements, and except as hereinafter provided, any Member may
engage in, acquire or possess an interest or interests in other business
ventures of any nature or description, independently or with others and neither
the Company not any Member shall have any rights in or to such independent
ventures or the income or profits derived therefrom. Notwithstanding the
foregoing, each Member acknowledges, understands and agrees that pursuant to
Section 3.1.1, TSMC has contributed to the Company proprietary, trade secret,
know-how and other Confidential Information and that TSMC would not have entered
into this Agreement with a Prohibited Person. Further, each Member acknowledges,
understands and agrees that monetary compensation would not be an adequate
inducement for TSMC to enter into this Agreement with a Prohibited Person.
Accordingly, each Member except TSMC agrees that so long as such Member shall be
a Member and for a period of two years thereafter, such Member shall not acquire
or possess a controlling interest, directly or indirectly, by operation of law
or otherwise, in any venture (an "OTHER VENTURE") (not including TSMC or an
Affiliate thereof) that has as one of its primary purposes the provision of
foundry services for the manufacture of IC wafers for sale to third-parties not
affiliated with such Other Venture and not for the Member's own use or the use
of other parties affiliated with the Other Venture. This restriction shall not
limit the existing ventures of any Member, or future ventures in which any
Member has a non-controlling minority interest, from selling IC wafers to third
parties not affiliated with such Other Venture. This Section shall not limit the
ability of TSMC or any of its Affiliates to enter into any Other Venture or
subject to Section 13.2, to construct any other foundry.
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2.10.2 CONFLICT OF INTEREST. Subject to Section 3.6, the fact
that a Person is employed by or is directly or indirectly interested in or
connected with any Person employed by the Company to render any service or from
whom the Company may buy merchandise shall not prohibit the Company from
employing or dealing with such Person; provided, however, that any contract,
employment or other arrangement with such Person shall be on an arm's-length
basis and in accordance with competitive rates and other terms prevailing
throughout the industry for similar goods or services.
2.11 BUSINESS PLAN. On the Effective Date each Initial Member received a
preliminary annual operating budget and business plan of the Company for Fiscal
Years 1996 through 2002, which was prepared by TSMC and its Affiliates in good
faith for planning purposes and is incorporated herein by this reference (as it
may be amended from time to time, the "BUSINESS PLAN"). Each Managing Member
agrees to use reasonable commercial efforts in accordance with the terms of this
Agreement to facilitate the implementation of the Business Plan by the Company.
Notwithstanding the foregoing, the Members acknowledge that the Business Plan is
a projection only and, as a forward looking statement, reflects certain
anticipated goals, which may not be realized. The Members further acknowledge
that the Business Plan does not constitute an assurance, representation,
warranty or agreement by any Member or the Company for any purpose, including
but not limited to, the purpose of determining whether to enter into this
Agreement. Any material change or amendment to the Business Plan shall require
the Approval of Members holding not less than 71% in Percentage Interest, as
provided in Section 6.4.2.
2.12 MEMBER INTELLECTUAL PROPERTY.
2.12.1 GRANT OF LICENSES. Each Member, including TSMC and its
Affiliates to the extent not provided for pursuant to the Technology License and
Assistance Agreement or the Advanced Process Agreement, shall grant or extend to
the Company the rights, licenses or cross licenses from third parties obtained
or held by such Member as the same are related to and required for the
manufacture of IC wafers by the Company, to the extent that any such action is
not in conflict with such Member's agreements with third parties. In case any
third party agreement requires the payment of fees or royalties to a third party
in the event of such grant or extension, the Company shall be offered the option
to accept the grant or extension and to pay such fees or royalties.
2.12.2 SHARING OF TECHNOLOGY. Any Managing Member (other than
TSMC or its Affiliates, to which the terms of the Technology License and
Assistance Agreement and Advanced Process License Agreement will apply), which
has knowledge or know-how relating to the manufacture of IC wafers may offer to
provide such knowledge or know-how to the Company in consideration for the right
to use the knowledge or know-how developed by the Company relating to that
knowledge or know-how provided by such Member. The terms and conditions of any
such exchange of knowledge or know-how shall be determined by mutual agreement
between the applicable Managing Member and the Company. Notwithstanding the
foregoing, any such Managing Member (other than TSMC or its Affiliates) shall
not use the
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knowledge or know-how developed by the Company to manufacture any products
competitive with the Products produced for any other Managing Member (other than
TSMC or its Affiliates).
2.12.3 CO-DEVELOPMENTS. In the event personnel of the Company and
any Managing Member co-develop (i.e. both parties substantially and
significantly contribute to the development) devices, ICs, processes or
apparatus relating to the subject matter of this Agreement, the Manufacturing
Agreement, the Purchase Agreement, or the Future Purchase Agreement, then the
Intellectual Property Rights created by such co-development shall be jointly
owned by the Company and the applicable Managing Member without accounting to
each other, both parties having the right under the Intellectual Property Rights
obtained with respect to such co-development to make, have made, use, modify,
lease, sell, or otherwise dispose of products and to license (with a right to
sub-license) such Intellectual Property Rights, subject to the other party's
rights therein but without the necessity of obtaining the consent of the other
party. The Company and applicable Managing Member shall cooperate in applying
for, prosecuting and maintaining patents and copyright and mask work
registrations for such co-developments and shall equally divide the expenses
thereof. Notwithstanding the preceding sentence, either the Company or the
applicable Managing Member may elect not to share the expenses of any such
applications in any or all countries, in which case the other party may file
and/or prosecute at its own expense and shall have sole control and ownership of
such applications and any patents, copyright or mask work registrations issuing
thereon, subject to a non-exclusive non-transferable, paid-up and royalty-free,
worldwide license under such patents, copyright and mask right registrations in
favor of the non-electing party to make, have made, use, modify, lease, sell, or
otherwise dispose of products to the extent of the rights granted by such
patents and registrations (with the right to sublicense only to Affiliates). The
Company or the applicable Managing Member, as the case may be, shall be
obligated to share the expenses referred to in the preceding sentence unless
such party provides written notice of its election not to do so to the other
party within thirty (30) days of a written request from such other party. An
election not to share expenses shall be irrevocable.
2.13 FORMATION AUTHORIZATION. Each of the Members ratifies and approves
the acts of TSMC prior to the date of this Agreement taken to (i) handle matters
with respect to the formation and establishment of the Company, (ii) commit to
the acquisition of the Real Property including the grant of the TSMC Land
Option, (iii) commit to the construction of the Foundry, and (iv) commit to the
purchase of such equipment as is required by the Company to commence the Project
(collectively, the "ORGANIZATIONAL MATTERS"). Each Member authorizes TSMC to
continue to implement the Organizational Matters in accordance with this
Agreement. TSMC will attempt to obtain favorable terms for such Organizational
Matters, and the Members will cooperate to discuss and resolve any issues in
connection therewith.
2.14 REIMBURSEMENT OF TSMC EXPENSES. By execution and delivery of this
Agreement, the Members agree that the following out-of-pocket expenses incurred
by TSMC, or its Affiliates, upon presentation by TSMC to the Company of an
itemization of such expenses, shall be reimbursed by the Company. Such expenses
may include the following:
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2.14.1 Any and all reasonable expenses incurred for the
acquisition of the Real Property including but not limited to those incurred in
the site selection and permitting activities;
2.14.2 Any and all reasonable fees and expenses incurred to
commit to construction of the Foundry;
2.14.3 Any and all fees and expenses charged by the counsel,
consultants and specialists retained in connection with the formation of the
Company, the acquisition of the Real Property and the construction of the
Foundry; and
2.14.4 Any and all other fees and expenses incurred in handling
the matters authorized in Section 2.13 or this Section 2.14.
An estimate of such expenses as of the Effective Date was delivered to
each Initial Member on the Effective Date.
ARTICLE 3
AUTHORIZED CAPITAL; CAPITAL CONTRIBUTIONS
3.1 AUTHORIZED CAPITAL. The Company shall have the authority to issue up
to TWO HUNDRED TWENTY FIVE MILLION (225,000,000) Preferred Shares and up to
THIRTEEN MILLION FIVE HUNDRED THOUSAND (13,500,000) Common Shares. To
acknowledge and reflect the relative Capital Contributions previously made and
to be made by the Members, the Company shall issue to each Member that number of
Preferred Shares and/or Common Shares specified on the attached Exhibit A as
amended from time to time in accordance with this Agreement. The Company shall
maintain stock records reflecting such ownership. Shares may be transferred, to
the extent permitted by the terms of this Agreement, solely by submitting to the
Company a written power of attorney to assign and transfer the Shares on the
stock records of the Company. Unless otherwise authorized by the Board of
Directors, no certificates will be issued reflecting such ownership.
3.1.1 Except as otherwise provided in this Agreement or the Act,
the Common Shares shall have no right to vote or manage the business and affairs
of the Company and shall have solely the rights and privileges provided by this
section.
3.1.1.1 The Common Shares shall have the right to
participate in distributions as provided by Article 4 and Section 11.4.
3.1.1.2 The Common Shares shall have the right to
information concerning the business and affairs of the Company, as provided in
this Agreement and under the Act.
3.1.1.3 The Common Shares shall, upon issuance thereof in
exchange for the consideration specified by the terms of the option grant, be
fully paid and non-assessable and shall have no obligation for Additional
Capital Contributions.
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3.1.2 The Preferred Shares shall have the rights and privileges
provided by this Agreement, including without limitation the following:
3.1.2.1 The Preferred Shares shall have the right to vote
as provided by Section 6.4.2 and other provisions requiring the Approval of
Members holding not less than 71% in Percentage Interest, Approval of Members
holding not less than 87% in Percentage Interest and the Approval of Members
holding a Majority in Percentage Interest.
3.1.2.2 The Preferred Shares shall have the distribution
and liquidation preferences as provided by Article 4 and Section 11.4.
3.1.2.3 The Preferred Shares shall have the sole right to
manage the business and affairs of the Company.
3.2 INITIAL CAPITAL CONTRIBUTIONS.
3.2.1 FIRST PART CAPITAL CONTRIBUTION. Subject to the
satisfaction or waiver of the conditions precedent set forth in Article 17, on
the Effective Date (sometimes referred to herein as the "FIRST CONTRIBUTION
DATE") each Initial Member contributed to the Company in good same day funds an
amount of cash equal to the cash contribution set forth opposite such Initial
Member's name on Exhibit A under the column "FIRST PART CAPITAL CONTRIBUTION"
and in addition TSMC contributed to the Company (i) the Manufacturing Agreement,
the Technology License and Assistance Agreement and the Advanced Process
Agreement, by assigning such agreements to the Company, and (ii) all rights and
interests of TSMC in the Real Property, the Foundry and all equipment purchased
by TSMC ("FIRST PART CAPITAL CONTRIBUTION").
3.2.2 SECOND PART CAPITAL CONTRIBUTION. On November 30, 1996 (the
"SECOND CONTRIBUTION DATE"), each Initial Member contributed to the Company an
amount of cash equal to the cash contribution set forth opposite such Initial
Member's name on Exhibit A under the column "Second Part Capital Contribution"
(the "SECOND PART CAPITAL CONTRIBUTION").
3.2.3 THIRD PART CAPITAL CONTRIBUTION. On November 3, 1997 (the
"THIRD CONTRIBUTION DATE"), each Initial Member shall contribute to the Company
an amount of cash equal to the cash contribution set forth opposite such Initial
Member's name on Exhibit A under the column "Third Part Capital Contribution"
(the "THIRD PART CAPITAL CONTRIBUTION").
3.2.4 PERCENTAGE INTEREST. Upon making each such Capital
Contribution, each Initial Member shall be credited for its Capital Contribution
and shall have the Percentage Interest in the Company as set forth with respect
to such Initial Member on Exhibit A.
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3.3 ADDITIONAL CAPITAL CONTRIBUTION. No Member shall be obligated to or
shall make any additional capital contribution to the Company in excess of such
Member's portion of the Initial Capital Contribution provided for in Section 3.2
("ADDITIONAL CAPITAL CONTRIBUTION") except that the Board of Directors may
approve and require Preferred Members to make Additional Capital Contributions.
The Board of Directors shall send to each Preferred Member written notice of the
Additional Capital Contribution including a description of the purpose of the
Additional Capital Contribution, a statement of the potential benefits to the
Company and to Members who make such Additional Capital Contribution and a
statement of the potential impact upon each Member pursuant to Section 3.4.1 if
such Member does not make the Additional Capital Contribution (the "Additional
Capital Contribution Notice"). If a proposed Additional Capital Contribution,
together with all prior Additional Capital Contributions, exceeds in the
aggregate an amount equal to 15% of the Total Initial Capital Contribution, as
set forth on Exhibit A hereto, such Additional Capital Contribution must also be
Approved by Members holding not less than 71% in Percentage Interest as provided
in Section 6.4.2. Following approval as set forth above and subject to Section
3.4.2.1., all Preferred Members shall contribute their Additional Capital
Contributions to the Company in proportion to their respective Percentage
Interests promptly at such time or times as may be so established by the Board
of Directors for the payment thereof.
3.4 CONSEQUENCES OF FAILURE TO CONTRIBUTE.
3.4.1 DEFAULT ON SECOND PART OR THIRD PART CAPITAL CONTRIBUTION.
In the event any Preferred Member fails to pay its Second Part Capital
Contribution or its Third Part Capital Contribution as contemplated in this
Agreement, such Defaulting Member shall pay to the Non-Defaulting Members which
have made their required Second Part Capital Contributions or Third Part Capital
Contributions, as the case may be, as a partial liquidated payment for damages
suffered by the Company and the Non-Defaulting Members as a result of such
failure to pay, a cash payment equal to 10% of the Second Part Capital
Contribution or Third Part Capital Contribution, as the case may be, of the
Defaulting Member. Such cash payment shall be distributed among the
Non-Defaulting Members according to their respective Percentage Interests. Such
Defaulting Member's Membership Interest thereupon and without more shall be
terminated and the following procedures shall apply:
3.4.1.1 MISSING CAPITAL CONTRIBUTION. The Non-Defaulting
Members shall have the right, but not the obligation to, subject to the
provisions of Section 8.6, contribute that portion of the Capital Contribution
to have been funded by the Defaulting Member ("MISSING CAPITAL") in proportion
to the respective Percentage Interest of each electing Non-Defaulting Member. If
any Non-Defaulting Member elects to contribute none or less than all of such
Non-Defaulting Member's pro rata share of the Missing Capital, then the other
Non-Defaulting Members may elect to contribute the remaining portion of the
Missing Capital in proportion to their respective Percentage Interests. If less
than all of the Missing Capital is contributed by Non-Defaulting Members,
subject to the provisions of Section 8.6, one or more new Preferred Members, if
approved pursuant to Section 8.4, may be admitted as a Preferred Member or
Members to contribute any remaining Missing Capital to the Company. If the
entire Missing Capital is not contributed, the Initial Capitalization of the
Company shall be reduced
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accordingly. Following such process, the Percentage Interest of all Preferred
Members shall, subject to the last sentence of Section 3.4.1.4, be adjusted so
that each Preferred Member's Percentage Interest (including that of any new
Preferred Member) shall be determined by multiplying (1) the aggregate
Percentage Interests of all of the Preferred Members times (2) a fraction, the
numerator of which is the aggregate amount of such Preferred Member's Capital
Contributions and the denominator of which is the sum of all Preferred Member's
Capital Contributions (including that of any new Preferred Member) and each
Preferred Member's Capital Account Balance shall be adjusted accordingly. As
used in the preceding sentence, Capital Contributions shall include those
portions of Capital Contributions made by a Defaulting Member or a Terminated
Member that are credited to the Capital Account Balances of Non-Defaulting
Members or Remaining Members following a transfer of part of the Defaulting
Member's Interest or Terminated Member's Interest under clause (ii) of either of
Section 3.4.1.4 or Section 10.5. For purposes of the remainder of this Section
3.4, any reference to a Non-Defaulting Member shall include any new Preferred
Member admitted in connection with a failure to contribute Capital described in
Section 3.4.1.1.
3.4.1.2 PURCHASE RIGHT. Upon termination of a Defaulting
Member's Membership Interest pursuant to this Section and after giving effect to
Section 3.4.1.1, subject to the provisions of Section 8.6, the Non-Defaulting
Members shall have the right to purchase and the Defaulting Member shall have
the obligation to sell, the Defaulting Member's Interest in the Company in the
manner contemplated in Sections 3.4.1.3 through 3.4.1.6, inclusive. The purchase
price for such Interest shall be an amount equal to 50% of the cash Capital
Contributions of the Defaulting Member as of the termination date of the
Defaulting Member. Such reduction in value shall constitute partial compensation
for damages suffered by the Company and the Non-Defaulting Members as a result
of the failure by the Defaulting Member to contribute the Second Capital
Contribution or Third Capital Contribution, as the case may be. The Board of
Directors shall give notice to all Non-Defaulting Members of such purchase
price.
3.4.1.3 OPTION OF NON-DEFAULTING MEMBERS TO PURCHASE. Each
Non-Defaulting Member shall have the right, but not the obligation, to elect to
purchase a portion of the Defaulting Member's Interest, as hereinafter provided.
Any Non-Defaulting Member so electing shall notify the Directors in writing
within thirty (30) days after the notice from the Directors referred to in
Section 3.4.1.2 above, of such Non-Defaulting Member's desire to purchase a
portion of the Defaulting Member's Interest. The failure of any Non-Defaulting
Member to submit such notice within the applicable period shall constitute an
election on the part of the Non-Defaulting Member not to purchase any of the
Defaulting Member's Interest. Each Non-Defaulting Member so electing to purchase
shall be entitled to purchase a portion of the Defaulting Member's Interest in
the same proportion that the Percentage Interest of the Non-Defaulting Member
bears to the aggregate of the Percentage Interest of all of the Non-Defaulting
Members electing to purchase a portion of the Defaulting Member's Interest.
3.4.1.4 ELECTION TO PURCHASE LESS THAN ALL OF THE
DEFAULTING MEMBER'S INTEREST. If any Non-Defaulting Member elects to purchase
none or less than all of such Non-Defaulting Member's pro rata share of the
remaining Defaulting Member's Interest, then subject to the provisions of
Section 8.6, the other Non-Defaulting Members may elect to
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purchase that Interest remaining in proportion to their respective Percentage
Interests. Each Non-Defaulting Member who purchases part of the Defaulting
Member's Interest shall succeed to a pro rata share of the Defaulting Member's
Unpaid Capital Preference and Capital Account Balance. If the Non-Defaulting
Members do not purchase the entire Interest of the Defaulting Member, then
subject to the provisions of Section 8.6, one or more new Members, if approved
pursuant to Section 8.4, may be admitted as a Member and purchase the remaining
Defaulting Member's Interest by paying for such Interest in cash. If the entire
remaining Interest has not been purchased, with respect to all or any remaining
share of the Defaulting Member's Interest, the Defaulting Member shall have only
an Economic Interest, and without limiting the generality of the foregoing,
shall not be a Managing Member, shall not be entitled to designate a Director
hereunder and any current Director or Directors appointed by such Member shall
be deemed to be removed and the number of Directors on the Board of Directors
shall be reduced accordingly. In such event, as partial compensation for damages
suffered by the Company and the Non-Defaulting Members, (i) the Defaulting
Member's remaining Interest shall be reduced by fifty percent (50%) and the
Non-Defaulting Members' Interests shall be increased pro rata accordingly, (ii)
the Defaulting Member's Capital Account Balance and Unpaid Capital Preference
shall be reduced by 50%, and the difference shall be added to the Capital
Account Balances and Unpaid Capital Preferences of the Non-Defaulting Members,
pro rata according to their Interests, and (iii) solely for purposes of
determining the Managing Members' and a Defaulting Member's rights and
obligations to purchase the output of the Foundry under the Purchase Agreement
or Future Purchase Agreement (which rights and obligations shall be a function,
to be specified in each of those agreements, of the Managing Members' and
Defaulting Member's Percentage Interests), effect shall not be given to any
increase or decrease in a Managing Member's or Defaulting Member's Percentage
Interest attributable to (A) the operation of clause (i), or (B) any reduction
(x) in the Capital Contribution of the Defaulting Member due to (I) that portion
of the Missing Capital that is not contributed by any other Person or (II) that
portion of the Missing Capital contributed by a Person other than a Managing
Member or a new Member who will become a party to the Purchase Agreement or
Future Purchase Agreement (a "NEW BUYER") or (y) in the total Capital
Contributions of Members due to that portion of the Missing Capital that is not
contributed by any Person.
3.4.1.5 PAYMENT OF PURCHASE PRICE. The purchase price
shall be paid by the electing Non-Defaulting Members by either of the following
methods, each of which may be selected separately by the electing Non Defaulting
Members in their respective sole discretion:
(i) The Non-Defaulting Members shall at the consummation
of the purchase of the Defaulting Member's Interest ("CLOSING") pay in cash the
total purchase price for the Defaulting Member's Interest; or
(ii) The Non-Defaulting Members shall pay at the Closing
one-fifth (1/5) of the purchase price in cash and the balance of the purchase
price shall be paid in four equal annual principal installments, plus accrued
interest, and be payable each year on the anniversary date of the Closing. The
unpaid principal balance shall accrue interest at the current applicable U.S.
Federal rate as provided in the Code for the month in which the initial payment
is made, but the Non-Defaulting Members shall have the right to prepay in full
or in part at any
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time without penalty. The obligation of each purchasing Non-Defaulting Member to
pay its portion of the balance due shall be evidenced by a separate promissory
note executed by the respective Non-Defaulting Member. Each such promissory note
shall be in an original principal amount equal to the portion owed by the
respective purchasing Non-Defaulting Member. The promissory note executed by
each purchasing Non-Defaulting Member shall be secured by a pledge of that
portion of the Defaulting Member's Interest purchased by such Non-Defaulting
Member.
3.4.1.6 CLOSING OF PURCHASE OF DEFAULTING MEMBER'S
INTEREST. The Closing for the sale of a Defaulting Member's Interest pursuant to
this Section 3.4 shall be held at 10:00 a.m. at the principal office of Company
no later than sixty (60) days after the determination of the purchase price. At
the Closing, the Defaulting Member or such Defaulting Member's legal
representative shall deliver to the electing Non-Defaulting Members an
instrument of transfer (containing warranties of title and no encumbrances)
conveying the Defaulting Member's Interest free and clear of all liens, charges
and encumbrances whatsoever, except as permitted by the purchaser thereof. The
Defaulting Member or such Defaulting Member's legal representative, the Company
and the Non-Defaulting Members shall do all things and execute and deliver all
documents as may be necessary or convenient to consummate such sale and purchase
in accordance with the terms and provisions of this Agreement. Without limiting
the generality of the foregoing, each Defaulting Member hereby appoints each
Non-Defaulting Member as its attorney-in-fact and agent, with full power and
authority to take all actions and execute and deliver all agreements, deeds,
leases, releases, assignments, bills of sale, security instruments and any other
document which, in the sole judgment of such Non-Defaulting Member, is necessary
or convenient to consummate such sale and purchase.
3.4.2 FAILURE TO PAY ADDITIONAL CAPITAL CONTRIBUTION.
3.4.2.1 FAILURE TO PAY ADDITIONAL CAPITAL CALL NOT
APPROVED BY NON-PAYING MEMBER. The provisions of this Section 3.4.2.1 shall
apply in the event a Member fails to make an Additional Capital Contribution:
(i) requiring the Approval of Members holding not less than 71% in Percentage
Interest as provided in Section 6.4.2.5, if such non-paying Member did not
consent to such Additional Capital Contribution, or (ii) not requiring the
consent of Members pursuant to Section 6.4.2.5 and (x) not approved by such
Member's representative on the Board of Directors if such Member has a
representative on the Board of Directors, or (y) if such Member does not have a
representative on the Board of Directors. Such a Member shall be referred to in
this Section as a "NON-PAYING MEMBER." In such event, the other Members who have
made the Additional Capital Contribution (the "PAYING MEMBERS") shall have the
right, but not the obligation, subject to the provisions of Section 8.6, to
contribute that portion of the Additional Capital Contribution to have been
funded by the Non-Paying Member ("MISSING ADDITIONAL CAPITAL") in proportion to
the respective Percentage Interests of each electing Paying Member. If any
Paying Member elects to contribute none, or less than all of such Paying
Member's pro-rata share of the Missing Additional Capital, then the other Paying
Members may elect to contribute the remaining portion in proportion to their
respective Percentage Interests. If less than all of the Missing Additional
Capital is contributed by the Paying Members, one or more new investors,
approved as provided in Section 8.4, may be admitted as a Preferred
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Member to pay to the Company the remaining Missing Additional Capital. (Such a
new Member shall be treated as a Paying Member for purposes of the remainder of
this Section 3.4.2.1.) The failure of the Non-Paying Member to make an
Additional Capital Contribution under the circumstances specified in this
Section shall not constitute an Event of Default under this Agreement, but the
Percentage Interests of all Preferred Members shall be adjusted so that each
Preferred Member's Percentage Interest (including that of the new Member, if
any), shall be determined by multiplying (1) the aggregate Percentage Interests
of all of the Preferred Members times (2) a fraction, the numerator of which is
the aggregate amount of each Preferred Member's Capital Contributions and the
denominator of which is the sum of all Preferred Members' Capital Contributions
(including that of the new Member, if any). As used in the preceding sentence,
Capital Contributions shall include those portions of Capital Contributions made
by a Defaulting Member or a Terminated Member that are credited to the Capital
Account Balances of Non-Defaulting Members or Remaining Members following a
transfer of part of the Defaulting Member's or Terminated Member's Interest to
such Members under clause (ii) of either of Section 3.4.1.4 or Section 10.5.
Notwithstanding the foregoing, if the Board of Directors in its reasonable
discretion determines that the fair market value of the Company as of the date
immediately prior to the requested Additional Capital Contribution is less than
total Capital Contributions made to such date, the Preferred Members' Percentage
Interests (including that of the new Member, if any), shall be adjusted to
reflect a fraction, the numerator of which is (A) the fair market value of the
Company multiplied by the Percentage Interest of each Preferred Member as of
such date, plus (B) the Additional Capital Contribution made by such Member (if
any), and the denominator of which is such fair market value of the Company as
of such date plus the total Additional Capital Contributions of all Members
(including that of the new Member, if any). The Board of Directors in its
reasonable discretion shall determine the fair market value of the Company
except that any Director who was elected by a Non-Paying Member shall not vote
or otherwise participate in any such determination. Each Member's Capital
Account shall be adjusted as provided in Section 3.4. If the failure to make the
Additional Capital Contribution is a Dilution Event, each Managing Member's
right to receive and obligation to take the output of the Foundry pursuant to
the Purchase Agreement and the Future Purchase Agreement shall be adjusted
contemporaneously to give effect to the changes in Members' Percentage
Interests. If the failure to make the Additional Capital Contribution is not a
Dilution Event each Managing Member's right to receive and obligation to take
the output of the Foundry pursuant to the Purchase Agreement and Future Purchase
Agreement shall not be affected in which case the provisions of Section 8.6 with
respect to an increase in the obligations of new Members or Members acquiring an
additional Percentage Interest pursuant to such agreements shall not apply.
Additionally, a Non-Paying Member shall not be entitled to acquire directly or
indirectly any Products of the Company, the production of which has been funded,
enabled or otherwise facilitated by such Additional Capital Contribution made by
the Paying Members, and the production of which was described in the Additional
Capital Contribution Notice.
3.4.2.2 DEFAULT FOLLOWING MEMBERS APPROVAL OF ADDITIONAL
CAPITAL CONTRIBUTION. This Section 3.4.2.2 shall apply in the event a Member
fails to make an Additional Capital Contribution or any installment payment of
an Additional Capital Contribution that has been: (i) approved by such
Defaulting Member, if the Additional Capital
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Contribution is one requiring Approval of Members holding not less than 71% in
Percentage Interest as provided in Section 6.4.2.5, or (ii) approved by such
Member's representative on the Board of Directors (if such Defaulting Member has
a representative on the Board of Directors) if the Additional Capital
Contribution is not one requiring Approval of Members holding not less than 71%
in Percentage Interest as provided in Section 6.4.2.5. In either circumstance,
the Defaulting Member's Membership Interest shall be terminated and the
procedures set forth in Sections 3.4.1.1 through 3.4.1.6 inclusive, shall apply.
3.5 CAPITAL ACCOUNTS. The Capital Accounts of the Members shall be
determined and maintained throughout the full term of the Company in accordance
with the capital account rules of Section 1.704-1(b)(2)(iv) of the Section
704(b) Regulations (relating to maintenance of capital accounts).
3.5.1 Each Member shall have a capital account ("CAPITAL
ACCOUNT") which shall be credited (increased) by:
3.5.1.1 the amount of such Member's cash capital
contributions to the Company and the agreed net fair market value of property
other than cash contributed to the Company by such Member (net of liabilities
secured by such contributed property that the Company is considered to have
assumed or taken subject to for purposes of Section 752 of the Code);
3.5.1.2 the amount of Net Profits and items thereof
allocated to it pursuant to Article 5 hereof; and
3.5.1.3 any other increase required to be made to the
Capital Account of the Member by the Section 704(b) Regulations, to the extent
not otherwise provided for herein.
3.5.2 Each Member's Capital Account shall be debited
(decreased) by:
3.5.2.1 the amount of Net Losses and items thereof
allocated to such Member pursuant to Article 5 hereof;
3.5.2.2 all amounts paid, distributed or deemed
distributed to it pursuant to Article 4 hereof, and the fair market value of
property distributed to it (in each case, net of liabilities securing such
distributed property that such Member is considered to have assumed or taken
subject to under Section 752 of the Code); and
3.5.2.3 any other reductions in the Capital Account of the
Member required by the Section 704(b) Regulations, to the extent not otherwise
provided for herein.
3.5.3 In the discretion of the Board of Directors, the capital
accounts may be adjusted to reflect a revaluation of Company property to the
extent permitted by the Section 704(b) Regulations in connection with capital
contributions to the Company by new or existing Members resulting in a change of
Percentage Interests held by the Members, or in
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connection with distributions by the Company to a retiring or continuing Member
as consideration for an Interest in the Company.
3.6 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY; COMPANY LOANS AND
GUARANTEES.
3.6.1 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY. With the
written approval of the Board of Directors, and the written consent of Preferred
Members with no economic interest in the transaction in question ("DISINTERESTED
MEMBERS") holding a majority of the Percentage Interests of Disinterested
Members, a Member or an Affiliate of a Member may transact business or contract
with the Company so long as the terms of any such transaction are at fair market
value and are comparable to those that could be obtained between independent
parties negotiating at arm's-length. The representatives of the contracting
Member on the Board of Directors shall not be prohibited from participating in
the decision made to enter into any such transaction. All Members agree that the
terms of the Ancillary Agreements and the Incentive Plans satisfy the standard
set forth in this Section 3.6.1, that such documents are deemed to have been
approved by the Board of Directors and the Members and that no further action or
approval by the Board of Directors or the Members to approve such instruments or
transactions is required.
3.6.2 LOANS TO THE COMPANY. With the approval of the Board of
Directors, and the consent of the Members contemplated in Section 6.4.2, a
Member may lend money to, act as a surety, guarantor or endorser for, or
guarantee or assume one or more specific obligations of, or provide collateral
for the Company (collectively, "COMPANY LOANS"), and, subject to applicable law,
has the same rights and obligations with respect to any Company Loan as a Person
who is not a Member; provided, however, that each Managing Member shall have the
option to participate in any such Company Loan pro rata in accordance with such
Managing Member's Percentage Interest. Unless otherwise agreed to in writing by
the Board of Directors, Company Loans shall not be considered capital
contributions or be reflected in the balance of any Capital Account. Each
Company Loan shall be a debt due from the Company to the lending Member, shall
bear interest at the rate agreed to between such Member and the Company and,
except as otherwise expressly provided in this Agreement or agreed between such
Member and the Company at the time such funds are advanced, shall be repaid as
soon as practicable to such Member.
3.6.3 PROHIBITION ON LOANS TO MEMBERS. The Company shall not lend
money to, act as a surety, guarantor or endorser for, or guaranty or assume any
obligations of any Member (other than, with respect to Common Members, such
loans as may be approved by the Board of Directors).
3.6.4 GUARANTEES. To the extent a Member guarantee is required by
an institutional lender to the Company, the Board of Directors shall send to
each Preferred Member written notice of the required guarantee including a
description of the purpose of the loan the Members are being asked to guarantee,
a statement of the potential benefits of the loan to the Company and the Members
who guarantee the loan and a statement of the potential impact upon
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each Member pursuant to this Section if such Member does not guarantee the loan
(the "GUARANTEE NOTICE"). The Preferred Members agree to provide, to a maximum
aggregate amount of US$250 Million, a several guarantee of the Company's debt
according to their respective Percentage Interests. If any Preferred Member
fails to provide, in whole or in part, a guarantee as specified above, such
failure shall not constitute an Event of Default under this Agreement, but the
Percentage Interests of the Preferred Members shall be adjusted so that each
Preferred Member's Percentage Interest shall be determined by multiplying (1)
the aggregate Percentage Interests of all of the Preferred Members times (2) a
fraction, the numerator of which represents the aggregate amount of each
Preferred Member's Capital Contribution plus any amount such Member guaranteed
as provided for above, and the denominator of which represents the sum of all
Preferred Members' Capital Contributions (other than Common Members) plus the
total amount guaranteed by the Members. In addition, the Unpaid Capital
Preference and Capital Account of the Preferred Member who fails to approve in
whole or in part a guarantee, as specified above, shall be adjusted in
substantially the same manner as Percentage Interests. The Preferred Shares
owned by each Preferred Member shall be adjusted accordingly to reflect such
adjustments in each Preferred Member's Percentage Interest. As used in the
preceding sentence, Capital Contributions shall include those portions of
Capital Contributions made by a Defaulting Member or Terminated Member that are
credited to the Capital Account Balances of Non-Defaulting Members or Remaining
Members following a transfer of part of the Defaulting Member's or Terminated
Member's Interest to such Members under clause (ii) of either of Section 3.4.1.4
or Section 10.5. If the failure to guarantee the Company's debt is not a
Dilution Event each Member's right to receive and obligation to take the output
of the Foundry pursuant to the Purchase Agreement and Future Purchase Agreement
shall not be affected. However, if such failure is a Dilution Event, the
Members' right to receive and obligation to take the output of the Foundry
pursuant to the Purchase Agreement and the Future Purchase Agreement shall be
adjusted contemporaneously to reflect the change in Percentage Interests.
Additionally, if a Member fails to provide a guarantee as specified above, such
Member shall not be entitled to acquire directly or indirectly any Products of
the Company, the production of which has been funded, enabled or otherwise
facilitated by the proceeds of any Company debt such Member failed to guarantee,
the production of which was described in the Guarantee Notice.
3.7 RIGHTS WITH RESPECT TO CAPITAL.
3.7.1 CAPITAL. No Member shall have the right to withdraw all or
any part of its Capital Contribution. No Member shall have any right to the
return of all or any part of its Capital Contribution except through
distributions as provided in this Agreement.
3.7.2 NO INTEREST ON CAPITAL CONTRIBUTIONS. Except as expressly
provided in this Agreement, no Capital Contribution of any Member shall bear any
interest or otherwise entitle the contributing Member to any compensation for
use of the contributed capital.
3.7.3 DISTRIBUTION IN KIND. Except as provided in Article 19, no
Member shall have the right to demand and receive any distribution in any form
other than cash,
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regardless of the nature of its Capital Contribution. No Member shall be
compelled to accept a distribution of any asset in kind to the extent that the
percentage of the asset distributed to such Member exceeds a percentage of that
asset that is equal to the percentage in which such Member shares in
distributions from the Company.
ARTICLE 4
DISTRIBUTIONS
4.1 CASH AVAILABLE FOR DISTRIBUTION. Cash Available for Distribution
shall be distributed to the Members in accordance with the following:
4.1.1 DETERMINATION. The Company shall distribute, from time to
time, pursuant to Sections 4.1.3, 4.2 and 4.3 as determined by the Board of
Directors and approved by the Members as provided in Section 6.4.2, Cash
Available For Distribution, if any, to the Members as provided in this Article
4.
4.1.2 DEFINITION OF CASH AVAILABLE FOR DISTRIBUTION. For purposes
of this Agreement, "Cash Available For Distribution" means the cash available
for distribution to Members after giving effect to the following: (i) projected
cash available from operations of the Company as determined by the Board of
Directors; (ii) cash on hand of the Company; (iii) a prudent level of reserves
for the Company, as determined by the Board of Directors; (iv) projected cash
needed for operations of the Company including for payment of debt and for
future Special Tax Distributions to Members, as such are determined by the Board
of Directors; and ( v) the anticipated total project costs for any new foundry
to be developed by the Company or retrofit of the Foundry which have been
approved by the Members in accordance with Section 6.4.2.
4.1.3 FINAL SALE. Notwithstanding the foregoing provisions, all
distributions and proceeds resulting from a final sale or other event causing a
dissolution of the Company shall be applied in the manner set forth in Section
11.4 and not in the manner set forth in this Section 4.1.
4.2 TAX DISTRIBUTIONS. For each Fiscal Year, the Company shall
distribute to its Members in accordance with the amount of Net Profit allocated
to them in such Fiscal Year and to the extent available from the cash resources
of the Company (including borrowings), before calculation of Cash Available for
Distribution, within ninety (90) days after the end of each Fiscal Year (a
"SPECIAL TAX DISTRIBUTION"), an aggregate amount of cash equal to the excess of
(i) the product of (A) the Company's aggregate amount of Net Profit for the
Fiscal Year determined for this purpose only without regard to the adjustments
set forth in clauses (iii) and (iv) of Section 1.1.52 and (B) the highest
applicable composite marginal rate borne by any Initial Member for U.S. Federal,
state and local taxes for such Fiscal Year over (ii) the aggregate net cash
distributions previously made to the Members with respect to such Fiscal Year
pursuant to this Section 4.2. All amounts withheld under Section 4.4 shall be
deemed to be distributions to the respective Members for purposes of this
Section 4.2.
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4.3 DISCRETIONARY DISTRIBUTIONS The Board of Directors, following the
approval of the Members pursuant to Section 6.4.2, may make additional
distributions ("DISCRETIONARY DISTRIBUTIONS") of Cash Available for Distribution
(as defined in Section 4.1.2) as it deems appropriate at any time prior to the
commencement of the liquidation of the Company.
4.3.1 REDUCTION OF UNPAID CAPITAL PREFERENCE. All Discretionary
Distributions shall be made solely to the Preferred Members in proportion to
their respective Unpaid Capital Preferences at the time of distribution until
each Preferred Member's Unpaid Capital Preference equals zero.
4.3.2 RESIDUAL DISTRIBUTIONS. The balance, if any, of any
Discretionary Distributions shall be made to the Members pro rata in accordance
with their respective Percentage Interests.
4.4 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provision of any state or local tax law with respect to any payment,
distribution or allocation to the Company or the Members shall be treated for
all purposes under this Agreement as amounts distributed to the Members pursuant
to this Article 4. The Board of Directors is authorized to withhold from
distributions, or with respect to allocations, to the Members and to pay over to
any U.S. Federal, state, or local government any amounts required to be so
withheld pursuant to the Code or any provisions of any other U.S. Federal, state
or local law and shall allocate such amounts to the Members with respect to
which such amount was withheld.
ARTICLE 5
ALLOCATION OF PROFITS AND LOSSES
5.1 ALLOCATION OF NET PROFIT AND LOSS. In each fiscal period Net Profit
and Net Loss of the Company shall be allocated among the Members (consistent
with and subject to the rules stated in Exhibit G) as follows:
5.1.1 NET LOSS.
5.1.1.1. Net Loss shall be allocated first, to each Member
with a positive Capital Account balance, in the amount of such positive balance;
provided, however, that if the amount of Net Loss to be allocated is less than
the sum of the Capital Account balances of all Members having positive Capital
Account balances, then the Net Loss shall be allocated to the Members in such
proportions and in such amounts as would result in the Capital Account balance
of each Member equaling, as nearly as possible, the amount such Member would be
distributed if the Company (i) sold all of its assets at their respective
adjusted tax bases (or, if different, their book values as determined pursuant
to Treasury Regulation Section 1.704-1(b)(2)), (ii) paid all of its liabilities
in accordance with their terms and (iii) distributed the balance of the proceeds
from such sale in accordance with Section 4.3 hereof; and
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5.1.1.2 Thereafter, Net Loss shall be allocated among the
Members in proportion to their respective Percentage Interests.
5.1.2 NET PROFIT.
5.1.2.1 Net Profit shall be allocated first, to any
Members having negative Capital Account balances, in proportion to and to the
extent of such negative balances.
5.1.2.2 Thereafter, Net Profit shall be allocated to the
Members in such proportions and in such amounts as would result in the Capital
Account balance of each Member equaling, as nearly as possible, the amount such
Member would be distributed if the Company (i) sold all of its assets at their
respective adjusted tax bases (or, if different, their book values as determined
pursuant to Treasury Regulation Section 1.704-1(b)(2)), (ii) paid all of its
liabilities in accordance with their terms and (iii) distributed the balance of
the proceeds from such sale in accordance with Section 4.3 hereof.
5.1.3 CAPITAL ACCOUNT ADJUSTMENTS. Adjustments to the Capital
Accounts pursuant to Sections 3.5.1.3 and 3.5.2.3 shall be allocated among the
Capital Accounts of the Partners in the same manner as Net Profit and Net Loss.
5.2 RESIDUAL ALLOCATIONS. Except as otherwise provided in this
Agreement, all items of Company income, gain, loss, deduction, and any other
allocations not otherwise provided for shall be divided among the Members in the
same proportions as they share Net Profit or Net Losses, as the case may be, for
the Fiscal Year, consistent with the rules stated in Exhibit G.
5.3 OTHER ALLOCATION RULES.
5.3.1 The Members are aware of the income tax consequences of the
allocations made by this Article 5 and agree to be bound by the provisions of
this Article 5 in reporting their shares of Company income and loss for income
tax purposes.
5.3.2 For purposes of determining the Net Profits, Net Losses, or
any other items allocable to any period, Net Profits, Net Losses, and any such
other items shall be determined on a daily, monthly, or other basis, as
determined by the Board of Directors using any permissible method under Code
Section 706 and the Regulations thereunder.
5.4 TAX ALLOCATIONS.
5.4.1 Except as otherwise provided in this Section 5.4, for
income tax purposes each item of income, gain, loss and deduction (collectively,
"TAX ITEMS") shall be allocated among the Members in the same manner as its
correlative item of "book" income, gain, loss or deduction is allocated pursuant
to Sections 5.1 - 5.2.
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5.4.2 Notwithstanding Section 5.4.1, Tax Items with respect to
Property that is contributed to the Company by a Member shall be shared among
the Members for income tax purposes in accordance with the "traditional method"
pursuant to Regulations promulgated under Section 704(c) of the Code, so as to
take into account the variation, if any, between the book and tax basis of the
Property contributed to the Company.
5.4.3 Any elections or other decisions relating to such
allocations shall be made by the Directors in a manner that reasonably reflects
the purpose and intention of this Agreement. Allocations pursuant to this
Section 5.4 are solely for purposes of U.S. Federal, state, and local taxes and
shall not affect, or in any way be taken into account in computing, any Person's
Capital Account or share of Net Profits, Net Losses, other items, or
distributions pursuant to any provisions of this Agreement.
ARTICLE 6
MANAGEMENT OF THE COMPANY
6.1 MANAGEMENT BY DIRECTORS. Subject to the provisions of the
Certificate of Formation and this Agreement relating to actions required to be
approved by the Members, the business, property and affairs of the Company shall
be managed and all powers of the Company shall be exercised by or under the
direction of the Managing Members who shall act through their designated
representatives as the Board of Directors ("BOARD OF DIRECTORS"). Subject to the
foregoing, the Members are the "MANAGERS" of the Company as such term is defined
under the Act. Notwithstanding Section 18402 of the Act, the powers of the
Members and the Board of Directors to bind the Company are as set forth in this
Agreement.
6.2 NUMBER AND DESIGNATION OF DIRECTORS; OBSERVER OF THIRD PARTY
INVESTORS.
6.2.1 BOARD OF DIRECTORS. The Company shall have a board of seven
(7) directors ("DIRECTORS"). TSMC shall designate four (4) of the Directors, one
(1) of whom shall be voting and three (3) of whom shall be non-voting. Each of
Altera, ADI and ISSI shall designate one (1) voting Director. Each Director
shall serve at the pleasure of the Member who designated such Director. Only the
Member who originally designated a Director may remove such Director, except
that one or more Members holding a Majority in Interest may remove any Director
appointed by a Terminated Member. Any Director may resign upon written notice to
the Member who designated such Director. The resignation shall take effect upon
receipt of such notice, or at such later time as shall be specified in such
notice. Any vacancy occurring for any reason in the number of Directors shall be
filled by the Member who originally designated the Director whose position has
become vacant.
6.2.2 OBSERVER. The Third Party Investors may from time to time
designate one representative, approved by TSMC, who shall serve in an advisory
capacity to the Board of Directors, with no other rights, duties or authority
(the "OBSERVER"). TSMC may revoke its approval of a designated Observer at any
time, following which the Third Party Investors shall select an alternative
Observer approved by TSMC. The Observer shall be entitled to attend such
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meetings of the Board of Directors as he is invited by the Board of Directors to
attend, and to receive all materials distributed to the Directors for such
meetings. The initial Observer shall be Mr. Quintin Wu.
6.3 MEETINGS OF DIRECTORS.
6.3.1 MEETINGS. Meetings of the Directors shall be held at least
once each calendar quarter and may be called by the Chairman/Chief Executive
Officer ("CEO") of the Company. All meetings shall be held upon seven (7) days
notice by mail or four (4) days notice (or upon such shorter notice period if
necessary under the circumstances) delivered personally or by telephone, e-mail
or facsimile. A notice need not specify the purpose of any meeting. Notice of a
meeting need not be given to any Director who signs a waiver of notice or a
consent to holding the meeting (which waiver or consent need not specify the
purpose of the meeting) or an approval of the minutes thereof, whether before or
after the meeting, or who attends the meeting without protesting, prior to its
commencement, the lack of notice to such Director. All such waivers, consents
and approvals shall be filed with the Company records or made a part of the
minutes of the meeting. A majority of the Directors present, whether or not a
quorum is present, may adjourn any meeting to another time and place. If the
meeting is adjourned for more than twenty-four (24) hours, notice of any
adjournment shall be given prior to the time of the adjourned meeting to the
Directors who are not present at the time of the adjournment. Meetings of the
Directors may be held at any place which has been designated in the notice of
the meeting or at such place as may be approved by the Directors. Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all Directors participating in such meeting
can hear one another. Participation in a meeting in such manner constitutes a
presence in person at such meeting.
6.3.2 QUORUM; ACTION OF THE DIRECTORS. Directors elected by one
or more Members holding a Majority in Interest, present at a meeting shall
constitute a quorum of Directors for the transaction of business. Every action
or resolution done or made by Directors holding a majority of the Director Votes
(as defined below) at a meeting at which a quorum is present is the action of
the Directors. Each voting Director shall hold the same number of votes as the
Percentage Interest held by the Member who designated such Director ("DIRECTOR
VOTES"). If the voting Director of TSMC shall not be present at a meeting, such
voting Director may delegate in writing such Director's voting authority to one
of the non-voting Directors nominated by TSMC. TSMC shall designate which of its
Director nominees shall be its voting Director.
6.3.3 ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken by the Directors may be taken by the Directors without a meeting, if
Directors holding all Director Votes consent in writing to such action. Such
action by written consent shall have the same force and effect as a unanimous
vote of such Directors.
6.4 POWERS OF DIRECTORS.
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6.4.1 POWERS OF DIRECTORS. Without limiting the generality of
Section 6.1, but subject to Sections 3.6, 6.4.2 and 6.4.3, and to any express
limitations set forth elsewhere in this Agreement, the Board of Directors shall
have all powers necessary or convenient to manage and carry out the purposes,
business, property and affairs of the Company, including, without limitation,
the power to:
6.4.1.1 approve the annual budget;
6.4.1.2 provide for capital increase and capacity
expansion of the Company;
6.4.1.3 sell, transfer, mortgage or dispose of property of
the Company;
6.4.1.4 borrow, guarantee or incur long term debt;
6.4.1.5 amend the Certificate of Formation of the Company
or this Agreement;
6.4.1.6 voluntarily dissolve the Company or merge the
Company with another entity;
6.4.1.7 dissolve, liquidate, wind up, reorganize the
Company, or any similar action; or
6.4.1.8 convert or exchange the Interests of the Members
into or for, as the case may be, an interest in the Delaware Corporation as
contemplated in Article 14.
Subject to applicable laws and regulations, all actions of the Board of
Directors shall be taken as provided in Section 6.3.2 and 6.3.3.
6.4.2 LIMITATIONS ON RIGHTS AND POWERS; APPROVAL OF MEMBERS
HOLDING NOT LESS THAN 71% IN PERCENTAGE INTEREST. In addition to any affirmative
vote of the Board of Directors or Members otherwise required by law or this
Agreement, each of the following actions shall require the Approval of Members
holding not less than 71% in Percentage Interest:
6.4.2.1 borrow, guarantee or incur long term debt in any
way greater than the amount of US $25 Million in the aggregate;
6.4.2.2 determine that a Member or an Affiliate of a
Member is a Prohibited Person;
6.4.2.3 convert or exchange the Interest of the Members
into or for, as the case may be, an interest in the Delaware Corporation if such
conversion or exchange does not occur contemporaneously with an IPO of the
Delaware Corporation;
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6.4.2.4 reduce the Company's capital;
6.4.2.5 authorize or call for any Additional Capital
Contribution in an amount exceeding 15% of the Total Initial Capital
Contribution as set forth on Exhibit A hereto;
6.4.2.6 determine if Cash Available For Distribution
exists to be distributed to the Members;
6.4.2.7 engage legal counsel to the Company or engage
certified public accountants to audit and certify the financial statements of
the Company;
6.4.2.8 construct another foundry or retrofit the Foundry;
6.4.2.9 create any Incentive Plan, except for the Senior
Executive Incentive Plan and Employee Incentive Plan provided for in Article 12,
or amend an Incentive Plan in any manner that increases the maximum aggregate
awards thereunder;
6.4.2.10 make any material change or amendment to the
Business Plan including, but not limited to, the capacity ramp up schedule
incorporated therein; or
6.4.2.11 admit any new Member other than a participant in
an Incentive Plan.
6.4.3 LIMITATIONS ON RIGHTS AND POWERS; APPROVAL OF MEMBERS
HOLDING NOT LESS THAN 87% IN PERCENTAGE INTEREST. In addition to any affirmative
vote of the Board of Directors or Members otherwise required by law or this
Agreement, each of the following actions shall require, in addition to the
approval of the Board of Directors, the Approval of Members holding not less
than 87% in Percentage Interest:
6.4.3.1 Except for any action taken pursuant to Section
6.4.2.8, discontinue a material part of, add materially to or materially change
the business of the Company as it is described in Section 2.6.1;
6.4.3.2 Transfer in a single transaction or in a series of
related transactions, all or substantially all of the Company's business and
assets;
6.4.3.3 subject to Article 16, amend, restate or alter the
Certificate of Formation or this Agreement (other than an Incentive Plan or the
Business Plan, which may be changed or amended as contemplated in Section
6.4.2.9 or 6.4.2.10, respectively);
6.4.3.4 merge or consolidate the Company, other than as
provided in Article 14; or
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6.4.3.5 dissolve, liquidate, place into bankruptcy, wind
up or reorganize the Company or any similar event, if such action does not occur
contemporaneously with an IPO of the Delaware Corporation.
6.5 ANNUAL INFORMATIONAL MEETING OF MEMBERS. The Members shall hold an
annual informational meeting concerning the affairs of the Company. All Members
of the Company shall be entitled to attend the annual informational meeting. The
annual informational meeting shall be held in the first quarter of each year
with the exact time and date of the meeting to be determined by the
Chairman/CEO. Notice of the annual informational meeting shall be given to all
Members at least ten (10) days before the scheduled meeting. At such meeting,
the Members may take any action that pursuant to this Agreement, would otherwise
be taken by written consent.
6.6 COMPENSATION COMMITTEE. The Board of Directors shall appoint a
Compensation Committee composed of the Directors designated by Altera and ADI
and the voting Director designated by TSMC pursuant to Section 6.2.1. The
Compensation Committee shall serve in an advisory capacity only to the Board of
Directors and may make non-binding recommendations to the Board of Directors
regarding the compensation of employees of the Company and the administration of
any Incentive Plan.
6.7 EXPENSE REIMBURSEMENT. The Company shall reimburse the Members for
any expenses paid by them that properly are to be borne by the Company, as
approved from time to time by the Board of Directors.
6.8 INSURANCE. The Company shall maintain adequate types and amounts of
insurance as determined from time to time by the Board of Directors including
worker's compensation, comprehensive general liability, product liability, and
fire and extended coverage, considering the risks of conducting the Company's
business and the replacement value of the Project.
6.9 OFFICERS.
6.9.1 APPOINTMENT OF OFFICERS. The Officers of the Company shall
include a Chairman/CEO, a Vice Chairman, a President/Chief Operating Officer
("COO"), one or more Vice Presidents, a Secretary, and a Chief Financial
Officer, each of whom shall be appointed by the Board of Directors. If deemed
necessary by the Board of Directors, the Company shall have such additional
Officers as the Board of Directors may from time to time approve. The Officers
shall serve at the pleasure or the Directors, subject to all rights, if any, of
an Officer under any contract of employment with the Company. Any individual may
hold any number of offices. A Member's officers, directors, members or
employees, as the case may be, may serve as Officers of the Company if elected
by the Directors. The Officers shall exercise such powers and perform such
duties as specified in this Agreement and as shall be determined from time to
time by the Directors. Notwithstanding the foregoing, no Officer shall have the
power or authority to implement any of the matters specifically enumerated in
Section 6.4.1, without the explicit approval of the Board of Directors.
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6.9.2 REMOVAL, RESIGNATION AND FILLING OF VACANCY OF OFFICERS.
Any Officer may be removed, either with or without cause, by the Directors at
any time. Any Officer may resign at any time by giving written notice to the
Directors. Any resignation shall take effect at the date of the receipt of such
notice or at any later time specified in such notice, and, unless otherwise
specified in such notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Company under any contract to which such Officer is a
party. A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
this Agreement for regular appointments to that office.
6.9.3 DUTIES AND POWERS OF THE CHAIRMAN/CEO. The Chairman/CEO
shall be the chief executive officer of the Company and, if present, shall
preside at all meetings of the Members and at all meetings of the Directors. The
Chairman/CEO shall have the general powers and duties of management usually
vested in the office of chief executive officer of a Delaware general
corporation and shall have general and active management of the business of the
Company and shall see that all orders and resolutions of the Members and
Directors are carried into effect. The Chairman/CEO shall have such other duties
and responsibilities as may be assigned to the Chairman/CEO by the Board of
Directors and which he shall accept.
6.9.4 DUTIES AND POWERS OF THE VICE CHAIRMAN. The Vice Chairman
shall in the absence or disability of the Chairman/CEO perform the duties and
exercise the powers of the Chairman/CEO and shall perform such other duties and
have such other powers as the Directors by resolution may from time to time
determine.
6.9.5 DUTIES AND POWERS OF THE PRESIDENT/COO. Subject to such
supervisory powers, if any, as may be assigned by the Directors to the
Chairman/CEO and Vice Chairman, the President/COO shall assist the Chairman/CEO
and Vice Chairman with the general and active management of the business of the
Company. The President/COO shall have authority to execute bonds, mortgages and
other contracts except where required or permitted by law to be otherwise signed
and executed, and except where the signing and execution thereof shall be
expressly delegated by the unanimous action of the Directors to some other
officer or agent of the Company. The President/COO shall perform such other
duties and have such other powers as the Directors by resolution may from time
to time determine.
6.9.6 DUTIES AND POWERS OF VICE-PRESIDENT. The Vice-President, or
if there shall be more than one, the Vice-Presidents in the order determined by
a resolution of the Directors, shall, in the absence or disability of the
President, perform the duties and exercise the powers of the President and shall
perform such other duties and have such other powers as the Directors by
resolution may from time to time determine.
6.9.7 DUTIES AND POWERS OF SECRETARY.
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6.9.7.1 The Secretary shall attend all meetings of the
Directors and all meetings of the Members, and shall record all the proceedings
of the meetings in a book to be kept for that purpose, and shall perform like
duties for the standing committees when required. The Secretary shall give, or
cause to be given, notice of all meetings of the Members and all meetings of the
Directors and shall perform such other duties as may be determined by the
Directors. The Secretary shall have custody of the seal, if any, and the
Secretary shall have authority to affix the same to any instrument requiting it,
and when so affixed, it may be attested by the Secretary's signature. The
Directors may give general authority to any other officer to affix the seal of
the Company, if any, and to attest the affixing by his or her signature.
6.9.7.2 The Secretary shall keep, or cause to be kept, at
the principal executive office or at the office of the Company's transfer agent
or registrar, as determined by resolution of the Directors, a register, or a
duplicate register, showing the names of all Members and their addresses and
their Percentage Interests. The Secretary shall also keep all documents
described in Section 9.1 and such other documents as may be required under the
Act. The Secretary shall perform such other duties and have such other authority
as may be prescribed elsewhere in this Agreement or from time to time by the
Directors. The Secretary shall have the general duties, powers and
responsibilities of a secretary of a Delaware general corporation.
6.9.8 DUTIES AND POWERS OF CHIEF FINANCIAL OFFICER.
6.9.8.1 The Chief Financial Officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the Company,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, Membership Interests and Economic Interests. The books of
account shall at all reasonable times be open to inspection by any Director.
6.9.8.2 The Chief Financial Officer shall have the custody
of the funds and securities of the Company, and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Company, and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Company in such depositories as may be designated by the
Directors.
6.9.8.3 The Chief Financial Officer shall disburse the
funds of the Company as may be ordered by the Directors, taking proper vouchers
for such disbursements, and shall render to the CEO and the Directors, at their
regular meetings, or when Members so require, at a meeting of the Members an
account of all his or her transactions as treasurer and of the financial
condition of the Company.
6.9.8.4 The Chief Financial Officer shall perform such
other duties and shall have such other responsibility and authority as may be
prescribed elsewhere in this Agreement or from time to time by the Directors.
The Chief Financial Officer shall have the general duties, powers and
responsibility of a Chief Financial Officer of a Delaware general corporation,
and shall be the chief financial and accounting officer of the Company.
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6.10 MEMBER CONSENTS. Except for actions approved by unanimous written
consent of all Preferred Members, no action requiring written consent of the
Preferred Members shall become effective until five (5) Business Days after all
Preferred Members have been notified of such action in accordance with Section
23.3.
6.11 BEST INTEREST OF THE COMPANY. In managing the affairs of the
Company the Members and the Board of Directors will take into account, among
other things, the best interests of the Company and the best interests of the
Members as a whole, and will endeavor not to take any action prejudicial to any
Member unless, in the sole determination of the Board of Directors, such action
is in the best interests of the Company or the best interests of the Members as
a whole.
ARTICLE 7
MEMBER REPRESENTATIONS AND WARRANTIES
7.1 NATURE OF MEMBER'S INTEREST. The Interest of each Member constitutes
personal property of such Member. No Member has any interest in the Property.
7.2 MEMBER REPRESENTATIONS AND WARRANTIES.
7.2.1 POWER AND AUTHORITY. Each Member (other than natural
persons) represents and warrants that such Member has full corporate power and
authority to enter into this Agreement and to consummate and perform the
transactions contemplated hereby. Each Member (other than natural persons)
further represents and warrants that this Agreement has been duly authorized by
it.
7.2.2 GOOD STANDING. Each Member (other than natural persons)
represents and warrants that it is duly incorporated or formed, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
formation.
7.2.3 EXECUTION. Each Member represents and warrants that the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or violate its charter
documents or any law, rule, regulation, court order, contract, agreement,
judgment or decree binding upon or applicable to such Member or by which the
property of such Member is bound or affected in a manner that would materially
and adversely affect such Member's performance hereunder and thereunder.
7.2.4 INVESTMENT REPRESENTATIONS.
7.2.4.1 KNOWLEDGE. Each Member (other than Participants in
the Incentive Plans) represents and warrants that such Member (i) has such
knowledge, skill and experience in business and financial matters, that such
Member is capable of evaluating the merits and risks of an investment in the
Company and the suitability thereof as an investment for such Member, (ii) has
sufficient net worth to sustain a loss of all such Member's interest in the
Company without economic hardship if such a loss should occur and can bear the
economic risk
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of such Member's investment in the Company, (iii) understands that an investment
in the Company involves a considerable degree of risk of loss by such Member,
(iv) has reviewed this Agreement and each of the Ancillary Agreements and has
received such other documents and information as such Member has requested and
has had an opportunity to ask questions of and receive satisfactory answers from
the Company concerning the terms and conditions of the investment contemplated
under this Agreement, and based thereon believes that such Member can make an
informed investment decision, and (v) (if not a natural person) was not formed
for the specific purpose of making an investment in the Company.
7.2.4.2 INVESTMENT INTENT. Each Member represents and
warrants that such Member is acquiring such Member's Interest for investment for
such Member's own account and not with a view to, or for resale in connection
with, any distribution thereof, subject, nevertheless, to the condition that,
except as otherwise provided herein, the disposition of the property of each
Member shall at all times be within such Member's control. By execution of this
Agreement, each Member represents and warrants that, except as otherwise
permitted by this Agreement, such Member has no agreement, contract, or
understanding with any person or entity to sell, transfer, or grant rights in
any of such Member's Interest.
7.2.5 SECURITIES LAWS. EACH MEMBER REPRESENTS AND WARRANTS THAT
SUCH MEMBER UNDERSTANDS THAT SUCH MEMBER'S INTEREST HAS NOT BEEN AND WILL NOT BE
REGISTERED UNDER APPLICABLE U.S. FEDERAL OR STATE SECURITIES LAWS BY REASON OF
CERTAIN EXEMPTIONS FROM THE REGISTRATION PROVISIONS THEREOF WHICH DEPEND UPON,
AMONG OTHER THINGS, THE BONA FIDE NATURE OF SUCH MEMBER'S REPRESENTATIONS AND
INVESTMENT INTENT AS EXPRESSED HEREIN, AND UNDERSTANDS THAT NO PUBLIC MARKET NOW
EXISTS, OR MAY EVER EXIST, FOR THE INTERESTS.
7.2.6 STATEMENTS IN BUSINESS PLAN. EACH MEMBER REPRESENTS AND
WARRANTS THAT SUCH MEMBER UNDERSTANDS THAT THE STATEMENTS CONTAINED IN THE
BUSINESS PLAN THAT ARE NOT HISTORICAL STATEMENTS ARE FORWARD LOOKING STATEMENTS.
THESE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT
NOT LIMITED TO THE RISK THAT ACTUAL RESULTS OF OPERATIONS MAY NOT MATCH THOSE
PRESENTED THEREIN.
7.2.7 ACCREDITED INVESTOR. Each Initial Member represents and
warrants that it is an institutional investor or accredited investor meeting the
standards of sophistication normally expected of an investor in a transaction
exempt from the registration provisions of the United States Securities Act of
1933, as amended, under Section 4(2) thereof or as defined in Regulation D
promulgated thereunder, with respect to the purchase of the Interests.
7.2.8 NO COMMISSIONS. Each Member represents and warrants that no
person has or will have, as a result of the transactions contemplated by this
Agreement, any rights, interest or valid claim against or upon the Company or
any other party hereto for any
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commission, fee or other compensation as a finder or broker because of any act
or omission by such Member or any agent of such Member. Each Member agrees to
indemnify and hold the Company and each other party hereto harmless against any
and all costs and liabilities as a result of any such claim arising from any
such act or omission by such Member.
ARTICLE 8
RESTRICTIONS ON TRANSFER; PREEMPTIVE RIGHT;
ADMISSION OF NEW MEMBERS; RIGHT OF FIRST REFUSAL
8.1 RESTRICTIONS ON TRANSFER.
8.1.1 NO TRANSFER WITHOUT CONSENT. Until the fifth anniversary of
the Effective Date, except with the prior unanimous consent of the Preferred
Members or as provided in Sections 3.4.1, 3.4.2.2, 8.1.2, or 10.3 through 10.7,
inclusive, no Preferred Member may sell, convey, transfer, assign, mortgage,
pledge, hypothecate or otherwise encumber in any way ("TRANSFER") all or any
portion of such Member's Interest. In addition, the Transfer of Common Shares by
a Participant in an Incentive Plan shall be subject to the restrictions provided
in such Incentive Plan. As used in this Agreement, a Transfer shall not include
a reincorporation or merger not entered into for the purpose of, and not having
the effect of, changing or influencing the control of such Member. From and
after the fifth anniversary of the Effective Date, no Member may Transfer all or
any portion of such Member's Interest except (i) with the prior written consent
of other Preferred Members holding not less than a majority of the Percentage
Interests held by such other Preferred Members and (ii) in compliance with
Section 8.5. This Section 8.1.1 shall not apply to a Transfer by a Member to its
wholly-owned subsidiary, or to a Transfer pursuant to Section 14.1.
8.1.2 TRANSFER FOLLOWING APPROVAL OF NEW FOUNDRY. Notwithstanding
the provisions of Section 8.1.1, a Preferred Member may Transfer such Member's
Interest if (i) such Transfer follows the approval of the construction of a new
foundry by the Company by the Board of Directors and the Preferred Members as
provided in Section 6.4.2.8 and the Preferred Member proposing to Transfer its
Interest did not consent to the construction of such new foundry by the Company,
and (ii) the provisions of Section 8.5 have been complied with. A Transfer
pursuant to this Section 8.1.2 shall be limited to a Preferred Member's Economic
Interest if the Board of Directors of the Company in its reasonable discretion
determines that a Transfer of the Preferred Member's Membership Interest will
jeopardize the Company's treatment as a partnership for federal or state tax
purposes.
8.1.3 NO TRANSFER TO COMPETITOR. Without the prior unanimous
written consent of the Managing Members, no Transfer may be made by a Member of
such Member's Interest to a Prohibited Person.
8.1.4 TRANSFER IN VIOLATION VOID. Any attempted Transfer not
permitted hereunder shall be null and void ab initio. If, notwithstanding the
foregoing, a Transfer not permitted hereunder is determined by a court of
competent jurisdiction to be valid, any transferee taking pursuant thereto shall
receive only the Economic Interest of the transferring
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Member. Any Member who Transfers or purports or attempts to Transfer an Interest
in violation of Section 8.1 shall promptly pay over and be liable to the
non-breaching Members, according to their respective Percentage Interests, for
the total transfer price of such Interest, received and to be received, in
addition to, and not in lieu of, any other right or remedy which the
non-breaching Members may have, at law or in equity, or pursuant to Article 10,
all subject to Article 21.
8.2 GENERAL TRANSFER PROVISIONS. Notwithstanding any other provisions
of this Agreement:
8.2.1 NO VIOLATION OF LAW. No portion of, or interest in, an
Interest may be the subject of a Transfer without assurances to the Company that
are satisfactory to non-transferring Preferred Members that the proposed
Transfer does not violate any law applicable to the Company. The nontransferring
Preferred Members may, among other things, require (i) a written opinion
addressed to the Company, in form and substance satisfactory to the
non-transferring Preferred Members, of legal counsel acceptable to the
non-transferring Preferred Members, to the effect that the proposed Transfer is
exempt from registration under the Securities Act of 1933, as amended (or a "no
action" letter from the staff of the Securities and Exchange Commission
satisfactory to the non-transferring Preferred Members, to the effect that such
Transfer is exempt from such registration); (ii) registration under applicable
state securities laws or a written opinion addressed to the Company, in form and
substance satisfactory to the non-transferring Preferred Members, of legal
counsel acceptable to the Company, to the effect that such Transfer is exempt
under applicable state securities laws; (iii) a written opinion addressed to the
Company, in form and substance satisfactory to the non-transferring Preferred
Members, of legal counsel acceptable to the non-transferring Preferred Members,
to the effect that any such contemplated Transfer will not require the Company
to register under the Investment Company Act of 1940, require that the Company
or any Member register as an investment adviser under the Investment Advisers
Act of 1940, or cause the Company to lose its partnership status for U.S.
Federal income tax purposes; and (iv) representations and warranties concerning
the facts and circumstances establishing the basis for the availability of
exemptions from registration under the Securities Act of 1933, the Investment
Company Act of 1940, the Investment Advisers Act of 1940, and other reasonable
assurances relating to any other applicable laws, from the proposed substituted
or proposed transferee Member.
8.2.2 TRANSFEREE TO BE BOUND BY THIS AGREEMENT. In addition to
any other requirements contained in this Agreement pertaining to a Transfer of
Interests, as a condition precedent to any Transfer, the prospective transferee
shall, for the express benefit of the Company and each non-transferring Member,
agree to be bound by all of the terms of this Agreement and to make such
reasonable representations and warranties as the Preferred Members may request.
8.2.3 DELAY IN TRANSFER. Except as may occur upon conversion of
the Company or upon transfers of Interest to a corporation pursuant to Section
14.1, if, in the determination of the non-transferring Preferred Members, a
proposed Transfer would, alone or in conjunction with one or more other
Transfers cause the Company to lose its partnership status or terminate its
partnership existence for U.S. Federal income tax purposes, such Transfer (if
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otherwise permitted) shall be delayed in whole or in part until the earliest
time as determined by the non-transferring Preferred Members that such Transfer
may occur without causing the Company to lose its partnership status or to
terminate for U.S. Federal income tax purposes. If at any time more than one
Transfer is being delayed under this Section 8.2.3, such Transfers shall be made
in the order in which the Company received written notice of the proposed
Transfers under this Section.
8.2.4 LIABILITY OF TRANSFEROR. Except as may occur upon
conversion of the Company or upon Transfers of Interest to a corporation
pursuant to Section 14.1, any Member who voluntarily Transfers or attempts to
Transfer any portion of or interest in its Interest, if such a Transfer causes
or would cause the Company to lose its partnership status or terminate its
partnership existence for U.S. Federal income tax purposes, shall be liable to
the Company and promptly shall pay for any incremental costs, taxes, fines,
penalties, damages or losses which may be due from the Company or the Members or
suffered by the Company or the Members, including costs of enforcement of the
Company's power to void or otherwise prohibit such Transfer or attempted
Transfer.
8.2.5 NO RELEASE. No Transfer of all or any portion of, or
interest in, an Interest, whether or not in compliance with this Article 8 and
even if it results in the substitution of the transferee as a new Member, shall
release the transferor from those liabilities to the Company which survive such
Transfer.
8.3 PREEMPTIVE RIGHTS.
8.3.1 PREEMPTIVE RIGHT. Subject to Section 8.6, if the Company
shall propose to issue, sell or distribute any Membership Interest or any
option, warrant or right to acquire, or any security convertible into or
exchangeable for any of the foregoing, each Preferred Member shall, subject to
the provisions of Section 8.6, have a right of first refusal to participate in
such issuance, sale or distribution on a pro rata basis in accordance with the
respective Percentage Interest held by each Preferred Member so that following
such issuance, sale or distribution each Preferred Member would acquire or have
the right to acquire, if each Preferred Member had elected to acquire such
Preferred Member's pro rata portion, the same Percentage Interest in the Company
as each Preferred Member had by reasons of such Preferred Member's Percentage
Interest prior to such issuance, sale or distribution.
8.3.2 PROCEDURE. The Company shall provide each Preferred Member
with notice of any such proposed issuance which notice shall specify the nature
of the proposed issuance, the consideration to be received therefor, the
identity of the proposed purchaser, and the terms upon which such issuance shall
be undertaken. Each Preferred Member shall have the right to elect to purchase
from the Company a portion of the Interest referred to in the notice at the same
price and on the same terms as specified in the notice for a period of sixty
(60) days after the giving of the notice but not thereafter. A Preferred Member
shall exercise this right by delivering in writing to the Company notice of such
Preferred Member's intent to purchase such Preferred Member's pro rata share
along with the purchase price therefore. If any Preferred Member shall elect to
purchase none, or less than all of the offered Interest, the other Preferred
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Members shall have the right to purchase the pro rata share of the Preferred
Member who has declined to purchase the offered Interest, according to each
purchasing Preferred Member's pro rata share of such Interest, for a successive
period of thirty (30) days thereafter. All or any portion of the Interest not so
purchased may be issued as specified in the notice within a period of forty-five
(45) days after the expiration of such ninety (90) day period specified above.
8.3.3 LIMITATION. Notwithstanding the foregoing, the provisions
of this Section 8.3 shall not apply to any of the following: (i) any issuance,
sale or distribution in connection with the conversion of each Member's Interest
in the Company to an interest in the Delaware Corporation as provided for in
Article 14, (ii) the transactions contemplated by Sections 3.4.1, 3.4.2, 3.6.4
or 10.5, or (iii) the sale, issuance or grant of any Shares, options, warrants
or other rights to Officers, Directors or employees of the Company pursuant to
any Incentive Plan.
8.4 ADMISSION OF NEW MEMBERS. A new Member may be admitted to the
Company only if Section 8.3 has been complied with and upon the Approval of
Members holding not less than 71% in Percentage Interest (without consideration
of the Percentage Interest of any Defaulting Member, Selling Member, Terminated
Member or Non-Paying Member). Prior to any new Member acquiring the Interest of
a Managing Member, the Managing Member proposing to Transfer its Interest shall
disclose to the other Preferred Members, whether it is proposed that the new
Member shall, following the Transfer, designate such Managing Member's
representative on the Board of Directors, and hold the decision making authority
of the Managing Member for decisions which pursuant to this Agreement require
the consent of the Managing Members. Any Transfer approved pursuant to the first
sentence of this Section shall then be an approval of the Transfer of the rights
specified in the disclosure notice.
8.4.1 CAPITAL CONTRIBUTION. The type and amount of Capital
Contribution which must be made by a new Member shall be determined by the
Approval of Members holding not less than 71% in Percentage Interest (without
consideration of the Percentage Interest of any Defaulting Member, Selling
Member, Terminated Member or Non-Paying Member).
8.4.2 TIME OF ADMISSION. A new Member shall not be deemed
admitted into the Company until the Capital Contribution required of such Person
shall have been made and such Person has become a party to this Agreement.
8.4.3 ADJUSTMENT OF INTERESTS. Upon admission of a new Member,
the Percentage Interests of all previously existing Members shall be adjusted to
reflect the addition of such new Member and such new Member's Capital
Contribution.
8.5 RIGHT OF FIRST REFUSAL.
8.5.1 If any Preferred Member ("SELLING MEMBER") intends to
Transfer its Interest or any part thereof (the "OFFERED INTEREST") (except to a
wholly-owned subsidiary), it shall notify the Company and the other Preferred
Members of its intention to do so ("OFFERING
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NOTICE"). The Offering Notice shall specify the nature of the Transfer, the
consideration to be received therefor, the identity of the proposed purchaser
(or lender, as the case may be), and the terms upon which such Member intends to
undertake such Transfer. Within thirty (30) days after receipt of the Offering
Notice, the Preferred Members other than the Selling Member shall have the
right, but not the obligation, subject to Section 8.6, to elect to purchase from
the Selling Member a portion of the Offered Interest referred to in the Offering
Notice at the same price and on the same terms as specified in the Offering
Notice for a period of thirty (30) days after the giving of the Offering Notice
(or make the loan, if the same involves an encumbrance, hypothecation or
mortgage, upon the same terms on which said loan was to be made therefor) by
delivering in writing to the Company an offer to purchase (or loan) a portion of
the Offered Interest of the Selling Member. Each Preferred Member so electing to
purchase shall be entitled to purchase a portion of such Offered Interest in the
same proportion that such Preferred Member's Percentage Interest bears to the
aggregate of the Percentage Interests of all of the Preferred Members electing
to purchase the Offered Interest. In the event any Preferred Member elects to
purchase less than all of such Preferred Member's pro rata share of such Offered
Interest ("SHORTFALL"), subject to Section 8.6, the other Preferred Members may
elect to purchase their pro rata share of the Shortfall. Within sixty (60) days
after the election notice of the Preferred Members who so elect, the purchase
shall be consummated on the terms and conditions set forth in the Offering
Notice of the Selling Member (or if the same involves a mortgage, encumbrance or
other hypothecation, the loan shall be consummated upon the terms and conditions
of the loan set forth in the Offering Notice).
8.5.2 If none of the other Preferred Members elect to purchase
the Offered Interest (or elect to make the loan specified), or the election is
made for less than all of the Offered Interest, then the Selling Member, subject
to Section 8.6, within thirty (30) days after the expiration of said sixty (60)
day period, may undertake and complete the Transfer to any Person the identity
of which was disclosed in the Offering Notice for that portion of the Offered
Interest not undertaken to be purchased by the other Preferred Members provided,
however, that the proposed transferee has been approved by the other Preferred
Members as specified in Sections 8.1.1, 8.1.3, and 8.4, as such Sections may be
applicable to the Transfer, and the provisions of Section 8.6 have been complied
with. The Transfer shall not be undertaken at a lower price or upon more
favorable terms than specified in the Offering Notice. If the Selling Member
does not then consummate the original proposed Transfer within ninety (90) days
after the date of the Offering Notice, or within the time scheduled for closing
by the purchasing person, firm or corporation, whichever is later, then all
restrictions of this Section shall apply as though no Offering Notice had been
given.
8.6 SPECIAL TRANSFER PROVISION. Any Managing-Member who elects pursuant
to Sections 3.4, 8.1, 8.5 or 10.3 of this Agreement to acquire an additional
Interest in the Company (which Interest was previously held by or was to be held
by a Managing Member) shall at the time such Member's Percentage Interest is
increased also have an increase in such Member's rights and obligations to
purchase the output of the Foundry pursuant to the Purchase Agreement or Future
Purchase Agreement corresponding to the additional Percentage Interest being
acquired. Any New Buyer which acquires pursuant to Section 3.4, 8.1, 8.5 or 10.3
hereof an Interest that was previously held by a Managing Member or other Person
holding rights and
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obligations to purchase the output of the Foundry pursuant to the Purchase
Agreement or Future Purchase Agreement shall at the time of such acquisition
acquire rights and obligations to purchase the output of the Foundry
corresponding to the Percentage Interest being acquired. If at any time (a) a
Member's or other Person's Percentage Interest changes as a result of (i) a
Transfer in accordance herewith, (ii) a failure to pay a Second Part Capital
Contribution, Third Part Capital Contribution, or Additional Capital
Contribution, (iii) a failure to guarantee a loan to the Company in accordance
herewith, (iv) an Event of Default, or (v) any other provision hereunder and (b)
in the reasonable opinion of the Board of Directors, such change, in conjunction
with the provisions herein and in the Purchase Agreement or Future Purchase
Agreement for adjusting the Managing Members' purchase rights or obligations
under such agreements, produces an inequitable or unintended result, then the
Board of Directors, with the concurrence of all Managing Members that are
parties to the Purchase Agreement or Future Purchase Agreement, may adjust the
purchase rights and obligations of such Members in such manner as the Board of
Directors determines in good faith is equitable under the circumstances.
8.7 SPECIAL RIGHT OF MANAGING MEMBERS OTHER THAN TSMC TO PURCHASE. This
Section shall apply if pursuant to Sections 3.4, 8.3, 8.5, or 10.3 of this
Agreement, TSMC provides notice to the Company of its intention to acquire an
additional Interest in the Company which, after the Percentage Interests of all
Members are adjusted in connection with such transaction, would result in TSMC
having a Percentage Interest which, when combined with the Percentage Interest
of the Third Party Investors', would equal or exceed a 71% Percentage Interest
of all Preferred Members. Prior to the completion of any such transaction, the
Board of Directors shall provide written notice to each Managing Member of this
provision and the option of such Managing Members (other than TSMC and excluding
any Managing Member whose Interest is being offered pursuant to Sections 3.4,
8.5 or 10.3 of this Agreement (the "SUBJECT INTEREST")) to purchase, in addition
to their pro rata portion of the Subject Interest, a pro rata portion of the
Excess Subject Interest (including the right to purchase a pro rata portion of
any shortfall resulting from another Member's election to purchase less than its
entire pro rata allocation). As used in this Section 8.7, the term "EXCESS
SUBJECT INTEREST" means the portion of the Subject Interest which TSMC has
elected to purchase which would cause TSMC and the Third Party Investors to
jointly hold a Percentage Interest equal to or exceeding 71% of all Preferred
Members. Each such Managing Member shall have the right to purchase its pro rata
share of the Excess Subject Interest by giving notice within thirty (30) days of
the notice received from the Board of Directors pursuant to this Section of such
Member's intent to acquire its pro rata share of the Excess Subject Interest. If
such Managing Members do not elect to purchase all of the Excess Subject
Interest, TSMC may proceed with its acquisition of any portion of the Excess
Subject Interest not so acquired.
ARTICLE 9
BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS
9.1 MAINTENANCE OF BOOKS AND RECORDS. The Company shall cause books and
records of the Company to be maintained in accordance with GAAP (except for the
Capital Accounts which shall be maintained in accordance with the Regulations as
provided in Section 3.5), and shall give reports to the Members in accordance
with prudent business practices
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and the Act. The annual accounting period of the Company shall be the Fiscal
Year. The books and records of the Company shall be audited annually by a
certified public accounting firm nationally recognized in the United States,
selected by the Board of Directors and approved by the Members as provided for
in Section 6.4.2.7. The Company shall promptly upon receipt make available to
the Managing Members all preliminary drafts of financial statements that it
receives from the Company's certified public accountants. Not less than five (5)
days before the financial statements of the Company become final, the Company
shall provide each of the Managing Members with a copy of the draft of the
financial statements of the Company and during this period, shall provide each
of the Managing Members with the opportunity to comment on such financial
statements. The initial firm of certified public accountants is Arthur Andersen
& Co. LLP. There shall be kept at the principal business office of the Company
specified in Section 2.4 the following Company documents:
9.1.1 A current list of the full name and last known business or
residence address of each Member and each holder of an Economic Interest, set
forth in alphabetical order, together with the amount of cash and a description
and statement of the agreed value of any other property or services that were
Capital Contributions of each Member and that each Member has agreed to
contribute to the Company in the future, the date on which each Member became a
Member, and the share in Net Profit and Net Loss of each Member and holder of an
Economic Interest;
9.1.2 A copy of the Certificate of Formation and any amendments
thereto, together with any powers of attorney pursuant to which the Certificate
of Formation and any amendments thereto were executed;
9.1.3 Copies of the Company's U.S. Federal, state, local and
other income tax or information returns and reports, if any, for the six most
recent taxable years;
9.1.4 A signed counterpart of this Agreement and any amendments
hereto, together with any powers of attorney pursuant to which this Agreement
and any amendments hereto were executed;
9.1.5 Copies of the financial statements of the Company, if any,
for the six (6) most recent Fiscal Years;
9.1.6 The Company's books and records as they relate to internal
affairs of the Company for at least the current and past four (4) Fiscal Years;
9.1.7 Any other information necessary to provide true and full
information regarding the status of the business and financial condition of the
Company; and
9.1.8 Other information regarding the affairs of the Company as
is reasonable or prudent.
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9.2 INSPECTION RIGHTS. Each Member and each holder of an Economic
Interest has the right upon reasonable request, for purposes reasonably related
to the interest of that Person as a Member or holder of an Economic Interest, to
inspect and copy during normal business hours any of the books and records
required to be maintained in accordance with Section 9.1. Such right may be
exercised by such Person or by that Person's agent or attorney.
9.3 RIGHTS TO RECEIVE COPIES OF DOCUMENTS. Upon the request of a Member
or holder of an Economic Interest, for purposes reasonably related to the
interest of that Person as a Member or holder of an Economic Interest, the
Member who has custody of the following documents shall promptly deliver to the
Member or holder of an Economic Interest, at the expense of the Company, a copy
of this Agreement and a copy of the documents listed in Sections 9.1.1 and 9.1.3
of this Agreement.
9.4 BANK ACCOUNTS. The bank accounts of the Company shall be maintained
in such banking institutions as the Board of Directors shall determine.
9.5 TAX MATTERS HANDLED BY TAX MATTERS PARTNER.
9.5.1 TSMC is hereby designated the "TAX MATTERS PARTNER" (as
defined in Code Section 6231), and is authorized and required to represent the
Company (at the Company's expense) in connection with all examinations of the
Company's affairs by tax authorities, including administrative and judicial
proceedings, and to expend Company funds for professional services and costs
associated therewith. The Tax Matters Partner will control all decisions with
respect to such proceedings, but will keep the Board of Directors and other
Managing Members reasonably informed with respect to such proceedings and will
provide the other Managing Members the opportunity to offer comments and
suggestions with respect to such proceedings to the extent practicable. Each
Member agrees to cooperate with the Tax Matters Partner and to do or refrain
from doing any or all things reasonably requested by the Tax Matters Partner
with respect to the conduct of such proceedings. The Tax Matters Partner shall
arrange for the preparation and timely filing of all returns required to be
filed by the Company. Any Member receiving advice that the Internal Revenue
Service or any state or foreign revenue service intends to examine any income
tax return of the Company shall promptly notify the Tax Matters Partner.
9.5.2 The Tax Matters Partner shall exert commercially reasonable
efforts to adopt positions and make elections for tax purposes which (i)
minimize the sum of the current taxable income and gain, and (ii) maximize the
sum of the current taxable losses, deductions, and credits, to the Managing
Members as a group. In addition, notwithstanding any other provision of this
Agreement, the Tax Matters Partner shall cause all Company tax returns and other
related tax filings to be prepared in such manner as to reflect that any income,
gain, loss, or deduction recognized by the Company as the result of an
adjustment, reallocation or recharacterization by any tax authority of the tax
treatment of any transaction between the Company and a Member or an Affiliate of
a Member as originally reported on any tax return filed for the Company shall be
specially allocated to such Member for the taxable year of the adjustment,
reallocation or recharacterization and for each taxable year thereafter so that
the tax consequences to the other
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Members shall, to the extent possible, have the same cumulative aggregate tax
consequences as if no such adjustment, reallocation or recharacterization had
occurred. No such adjustment shall be reflected in the Capital Accounts of the
Members. Not less than thirty (30) days before actual filing, the Tax Matters
Partner shall provide to all of the other Managing Members a copy of each of the
final returns and other administrative or judicial filings of the Company
relating to income taxation, and during this period, shall provide the other
Managing Members with the opportunity to comment on such returns and filings.
The Members agree that, except as otherwise approved in advance by the Board of
Directors, no Member shall take any position in any such administrative
proceeding inconsistent with the tax returns filed by the Company, provided such
tax returns are prepared in a manner consistent with this Agreement. Nothing in
this Agreement shall be construed to provide the Tax Matters Partner with
rights, powers or privileges relating to tax administrative proceedings in
excess of the minimum rights, powers and privileges provided to the Tax Matters
Partner by Code Sections 6221, et. seq., and the Treasury Regulations
thereunder.
9.6 FEDERAL INCOME TAX ELECTIONS MADE BY TAX MATTERS PARTNER. Except as
otherwise provided herein, the Tax Matters Partner on behalf of the Company may
make all elections for U.S. Federal, state and local income tax purposes,
including but not limited to, the following:
9.6.1 USE OF ACCELERATED DEPRECIATION METHODS. To the extent
permitted by applicable law and regulations, the Company may elect to use an
accelerated depreciation method on any depreciable unit of the assets of the
Company.
9.6.2 ADJUSTMENT OF BASIS OF ASSETS. In case of a transfer of all
or part of the Interest of any Member, the Company may elect, pursuant to
Sections 734, 743, and 754 of the Code, to adjust the basis of the assets of the
Company.
9.7 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS. The Members are aware
of the income tax consequences of the allocations made by this Agreement and
hereby agree to be bound by the provisions of this Agreement in reporting their
shares of the Company income and loss for income tax purposes in a manner
consistent with the tax returns filed by the Company, provided such tax returns
are prepared in a manner consistent with this Agreement.
ARTICLE 10
EVENT OF DEFAULT; TERMINATION OF MEMBERSHIP
10.1 EVENT OF DEFAULT. The occurrence of any one or more of the
following events shall be a breach and a default ("EVENT OF DEFAULT") hereunder:
10.1.1 A Member shall fail to perform a material obligation of
this Agreement or of any of the Ancillary Agreements and, (except for breaches
contemplated in Sections 10.1.5 or 10.1.6 of this Agreement, which provide for
no opportunity to cure, and except for breaches for which another cure period is
specified herein), does not cure or remedy the default within sixty
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(60) days thereafter. Notwithstanding the foregoing, the breach or failure to
perform any of the following Sections shall not be, or be deemed to be, an Event
of Default: Sections 3.4.1, 3.4.2, and 3.6.4 (each of which shall be treated as
provided in such Sections).
10.1.2 Any representation, warranty or statement made by a Member
under or pursuant to this Agreement or any Ancillary Agreement or under any
affidavit, certificate or other instrument executed in connection with any of
the foregoing, shall be false or misleading in any material respect as of the
Effective Date or shall become so at any time prior to the Dissolution Date, and
such Member does not cure the same within thirty (30) days written notice
thereof.
10.1.3 A Member shall (i) be adjudicated as bankrupt or
insolvent; (ii) make a general assignment for the benefit of its creditors;
(iii) file a petition, answer or consent seeking, or have entered against it (or
fail reasonably to contest the material allegations of any petition for) an
order for relief (or any similar remedy) under any provision of Title 11 of the
United States Code or any other U.S. Federal or state law relating to
insolvency, bankruptcy, rehabilitation, liquidation or reorganization, or
consent to the institution of any proceedings thereunder; (iv) convene a general
meeting of its creditors, or any class thereof, for the purpose of effecting a
general moratorium upon or general extension or composition of its debts; (v)
fail to pay such Member's debts as they mature; (vi) admit in writing that such
Member is generally not able to pay its debts as they mature; or (vii) apply for
or consent to the appointment of a receiver, trustee, custodian, liquidator or
other similar official of all or a substantial portion of such Member's assets.
10.1.4 Any one or more of the following occurs: (i) a petition is
filed or any case or proceeding described in Section 10.1.3 above is commenced
against any Member or against the assets thereof, unless such petition and the
case or proceeding initiated thereby is dismissed within sixty (60) days from
the date of the filing; (ii) an answer is filed by any Member admitting the
allegations of any such petition; or (iii) a court of competent jurisdiction
enters an order, judgment or decree appointing, without the consent of any
Member, a custodian, trustee, agent or receiver of it, or for all or a
substantial part of its property, or authorizing the taking possession by a
custodian, trustee, agent or receiver of it, or of all or a substantial part of
its property unless such appointment is vacated or dismissed or such possession
is terminated within sixty (60) days from the date of such appointment or
commencement of such possession, but not later than 5 days before the proposed
sale of any assets of such Member by such custodian, trustee, agent or receiver.
10.1.5 A Member files a certificate of dissolution or otherwise
dissolves, terminates or liquidates, or is merged with or is consolidated into
any other corporation, limited liability company, partnership, or other entity
other than an Affiliate of such Member, except for a merger or consolidation not
entered into for the purpose of and not having the effect of changing or
influencing the control of the Member.
10.1.6 A Member becomes a Prohibited Person or an Affiliate of a
Prohibited Person.
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10.2 TERMINATION OF MEMBER. If an Event of Default occurs and is not
cured within the applicable time period (if any) specified in Section 10.1, the
defaulting Member shall be terminated as a Member, and all rights and privileges
of such former Member under this Agreement shall be adjusted and disposed of as
follows:
10.2.1 If the Event of Default is as provided or described in any
of Section 10.1.1, Section 10.1.2 or Section 10.1.5, the Member shall be
terminated as a Member upon the vote of the non-defaulting Preferred Members
with a majority of the Preferred Shares owned by non-defaulting Members.
10.2.2 For all other Events of Default, termination of Membership
shall occur immediately following the elapse of the specified cure period, if
any.
10.2.3 Notwithstanding any other provision of this Agreement and
subject to Section 11.2.3, the termination of a Member ("TERMINATED MEMBER") as
contemplated in this Section 10.2 shall not affect the rights of any other
Member under this Agreement. The Company shall promptly notify a Terminated
Member of such termination, but the failure to give such notice shall not affect
such termination or create any rights in the Terminated Member.
10.3 PURCHASE RIGHT. Unless provided otherwise in this Agreement, upon
termination of a Terminated Member as contemplated in Section 10.2, the
remaining Preferred Members (a "REMAINING MEMBER") shall have the right to
purchase and the Terminated Member shall have the obligation to sell, the
Terminated Member's Interest as provided in Sections 10.3 through 10.7,
inclusive. The purchase price for such Interest shall be an amount equal to 50%
of the lesser of (i) the Terminated Member's Percentage Interest in the book
value of the Company as of such termination date, or (ii) the fair market value
of the Terminated Member's Interest as of such termination date as determined in
the reasonable discretion of the Board of Directors, not including any Director
appointed by the Terminated Member. Such reduction in value shall constitute
partial compensation for damages suffered by the Remaining Members as a result
of the act, omission or condition which resulted in the termination of the
Terminated Member, and subject to Article 21, shall be in addition to, and not
in lieu of any other right or remedy which the Remaining Members may have, at
law or in equity, or pursuant to this Agreement. The Directors shall give notice
to all Remaining Members of such purchase price.
10.4 NOTICE OF INTENT TO PURCHASE. Within thirty (30) days after the
Directors have determined and notified the Remaining Members as to the purchase
price of the Terminated Member's Interest determined in accordance with Section
10.3, each Remaining Member shall have the right, but not the obligation, to
elect to purchase a portion of the Terminated Member's Interest. Any Remaining
Member so electing shall notify the Directors in writing within thirty (30) days
after the notice from the Directors of such Remaining Member's desire to
purchase a portion of the Terminated Member's Interest. The failure of any
Remaining Member to submit such notice within the applicable period shall
constitute an election on the part of the Remaining Member not to purchase any
of the Terminated Member's Interest. Each
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Remaining Member so electing to purchase shall be entitled to purchase a portion
of the Terminated Member's Interest in the same proportion that the Percentage
Interest of the Remaining Member bears to the aggregate of the Percentage
Interest of all of the Remaining Members electing to purchase the Terminated
Member's Interest.
10.5 ELECTION TO PURCHASE LESS THAN ALL OF THE TERMINATED MEMBER'S
INTEREST. If any Remaining Member elects to purchase none or less than all of
such Remaining Member's pro rata share of the Terminated Member's Interest
("SHORTFALL AMOUNT"), then subject to the provisions of Section 8.6, the other
Remaining Members may elect to purchase the Shortfall Amount in proportion to
their respective Percentage Interests. Each Remaining Member who purchases part
of the Terminated Member's Interest shall succeed to a pro rata share of the
Terminated Member's Capital Account balance. If the Remaining Members do not
purchase the entire Interest of the Terminated Member, then subject to the
provisions of Section 8.6, with respect to all or any remaining share of the
Terminated Member's Interest, one or more new Members, if approved pursuant to
Section 8.4, may be admitted as a Member or Members and purchase the Terminated
Member's remaining Interest by paying for the Interest in cash. If the entire
Interest of the terminated Member is not purchased, the Terminated Member shall
have only an Economic Interest, and without limiting the generality of the
foregoing, shall not be a Managing Member, shall not be entitled to designate a
Director hereunder and any current Director or Directors appointed by such
Terminated Member shall be deemed to be removed and the number of Directors on
the Board of Directors shall be reduced accordingly. In such event as partial
compensation for damages suffered by the Company and the Remaining Members, (i)
the Terminated Member's remaining Interest shall be reduced by fifty percent
(50%) and the Remaining Members' Interests shall be increased pro rata
accordingly, (ii) the Terminated Member's Capital Account Balance following the
purchase of any Remaining Member, if any, shall be reduced by 50%, and the
difference shall be added to the Capital Account Balances of the Remaining
Members, pro rata according to their Interests, and (iii) solely for purposes of
determining the Managing Members' and a Terminated Member's rights and
obligations to purchase the output of the Foundry under the Purchase Agreement
or Future Purchase Agreement (which rights and obligations shall be a function,
to be specified in each of those agreements, of the Managing Members' and
Terminated Member's Percentage Interests), effect shall not be given to any
increase or decrease in a Managing Member's or Terminated Member's Percentage
Interest attributable to the operation of clause (i).
10.6 PAYMENT OF PURCHASE PRICE. The purchase price shall be paid by the
electing Remaining Members by either of the following methods, each of which may
be selected separately by the electing Remaining Members in their respective
sole discretion:
10.6.1 The Remaining Members shall at the consummation of the
purchase of the Terminated Member's Interest ("CLOSING") pay in cash the total
purchase price for the Terminated Member's Interest; or
10.6.2 The Remaining Members shall pay at the Closing one-fifth
(1/5) of the purchase price in cash and the balance of the purchase price shall
be paid in four equal annual principal installments, plus accrued interest, and
be payable each year on the anniversary date of
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the Closing. The unpaid principal balance shall accrue interest at the current
applicable U.S. Federal rate as provided in the Code for the month in which the
initial payment is made, but the Remaining Members shall have the right to
prepay in full or in part at any time without penalty. The obligation of each
purchasing Remaining Member to pay its portion of the balance due shall be
evidenced by a separate promissory note executed by the respective Remaining
Member. Each such promissory note shall be in an original principal amount equal
to the portion owed by the respective purchasing Remaining Member. The
promissory note executed by each purchasing Remaining Member shall be secured by
a pledge of that portion of the Terminated Member's Interest purchased by such
Remaining Member.
10.7 CLOSING OF PURCHASE OF TERMINATED MEMBER'S INTEREST. The Closing
for the sale of a Terminated Member's Interest pursuant to this Article 10 shall
be held at 10:00 a.m. at the principal office of Company no later than sixty
(60) days after the determination of the purchase price. At the Closing, the
Terminated Member or such Terminated Member's legal representative shall deliver
to the electing Remaining Members an instrument of transfer (containing
warranties of title and no encumbrances) conveying the Terminated Member's
Interest free and clear of all liens, charges and encumbrances whatsoever,
except as permitted by the purchaser thereof. The Terminated Member or such
Terminated Member's legal representative, the Company and the Remaining Members
shall do all things and execute and deliver all documents as may be necessary or
convenient to consummate such sale and purchase in accordance with the terms and
provisions of this Agreement. Without limiting the generality of the foregoing,
each Member hereby appoints each Remaining Member as its attorney-in-fact and
agent, with full power and authority to take all actions and execute and deliver
all agreements, deeds, leases, releases, assignments, bills of sale, security
instruments and any other document which, in the sole judgment of such Remaining
Member, is necessary or convenient to consummate such sale and purchase.
ARTICLE 11
TERMINATION AND DISSOLUTION
11.1 TERMINATION. This Agreement shall terminate on the first to occur
of (i) the Dissolution Date or (ii) the unanimous written consent of the
Preferred Members or (iii) upon consummation of the Company's merger or
consolidation as contemplated in Article 14.
11.2 DISSOLUTION. The Company shall be dissolved upon the first to occur
of the following events:
11.2.1 The Approval of Members holding not less than 87% in
Percentage Interest if the dissolution does not occur contemporaneously with an
IPO of the Delaware Corporation;
11.2.2 The action of the Board of Directors if such action occurs
contemporaneously with an IPO of the Delaware Corporation;
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11.2.3 The death, retirement, insanity, incapacity, resignation,
expulsion, bankruptcy or dissolution of a Managing Member, or the occurrence of
any other event which terminates a Managing Member's continued membership in the
Company, unless the business of the Company is continued with the written
consent of other Members holding a Majority in Interest of such other Members
within ninety (90) days following the occurrence of such event;
11.2.4 The appointment of a receiver, trustee or liquidator of
the Project which appointment is not vacated within thirty (30) days; or the
attachment, execution or other judicial seizure of the Project where such
seizure is not discharged within ten (10) days thereafter; or
11.2.5 The entry of a decree of judicial dissolution under
Section 18-802 of the Act; or
11.2.6 Following an act of Governmental Intervention, if written
request shall be made by one Managing Member to the other Managing Members
within sixty (60) days from said Governmental Intervention and the Managing
Members hereto shall have entered into good faith negotiations with the
objective of restructuring the relationship among the Members in a manner such
that the adverse effect of said alteration or modification of this Agreement
will be minimized and following which, the Managing Members cannot unanimously
reach a reasonably acceptable modification to this Agreement, within six (6)
months from the date of dispatch of said written request, or within such longer
period of time as mutually agreed upon by the unanimous consent of the Managing
Members.
11.2.7 On the thirtieth (30th) anniversary of the date of the
filing of the Certificate of Formation of the Company.
11.3 WINDING UP. Upon the dissolution of the Company, TSMC (or if TSMC
is no longer a Member, a liquidating trustee appointed by a Majority in Interest
of the remaining Members) shall wind up the affairs of the Company (such Person
or Persons herein collectively called the "LIQUIDATING PERSON"). Upon
dissolution of the Company and until the filing of the certificates of
cancellation pursuant to Section 11.6, the Liquidating Person may, in the name
of, and on behalf of, the Company, prosecute and defend suits, whether civil,
criminal or administrative, gradually settle and close the Company's business,
dispose of and make reasonable provision for the Company's liabilities, and
distribute to the members any remaining assets of the Company, all without
affecting the liability of the Members and without imposing liability on a
liquidating trustee. The Liquidating Person shall be entitled to reimbursement
for out-of-pocket expenses incurred and reasonable compensation for services
rendered in connection with the winding up and liquidation of the Company, as
agreed by the Members. Such reimbursement shall be paid as an expense of the
Company after all debts to third parties have been repaid or adequately provided
for but before any repayment of loans or advances by Members.
11.4 DISTRIBUTION OF ASSETS. The Members shall continue to divide Net
Profit and Net Loss and Cash Available For Distribution during the winding-up
period in the
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same manner and the same priorities as provided for in Articles 4 and 5 hereof.
The proceeds from the liquidation of Property shall be applied in the following
order:
11.4.1 To the payment of creditors, including Members who are
creditors, in satisfaction of liabilities of the Company (whether by payment of
the making or reasonable provision for payment thereof) other than liabilities
for which reasonable provision for payment has been made and liabilities to
Members for distributions pursuant to Article 4;
11.4.2 To set up reasonable reserves for contingent or unforeseen
liabilities of the Company, to be maintained in a regular trust fund account;
11.4.3 To repay pro rata all loans or advances made by the
Members to the Company, but in the event the amount available for such repayment
shall be insufficient, then pro rata on account thereof;
11.4.4 The balance if any, to the Members in accordance with the
provisions of Section 4.3 hereof;
except, if the Company shall be dissolved prior to the expiration of the period
beginning on the Effective Date and ending five years from the date of
Commencement of Production, as defined in the Purchase Agreement (the
"SUBORDINATION PERIOD") and if such dissolution is as a result of an event of
Force Majeure or a major economic or business event or condition such that the
economic or business assumptions underlying the Business Plan have changed to
the extent that it is economically impracticable to substantially implement the
Business Plan (including, but not limited to, major claims or litigation against
the Company, failure to operate the Foundry on an economically viable basis, a
change in technology rendering the business of the Company obsolete, or a major
economic recession), and the Board has determined to dissolve the Company with
the approval of the Members as provided in Section 11.2.1, then the
Manufacturing Agreement, the Technology License and Assistance Agreement, and
the Advanced Process Agreement (collectively and together with the other
property listed as contributed by TSMC on Exhibit A, the "TSMC CONTRIBUTED
PROPERTY") shall each be terminated and the balance of the proceeds from the
liquidation of Property shall be paid or distributed to the Members as follows:
(i) first, to the Members in reverse chronological order (last in, first out),
until the entire Cash Contribution of each is returned to each Member, without
any interest, and (ii) the rest, residue and remainder, if any, to the Members
in accordance with each Member's Percentage Interest. For purposes of the
preceding sentence, TSMC shall be treated as if it had contributed pursuant to
the First Part Capital Contribution described in Section 3.1.1 hereof, an amount
of cash ("PROPERTY CASH"), in addition to the cash contribution of TSMC
described in such Section 3.1.1, equal to the product of (x) the initial agreed
value of the TSMC Contributed Property as shown on Exhibit A and (y) the
Permitted Percentage. For purposes of this Section 11.4.4, the term "PERMITTED
PERCENTAGE" shall be and mean zero percent (0%) on and before the Commencement
of Production, increasing daily thereafter at an annual rate of twenty percent
(20%) until the Permitted Percentage is one hundred percent (100%) on the last
day of the Subordination Period.
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Where the distribution pursuant to this Section 11.4 consists both of
cash (or cash equivalents) and non-cash property, the cash (or cash equivalents)
shall first be distributed, in a descending order, to fully satisfy each
category starting with the most preferred category above. To the maximum extent
practicable consistent with the foregoing, non-cash property shall be returned
to the Member which has contributed it.
11.5 TIME FOR WINDING UP. A reasonable time shall be allowed for the
orderly liquidation of assets of the Company and the discharge or other
provision of liabilities to creditors so as to enable the Liquidating Person to
minimize any losses attendant upon a liquidation.
11.6 FINAL ACCOUNTING; CERTIFICATES OF CANCELLATION. Each of the Members
shall be furnished with a statement, prepared by the Company's independent
certified public accountant, setting forth the assets and liabilities of the
Company as of the date of the complete liquidation. Upon the compliance by the
Liquidating Person with the foregoing distribution plan, the Members shall cease
to be such, and the Liquidating Person shall execute and cause to be filed any
and all documents necessary with respect to the termination and cancellation of
the Company, including, without limitation, a certificate of cancellation under
Section 18-203 of the Act.
ARTICLE 12
INCENTIVE PLANS
12.1 AUTHORIZATION OF INCENTIVE PLANS. The Company shall have a Senior
Executive Incentive Plan and an Employee Incentive Plan (each an "INCENTIVE
PLAN" and, collectively, the "INCENTIVE PLANS") in the forms attached as
Exhibits H and I. The Incentive Plans shall be administered by the Board in
accordance with their terms. In no event shall the aggregate rights awarded
under the Incentive Plans exceed 13.5 million Common Shares.
12.2 ADMISSION OF PLAN PARTICIPANTS. Upon exercise of an option or
payment of an award for Common Shares, payment of any applicable purchase price
in connection with such option or award, and execution of a counterpart of this
Agreement, a participant shall be admitted as a Member. Such participant shall
have an initial Capital Account equal to the purchase price paid for such Common
Shares, plus the amount of any income recognized on such acquisition (if any);
and such Capital Account shall thereafter be determined in accordance with
Section 3.5.
ARTICLE 13
TSMC LAND OPTION; NEW VENTURE RIGHTS
13.1 LAND OPTION. By execution of this Agreement, the Members agree and
acknowledge that as part of the Initial Capital Contribution of TSMC, and as a
convenience and accommodation to the Company, TSMC has arranged for option
agreements covering the Real Property to be assigned to the Company, which
option agreements cover real property in excess
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of that amount necessary to construct the Foundry. On the Effective Date, the
Company with the approval of the Members granted to TSMC the TSMC Land Option,
whereby TSMC has the option to purchase the Land from the Company, for the
Purchase Price (as defined in the TSMC Land Option).
13.2 NEW FAB VENTURE RIGHT OF FIRST REFUSAL. On the Effective Date and
until the tenth (10th) anniversary of the Effective Date, TSMC has granted and
hereby grants a right of first refusal to each of the Managing Members to
participate in any venture controlled by TSMC or its Affiliates to construct
another foundry on the Land which is the subject of the TSMC Land Option, or
anywhere else in North America in proportion to their respective Percentage
Interests in the Company. TSMC agrees to meet and confer with the Managing
Members prior to exercise of TSMC's rights under the TSMC Land Option, in order
to discuss the participation of the Managing Members in any venture related
thereto.
13.3 FURTHER ASSURANCES. The Members, from time to time and as requested
by a Managing Member, shall, and shall cause the Company to, execute and deliver
such additional documents, give such further assurances and take any additional
actions as may be necessary or appropriate to effectuate, carry out and perform
all of the terms, provisions and conditions of this Article 13.
ARTICLE 14
CHANGE OR CONVERSION TO A GENERAL CORPORATION
14.1 MERGER OR CONSOLIDATION TO A GENERAL CORPORATION. Subject to the
approval required by Section 6.4.2.3, each Member by execution and delivery of
this Agreement agrees to vote, and hereby votes, in favor of the
reincorporation, merger or consolidation of the Company, pursuant to Section
18-209 of the Act, or otherwise, to change or convert the Company into a
Delaware general corporation or a parent or a subsidiary of a Delaware
corporation, at such time, in such manner and on such basis as the Board of
Directors shall determine is in the best interests of the Company. Such change
or conversion to a Delaware general corporation may be accomplished by a direct
merger into a corporation, by one of the methods illustrated in Exhibit E, or by
any other method the Board of Directors determines is desirable, provided,
however, that each Member shall have the right to participate in proportion to
its Percentage Interest in whichever method is selected by the Board of
Directors. As used herein "DELAWARE CORPORATION" shall mean any corporation
which through one transaction or a series of transactions involves the
conversion or exchange of the Interests of those Members who choose to
participate in such transaction into an interest in or the stock of such
corporation in proportion to a Member's Interest in the Company as adjusted to
reflect the participation of the other Members. Additionally, by execution and
delivery of this Agreement, each Member agrees to take any and all actions
necessary to consummate such a change or conversion, including, but not limited
to, the execution and delivery of an Agreement of Merger or Consolidation and
filing of a Certificate of Merger or Consolidation with the Office of the
Secretary of State, in such form and on such basis as the Board of Directors may
determine.
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14.2 REGISTRATION RIGHTS. In the event the Delaware Corporation
undertakes an IPO, the Preferred Members shall have the registration rights
provided for in the Registration Rights Agreement. At the time the Member's
Interests are converted into or exchanged for an interest or shares in the
Delaware Corporation, each of the Members shall use its best efforts to cause
the Delaware Corporation to assume all rights, duties and obligations ascribed
to it in the Registration Rights Agreement. In the event any Preferred Member's
shares of the Delaware Corporation are included for sale in the initial public
offering, each Preferred Member shall be entitled to include such Preferred
Member's shares of the Delaware Corporation in such initial public offering on a
pro rata basis.
14.3 VOTING ARRANGEMENTS.
14.3.1 CONVERSION CONTEMPORANEOUSLY WITH IPO. Each Preferred
Member agrees that if the conversion or exchange of each Preferred Member's
Interest into an interest in the Delaware Corporation occurs contemporaneously
with an IPO of the Delaware Corporation, then such Member shall execute and
deliver a voting agreement or other arrangement with a term and on such terms as
may be specified by TSMC, whereby TSMC shall have authority to designate the
majority of the board of directors of the Delaware Corporation. Each Member
shall take any and all actions necessary and execute any and all documents
necessary to give TSMC such authority.
14.3.2 CONVERSION NOT CONTEMPORANEOUSLY WITH IPO. Each Member
agrees that if the conversion or exchange of each Member's Interest into an
interest in the Delaware Corporation is not contemporaneous with an IPO of the
Delaware Corporation, then the Articles, Bylaws, Stockholder's Agreement, and
other governing documents of the Delaware Corporation shall provide for
corporate governance substantially equivalent to that of the Company as set
forth in this Agreement.
14.4 OPTIONS. In the event that each Member's Interest is converted or
exchanged into an interest in or shares of the Delaware Corporation, any
outstanding options, warrants or right to securities of the Company shall be
changed or converted into similar securities of the Delaware Corporation on the
same basis as a Member's Interest is changed or converted to an interest in or
shares of the Delaware Corporation.
14.5 CONVERSION OF COMMON SHARES AND PREFERRED SHARES. In the event of a
conversion pursuant to Section 14.1 of the Company into a Delaware corporation
contemporaneously with an IPO, each Common Share and each Preferred Share shall
be converted into common stock (the "COMMON STOCK") of the Delaware Corporation
as hereinafter provided.
14.5.1 Each Common Share shall be convertible into one fully paid
and nonassessable share of Common Stock.
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14.5.2 The Board of Directors shall have the discretion to
determine the class or classes of securities of the Delaware Corporation into
which all or part of each Preferred Share shall be convertible.
14.5.3 Unless otherwise approved by the Board of Directors, each
Preferred Share shall be convertible into one fully paid and nonassessable share
of Common Stock.
ARTICLE 15
STANDARD OF CARE; INDEMNIFICATION
15.1 STANDARD OF CARE. Each Director, Officer, employee and agent shall
perform its, his or her duties to the Company in good faith, in a manner he, she
or it reasonably believes to be in or not opposed to the best interests of the
Company, and with the care that a prudent person in a similar position would use
under similar circumstances. Each Director, Officer, employee and agent of the
Company and any Liquidating Person (individually, an "Indemnitee" and
collectively, the "Indemnitees") acting in such capacity shall be fully
protected in relying in good faith on information, opinions, reports or
statements, including financial statements, books of account and other financial
data, if prepared or presented by (i) one or more Directors, Officers or
employees of the Company who the Indemnitee reasonably believes are reliable and
competent in the matters prepared or presented, or (ii) legal counsel, certified
public accountants or other persons as to matters that the Indemnitee reasonably
believes are within the person's professional or expert competence. No
Indemnitee shall be liable for damages to the Company or any present or former
Member with respect to claims relating to its conduct for or on behalf of the
Company, except to the extent that there is a final judicial determination based
on clear and convincing evidence that (a) its action or failure to act involved
an act or omission undertaken with deliberate intent to cause injury to the
Company or undertaken with reckless disregard for the best interests of the
Company, or (b) with respect to any criminal action, proceeding or
investigation, it had no reasonable cause to believe its conduct was unlawful.
15.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The
Company shall indemnify, defend and hold harmless each Indemnitee from and
against any and all claims, demands, causes of action, loss, liability, cost, or
expense (including reasonable attorneys' fees and disbursements), judgments,
fines, settlements and other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which the Indemnitee was involved or may be involved, or
threatened to be involved, as a party or otherwise, arising out of or incidental
to the business of the Company, excluding liabilities to any Member, regardless
of whether the Indemnitee is or continues to be a Director, Officer, employee,
or agent of the Company, or a Liquidating Person at the time any such liability
or expense is paid or incurred, to the fullest extent permitted by the Act and
all other applicable laws.
15.3 EXPENSES. Expenses incurred by an Indemnitee in defending any
claim, demand, action, suit or proceeding subject to Section 15.2 shall, from
time to time, be advanced by the Company prior to the final disposition of such
claim, demand, action, suit or proceeding
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upon receipt by the Company of an undertaking by or on behalf of the Indemnitee
to repay such amount if it shall be determined that such Person is not entitled
to be indemnified as authorized in Section 15.2.
15.4 INDEMNIFICATION RIGHTS NON-EXCLUSIVE. The indemnification provided
by Section 15.2 shall be in addition to any other rights to which those
indemnified may be entitled under any agreement, action of the Board of
Directors, vote of the Members, as a matter of law or equity or otherwise, both
as to action in the Indemnitee's capacity as an Officer, Director, employee, or
agent of the Company or as a Liquidating Person and as to any action in another
capacity, and shall continue as to an Indemnitee who has ceased to serve in such
capacity and shall inure to the benefit of the heirs, successors, assigns and
administrators of the Indemnitee.
15.5 ERRORS AND OMISSIONS INSURANCE. The Company may purchase and
maintain insurance, at the Company's expense, on behalf of the Directors and
Officers and such other Persons as the Directors shall determine, against any
liability that may be asserted against, or any expense that may be incurred by,
such Person in connection with the activities of the Company, regardless of
whether the Company would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
15.6 ASSETS OF THE COMPANY. Any indemnification pursuant to Section 15.2
shall be satisfied solely out of the assets of the Company. No Member shall be
subject to personal liability or required to fund or to cause to be funded any
obligation by reason of these indemnification provisions.
ARTICLE 16
AMENDMENTS
16.1 AMENDMENT, ETC. OF LIMITED LIABILITY COMPANY AGREEMENT. Except as
provided in Sections 6.4.2.9 and 6.4.2.10 and except to admit a new Member
approved as contemplated in Section 6.4.2.11, this Agreement may be amended, or
repealed and a new agreement may be adopted, only by (i) action of the
Directors, and (ii) the Approval of Members holding not less than 87% in
Percentage Interest.
16.2 AMENDMENT, ETC. OF CERTIFICATE OF FORMATION. The Certificate of
Formation may be amended only by (i) action of the Directors, and (ii) the
Approval of Members holding not less than 87% in Percentage Interest.
ARTICLE 17
CONDITIONS PRECEDENT
17.1 CONDITIONS TO MEMBERS' PERFORMANCE. Notwithstanding anything to the
contrary contained herein, on the Effective Date each of the following
conditions had been satisfied:
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17.1.1 Expiration of any waiting periods that are required by the
laws of the U.S. or Taiwan to expire, and obtaining all requisite governmental
and other approvals, prior to the consummation of such transactions, including,
but not limited to, any waiting period required under the U.S. Hart Scott Rodino
Antitrust Improvement Act of 1976, as amended.
17.1.2 The execution and delivery by the Company of all Ancillary
Agreements that this Agreement contemplates the Company shall execute.
17.1.3 The Certificate of Formation shall have been filed with
the Office of the Delaware Secretary of State.
17.2 CONDITIONS TO TSMC'S PERFORMANCE. In addition to the conditions set
forth in Section 17.1, notwithstanding anything to the contrary contained
herein, on the Effective Date each of the following conditions were deemed
satisfied by TSMC:
17.2.1 The truth and accuracy as of the Effective Date of each of
the representations and warranties set forth in Section 7.2 made by each other
Initial Member.
17.2.2 The execution and delivery by each other Initial Member of
each of the Ancillary Agreements that this Agreement contemplates such Initial
Member shall execute.
17.2.3 The performance by each other Initial Member of all
obligations and covenants set forth in this Agreement and required to be
performed on the date hereof, including without limitation, that each other
Initial Member shall have made its respective First Part Capital Contribution.
17.2.4 Receipt of any necessary approval by the Taiwan Ministry
of Economic Affairs of the investment in the Company by TSMC as contemplated
hereby.
17.3 CONDITIONS TO ADI'S PERFORMANCE. In addition to the conditions set
forth in Section 17.1, notwithstanding anything to the contrary contained
herein, on the Effective Date each of the following conditions were deemed
satisfied by ADI:
17.3.1 The truth and accuracy as of the Effective Date of each of
the representations and warranties set forth in Section 7.2 made by each other
Initial Member.
17.3.2 The execution and delivery by each other Initial Member of
each of the Ancillary Agreements that this Agreement contemplates such Initial
Member shall execute.
17.3.3 The performance by each other Initial Member of all
obligations and covenants set forth in this Agreement and required to be
performed on the date hereof, including without limitation, that each other
Initial Member shall have made its respective First Part Capital Contribution.
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17.4 CONDITIONS TO ALTERA'S PERFORMANCE. In addition to the conditions
set forth in Section 17.1, notwithstanding anything to the contrary contained
herein, on the Effective Date each of the following condition were deemed
satisfied by Altera:
17.4.1 The truth and accuracy as of the Effective Date of each of
the representations and warranties set forth in Section 7.2 made by each other
Initial Member.
17.4.2 The execution and delivery by each other Initial Member of
each of the Ancillary Agreements that this Agreement contemplates such Initial
Member shall execute.
17.4.3 The performance by each other Initial Member of all
obligations and covenants set forth in this Agreement and required to be
performed on the date hereof, including without limitation, that each other
Initial Member shall have made its respective First Part Capital Contribution.
17.5 CONDITIONS TO ISSI'S PERFORMANCE. In addition to the conditions set
forth in Section 17.1, notwithstanding anything to the contrary contained
herein, on the Effective Date each of the following conditions were deemed
satisfied by ISSI:
17.5.1 The truth and accuracy as of the Effective Date of each of
the representations and warranties set forth in Section 7.2 made by each other
Initial Member.
17.5.2 The execution and delivery by each other Initial Member of
each of the Ancillary Agreements that this Agreement contemplates such Initial
Member shall execute.
17.5.3 The performance by each other Initial Member of all
obligations and covenants set forth in this Agreement and required to be
performed on the date hereof, including without limitation, that each other
Initial Member shall have made its respective First Part Capital Contribution.
17.6 CONDITIONS TO THE THIRD PARTY INVESTORS' PERFORMANCE. In addition
to the conditions set forth in Section 17.1, notwithstanding anything to the
contrary contained herein, on the Effective Date each of the following
conditions were deemed satisfied by the Third Party Investors:
17.6.1 The truth and accuracy as of the Effective Date of each of
the representations and warranties set forth in Section 7.2 made by each other
Initial Member.
17.6.2 The execution and delivery by each other Initial Member of
each of the Ancillary Agreements that this Agreement contemplates such Initial
Member shall execute.
17.6.3 The performance by each other Initial Member of all
obligations and covenants set forth in this Agreement and required to be
performed on the date hereof, including without limitation, that each other
Initial Member shall have made its respective First Part Capital Contribution.
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17.6.4 Receipt of any necessary approval by the Taiwan Ministry
of Economic Affairs of the investment in the Company by a Third Party Investor
as contemplated hereby.
ARTICLE 18
CONFIDENTIALITY
18.1 EXCHANGE OF INFORMATION AND NONDISCLOSURE. In furtherance of this
Agreement, or pursuant to the Ancillary Agreements the Members may from time to
time come into possession of certain information and data, including business
plans, fabrication techniques, processes, technology, financial information and
other compilations of information, which relate to the business of the Members.
Prior to the execution of this Agreement, each Initial Member has executed, and
each new Member shall sign and become a party to, the Member's Confidentiality
Agreement relating to such information.
18.2 CONFIDENTIALITY AGREEMENTS FOR VISITORS AND EMPLOYEES. Any
employee, contractor, subcontractor or guest of TSMC, ADI, Altera or ISSI who
visit the Foundry ("VISITOR") shall execute and deliver a copy of the
Confidentiality Agreement in the form of Exhibit C(1). Visitors shall not be
permitted to: make or compile any notes, documentation or other information, or
make any photographs, drawings, tapes, films or other graphic representations.
Each employee of the Company at the time of employment shall execute and deliver
a copy of the Employee Invention Assignment and Confidentiality Agreement in the
form of Exhibit C(2).
18.3 THIRD PARTY REQUEST FOR INFORMATION. Except as otherwise provided
in this Agreement and except for private requests in the ordinary course of
business for non-Confidential Information relating to the Proven Products, a
Member shall immediately notify the other Preferred Members of any private or
governmental request for Confidential Information or any other information or
documents relating to the Proven Products or this Agreement. Each Preferred
Member shall have the right to participate in any other Member's response to any
such request. In the event that a Member receives any subpoena or other legal
process requiring the production of information, documents, data, work papers,
reports, or other materials relating to this Agreement, that Member shall:
18.3.1 give the other Preferred Members, if possible, the
opportunity to participate in quashing, modifying or otherwise responding to any
compulsory process in an appropriate and timely manner; and
18.3.2 cooperate fully with the other Preferred Member's efforts
to narrow the scope of any such compulsory process, to obtain a protective order
limiting the use or disclosure of the information sought, or in any other lawful
way to obtain continued protection of the Confidential Information.
Notwithstanding the foregoing, a private request to a Member from a
third party for Design Rules (as defined in the Purchase Agreement) and
reliability results may be disclosed
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without prior notice to the other Preferred Members if such third party executes
a Confidentiality Agreement in the form of Exhibit L to the Purchase Agreement
and the other Preferred Members are promptly provided with notice of the
disclosure after the disclosure is made.
18.4 REPORTING LOSS, THEFT OR MISAPPROPRIATION. If any Member becomes
aware of the loss, theft or misappropriation of Confidential Information which
is in its possession or control, it shall notify the other Preferred Members in
writing within five (5) days of its discovery of such loss, theft or
misappropriation.
18.5 BREACH OF CONFIDENTIALITY. Each Member acknowledges that a breach
of this Article 18 or a breach of either of the Confidentiality Agreements will
result in irreparable injury to the party whose Confidential Information has
been disclosed and such party shall be entitled to temporary, preliminary and
permanent injunctive relief or to a protective order for any threatened or
actual violation of the provisions of this Article. Each Member agrees and
consents to the entry of an injunction or protective order by any court of
competent jurisdiction upon a showing by the party whose Confidential
Information has been disclosed that its Confidential Information is being used
or disclosed contrary to the terms of this Article 18 or the Confidentiality
Agreements. The foregoing provisions are in addition to, and not in limitation
of, the remedies of specific performance, damages, and any other remedies at
law, in equity or otherwise that the Members may have upon breach. The Members
stipulate that the arbitration provisions of Article 20 shall not apply to any
temporary restraining order, preliminary injunctive relief or other provisional
remedy sought to prohibit a breach or threatened breach of the provisions of
this Article or the Confidentiality Agreements.
ARTICLE 19
ANCILLARY AGREEMENTS
19.1 EXECUTION AND DELIVERY. On or before the Effective Date, the
following documents were executed and delivered by the parties thereto, and the
Company executed and delivered each such document: the Confidentiality
Agreements, the Registration Rights Agreement, and the Assignments of the
Manufacturing Agreement, the Technology License and Assistance Agreement and the
Advanced Process Agreement.
19.2 TERMINATION OF MANUFACTURING AGREEMENT; FUTURE PURCHASE AGREEMENT.
Following the expiration or termination of the Manufacturing Agreement (and
consequently, the termination of the Purchase Agreement), until the useful life
of the Foundry has ended, the Managing Members shall enter into the Future
Purchase Agreement, the form of which is attached hereto as Exhibit F, whereby
the Managing Members shall have the right and obligation to purchase the output
of the Foundry as provided for in the Future Purchase Agreement. Notwithstanding
the foregoing, the Members agree that if the Company constructs an additional
foundry on the Real Property, any rights or obligations to purchase the output
of such additional foundry shall be negotiated at that time and shall not be
covered by the provisions of the Purchase Agreement or the Future Purchase
Agreement.
ARTICLE 20
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DISPUTE RESOLUTION; ARBITRATION
20.1 NEGOTIATION BETWEEN EXECUTIVES. Each of the Members and the Company
shall attempt in good faith to resolve any dispute, controversy or claim
("Dispute") arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the Dispute. Any
Member or the Company may give the other Preferred Members and the Company
written notice of any Dispute not resolved in the normal course of business.
Within twenty (20) days after delivery of such a notice, executives of the
Members and the Company involved in the Dispute who have authority to settle the
Dispute shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to attempt to resolve the Dispute. If
the matter has not been resolved within thirty (30) days after such notice,
unless extended by the agreement of the parties involved in the Dispute in
writing (the "Negotiation Period"), the matter shall be subject to mediation as
provided in Section 20.2. If a Member or the Company intends to be accompanied
at a meeting by an attorney, the other involved parties shall be given at least
three (3) Business Days' notice of such intention and may also be accompanied by
an attorney. All negotiations pursuant to this provision are confidential and
shall be treated as compromise and settlement negotiations for purpose of the
United States Federal Rules of Evidence and state rules of evidence.
20.2 MEDIATION. Any Dispute not settled pursuant to Section 20.1 shall
be submitted to mediation administered by the American Arbitration Association
under its Commercial Mediation Rules (such mediation, "MEDIATION"), before
resorting to arbitration as hereinafter provided. The Mediation shall be
completed within forty-five (45) days of its initiation pursuant to the
Commercial Mediation Rules, unless all the parties involved in the Dispute
otherwise agree. Executives of all parties involved in the Dispute with
authority to resolve the Dispute shall participate in the Mediation. The
Mediation shall take place in San Jose, California. The parties shall attempt in
good faith to reach agreement on the appointment of a mediator. If they cannot
so agree, the mediator shall be appointed pursuant to the Commercial Mediation
Rules; provided, however, that the mediator appointed shall have a background in
the semiconductor industry. The parties involved in the Dispute shall each pay
their own expenses of Mediation, including attorney's fees, and shall share
equally the mediator's fees and expenses.
20.3 CLAIMS SUBJECT TO ARBITRATION. Except as otherwise specified below,
any Dispute arising out of or relating to this Agreement, or the breach or
termination thereof, and not resolved pursuant to Section 20.1 or Section 20.2
shall be resolved by binding arbitration in accordance with the Federal
Arbitration Act, 9 U.S.C. Section 1 et seq. (the "FAA"), and the
Commercial Arbitration Rules and, where the amount in controversy exceeds
$1,000,000, the Supplementary Procedures for Large Complex Disputes, of the AAA
(collectively, the "RULES"). In the event of a conflict between the FAA and the
Rules, the Rules shall govern. In the event of a conflict between this Article
20 and the FAA or the Rules, the provisions of this Article 20 shall govern. A
court of competent jurisdiction, upon application from any party to the Dispute,
may relieve the parties of their duty to arbitrate Disputes in whole or in part,
or may stay any arbitration hereunder in whole or in part, if ongoing litigation
between one or more of the parties and a third party (or parties) involves
issues of fact or law common
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with those subject to arbitration hereunder and there exists the possibility of
inconsistent judgments if such relief is not granted. Each party involved in a
Dispute also reserves the right to file with a court of competent jurisdiction
an application for temporary or preliminary injunctive relief, a protective
order or other appropriate provisional remedy on grounds that (a) the
arbitration award to which the applicant may be entitled may be rendered
ineffectual in the absence of such relief; or (b) in the event of a breach or
threatened breach of Article 18 hereof or the Confidentiality Agreements.
20.3.1 VENUE. The venue for such arbitration proceeding will be
San Jose, California.
20.3.2 SELECTION OF ARBITRATOR AND DETERMINATION OF
CONTROVERSIES.
20.3.2.1 Any Dispute subject to arbitration shall be
submitted to a single neutral arbitrator, who, unless otherwise agreed by all
parties involved in the Dispute, shall be a retired judge or other lawyer who is
a member of the arbitration panel of the Judicial Arbitration and Mediation
Service ("JAMS") or the national panel of arbitrators of the AAA and who has
substantial experience in the area of the Dispute. The parties involved in the
'Dispute shall confer concerning the selection of the AAA or JAMS with the
objective of selecting one or the other within thirty (30) days of the
conclusion of the Mediation; provided, however, that if all parties to the
Dispute do not agree on one or the other within such thirty (30) day period, the
Dispute initially will be submitted simultaneously to both the AAA and JAMS for
the sole purpose of picking the arbitrator. If the parties to the Dispute select
the arbitrator from the JAMS panel, then the term "RULES" as used herein shall
mean the then-prevailing JAMS rules. The AAA (or JAMS, as the case may be)
simultaneously shall submit to each party involved in the Dispute an identical
list of five proposed qualified arbitrators drawn from the applicable panel of
commercial arbitrators. If the parties involved in the Dispute are unable to
agree upon an arbitrator within thirty (30) days from the date that the AAA (or
JAMS, as the case may be) submits such list to the parties involved in the
Dispute, then the AAA (or JAMS, as the case may be) shall simultaneously submit
to each party involved in the Dispute a second identical list of five additional
proposed qualified arbitrators drawn from the applicable panel of commercial
arbitrators. If for any reason, the appointment of an arbitrator cannot be made
from either list, the AAA (or JAMS, as the case may be) may make the appointment
from among other qualified members of the panel without the submission of
additional lists to the parties involved in the Dispute. If the Dispute is
initially submitted to both the AAA and JAMS for the purpose of picking the
arbitrator, then both the AAA and JAMS simultaneously shall submit to each party
lists of five proposed qualified arbitrators drawn from the applicable panel
(with each party receiving the identical list from AAA and the identical list
from JAMS), and if the parties are unable to agree upon an arbitrator within
thirty (30) days from the date that both the AAA and JAMS submit the first such
lists to each party, then the AAA and JAMS simultaneously shall submit to each
party second lists of five additional proposed qualified arbitrators (with each
party receiving an identical second list from AAA and an identical second list
from JAMS). If the parties for any reason are unable to select an arbitrator
from the first and second lists submitted by the AAA and JAMS, then a majority
of the parties shall select to arbitrate with either the
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AAA or JAMS, and the arbitration organization so selected shall make the
appointment from among other qualified members of the arbitration panel of that
organization without the submission of additional lists to the parties. Where
the parties have initially submitted the Dispute to both the AAA and JAMS, then
once an arbitrator has been appointed, the arbitration proceeding will be
terminated with the arbitration organization that has not been selected and the
parties shall equally share the costs and fees of the arbitration organization
so terminated. If for any reason the parties to the Dispute have not selected an
arbitrator within ninety (90) days of the conclusion of the Mediation, then the
arbitration shall be conducted with the AAA. No matter how selected, the
arbitrator shall have no prior or existing affiliation or relationship with any
party involved in the Dispute or its counsel, and shall sign an oath of
impartiality upon appointment.
20.3.2.2 The parties involved in the Dispute shall be
entitled to obtain pre-hearing discovery through depositions and requests for
the inspection and copying of documents and other items upon reasonable notice
and to obtain the issuance of a subpoena duces tecum therefor in accordance with
applicable law, including without limitation 9 U.S.C. Section 7 and
(notwithstanding Section 1297.17 of the California Code of Civil Procedure)
Section 1283.05 of the California Code of Civil Procedure; provided that
depositions shall not be taken unless leave to do so is first granted by the
arbitrator. As between the parties involved in the Dispute, the arbitrator shall
have the power to enforce the rights, remedies, procedures, duties, liabilities
and obligations of discovery by the imposition of the same terms, conditions,
consequences, sanctions and penalties as may be imposed in like circumstances in
a civil action by a U.S. Federal court.
20.3.3 ARBITRATION AWARD AND JUDICIAL REVIEW. The arbitrator, in
deciding any Dispute, shall base his or her decision on the record and in
accordance with this Agreement and applicable law. In no event shall the
arbitrator make any ruling, finding or award that does not conform to the terms
and conditions of this Agreement, is not supported by the weight of the
evidence, or is contrary to statute, administrative regulations or established
judicial precedents. The arbitration award shall be a factually detailed,
reasoned opinion stating the arbitrator's findings of fact and conclusions of
law. Unless the arbitrator for good cause determines otherwise, the final award
shall include attorneys' fees, costs and expenses of the prevailing party,
including expert and non-expert witness fees and the prevailing party's share of
the administrative fee and the arbitrator's fees and expenses, if any.
Notwithstanding any other provisions of this Agreement, the arbitrator shall
have no jurisdiction to award damages in contravention of Article 21 hereof. The
arbitration award shall be subject to judicial review in accordance with 9
U.S.C. Sections 10-12; provided, however, that the arbitration award shall
also be vacated to the extent that the arbitrator exceeds his or her authority
as set forth in this Section 20.3.3, and, on balance, the party seeking vacation
of the award has been materially and adversely affected thereby. Judgment may be
entered on the award by the United States District Court in accordance with 9
U.S.C. Section 9.
20.3.4 DERIVATIVE ACTION. Pursuant to Section 20.3, a Member may
initiate and pursue in the right of the Company any Dispute arising out of or
relating to
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a transaction which is the subject matter of Section 2.10.2 or Section 3.6.1.
The parties to any such Dispute shall first attempt to resolve the Dispute
pursuant to Section 20.1 or 20.2.
ARTICLE 21
LIMITATION ON DAMAGES; CONTRACTUAL LIMITATIONS PERIOD
21.1 LIMITATION ON DAMAGES.
21.1.1 WITH THE EXCEPTION OF ANY LOSS, LIABILITY, DAMAGE OR
OBLIGATION ARISING OUT OF OR RELATING TO DISCLOSURE OF CONFIDENTIAL INFORMATION
IN VIOLATION OF ARTICLE 18, NO MEMBER SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, LOSS
OF PROFITS OR LOSS OF USE) SUFFERED BY ANY OTHER MEMBER ARISING FROM OR RELATING
TO A MEMBER'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A
COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION HEREOF. EXCEPT AS
SPECIFICALLY PROVIDED IN THE PRECEDING SENTENCE, EACH MEMBER WAIVES AND
RELINQUISHES CLAIMS FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
NOTWITHSTANDING SUCH WAIVER AND RELINQUISHMENT, WITH RESPECT TO ANY LOSS,
LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO DISCLOSURE OF
CONFIDENTIAL INFORMATION IN VIOLATION OF ARTICLE 18, A MEMBER SHALL BE LIABLE
FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGE (INCLUDING WITHOUT
LIMITATION, LOSS OF PROFITS OR LOSS OF USE) SUFFERED BY ANY OTHER MEMBER ARISING
FROM OR RELATING TO A MEMBER'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR
DEFAULT UNDER SAID ARTICLE 18.
21.1.2 NO MEMBER SHALL HAVE THE RIGHT TO RECOVER PUNITIVE DAMAGES
FROM THE OTHER MEMBER, AND EACH MEMBER HEREBY WAIVES AND RELINQUISHES ANY AND
ALL PUNITIVE DAMAGE CLAIMS.
21.1.3 THE LIMITATIONS ON LIABILITY AND DAMAGES SET FORTH IN
SECTIONS 21.1.1 AND 21.1.2 APPLY TO ALL CAUSES OF ACTION THAT MAY BE ASSERTED
HEREUNDER, WHETHER SOUNDING IN BREACH OF CONTRACT, BREACH OF WARRANTY, TORT,
PRODUCT LIABILITY, NEGLIGENCE OR OTHERWISE.
21.2 CONTRACTUAL LIMITATIONS PERIOD. Any arbitration, litigation,
judicial reference or other legal proceeding involving the parties shall be
commenced within two (2) years after the accrual of the cause of action, except
for arbitration, litigation, judicial reference or other legal proceedings in
respect to claims for indemnification under the provisions of this Agreement,
which indemnification claims shall be commenced within the statutory limitations
period provided by applicable law.
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ARTICLE 22
FORCE MAJEURE
22.1 FORCE MAJEURE. Subject to the limitations set forth in Section
22.4, should any Member be prevented from performing such Member's contractual
obligations under this Agreement due to the cause or causes of Force Majeure,
that Member shall not be liable to any other Member for any delay or failure of
performance caused by any Force Majeure events; nor shall that Member be deemed
to have committed an Event of Default hereunder. Notwithstanding the foregoing,
a Force Majeure event shall not excuse a Member's obligation to pay money.
However, a monetary obligation shall be suspended until cessation of such Force
Majeure event if, and only if, the Force Majeure event actually and directly
renders physically impossible a Member's payment of money due under this
Agreement.
22.2 NOTIFICATION. The Member prevented or delayed by a Force Majeure
event in the performance of any obligation hereunder shall promptly notify the
other Members of the occurrence of any Force Majeure event in writing by cable,
telex or telecopier.
22.3 RESPONSE TO FORCE MAJEURE. Should the delay caused by any events of
Force Majeure continue for more than ninety (90) days, the Members shall settle
all questions of further performance of this Agreement through good faith
negotiations as soon as possible with the objective of restructuring the
relationship among them such that the effects of such events of Force Majeure
are minimized. If the Members do not agree in writing on a mutually acceptable
solution within six (6) months of a Member's request for such negotiations, the
Board of Directors shall have the authority to deem the Member subject to the
Force Majeure event to have committed an Event of Default at which time, the
Member shall become a Terminated Member, without necessity for a vote of the
Members, and, without limitation, shall be subject to the provisions of Sections
10.3 through 10.7, inclusive.
22.4 LIMITATIONS ON APPLICABILITY OF FORCE MAJEURE. This Article 22
shall be void and inapplicable to any Member (i) if such Member fails to use
reasonable diligence to remedy any Force Majeure event that prevents or delays
that Member's performance hereunder by continuously pursuing such actions as
that Member reasonably can take under the circumstances; and (ii) in the event
of a strike, lockout or other labor disruption, if the Member is found by the
National Labor Relations Board or other governmental agency having jurisdiction
to have caused such strike, lockout or labor disruption or if such Member
refuses to enter into bargaining with respect to such strike, lockout or labor
disruption.
ARTICLE 23
GENERAL PROVISIONS
23.1 SEVERABILITY. If any provision of this Agreement is, or becomes or
is deemed invalid, illegal or unenforceable in any jurisdiction, such provision
shall be deemed amended to conform to applicable laws so as to be valid and
enforceable or, if it cannot be so amended without materially altering the
intention of the Members, it shall be stricken and the remainder of this
Agreement shall remain in full force and effect.
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<PAGE> 73
23.2 NEUTRAL INTERPRETATION; WAIVER. Each party hereto has received
independent legal advice from its attorneys with respect to the advisability of
executing this Agreement and the meaning of the provisions hereof. Each party
hereto waives any real, apparent, possible or inchoate conflict in connection
with, arising out of or resulting from the representation of any Member and its
Affiliates, and the Company by the same law firm. The provisions of this
Agreement shall be construed as to their fair meaning, and not for or against
any party hereto based upon any attribution to such party as the source of the
language in question.
23.3 NOTICES. Any notices, demands, requests, waivers or other
communications required or permitted to be given to a party hereunder shall be
in writing in the English language and shall be delivered or sent to such party
at its address set forth on Exhibit A hereto, or such other address as such
party may hereafter specify, and shall be deemed given (i) when personally
delivered to such party, (ii) when transmitted by facsimile and receipt of such
transmission is confirmed by facsimile, (iii) 24 hours after dispatch via an
established overnight courier service, or (iv) three (3) days after mailing by
prepaid first class, certified mail with return receipt requested.
23.4 TIME OF THE ESSENCE. Time is of the essence with respect to
each provision of this Agreement.
23.5 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, United States of America,
without regard to conflicts of laws principles.
23.6 ENTIRE AGREEMENT. Except as provided in Section 23.23, this
Agreement, the Ancillary Agreements, the Incentive Plans and that certain letter
from TSMC Taiwan to the Initial Members dated as of the Effective Date (the
"LETTER OF ASSURANCES") constitute and contain the entire agreement of the
Members, and supersede any and all prior or contemporaneous negotiation,
correspondence, understandings, representations, warranties and agreements
between the Members, written or oral, respecting the subject matter hereof or
thereof. Other than as contained herein and as provided in Section 23.23, in the
Ancillary Agreements or in the Letter of Assurances, no representation,
warranty, statement, or condition is binding on the parties hereto or thereto,
or has any force or effect whatsoever.
23.7 WAIVER. No waiver of any provision of this Agreement shall be
effective unless and until made in writing and signed by each party hereto. No
waiver, forbearance or failure by any party hereto of its right to enforce any
provision of this Agreement shall constitute a waiver or estoppel of such
party's right to enforce any other provision of this Agreement or a continuing
waiver by such party of compliance with any provision.
23.8 COOPERATION. Each party hereto shall cooperate with each other
party hereto and shall take such further action and shall execute and deliver
such further documents as may be necessary or desirable in order to carry out
the provisions and purposes of this
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Agreement. Each party, recognizing that there may be drafting errors in and
among this Agreement, the Ancillary Agreements and the Letter of Assurances,
agrees that it will cooperate with each other party to exercise good faith
efforts to correct any such drafting errors.
23.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
23.10 EXHIBITS AND SCHEDULES. All Exhibits and Schedules to which
reference is made in this Agreement are deemed to be incorporated by reference
into this Agreement, whether or not actually attached hereto.
23.11 ATTORNEYS' FEES. In the event of any arbitration, mediation,
litigation or other proceeding involving the parties to this Agreement to
enforce any provision of this Agreement, to enforce any remedy available upon
default under this Agreement, or seeking a declaration of the rights of a party
under this Agreement, the prevailing party shall be entitled to recover from the
other such attorneys' fees and costs as may be reasonably incurred, including
the cost of reasonable investigation, preparation and professional or expert
consultation incurred by reason of such litigation. Notwithstanding the
foregoing, (a) in an arbitration proceeding the award of attorneys' fees shall
be governed by the provisions of Section 20.3.3, and (b) in a mediation each
party shall pay its own attorneys' fees in accordance with Section 20.2.
23.12 DATE OF PERFORMANCE. If the date on which any performance required
hereunder is other than a Business Day, then such performance shall be required
as of the next following Business Day.
23.13 SURVIVAL. Following early termination or the elapse or expiration
of this Agreement, the provisions of Article 1, Section 7.2, Article 9, Article
14, Article 15, Article 16, Article 20, Article 21 and Article 23 shall survive
and remain in full force and effect in accordance with their terms.
23.14 SURVIVAL OF RIGHTS. This Agreement shall be binding upon, and, as
to permitted or accepted successors, transferees and assigns, inure to the
benefit of the Members and the Company and their respective heirs, legatees,
legal representatives, successors, transferees and assigns, in all cases whether
by the laws of descent and distribution, merger, reverse merger, consolidation,
sale of assets, other sale, operation of law or otherwise.
23.15 THIRD-PARTY BENEFICIARIES. There are no third-party beneficiaries
of this Agreement except Indemnitees.
23.16 PARTITION. Each Member hereby irrevocably waives any and all
rights, duties, obligations and benefits with respect to any action for
partition of Company Property or to compel any sale or appraisal thereof or of
any deceased Member's interest therein. Further, all rights, duties, benefits
and obligations including inventory and appraisal of the Company assets or sale
of a deceased Member's interest therein, provision for which is made in the law
of
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<PAGE> 75
Delaware, or on account of the operation of any other role or law of any other
jurisdiction to compel any sale or appraisal of Company assets or sale or
appraisal of a deceased Member's interest therein, are hereby irrevocably waived
and dispensed with. The Interest of a deceased Member shall be subject to the
provisions of this Agreement.
23.17 GOVERNING LANGUAGE OF AGREEMENT. This Agreement is in the English
language only, which language shall be controlling in all respects, and all
other versions thereof in any other language shall be for accommodation only and
shall not be binding upon each party hereto. All communications to be made or
given pursuant to this Agreement shall be in the English language.
23.18 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Each party hereto
irrevocably Consents to the jurisdiction of the courts located in San Jose,
California, agrees, subject to the provisions of Article 20 and Article 21, that
any action, suit or proceeding by or among the Members (or any of them) or the
Company and any Member may be brought in any such court sitting in San Jose,
California and waives any objection which the Member may now or hereafter have
concerning jurisdiction and venue, whether based on considerations of personal
jurisdiction, forum non conveniens or on any other ground. Each party hereto
hereby irrevocably designates, appoints and empowers the Secretary of State of
California to receive for and on behalf of such party service of process in the
State of California and further irrevocably consents to the service of process
outside of the territorial jurisdiction of said courts by mailing copies thereof
by registered or certified United States mail, postage prepaid, to such party's
last known address- as shown in the records of the Company with the same effect
as if such party were a resident of the State of California and had been
lawfully served in such state. Nothing in this Agreement shall affect the right
to service of process in any other manner permitted by law. Any process served
on the California Secretary of State in accordance with the preceding sentence
shall also be noticed to the served party's last known address established in
accordance with Section 23.3, in a manner permitted by such Section 23.3. Each
party hereto further agrees that final judgment against it in any such action or
proceeding shall be conclusive and may be enforced in any other jurisdiction
within or outside the State of California by suit on the judgment, a certified
or exemplified copy of which shall be conclusive evidence of the fact and the
amount of such judgment.
23.19 LIQUIDATED DAMAGES. All provisions of this Agreement, including
without limitation those relating to the valuation of a Member's Interest or
adjustments in Percentage Interests, have been negotiated by the parties hereto
at arm's-length, and each party affirms that all such provisions are fair, just
and equitable. Without limiting the generality of the foregoing, the provisions
of Sections 3.4, 3.6.4, 8.1.4, 8.2.4, 10.3, 10.5 and 22.3 reflect the parties'
best estimates of liquidated compensatory damages and do not constitute a
penalty, and no party shall make any claim or allegation to the contrary.
23.20 AUTHORIZED REPRESENTATIVES. Until changed by a party hereto by
written notice to each of the other parties, the following individuals, and only
such individuals, are authorized to act on behalf of the party so designating
them as its authorized representative
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with full power and authority to speak for and bind such Member in connection
with all matters arising under this Agreement or relating to the business of the
Company:
TSMC
----------------------------------
ALTERA Rodney Smith
----------------------------------
ADI Rob Marshall
----------------------------------
ISSI Jimmy Lee
----------------------------------
COMPANY Kenneth Smith
----------------------------------
The Third Party Investors pursuant to a Power of Attorney and Proxy
contained in Subscription Agreements dated as of June 5, 1996 have designated
Donald W. Brooks as their attorney-in-fact and authorized representative, who
shall be their only representative authorized to act on their behalf, with full
power and authority to vote, speak for and bind such Third Party Investors in
connection with all matters arising under this Agreement or relating to the
business of the Company.
23.21 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE. The parties
hereto shall have all rights, remedies and recourse granted in this Agreement,
in any other agreements entered into between the parties hereto and available at
law or in equity, and except as otherwise provided in this Agreement or the
Ancillary Agreements the same (i) shall be cumulative and concurrent; (ii) may
be pursued separately, successively or concurrently; (iii) may be exercised as
often as occasion therefore shall arise, it being agreed that the exercise or
failure to exercise any right, remedy or recourse shall in no event be construed
as a waiver or release thereof; and (iv) are intended to be, and shall be,
non-exclusive.
23.22 WAIVER OF CONFLICT OF INTEREST. EACH OF THE MEMBERS HAS BEEN
REPRESENTED BY SEPARATE COUNSEL IN CONNECTION WITH THIS AGREEMENT AND THE
ANCILLARY AGREEMENTS. SUCH COUNSEL HAS NOT REPRESENTED THE COMPANY PRIOR TO THE
EFFECTIVE DATE. THE ATTORNEYS, ACCOUNTANTS AND OTHER EXPERTS WHO HAVE PERFORMED
SERVICES FOR THE MEMBERS IN THE PAST MAY PERFORM SERVICES FOR THE COMPANY AND
MAY CONTINUE TO ALSO PERFORM SERVICES FOR THE SEPARATE MEMBERS IN THE FUTURE. TO
THE EXTENT THAT SUCH DUAL REPRESENTATION CONSTITUTES A CONFLICT OF INTEREST, THE
COMPANY AND THE MEMBERS HEREBY EXPRESSLY WAIVE ANY SUCH CONFLICT OF INTEREST
WITH RESPECT TO ANY SUCH DUAL REPRESENTATION RELATIVE TO THE NEGOTIATION AND
EXECUTION OF THIS AGREEMENT AND THE ANCILLARY AGREEMENTS.
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<PAGE> 77
23.23 AMENDMENT AND RESTATEMENT. This Agreement amends, restates and
supersedes the Original Agreement. The operative effect of this Agreement and
the rights and obligations of each Member hereunder relate back to the Effective
Date.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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<PAGE> 78
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
TSMC DEVELOPMENT, INC.
By /s/ MORRIS CHANG
-------------------------------------
Name Morris Chang
-----------------------------------
Its
------------------------------------
ANALOG DEVICES, INC.
By /s/ JOSEPH E. MCDONOUGH
-------------------------------------
Name Joseph E. McDonough
-----------------------------------
Its Vice President, Finance & CFO
------------------------------------
ALTERA CORPORATION
By /s/ RODNEY SMITH
-------------------------------------
Name Rodney Smith
-----------------------------------
Its President & CEO
------------------------------------
INTEGRATED SILICON SOLUTIONS, INC.
By /s/ JIMMY LEE
-------------------------------------
Name Jimmy Lee
-----------------------------------
Its President & CEO
------------------------------------
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<PAGE> 79
EXHIBIT G
The allocation provisions below are included in this agreement to satisfy
certain provisions of the Treasury Regulations issued pursuant to Section 704 of
the Internal Revenue Code. Notwithstanding any other provision of this
Agreement, these provisions shall be taken into account in allocating items of
income, gain, loss, and deduction among the Members so that, to the extent
possible, the net amount of such allocations of any items to each Member shall
be equal to the net amount that would have been allocated to each such Member if
these provisions had not been applicable. To the extent that allocations taking
into account the provisions below vary from those which would have occurred in
the absence of such provisions, items of income, gain and loss shall be
allocated to the Preferred Members in later years to minimize or eliminate the
effect of such provisions as the Preferred Members shall deem appropriate.
Income Offset. No loss shall be allocated to a Member if such allocation causes
or increases a deficit balance in such Member's Capital Account. In determining
the extent to which the previous sentence is satisfied, each Member's Capital
Account also shall be adjusted, solely for purposes of this requirement, to take
into account the items and adjustments required by Treas. Reg. Section
1.704-1(b)(2)(ii)(d) as modified by Treas. Reg. Section 1.704-2(g)(1) and
1.704-2(i)(5). Allocations pursuant to this provision shall be offset by other
allocations (consistent with this Agreement) as soon as possible so that net
allocations to the Members of losses shall be the same as if no allocations had
been made pursuant to this Section. This provision is intended to comply with
the requirements of Treas. Reg. Section 1.704-1 (b)(2)(ii)(d)-and shall be
interpreted in accordance therewith.
Minimum Gain Chargeback. If for any Fiscal Year there is a net decrease in
Company minimum gain as defined in Treas. Reg. Section 1.704-1(b)(2), each
Member shall be specially allocated items of Company gross income and gross gain
for such year (and, if necessary, for succeeding years) in an amount equal to
such Member's share of the net decrease in Company Minimum Gain, determined in
accordance with Regulations Section 1.704-2(g), except as otherwise provided in
Regulations Section 1.704-2(f)(2), 1.704-2(f)(3), 1.704-(2)(f)(4), and
1.704-2(0(5). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(f)(6). This provision is intended to comply
with the minimum gain chargeback requirement of Regulations Section 1.704-2(f)
and shall be interpreted consistently therewith.
Member Minimum Gain Chargeback. If during a fiscal year there is a net decrease
in member nonrecourse debt minimum gain, each Member who has a share of that
member nonrecourse debt minimum gain (determined in accordance with Regulations
Section 1.704-2(i)(5)) as of the beginning of such year shall be specially
allocated items of Company income and gain for such year (and, if necessary, for
succeeding years) in an amount equal to such Member's share of the
<PAGE> 80
net decrease in member nonrecourse debt minimum gain, determined in accordance
with Regulations Section 1.704-2(i)(4) (and taking into account the exceptions
provided therein).
Allocations pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Member pursuant thereto. The
items to be so allocated shall be determined in accordance with Regulations
Section 1.704-2(i)(4). This provision is intended to comply with the minimum
gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith.
Member Nonrecourse Deductions. Any member nonrecourse deductions, determined in
accordance with Treas. Reg. Section 1.704-2(i)(1) for any fiscal year or other
period shall be specially allocated to the Member who bears the economic risk of
loss with respect to the member nonrecourse debt to which such member
nonrecourse deductions are attributable in accordance with Regulations Section
1.704-2(i).
Deemed Capital Account Balance. Solely for purposes of Section 5.1.1.1 and
Section 5.1.2.2, the Capital Account balance of each Member shall be determined
by increasing the amount in such Member's Capital Account by the amount such
Member is deemed obligated to restore to the Company under Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) as a result of the application of Treasury
Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5).
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<PAGE> 1
EXHIBIT 13.1
ABOUT YOUR INVESTMENT
Stock Ownership Profile
The Company estimates that at December 31, 1997, there were more than 35,000
holders of Altera stock.
Stock Price
Altera's initial public offering took place on March 31, 1988. The Company's
price-to-earnings ratio at each year-end for the last five years, was as
follows:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
32.7 26.2 26.2 29.6 21.4
</TABLE>
Excludes R&D in-process write-off associated with the acquisition of Intel's
programmable logic business in 1994 and the cumulative effect of change in
accounting principle in 1997.
Trading Volume
The average trading volume in the Company's stock decreased 36% in 1997 over
1996, as measured by Nasdaq. Trading volume in 1997 averaged 2.8 million shares
per day, compared to 4.4 million per day in 1996, and 3.4 million in 1995,
retroactively adjusted for 2-for-1 splits of the Company's common stock in the
second quarter of 1995 and the fourth quarter of 1996.
Officers, Directors Institutional Investors 80%
& Employees 5% Individuals 15%
[Pie Chart]
Estimated Stock Ownership
[Graph]
Comparative Stock Performance
[Bar Graph]
Average Daily Volume
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Five-Year Summary
STATEMENTS OF OPERATIONS DATA:
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $631,114 $497,306 $401,598 $198,796 $140,279
Cost of sales 236,958 191,958 158,808 77,672 58,470
--------------------------------------------------------------------
Gross profit 394,156 305,348 242,790 121,124 81,809
Research and
development 54,417 49,513 33,849 45,994 16,847
Selling, general, and
administrative 112,784 87,742 74,658 45,771 35,202
--------------------------------------------------------------------
Income from operations $226,955 $168,093 $134,283 $ 29,359 $ 29,760
====================================================================
Income before income taxes and cumulative
effect of change in accounting principle $229,571 $169,137 $137,891 $ 31,496 $ 31,392
====================================================================
Income before cumulative
effect of change in accounting principle $151,517 $109,135 $ 86,871 $ 14,608 $ 21,195
Cumulative effect of change in
accounting principle 18,064 -- -- -- --
--------------------------------------------------------------------
Net income $133,453 $109,135 $ 86,871 $ 14,608 $ 21,195
====================================================================
Income per share before cumulative effect of
change in accounting principle:
Basic $ 1.71 $ 1.25 $ 1.00 $ 0.18 $ 0.26
Diluted 1.55 1.16 0.95 0.17 0.25
Net income per share:
Basic $ 1.51 $ 1.25 $ 1.00 $ 0.18 $ 0.26
Diluted 1.37 1.16 0.95 0.17 0.25
Shares used in computing income per share:
Basic 88,525 87,406 86,625 83,253 80,967
Diluted 102,616 100,813 95,931 86,490 83,983
The following are pro forma amounts with the
change in accounting principle related to
sales recognition applied retroactively
to years prior to 1997:
Sales $631,114 $497,006 $400,162 $198,156 $140,813
Gross profit 394,156 305,181 241,864 120,705 82,149
Income from operations 226,955 167,926 133,357 28,940 30,100
Net income 151,517 109,090 86,287 14,344 21,424
Net income per share:
Basic $ 1.71 $ 1.25 $ 1.00 $ 0.17 $ 0.26
Diluted 1.55 1.16 0.95 0.17 0.26
BALANCE SHEET DATA:
- -----------------------------------------------------------------------------------------------------------------------
Working capital $430,371 $295,020 $346,242 $121,479 $ 94,895
Total assets 952,518 778,212 715,554 213,882 155,757
Long-term debt 230,000 230,000 288,600 -- --
Stockholders' equity 536,687 370,245 255,189 158,019 121,699
Book value per share 6.02 4.23 2.93 1.84 1.49
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales 1997 sales of $631.1 million represents a 27% increase from 1996 sales of
$497.3 million and a 57% increase from 1995 sales of $401.6 million. Two-thirds
of the increase from 1996 was the result of increased sales of the Company's
newer products, principally the FLEX 10K, MAX 7000S, and MAX 9000 product
families. Sales of the Company's mainstream products, the MAX 7000 and FLEX 8000
families, accounted for the balance of the year over year increase. The increase
in 1996 sales, as compared to 1995 sales, was driven by higher unit sales of the
Company's MAX 7000 product family. Over the last two years, sales of the
Company's mature products have declined. Sales in North America increased 32%
from 1996 to 1997 as compared to the overall sales increase of 27%. North
America accounted for 55% of total sales for 1997 as compared to 53% in 1996.
Sales growth in Europe and Japan was 22% and 23%, respectively, while sales in
Asia Pacific grew more slowly at 13%. In the prior year, sales growth was
relatively consistent in each of the different geographic regions.
The increase in sales of the FLEX 10K family was the single largest contributor
to sales growth in 1997. The FLEX 10K family was first introduced in 1995 and
has been one of the fastest growing product families ever introduced by the
Company. The FLEX 10K family of devices presently offers densities up to 250,000
logic gates and additionally, has embedded array blocks that provide on-chip
memory capability.
The MAX 7000 product family was again the highest selling of any of the
Company's families -- accounting for over 44% of the Company's sales in 1997.
Since its introduction in 1992, the MAX 7000 family has become an industry
standard in programmable logic. However, this family is approaching maturity in
its product life cycle. The annual rate of sales growth of the MAX 7000 family
declined from the prior year and was lower than the aggregate growth rate of the
Company. Sales of the MAX 7000 family declined through the second half of the
year from their peak in the second quarter. Management expects sales for the MAX
7000 family to remain flat or decline in 1998 and, given the high percentage
base of revenues of this family, this will adversely impact the Company's
overall growth rate in 1998 and future years. The Company's MAX 7000S family,
introduced in 1996, is an enhanced version of the MAX 7000 family that offers
more functionality at lower prices. Sales of the MAX 7000S family have grown
rapidly throughout 1997, partially offsetting the decline in sales of the MAX
7000 family. However, sales of the MAX 7000S were a relatively small portion of
total sales in 1997, and there can be no assurance that any future growth in
sales of the MAX 7000S family will fully or partially offset the expected
decline in sales of the MAX 7000 family.
The end markets served by the Company in 1997 remained consistent with prior
years. Communications accounted for 56% of sales, computing accounted for 23% of
sales, industrial applications were 12% of sales and the balance was spread over
several end markets. The communications segment accounted for the largest dollar
increase from 1996 to 1997, comprising nearly half of the $133.8 million
increase in total sales. Expansion of the communications equipment industry,
both telecommunications and networking, has been the most important driver of
the Company's growth for the last several years. The Company's future growth
rate will depend on continued expansion of these end markets as well as the
Company's ability to maintain or increase market share.
However, in 1997, it was the computing segment that grew the fastest in
percentage terms, increasing more than 50% over the prior year. Sales in the
computing segment grew rapidly in the first half of 1997 and in the second
quarter accounted for 26% of total sales. However, sales in this segment
declined during the second half of 1997 and by the fourth quarter accounted for
less than 20% of total sales. Both the rapid increase and the subsequent decline
of sales in the computing segment relate to a limited number of projects with
certain customers; management does not expect similar programs to occur in this
segment in 1998.
[BAR GRAPH] [BAR GRAPH]
SALES UNITS SOLD
(DOLLARS IN MILLIONS) (IN MILLIONS)
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Major items in the statements of operations, expressed as a percentage of sales,
were as follows:
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Cost of sales 38% 39% 40%
Gross margin 62% 61% 60%
Research and development 9% 10% 8%
Selling, general, and administrative 18% 17% 19%
Operating income 36% 34% 33%
Interest expense 2% 3% 2%
Interest and other income, net 2% 3% 3%
Provision for income taxes 12% 12% 13%
Cumulative effect of change in
accounting principle 3% -- --
Net income 21% 22% 22%
- -----------------------------------------------------------------
</TABLE>
GROSS MARGIN Over the last three years, gross margin as a percentage of sales
has increased from 60.5% in 1995, to 61.4% in 1996 and to 62.4% in 1997. In
1996, rapid reductions in product cost resulting from declining wafer prices and
the migration of products to more advanced processes were mostly offset by
multiple price reductions on many of the Company's products, including the MAX
7000 and FLEX 8000 families. In 1997, the cost and pricing environments were
more stable. The cost reductions in 1997 were less dramatic and resulted
primarily from the introduction of new families using improved, lower cost
manufacturing processes. The new products manufactured with these processes are
sold at commensurately lower prices. The margin improvement experienced in 1997
resulted from continued incremental cost reductions which were not fully offset
by price reductions.
RESEARCH AND DEVELOPMENT Over the course of the last two years, the Company has
introduced the FLEX 10KA, MAX 7000S, and FLEX 6000 families. The FLEX 10K and
FLEX 10KA families are high density SRAM-based products that also offer on-chip
RAM. The FLEX 6000 family, introduced in 1997, was designed to offer
programmability at a low price point and offers price parity with gate array
products at densities of 24,000 gates and below. The MAX 7000S family extends
the MAX 7000 family with improved performance and additional features such as
in-system programmability or ISP.
As a percent of sales, research and development expenses were 8.4% in 1995,
10.0% in 1996, and 8.6% in 1997. Expenses were at a relative high in 1996 due to
prototype and pre-production expenses associated with the MAX 7000S, MAX 9000,
and FLEX 10K product families.
SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative
expenses increased 29% from 1996 to 1997 and increased slightly as a percentage
of sales, rising to 17.9% in 1997 from 17.6% in 1996. Selling, general, and
administrative expenses include commission and incentive expenses, advertising
and promotional expenditures, legal expenses, and salary expenses related to
field sales, marketing, and administrative personnel. The increased expenditures
over the last three years are mainly driven by higher marketing and
administrative headcount, new and expanded international sales offices, and
higher commissions on the increased sales volumes. In 1997, the Company
established its international sales headquarters in Hong Kong, and deployed its
international order entry and customer service functions to Hong Kong and the
United Kingdom. Also in 1997, the Company replaced its main business information
systems with a newer and more capable enterprise-wide management information
system running on a
[BAR GRAPH] [BAR GRAPH]
GROSS MARGIN RESEARCH & DEVELOPMENT
(PERCENTAGE OF SALES) (DOLLARS IN MILLIONS)
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
distributed computing platform. This new system was activated in January 1998.
The Company intends to add more functionality and enhanced features to the new
system throughout the course of 1998 and in future years. The Company added
significant personnel to install and support this and ancillary systems in late
1996 and throughout 1997. Altera has over twenty field sales offices and markets
its products through distributors, representatives, and its own direct sales
force. Approximately 90% of the Company's sales are made through distributors.
The Company will continue to increase sales resources in markets and regions
where it anticipates increased local resources will increase sales, enhance
competitive position, or improve customer service.
OPERATING INCOME Operating income was $134.3 million in 1995, $168.1 million in
1996, and $227.0 million in 1997. As a percent of sales, operating income has
increased from 33.4% in 1995 to 33.8% in 1996, and 36.0% in 1997. The increase
in operating income is primarily the result of the improvements in gross margin
over the three year period and to a lesser degree the general trend toward
reduced operating expenses (selling, general, and administrative plus research
and development).
INTEREST EXPENSE Interest expense decreased to $11.7 million in 1997 from $12.3
million in 1996. Interest expense relates to the convertible subordinated notes
issued in June 1995 and includes interest expense and amortization, partially
offset by capitalized interest related to the construction of the new
headquarters. The decrease in interest expense from 1996 to 1997 is primarily
attributable to higher capitalized interest in 1997. The Company does not expect
to capitalize any interest in 1998.
INTEREST AND OTHER INCOME, NET Interest and other income increased to $14.3
million in 1997 from $13.3 million in 1996 and $11.0 million in 1995. The
increase over the three year period resulted from increased cash balances
available for investment throughout the year.
TAXES Altera's effective tax rate was 34% in 1997 compared to 35% in 1996 and
37% in 1995. The reduction from 1996 to 1997 was the result of an increase in
research and development tax credits and a change in the geographic mix of
income. The reduction in the rate from 1995 to 1996 was due to an increased
amount of earned interest income from tax-exempt investments and research and
development tax credits.
ACCOUNTING CHANGE In October 1997, the Company changed its accounting method for
recognizing revenue on sales to distributors with an effective date of January
1, 1997. The Company previously recognized revenue upon shipment to distributors
net of appropriate reserves for sales returns and allowances. Following the
accounting change, revenue recognition on shipments to distributors is deferred
until the products are resold to the end customers. The Company believes that
deferral of revenue on distributor sales and related gross margins until the
product is shipped by the distributors results in a more meaningful measurement
of results of operations and is more consistent with industry practice and,
therefore, is a preferable method of accounting.
The cumulative effect in prior years of the change in accounting method was a
charge of $18.1 million (net of $9.3 million of income taxes) or $0.18 per
diluted share.
FUTURE RESULTS Future operating results will depend on the Company's ability to
develop, manufacture, and sell complicated semiconductor components and complex
software that offer customers greater value than solutions offered by competing
vendors. The Company's efforts in this regard may not be successful. The Company
plans to sustain future growth by offering programmable chips for applications
that are presently served by gate array vendors. These vendors have
well-established market positions and a solution that has been proven
technically feasible and economically competitive over several decades. There
can be no assurance that the Company will be successful in
[BAR GRAPH]
SG&A
(PERCENTAGE OF SALES)
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
displacing gate array vendors in the targeted applications and densities.
Furthermore, other programmable logic vendors are targeting these applications
and may be successful in securing market share to the exclusion of Altera.
Moreover, standard cell technologies are increasingly used by the Company's
customers to achieve greater integration in their systems; this may not only
impede the Company's efforts to penetrate the gate array market but may also
displace the Company's products in the applications that it presently serves.
The Company's future growth will depend on its ability to continue to expand the
programmable logic market.
The Company is highly dependent upon subcontractors to manufacture silicon
wafers and perform assembly, testing, and shipping services. The vast majority
of the Company's products are manufactured, stored, and shipped to customers by
subcontractors located in Asia, principally Japan, Taiwan, Korea, and Malaysia.
Several of these countries are experiencing significant economic disruptions
including volatile exchange rates, rising unemployment, insolvencies, and
government fiscal austerity programs. Disruptions or adverse supply conditions
arising from market conditions, political strife, labor disruptions and other
factors could have adverse consequences on the Company's future results. For
example, in 1997 there were production interruptions caused by fires in two
Taiwanese wafer fabrication plants not utilized by Altera. Natural or man-made
disasters, normal process fluctuations, and variances in manufacturing yields
could have severe negative impact on the Company's operating capabilities. The
Company has sought to diversify its operating risk by participating in the
WaferTech joint venture to manufacture silicon wafers with other partners in
Camas, Washington. The majority partner, TSMC, has never built or operated a
wafer fabrication plant outside of Taiwan. Start-up or operating difficulties of
WaferTech will impair the Company's operating performance and will also have
negative financial ramifications as the Company will consolidate WaferTech's
operating results as minority income. Also, a number of factors outside of the
Company's control, including general economic conditions and cycles in world
markets, exchange rate fluctuations, or a lack of growth in the Company's end
markets could adversely impact future results. An important component of the
Company's growth over the last several years, the networking equipment market,
has demonstrated slowing growth in the last two years. Should this trend
continue, the Company's growth in future years may be limited.
Because of the foregoing and other factors that might affect the Company's
operating results, past financial performance should not be considered an
indicator of future performance, and investors should not use historical trends
to anticipate future results. In addition, the cyclical nature of the
semiconductor industry and other factors have resulted in a highly volatile
price of the Company's common stock.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements for periods beginning after December 15, 1997. Comprehensive income,
as defined, includes all changes in equity (net assets) during a period from
non-owner sources including unrealized gains and losses on available-for-sale
securities. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt SFAS No. 130 beginning
in 1998 and does not expect such adoption to have a material effect on the
consolidated financial statements. In June 1997, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in annual financial statements for periods beginning after
December 15, 1997. It also establishes standards for related disclosures about
products and
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
services, geographic areas, and major customers. It is not expected that
adoption of SFAS No. 131 will have any impact on the Company's consolidated
financial statements.
Liquidity and Capital Resources
OPERATING ACTIVITIES During 1997, the Company generated $201.6 million in net
cash from operating activities which was primarily attributable to net income of
$133.5 million adjusted by non-cash items including the cumulative effect of
change in accounting principle of $18.1 million, depreciation and amortization
of $27.1 million, a decrease in accounts receivable and other assets of $17.8
million, and an increase in accounts payable and accrued liabilities and
deferred income on sales to distributors of $41.8 million. Offsetting these were
increases in deferred income taxes of $8.4 million, inventories of $23.1
million, and a decrease in income taxes payable of $5.2 million. These increases
in the use of cash were primarily the result of an increase in sales volumes
from 1996 to 1997.
INVESTING ACTIVITIES Net cash used for investing activities in 1997 was $282.6
million. The Company made its final payment on the WaferTech joint venture of
$56.2 million in November 1997. The Company completed construction of its
headquarters facility and occupied the facility in June 1997. Expenditures for
the facility were $44.2 million in 1997. Other capital expenditures were
primarily for test equipment and for a new management information system and
associated hardware and installation costs. Additionally, the Company purchased
$144.7 million (net) of short-term investments. Over the last three years,
excluding the headquarters facility, the Company's capital equipment purchases
have been primarily for semiconductor test and design equipment, and
communication and information systems software and hardware.
FINANCING ACTIVITIES In 1997, financing activities generated $33.0 million
through the issuance of common stock to employees through various option and
employee stock purchase plans, and ancillary tax benefits. In 1996, the Company
made payments of $57.1 million to TSMC as deposits for future wafer purchases.
In 1997, $6.7 million of these deposits were applied to wafer purchases. In
1995, the Company raised net proceeds of $224.8 million on the sale of
convertible subordinated notes. The convertible subordinated notes are due in
June 2002 and bear an interest rate of 5.75%, payable semiannually. The notes
are convertible at the option of the holder into shares of the Company's common
stock at a price of $25.59 per share. The notes are callable by the Company no
sooner than June 1998. At December 31, 1997, Altera had $377.6 million of cash,
cash equivalents, and short-term investments available to finance future growth,
no short-term obligations, and $230.0 million of long-term debt. Management
believes that operational capital expenditures in 1998 will approximate the
expenditures in 1997, less the expenditures for the headquarters facility.
Altera believes the available sources of funds and cash expected to be generated
from operations will be adequate to finance current operations and capital
expenditures through at least 1998.
MARKET RISK DISCLOSURE As of December 31, 1997, the Company's investment
portfolio consisted of fixed income securities of $360.3 million (see Note 4 of
Notes to the Consolidated Financial Statements). These securities, like all
fixed income instruments, are subject to interest rate risk and will decline in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 1997,
the decline in the fair value of the portfolio would not be material.
Additionally, the Company has the ability to hold its fixed income investments
until maturity and, therefore, the Company would not expect to recognize such an
adverse impact in income or cash flows. The Company has international sales and
facilities and is, therefore, subject to foreign currency rate exposure. To
date, the exposure to the Company related to exchange rate volatility has not
been significant. If the foreign currency rates fluctuate by 10% from rates at
December 31, 1997, the effect on the Company's
[BAR GRAPH] [BAR GRAPH] [BAR GRAPH]
TOTAL ASSETS WORKING CAPITAL CAPITAL
EXPENDITURES
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
financial position and results of operations would not be material. However,
there can be no assurance that there will not be a material impact in the
future.
YEAR 2000 COMPLIANCE Most computer programs were designed to perform data
computations on the last two digits of the numerical value of a year. When a
computation referencing the year 2000 is performed, these systems may interpret
"00" as the year 1900 and could either stop processing date-related computations
or could process them incorrectly. Computations referencing the year 2000 might
be invoked at any time, but are likely to begin occurring in the year 1999. The
Company recently implemented new information systems which are year 2000
compliant and does not anticipate that it will incur material expenditures for
the resolution of any year 2000 issues relating to either its own information
systems, databases and programs, or its software products. However, the Company
could be adversely impacted by year 2000 issues faced by major distributors,
suppliers, customers, vendors, and financial service organizations with which
the Company interacts. Management is in the process of determining the impact,
if any, that third parties who are not year 2000 compliant may have on the
operations of the Company.
EMPLOYEES Over the course of 1997, the number of regular employees increased 18%
to 1,086 at year end. Sales per employee was $630,000 in 1997, compared to
$553,000 in 1996, and $519,000 in 1995.
IMPACT OF CURRENCY AND INFLATION The Company purchases the majority of its
materials and services in U.S. dollars, and its foreign sales are also billed in
U.S. dollars. However, certain contracts for silicon wafer purchases are
denominated in Japanese yen, and the volume of such contracts increased
significantly in 1995 and 1996, and decreased in 1997. The appreciation of the
U.S. dollar with respect to the yen had a positive impact on the Company's
margin during 1996 and 1997. The declining value of the dollar with respect to
the yen had an adverse impact on the Company's margin during the first six
months of 1995. The Company was able to mitigate much of that impact with
improved yields and efficiencies. In addition, in the third quarter of 1995, the
Company purchased yen forward contracts in an amount approximately equal to its
expected yen requirements for that quarter. As of December 31, 1995 and
throughout 1996 and 1997, the Company had no open foreign exchange contracts for
the purchase or sale of foreign currencies. In January 1998, the Company entered
into a forward exchange contract to purchase Malaysian ringgit to meet a portion
of its firm contractual commitments of ringgit required in 1998. Depending on
market conditions, Altera may choose to hedge its currency exposure by
purchasing or selling forward foreign exchange contracts. In addition, the
impacts of other foreign currency exchange rate fluctuations may be material in
the future as a result of increased volatility in certain foreign currencies in
which the Company conducts business. The effects of inflation upon Altera's
financial results have not been significant to date.
[BAR GRAPH] [BAR GRAPH] [BAR GRAPH]
BOOK VALUE STOCKHOLDERS' SALES PER
PER SHARE EQUITY EMPLOYEE
(DOLLARS) (DOLLARS IN MILLIONS) (DOLLARS IN THOUSANDS)
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 22,761 $ 70,788
Short-term investments 354,808 210,062
-----------------------
Total cash, cash equivalents,
and short-term investments 377,569 280,850
Accounts receivable, less allowance
for doubtful accounts of $3,008 and $2,399 55,251 68,486
Inventories 98,883 75,798
Deferred income taxes 63,076 45,402
Other current assets 21,423 2,451
-----------------------
Total current assets 616,202 472,987
Property and equipment, net 152,417 89,804
Investments 179,167 206,671
Other assets 4,732 8,750
-----------------------
$952,518 $778,212
=======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 20,649 $ 13,279
Accrued liabilities 16,688 20,866
Accrued compensation 20,226 14,136
Deferred income on sales to distributors 128,268 68,343
Income taxes payable -- 5,183
Notes payable and short-term obligations -- 56,160
-----------------------
Total current liabilities 185,831 177,967
Convertible subordinated notes 230,000 230,000
-----------------------
Total liabilities 415,831 407,967
Commitments and contingencies
Stockholders' equity:
Common stock:
$.001 par value; 400,000 shares
authorized; 89,185 and 87,604 shares
issued and outstanding 89 88
Capital in excess of par value 123,544 90,556
Retained earnings 413,054 279,601
-----------------------
Total stockholders' equity 536,687 370,245
-----------------------
$952,518 $778,212
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
CONSOLIDATED STATEMENTS OF OPERATIONS
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Sales $ 631,114 $ 497,306 $ 401,598
Cost of sales 236,958 191,958 158,808
-------------------------------------------
Gross profit 394,156 305,348 242,790
Research and development 54,417 49,513 33,849
Selling, general, and administrative 112,784 87,742 74,658
-------------------------------------------
Income from operations 226,955 168,093 134,283
Interest expense (11,701) (12,284) (7,401)
Interest and other income, net 14,317 13,328 11,009
-------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 229,571 169,137 137,891
Provision for income taxes 78,054 60,002 51,020
-------------------------------------------
Income before cumulative effect of change
in accounting principle 151,517 109,135 86,871
Cumulative effect of change in accounting principle 18,064 -- --
-------------------------------------------
Net income $ 133,453 $ 109,135 $ 86,871
===========================================
Per Share:
Basic
Income before cumulative effect
of change in accounting principle $ 1.71 $ 1.25 $ 1.00
Cumulative effect of change in
accounting principle (.20) -- --
-------------------------------------------
Net income $ 1.51 $ 1.25 $ 1.00
===========================================
Diluted
Income before cumulative effect of
change in accounting principle $ 1.55 $ 1.16 $ 0.95
Cumulative effect of change in
accounting principle (.18) -- --
-------------------------------------------
Net income $ 1.37 $ 1.16 $ 0.95
===========================================
Shares used in computing income per share:
Basic 88,525 87,406 86,625
Diluted 102,616 100,813 95,931
-------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock
and Capital in
(IN THOUSANDS) Excess of Par Value Retained Earnings
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Stockholders' Equity
Balance, December 31, 1994 $ 73,146 $ 84,873
Tax benefit resulting from employee
stock transactions 5,269
Issuance of 1,165 shares 5,030
Net income 86,871
----------------------------------
Balance, December 31, 1995 83,445 171,744
Tax benefit resulting from employee
stock transactions 4,492
Issuance of 787 shares 5,760
Repurchase of 300 shares (3,053) (1,278)
Net income 109,135
----------------------------------
Balance, December 31, 1996 90,644 279,601
Tax benefit resulting from employee
stock transactions 20,044
Issuance of 1,581 shares 12,945
Net income 133,453
----------------------------------
Balance, December 31, 1997 $ 123,633 $ 413,054
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 133,453 $ 109,135 $ 86,871
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change
in accounting principle 18,064 -- --
Depreciation and amortization 27,105 20,884 12,166
Deferred income taxes (8,368) (8,063) (24,974)
Changes in assets and liabilities:
Accounts receivable, net 13,235 (13,968) (22,856)
Inventories (23,085) (20,377) (16,944)
Other assets 4,548 3,059 (4,341)
Accounts payable and accrued liabilities 9,282 (7,220) 19,121
Deferred income on sales to distributors 32,555 13,849 31,884
Income taxes payable (5,183) 943 2,894
-----------------------------------------------------------
Cash provided by operating activities 201,606 98,242 83,821
-----------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (80,879) (45,172) (45,820)
Other long-term investments (56,997) (86,240) (500)
Net change in short-term investments (144,746) 75,748 (234,855)
-----------------------------------------------------------
Cash used for investing activities (282,622) (55,664) (281,175)
-----------------------------------------------------------
Cash Flows from Financing Activities
Tax benefit from employee stock transactions 20,044 4,492 5,269
Net proceeds from issuance of common stock 12,945 5,760 5,030
Repurchase of common stock -- (4,331) --
Convertible subordinated notes -- -- 224,825
Payment of notes payable -- (57,120) --
-----------------------------------------------------------
Cash provided by (used for) financing activities 32,989 (51,199) 235,124
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (48,027) (8,621) 37,770
Cash and cash equivalents at beginning of year 70,788 79,409 41,639
-----------------------------------------------------------
Cash and cash equivalents at end of year $ 22,761 $ 70,788 $ 79,409
===========================================================
Cash paid during the year for:
Income taxes $ 77,853 $ 62,347 $ 64,122
Interest 13,225 13,225 6,392
Supplemental disclosure of non-cash activities:
Cancellation of notes payable related
to wafer capacity -- 63,400 --
Remaining obligations related
to WaferTech -- 56,160 --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Company and Business
Altera Corporation (Altera or the Company) designs, develops, manufactures, and
markets CMOS programmable logic integrated circuits and associated engineering
development software and hardware. The Company's major markets are
communications, computing, and industrial applications.
The Company's export sales were $281.7, $231.7, and $187.4 million for 1997,
1996, and 1995, respectively. Sales to Europe were $127.1, $103.8, and $84.2
million and sales to Japan were $117.0, $94.8, and $78.9 million in 1997, 1996,
and 1995, respectively. In 1997, the two largest distributors accounted for 32%
and 18% of sales. In 1996, the two largest distributors accounted for 29% and
15% of sales, whereas in 1995, they each accounted for 21% and 15% of sales,
respectively.
Note 2: Significant Accounting Policies
BASIS OF PRESENTATION Altera has a fiscal year that ends on the Friday nearest
December 31st. For presentation purposes, the consolidated financial statements
and notes refer to the calendar month end. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries after
elimination of all significant intercompany balances and transactions. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts; actual results could differ from those estimates.
RECLASSIFICATIONS Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the 1997 presentation. Such
reclassifications had no effect on previously reported results of operations or
retained earnings.
REINCORPORATION On June 19, 1997, the Company was reincorporated in the State of
Delaware. In connection with the reincorporation, as approved by the
stockholders, the number of authorized shares of the Company's common stock was
increased to four hundred million (400,000,000) and each share of common stock
was assigned a par value of $.001. The accompanying financial statements have
been restated to give effect to the reincorporation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly
liquid investments with original maturities of three months or less. Short-term
investments are held as securities available for sale and are carried at their
market value as of the balance sheet date which approximated cost. The amortized
cost of debt securities are adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in investment income.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except that those unrealized losses that are
deemed to be other than temporary are reflected in income.
INVENTORIES Inventories are recorded at the lower of standard cost, which
approximates actual cost on a first-in-first-out basis, or market. The
inventories at December 31, 1997 and 1996 were comprised of the following
components:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and raw materials $ 1,503 $ 1,773
Work in process 67,442 56,870
Finished goods 29,938 17,155
-----------------------------
Total inventories $98,883 $75,798
=============================
</TABLE>
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEPRECIATION AND AMORTIZATION Depreciation and amortization are computed using
the straightline method. Estimated useful lives of two to five years are used
for equipment and office furniture and forty years for buildings. Amortization
of leasehold improvements is computed using the shorter of the remaining
facility lease term or the estimated useful life of the improvements. As of
December 31, 1997, the costs of the Company's new headquarters building include
$4.0 million of capitalized interest incurred during the construction and
development period. Property and equipment at December 31, 1997 and 1996 was
comprised of the following components:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 20,496 $ 19,925
Building 75,111 32,955
Equipment 102,953 75,453
Office furniture and equipment 9,767 9,508
Leasehold improvements 1,884 3,493
----------------------------------
Property and equipment,
at cost 210,211 141,334
Accumulated depreciation and amortization (57,794) (51,530)
----------------------------------
Property and equipment, net $ 152,417 $ 89,804
==========================================================================================
</TABLE>
The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
REVENUE RECOGNITION The Company recognizes revenue from product sales upon
shipment to OEMs and end-users. Reserves for sales returns and allowances are
recorded at the time of shipment. The Company's sales to distributors are made
under agreements allowing for returns or credits under certain circumstances
and, effective the first day of 1997, the Company defers recognition of revenue
on sales to distributors until products are resold by the distributor to the
end-user. See Note 5.
FOREIGN EXCHANGE CONTRACTS The Company purchases the majority of its materials
and services in U.S. dollars and its foreign sales are also billed in U.S.
dollars. However, certain contracts for silicon wafer purchases are denominated
in Japanese yen. At times, the Company enters into foreign exchange option or
forward contracts to hedge against currency fluctuations which affect these and
other transactions. As of December 31, 1997, the Company had no open foreign
exchange contracts for the purchase or sale of foreign currencies, but may
choose to enter into such contracts in the future should conditions appear
favorable. In January 1998, the Company entered into a forward exchange
contract, maturing at various intervals through May 1998, to purchase $1.1
million of Malaysian ringgit.
STOCK SPLITS All share data have been retroactively restated to reflect a
2-for-1 split of the Company's outstanding common stock which was reflected in
the stock price as of January 7, 1997 and was effective as to the shareholders
of record on December 18, 1996. The share data has also been adjusted in 1995 to
reflect a 2-for-1 stock split which was reflected in the stock price as of
June 1, 1995 and was effective as to the shareholders of record on May 10, 1995.
<PAGE> 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION PLANS The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the exercise price of the
option granted. Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company's policy is to grant options with
an exercise price equal to the quoted market price of the Company's stock on the
grant date. Accordingly, no compensation has been recognized for its stock
option plans. The Company provides additional pro forma disclosures as required
under SFAS No. 123, "Accounting for Stock-Based Compensation." See Note 10.
FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable, notes payable and accounts payable, the carrying amounts
approximate fair value due to their short maturities. The estimated fair value
for the convertible notes (with a carrying amount of $230.0 million at December
31, 1997) is approximately $314.0 million. The fair value for the convertible
subordinated notes is primarily based on quoted market prices.
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents, short-term investments and accounts receivable. The Company places
its short-term investments in a variety of financial instruments and, by policy,
limits the amount of credit exposure through diversification and by restricting
its investments to highly rated securities. The Company sells its products to
distributors and original equipment manufacturers throughout the world. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires collateral, such as letters of credit,
whenever deemed necessary.
DEPENDENCE ON WAFER SUPPLIERS The Company does not directly manufacture finished
silicon wafers. The Company's strategy has been to maintain relationships with
wafer foundries. The Company has been successful in maintaining such
relationships (Notes 6 and 7). However, there can be no assurance that the
Company will be able to satisfy its future wafer needs from current or
alternative manufacturing sources. This could result in possible loss of sales
or reduced margins.
NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements for periods beginning after December 15, 1997.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources including unrealized gains and losses on
available-for-sale securities. Reclassification of financial statements for
earlier periods for comparative purposes is required. The Company will adopt
SFAS No. 130 beginning in 1998 and does not expect such adoption to have a
material effect on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements for periods beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. It is not expected that adoption of SFAS
No. 131 will have any impact on the consolidated financial statements.
<PAGE> 15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Income Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," during the fourth
quarter of 1997. SFAS No. 128 requires presentation of both basic and diluted
net income per share on the face of the income statement. All prior period net
income per share data presented has been restated in accordance with SFAS No.
128. Basic net income per share is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted net income per share gives effect to all dilutive
potential common shares outstanding during a period. In computing diluted net
income per share, the average stock price for the period is used in determining
the number of shares assumed to be purchased from exercise of stock options. A
reconciliation of the numerators and denominators of the basic and diluted
income per share is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic:
Income before cumulative effect of change in
accounting principle $ 151,517 $ 109,135 $ 86,871
Cumulative effect of change in accounting principle (18,064) -- --
------------------------------------------------
Net income $ 133,453 $ 109,135 $ 86,871
================================================
Weighted shares outstanding 88,525 87,406 86,625
------------------------------------------------
Per share:
Income before cumulative effect of
change in accounting principle $ 1.71 $ 1.25 $ 1.00
Cumulative effect of change in accounting principle (0.20) -- --
------------------------------------------------
Net income $ 1.51 $ 1.25 $ 1.00
================================================
Diluted:
Income before cumulative effect of change in
accounting principle $ 151,517 $ 109,135 $ 86,871
Effect of 5.75% convertible subordinated notes 7,224 7,440 4,397
------------------------------------------------
Income before cumulative effect of change in
accounting principle including the
effect of dilutive securities 158,741 116,575 91,268
Cumulative effect of change in accounting principle (18,064) -- --
------------------------------------------------
Net income $ 140,677 $ 116,575 $ 91,268
================================================
Weighted shares outstanding 88,525 87,406 86,625
Effect of dilutive securities:
Stock options 5,101 4,417 4,528
5.75% convertible subordinated notes 8,990 8,990 4,778
------------------------------------------------
102,616 100,813 95,931
================================================
Per share:
Income before cumulative effect of change in accounting principle $ 1.55 $ 1.16 $ 0.95
Cumulative effect of change in accounting principle (0.18) -- --
------------------------------------------------
Net income $ 1.37 $ 1.16 $ 0.95
================================================
</TABLE>
Note 4: Marketable Securities
The Company's portfolio of marketable securities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Money market funds $ 763 $ 19,951
Municipal bonds 315,987 218,295
U.S. government and agency obligations 13,540 13,112
Corporate bonds 24,919 9,190
Other debt securities 5,055 8,432
--------------------------
$360,264 $268,980
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the net unrealized holding gains and losses on
securities were immaterial. The marketable securities at December 31, 1997 and
1996 by contractual maturity are shown below.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 58,191 $ 96,056
Due after one year through two years 302,073 172,924
--------------------------
$360,264 $268,980
- ------------------------------------------------------------------------
</TABLE>
Note 5: Accounting Change - Recognition of Revenue on Sales to Distributors
In October 1997, the Company changed its accounting method for recognizing
revenue on sales to distributors with an effective date of January 1, 1997. The
Company previously recognized revenue upon shipment to distributors net of
appropriate reserves for sales returns and allowances. Following the accounting
change, revenue recognition on shipments to distributors is deferred until the
products are resold to the end customers. The Company believes that deferral of
revenue on distributor sales and related gross margins until the product is
shipped by the distributors results in a more meaningful measurement of results
of operations and is more consistent with industry practice and, therefore, is a
preferable method of accounting. The cumulative effect in prior years of the
change in accounting method was a charge of $18.1 million (net of $9.3 million
of income taxes) or $0.18 per diluted share. The estimated pro forma effect of
the accounting change on the current and prior years' results are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported:
Sales $631,114 $497,306 $401,598
Net income 133,453 109,135 86,871
Diluted net income per share 1.37 1.16 0.95
Pro forma amounts with the
change in accounting principle
related to revenue
recognition applied retroactively:
Sales 631,114 497,006 400,162
Net income 151,517 109,090 86,287
Diluted net income per share 1.55 1.16 0.95
- ----------------------------------------------------------------------------------------------
</TABLE>
Note 6: Investments and Obligations
At December 31, 1997, Altera's long-term investments primarily relate to an
investment in WaferTech, LLC (WaferTech) of $140.4 million, the long-term
portion of deposits with Taiwan Semiconductor Manufacturing Corporation (TSMC)
for future wafer allocations of $33.6 million (Note 7) and the Company's
investment in Cypress Semiconductor (Texas) Inc. (CSTI), a subsidiary of Cypress
Semiconductor Corporation, of $5.2 million.
In June 1996, Altera, TSMC, and several other partners formed WaferTech, a
joint-venture company, to build and operate a wafer manufacturing plant in
Camas, Washington. In return for a $140.4 million cash investment, Altera
received an 18% equity ownership in the joint-venture company and certain rights
to procure up to 27% of the factory's production at market prices. The
investment was made in three installments of $42.1 million each in June and
November of 1996 and $56.2 million in November 1997. In addition, the Company
has an obligation to guarantee a pro rata
<PAGE> 17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
share of debt incurred by WaferTech, up to a maximum of $45.0 million. The
Company accounts for this investment under the equity method based on the
Company's ability to exercise significant influence on the operating and
financial policies of WaferTech. The Company's share of WaferTech's results for
1997 and 1996 was not material. Altera owns a 17% equity interest in CSTI and
has the right to purchase a percentage of the wafers produced by CSTI
approximately equal to the Company's percentage ownership of CSTI. The Company
accounts for this investment under the cost method.
Note 7: Notes Payable
In 1995, the Company entered into several agreements with TSMC, whereby it
agreed to make certain deposits to TSMC for future wafer capacity allocations
extending into 2001. The Company made cash deposits amounting to $2.4 million in
1995 and issued promissory notes for $120.5 million representing partial
prepayments for wafers to be supplied under these agreements. During the second
quarter of 1996, the Company and TSMC renegotiated these agreements, resulting
in the cancellation of all notes payable and a refund of certain prepayments,
except for a $57.1 million prepayment made in January 1996 for wafer capacity
from 1997 through 2000.
Under the terms of the agreement related to the $57.1 million prepayment, TSMC
agrees to provide the Company with wafers manufactured using TSMC processes and
according to the Company's specifications, and the Company agrees to purchase
and TSMC agrees to supply, a specific capacity of wafers per year through 2000.
Subsequent billings for actual wafers used from TSMC will reduce the prepaid
balance. The prepayments are generally nonrefundable if the Company does not
purchase the full prepaid capacity unless the Company identifies a third-party
purchaser, acceptable to TSMC, for the capacity.
Note 8: Commitments
The Company leases certain of its sales facilities under non-cancelable lease
agreements expiring at various times through 2002. The leases require the
Company to pay property taxes, insurance, maintenance, and repair costs. Future
minimum lease payments under all non-cancelable operating leases as of December
31, 1997 are $2.2 million in 1998 and $2.0 million, $1.9 million, $1.6 million,
and $1.6 million in the years 1999 through 2002, respectively. Rental expense
under all operating leases amounted to $4.4 million, $4.0 million, and $3.2
million in 1997, 1996, and 1995, respectively. The Company has a standby letter
of credit facility in the amount of 1.5 billion yen (approximately $11.6
million). The terms of this facility require immediate funding of any draws
against any letters of credit issued under the facility. The facility requires
the Company to comply with certain covenants regarding net worth and financial
ratios.
Note 9: Convertible Subordinated Notes
In June 1995, the Company issued $230.0 million of convertible subordinated
notes due in June 2002 and bearing an interest rate of 5.75%, payable
semiannually. The notes are convertible into shares of the Company's common
stock at a price of $25.59 per share. Discounts, commissions, and expenses,
which are being amortized over the seven-year life of the notes, reduced the net
proceeds to $224.8 million. Accumulated amortization at December 31, 1997 and
1996 amounted to approximately $2.0 million and $1.2 million, respectively. The
notes are callable by the Company no sooner than June 1998.
<PAGE> 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10: Stock-Based Compensation
Plans At December 31, 1997, the Company has four stock-based compensation plans,
which are described below. The Company applies APB No. 25 in accounting for its
plans. Accordingly, no compensation cost has been recognized for its three fixed
stock option plans and its stock purchase plan.
STOCK OPTION PLANS There are 16.2 million shares of common stock reserved for
issuance under the 1987 Stock Option Plan, 5.3 million shares of common stock
are reserved for issuance under the 1996 Stock Option Plan and 940,000 shares of
common stock are reserved for issuance under the Company's 1988 Director Stock
Option Plan. The Director Stock Option Plan provides for the periodic issuance
of stock options to members of the Company's Board of Directors who are not also
employees of the Company. Under all Stock Option Plans, the exercise price of
each option equals the market price of the Company's stock on the date of grant
and an option's maximum term is 10 years. Options granted prior to October 1997
generally vest over five years at annual increments as determined by the Board
of Directors. In October 1997, the Board of Directors amended the terms of the
1996 Stock Option Plan whereby options granted subsequent to September 30, 1997
will generally vest over four years at annual increments as determined by the
Board of Directors.
The number of shares for which options were exercisable was approximately
3,488,000, 2,960,000, and 2,050,000 at December 31, 1997, 1996, and 1995,
respectively. A summary of the Company's stock option activity and related
weighted average exercise prices within each category for each of the years
ended December 31, 1997, 1996, and 1995 relating to the Company's stock option
plans are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
(SHARE AMOUNTS IN THOUSANDS) Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1, 12,500 $ 5.07 10,059 $ 3.02 9,128 $ 2.57
Stock options:
Granted 2,016 43.32 3,433 26.25 2,346 22.60
Exercised (1,400) 6.05 (620) 28.54 (839) 2.91
Forfeited (683) 16.42 (372) 13.40 (576) 6.54
----------------------------------------------------------------------------
Options outstanding at December 31, 12,433 $ 8.00 12,500 $ 5.07 10,059 $ 3.02
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant, as defined by SFAS No.123, is estimated on
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the fair value on the grant date. To
compute the estimated grant date fair value of the Company's stock option grants
in 1997, 1996, and 1995, respectively, the Black-Scholes method was used with
the following weighted-average assumptions: expected volatility of 40.6%, 36.4%,
and 34.6%, risk-free interest rates of 6.2%, 5.9%, and 6.6%, expected lives from
vesting date of 0.56, 0.41, and 0.45 years, and dividend yields of 0%. The
weighted-average fair value per share of stock options granted in 1997, 1996,
and 1995 were $18.41, $10.23, and $8.74, respectively.
<PAGE> 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------
Number Weighted Number
Outstanding Average Weighted- Exercisable Weighted
Range of at 12/31/97 Remaining Average at 12/31/97 Average
Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.81- $ 6.12 3,434 4.50 years $ 3.48 2,440 $ 3.12
$ 6.13- $ 9.25 1,796 6.47 $ 7.15 331 $ 7.24
$ 9.26- $20.88 1,597 8.10 $ 17.49 166 $ 14.72
$ 20.89- $31.38 3,071 8.25 $ 25.50 432 $ 25.98
$ 31.39- $38.69 1,233 8.94 $ 34.99 112 $ 34.81
$ 38.70- $49.57 1,049 9.31 $ 47.97 7 $ 44.90
$ 49.58- $63.82 253 9.55 $ 54.51 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective January 30, 1998, the Company offered employees, except all officers
and director level employees, the right to reprice their stock options granted
from January 1, 1995 through January 19, 1998. The repriced options have an
exercise price of $34.25, the fair value of the Company's common stock on the
effective date, and the vesting schedule of such options was extended by three
months. In connection with this action, approximately 1.3 million options were
repriced which previously had a weighted average exercise price of $48.50.
EMPLOYEE STOCK PURCHASE PLAN Under the 1987 Employee Stock Purchase Plan, the
Company is authorized to issue up to 2.8 million shares of common stock to its
full-time employees, nearly all of whom are eligible to participate. Under the
terms of the Plan, employees can choose each year to have up to 10 percent of
their annual base earnings withheld to purchase the Company's common stock. The
purchase price of the stock is 85 percent of the lower of the closing price at
the beginning or at the end of each six-month offering period. Approximately 75
to 80 percent of eligible employees have participated in the Plan in the last
two years.
Sales under the Employee Stock Purchase Plan in 1997, 1996, and 1995 were
173,294, 167,626, and 326,646 shares of common stock at an average price of
$25.46, $21.49, and $7.91 per share, respectively. At December 31, 1997, there
were 178,038 shares available for future purchases under the Employee Stock
Purchase Plan.
Compensation cost is recognized for the fair value of the employees' purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for 1997,1996, and 1995, respectively: an expected life of six
months for all years; expected volatility of 44.7%, 38.4%, and 30.7%; risk-free
interest rates of 5.3%, 5.1%, and 6.0%; and dividend yields of 0%. The
weighted-average fair value per share of those purchase rights granted in
1997,1996, and 1995, as defined by SFAS No.123, was $11.65, $5.55, and $4.35,
respectively.
The Company received a $20.0 million, $4.5 million, and $5.3 million tax benefit
in 1997, 1996, and 1995, respectively, on the exercise of non-qualified stock
options and on the disposition of stock acquired with an incentive stock option
or through the Employee Stock Purchase Plan.
PRO FORMA NET INCOME AND NET INCOME PER SHARE Had the Company recorded
compensation costs based on the estimated grant date fair value as defined by
SFAS No.123, for awards granted under its Stock Option Plans and Stock Purchase
Plan, the Company's net income and net income per share would have been reduced
to the pro forma amounts below for the years ended December 31, 1997, 1996,
and 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (in thousands) $ 116,054 $ 99,885 $ 83,815
Pro forma net income per share:
Basic $ 1.31 $ 1.14 $ .97
Diluted 1.21 1.08 .92
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The pro forma amounts reflect compensation expense related to 1997, 1996, and
1995 stock option grants only. In future years, the annual compensation expense
will increase as a result of the fair value of stock options granted in those
future years.
Note 11: Common Stock Repurchases
On July 15, 1996, the Board of Directors authorized the repurchase of up to 2
million shares of the Company's common stock. The repurchased shares offset the
dilution caused by the Company's employee stock purchase and stock option plans.
During July 1996, the Company repurchased 300,000 shares of common stock for a
total price of $4.3 million. In January 1998, the Company repurchased an
additional 540,000 shares of common stock for a total price of $17.0 million.
The repurchased shares were retired upon acquisition.
Note 12: Litigation
In June 1993, Xilinx, Inc. (Xilinx) brought suit against the Company seeking
monetary damages and injunctive relief based on the Company's alleged
infringement of certain patents held by Xilinx. In June 1993, the Company
brought suit against Xilinx, seeking monetary damages and injunctive relief
based on Xilinx's alleged infringement of certain patents held by the Company.
In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware,
Xilinx's state of incorporation, seeking monetary damages and injunctive relief
based on Xilinx's alleged infringement of one of the Company's patents. In May
1995, Xilinx counterclaimed against the Company in Delaware, asserting defenses
and seeking monetary damages and injunctive relief based on the Company's
alleged infringement of certain patents held by Xilinx. Subsequently, the
Delaware case has been transferred to California. Due to the nature of the
litigation with Xilinx and because the lawsuits are still in the pre-trial
stage, the Company's management cannot estimate the total expense, the possible
loss, if any, or the range of loss that may ultimately be incurred in connection
with the allegations. Management cannot ensure that Xilinx will not succeed in
obtaining significant monetary damages or an injunction against the manufacture
and sale of the Company's MAX 5000, MAX 7000, FLEX 8000, or MAX 9000 families of
products, or succeed in invalidating any of the Company's patents. Although no
assurances can be given as to the results of these cases, based on the present
status, management does not believe that any of such results will have a
material adverse effect on the Company's financial condition or results of
operations.
In August 1994, Advanced Micro Devices ("AMD") brought suit against the Company
seeking monetary damages and injunctive relief based on the Company's alleged
infringement of certain patents held by AMD. In September 1994, Altera answered
the complaint asserting that it is licensed to use the patents which AMD claims
are infringed and filed a counterclaim against AMD alleging infringement of
certain patents held by the Company. In October 1997, upon completion of trials
bifurcated from the infringement claims, the Court ruled that the Company is
licensed under all patents asserted by AMD in the suit. In December 1997, AMD
filed a Notice of Appeal of the Court's rulings. Due to the nature of the
litigation with AMD, and because AMD has appealed the court rulings that the
Company is licensed under all of the patents asserted by AMD in the suit, the
Company's management cannot estimate the total expense, the possible loss, if
any, or the range of loss that may ultimately be incurred in connection with the
allegations. Management cannot ensure that AMD will not succeed in obtaining
significant monetary damages or an injunction against the manufacture and sale
of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K, and
FLASHlogic product families, or succeed in invalidating any of the Company's
patents remaining in the suit. Although no assurances can be given to
<PAGE> 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the results of this case, based on its present status, management does not
believe that any of such results will have a material adverse effect on the
Company's financial condition or results of operations. Note 13: Income Taxes
The Company's income before taxes is composed primarily of domestic income. The
Company expects that the proportion of foreign income before taxes will increase
in the future. The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
United States $ 70,399 $ 57,680 $ 64,931
State 14,328 9,799 10,663
Foreign 1,695 586 400
---------------------------------------
Total current tax expense 86,422 68,065 75,994
Deferred taxes (8,368) (8,063) (24,974)
---------------------------------------
Total provision for income taxes $ 78,054 $ 60,002 $ 51,020
- --------------------------------------------------------------------------------------
</TABLE>
Deferred tax assets (liabilities) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Assets:
Accrued expenses and reserves $ 56,592 $ 38,404
Acquisition costs 7,273 7,282
State taxes 4,200 3,675
Other 1,726 1,590
------------------------
Gross deferred tax assets 69,791 50,951
Deferred tax liabilities (2,084) (909)
Deferred tax asset valuation allowance (4,631) (4,640)
------------------------
Net deferred tax assets $ 63,076 $ 45,402
- ---------------------------------------------------------------------
</TABLE>
The change in deferred taxes includes $9.3 million of deferred taxes included in
the cumulative effect of change in accounting principle. The valuation allowance
of $4.6 million at December 31, 1997 and 1996 is attributable to deferred tax
assets from the 1994 acquisition of Intel's programmable logic business.
Sufficient uncertainty exists regarding the realizability of these assets and,
accordingly, valuation allowances are required.
The provision for taxes reconciles to U.S. statutory taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at U.S. statutory rates $ 80,350 $ 59,198 $ 48,262
State taxes, net of federal benefit 7,290 6,172 6,315
Interest income on municipal obligations (4,270) (2,975) (1,435)
Other, net (5,316) (2,393) (2,122)
----------------------------------------
Total provision for income taxes $ 78,054 $ 60,002 $ 51,020
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 14: Quarterly Financial Information (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Sales
As originally reported $ 142,439 $ 164,115 $ 162,126 $ 157,088
Effect of revenue recognition change 3,604 1,742 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 146,043 165,857 162,126 157,088
------------------------------------------------------------------
Gross profit
As originally reported 88,345 102,872 101,377 98,121
Effect of revenue recognition change 2,343 1,098 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 90,688 103,970 101,377 98,121
------------------------------------------------------------------
Cumulative effect of change in accounting principle 18,064
------------------------------------------------------------------
Net income
As originally reported 34,056 39,729 38,811 36,650
Effect of revenue recognition change (16,518) 725 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 17,538 40,454 38,811 36,650
------------------------------------------------------------------
Basic income per share: Income before
cumulative effect of accounting change
As originally reported 0.39 0.45 0.44 0.41
Effect of revenue recognition change 0.02 0.01 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 0.41 0.46 0.44 0.41
------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.20)
------------------------------------------------------------------
Net income
As originally reported 0.39 0.45 0.44 0.41
Effect of revenue recognition change (0.19) 0.01 -- --
As restated for first three quarters and
as reported for fourth quarter 0.20 0.46 0.44 0.41
------------------------------------------------------------------
Diluted income per share: Income before
cumulative effect of accounting change
As originally reported 0.35 0.40 0.40 0.38
Effect of revenue recognition change 0.01 0.01 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 0.36 0.41 0.40 0.38
------------------------------------------------------------------
Cumulative effect of change in accounting principle (0.18)
------------------------------------------------------------------
Net income
As originally reported 0.35 0.40 0.40 0.38
Effect of revenue recognition change (0.16) 0.01 -- --
------------------------------------------------------------------
As restated for first three quarters and
as reported for fourth quarter 0.19 0.41 0.40 0.38
------------------------------------------------------------------
1996
Sales $ 137,098 $ 116,295 $ 116,728 $ 127,185
Gross profit 84,044 71,446 71,634 78,224
Net income 31,440 24,265 24,118 29,312
Basic net income per share 0.36 0.28 0.28 0.33
Diluted net income per share 0.33 0.26 0.26 0.31
Pro forma amounts for 1996 assuming the change in
accounting principle related to revenue recognition
was applied retroactively:
Sales 133,329 114,919 116,885 131,873
Gross profit 81,628 70,524 71,739 81,290
Net income 29,894 23,675 24,185 31,336
Basic net income per share 0.34 0.27 0.28 0.36
Diluted net income per share 0.32 0.25 0.26 0.33
</TABLE>
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Altera Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Altera
Corporation and its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 5 to the consolidated financial statements, in 1997 the
Company changed its method of recognizing revenue.
/s/ PRICE WATERHOUSE LLP
San Jose, California
January 20, 1998
<PAGE> 24
Corporate Directory
Board of Directors
Rodney Smith
Chairman, President, and Chief Executive Officer
Altera Corporation
Charles M. Clough
Former Chairman, President, and Chief Executive Officer
Wyle Electronics
Michael A. Ellison
Chief Executive Officer
Steller, Inc.
Paul Newhagen
Vice President, Administration
Altera Corporation
Robert W. Reed
Former Senior Vice President
Intel Corporation
William E. Terry
Former Director and Executive Vice President
Hewlett-Packard Company
Deborah Triant, Ph.D.
President and Chief Executive Officer
CheckPoint Software Technologies, Inc.
Corporate Officers
Rodney Smith
President and Chief Executive Officer
C. Wendell Bergere
Vice President, General Counsel, and Secretary
Denis Berlan
Executive Vice President and Chief Operating Officer
Erik R. Cleage
Vice President, Marketing
John R. Fitzhenry
Vice President, Human Resources
Paul Newhagen
Vice President, Administration
Thomas J. Nicoletti
Vice President, Investor Relations and Business Development
Nathan Sarkisian
Vice President, Finance and Chief Financial Officer
Peter Smyth
Vice President, Sales
Appointed Officers
Bahram Ahanin
Vice President, CAD and Design Automation
Donald Faria
Vice President, Customer Marketing
Bruce Mielke
Vice President, Product Engineering
Timothy J. Southgate
Vice President, Software Engineering
Clifton S. Tong
Vice President, Product Marketing
John E. Turner
Vice President, Design Engineering
Corporate Headquarters
101 Innovation Drive
San Jose, California 95134
(408) 544-7000
Independent Accountants
Price Waterhouse LLP
San Jose, California
Form 10-K
A copy of the Company's Form 10-K, as filed with the Securities and
Exchange Commission (without exhibits), is available from:
Altera Corporation
101 Innovation Drive
San Jose, California 95134
(408) 544-7707
Stock Listing
Altera's common stock is quoted on The Nasdaq Stock Market under
the symbol "ALTR."
For the past two years, the quarterly high and low closing sales prices for the
common stock were:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------
Quarter High Low High Low
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
First 48 1/8 35 7/8 38 1/2 22 9/16
Second 54 42 1/16 31 3/16 18 13/16
Third 64 7/8 49 3/8 27 5/8 14
Fourth 53 3/4 30 9/16 38 7/8 24 7/8
- -------------------------------------------------------------
</TABLE>
Registrar/Transfer Agent
Boston EquiServe, L.P.
Investor Relations
P.O. Box 8040
Boston, MA 02266-8040
(781) 575-3120
Altera, FLEX, FLEX 10K, FLEX 10KA, FLEX 10KE, FLEX 8000, FLEX 6000, MAX, MAX
9000, MAX 9000A, MAX 7000, MAX 7000S, MAX 5000, Classic, FLASHlogic, MAX+PLUS,
MAX+PLUS II, and individual device designations are trademarks and/or service
marks of Altera Corporation in the United States and other countries. Altera
Corporation acknowledges the trademarks of other organizations for their
respective products or services mentioned in this document.
<PAGE> 1
EXHIBIT 18.1
January 20, 1998
To the Board of Directors
of Altera Corporation
Dear Directors:
We have audited the consolidated financial statements included in Altera
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997
and issued our report thereon dated January 20, 1998. Note 5 to the consolidated
financial statements describes a change in the Company's method for recognizing
revenue from the time product is shipped to distributors to the time product is
shipped from the distributors to the end customers. It should be understood that
the preferability of one acceptable method of revenue recognition over another
has not been addressed in any authoritative accounting literature and in
arriving at our opinion expressed below, we have relied on management's business
planning and judgment. Based on our discussions with management and the stated
reasons for the change, we believe that such change represents, in your
circumstances, the adoption of a preferable alternative accounting principle for
revenue recognition in conformity with Accounting Principles Board Opinion No.
20.
Yours very truly,
/s/ PRICE WATERHOUSE LLP
- --------------------------------------
Price Waterhouse LLP
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION YEAR
NAME OF INCORPORATION ORGANIZED
---- ---------------- ---------
<S> <C> <C>
Altera GmbH Germany 1989
Altera Foreign Sales Corporation Barbados 1989
Nihon Altera KK Japan 1990
Altera France SARL France 1990
Altera Italia s.r.l. Italy 1991
Altera (UK) Limited United Kingdom 1992
Altera Corporation (M) Sdn Bhd Malaysia 1995
Altera B.V.B.A. Belgium 1996
Altera AB Sweden 1996
Altera International, Inc. Cayman Islands 1997
Altera International Limited Hong Kong 1997
Altera Taiwan Co., Ltd. Taiwan 1997
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-22877, No. 33-37159, No. 33-57350, No. 33-61085,
No. 333-06859 and No. 333-32555) of Altera Corporation of our report dated
January 20, 1998 appearing on page 32 of the Annual Report to Stockholders which
is incorporated in this Annual Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
--------------------------------------
PRICE WATERHOUSE LLP
San Jose, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,761
<SECURITIES> 354,808
<RECEIVABLES> 55,251
<ALLOWANCES> 3,008
<INVENTORY> 98,883
<CURRENT-ASSETS> 616,202
<PP&E> 210,211
<DEPRECIATION> 57,794
<TOTAL-ASSETS> 952,518
<CURRENT-LIABILITIES> 185,831
<BONDS> 230,000
0
0
<COMMON> 123,633
<OTHER-SE> 413,054
<TOTAL-LIABILITY-AND-EQUITY> 952,518
<SALES> 631,114
<TOTAL-REVENUES> 631,114
<CGS> 236,958
<TOTAL-COSTS> 236,958
<OTHER-EXPENSES> 167,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,701
<INCOME-PRETAX> 229,571
<INCOME-TAX> 78,054
<INCOME-CONTINUING> 151,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 18,064
<NET-INCOME> 133,453
<EPS-PRIMARY> 1.51<F1>
<EPS-DILUTED> 1.37
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
