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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended _____September 30, 1998_____
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934]
For the transition period from ______________________ to ______________________
Commission file number 0-23084
INTEGRATED SILICON SOLUTION, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 77-0199971
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2231 Lawson Lane, Santa Clara, California 95054.
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(Address of principal executive offices) zip code
Registrant's telephone number, including area code (408) 588-0800
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.0001 PER SHARE NASDAQ NATIONAL MARKET
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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 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 voting stock held by non-affiliates of
the registrant, based upon the closing price of such stock on November 28, 1997,
as reported by the Nasdaq National Market, was approximately $159.5 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on
December 1, 1998 was 19,417,827.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting
of Stockholders to be held on January 29, 1999 are incorporated by reference in
Part III of this Form 10-K.
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AMENDED FILING OF FORM 10-K FOR 1998
RESTATEMENT OF FINANCIAL STATEMENTS
AND CHANGES TO CERTAIN INFORMATION
This amendment is being filed to correct the financial statements for the
Company's fiscal year ended September 30, 1998 resulting from having incorrectly
omitted the impact of the cumulative translation adjustment in calculating the
Company's gain from the partial sale of its subsidiary during the June 1998
quarter (see the last paragraph of Note 1 to the Consolidated Financial
Statements).
General information in the originally filed Form 10-K was presented as of the
December 16, 1998 filing date, or earlier as indicated. Unless otherwise
stated, such information has not been updated in this amended filing.
Financial statement and related disclosures contained in this amended filing
reflect, where appropriate, changes to conform to the restatement.
TABLE OF CONTENTS
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PART I
Item 1. Business................................................................................1
Item 2. Properties..............................................................................9
Item 3. Legal Proceedings.......................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.....................................9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...............10
Item 6. Selected Consolidated Financial Data....................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................11
Item 8. Financial Statements and Supplementary Data.............................................22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..............................................................................44
PART III
Item 10. Directors and Executive Officers of the Registrant......................................44
Item 11. Executive Compensation..................................................................44
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................44
Item 13. Certain Relationships and Related Transactions..........................................44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................44
SIGNATURES.........................................................................................47
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When used in this Report, the words "expects," "anticipates," "believes,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements, which include statements concerning the timing
of new product introductions; the functionality and availability of products
under development; trends in the networking, telecommunications, personal
computer and instrumentation markets, in particular as they may affect demand
for or pricing of the Company's products; the percentage of export sales and
sales to strategic customers; the percentage of revenue by product line; and the
availability and cost of products from the Company's suppliers; are subject to
risks and uncertainties, including those set forth in Item 1 of Part I and in
Item 7 of Part II hereof entitled "Certain Factors Which May Affect the
Company's Business or Future Operating Results" and elsewhere in this Report,
that could cause actual results to differ materially from those projected in the
forward-looking statements. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or to reflect any change in events, conditions or
circumstances on which any such forward-looking statement is based, in whole or
in part.
PART I
ITEM 1. BUSINESS
GENERAL
Integrated Silicon Solution, Inc. ("ISSI" or the "Company") designs,
develops and markets high performance memory devices including static random
access memory ("SRAM"), specialty dynamic random access memory ("DRAM"), and
nonvolatile memory ("NVM"). The Company also designs, develops and markets
embedded memory devices which include voice recording chips and certain
microcontroller devices. The Company's memory devices are used in networking
applications, telecommunications, personal computers ("PC"), disk drives and
other peripherals, data communications, office automation, instrumentation and
consumer products. SRAM products include both asynchronous and synchronous
devices ranging in densities from 64K to 4 megabit. DRAM products focus on high
speed, low density devices with densities of 2, 4, and 16 megabits. Nonvolatile
memory products include Flash memories, EEPROMs (electrically erasable
programmable read only memories), and EPROMs (erasable programmable read only
memories). The Company has its headquarters in Santa Clara, California and
markets its products on a worldwide basis.
The primary function of high performance SRAMs is to improve the overall
performance of an electronic system by compensating for the disparity in the
speeds of other integrated circuits within the system architecture. As a result,
speed is a key performance characteristic for SRAMs. In many mobile or portable
applications the need for low power is also a key performance characteristic.
Customers also regard cost as a critical factor. For these reasons, in order to
continually improve product performance and reduce costs, the Company must have
access to state-of-the-art process technology for wafer manufacturing and be
able to implement design improvements, such as reduced geometries, on a
consistent basis.
The Company leverages its SRAM design and advanced complimentary metal
oxide semiconductor ("CMOS") process technology expertise to establish
collaborative manufacturing relationships with Asian semiconductor manufacturers
which use the Company's memory products as a vehicle for the development of
advanced process technology. The Company believes that these relationships
assist in securing access to leading edge process technology and a committed
source for wafer processing. The Company's principal collaborative manufacturing
relationship is with Taiwan Semiconductor Manufacturing Corporation ("TSMC"),
with which it jointly develops process technology for producing the Company's
SRAMs. The Company also has a collaborative program with Chartered Semiconductor
Manufacturing ("Chartered") in Singapore. In addition, the Company has a
manufacturing program with United Microelectronics Corporation ("UMC") in
Taiwan. To further strengthen its manufacturing relationships, the Company has
made an equity investment in a business venture with TSMC and an equity
investment in a business venture with UMC.
ISSI was founded in 1988. The Company has its headquarters in Santa
Clara, California. This facility focuses on research and development, product
definition, quality assurance and marketing and sales. The Company has majority
ownership of a subsidiary in Taiwan ("ISSI-Taiwan"). ISSI-Taiwan focuses on
manufacturing coordination, quality assurance, product test and regional sales
in the Asian market. See "Recent Developments".
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The Company also has a subsidiary in Hong Kong that primarily focuses on
research and development and a subsidiary in China which focuses mainly on
marketing.
RECENT DEVELOPMENTS
In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. Cash proceeds from the transaction totaled $35.5
million net of withholding and transaction taxes. The Company intends to
continue to use ISSI-Taiwan for the majority of its manufacturing coordination,
testing of wafers, and testing of its memory devices. However, the Company
believes that, in the next decade, more cost efficient testing services may
become available in countries such as China or Vietnam, and could be used by the
Company. The Company expects to sell up to an additional 18% of its interest in
ISSI-Taiwan in fiscal 1999 and, as a result, the Company's ownership interest in
ISSI-Taiwan will be less than 50%. At such time, the Company's financial
statements will not consolidate the results of ISSI-Taiwan but will account for
ISSI-Taiwan on the equity basis and will include its percentage share of
ISSI-Taiwan's financial results. At such time as the Company's consolidated
results no longer include ISSI-Taiwan, there will be a significant decline in
the Company's consolidated revenue, a decline in operating expenses, and there
may be an increase in the Company's effective tax rate. See Note 13 of Notes to
Consolidated Financial Statements.
In October 1998, the Company transferred its Flash memory business to a
newly formed company, NexFlash Technologies, Inc. ("NexFlash"). The Company
presently owns approximately 32% of NexFlash, ISSI-Taiwan owns approximately
17%, and private investors and management own approximately 51% of NexFlash. The
Company and NexFlash jointly own related Flash intellectual property. The
Company intends that future development of Flash products and the sale of such
products will be done through NexFlash. In fiscal 1999, the Company's financial
results will not consolidate the results of NexFlash, as the Company's ownership
of NexFlash is less than 50%. The Company will account for NexFlash on the
equity basis and will include in its financial statements its percentage share
of NexFlash's financial results. This change is expected to have a minimal
effect on the Company's consolidated revenue and will result in a decrease in
the Company's consolidated research and development expenses. See Note 19 of
Notes to Consolidated Financial Statements.
PRODUCTS
The Company designs and markets a family of high performance, low cost
SRAMs, high speed, low density DRAMs, as well as NVM products, including serial
EEPROMs, high speed EPROMS, and Voice EPROMs. Flash products are developed and
marketed by a minority owned company, NexFlash. See "Recent Developments". To
date the Company has derived substantially all of its revenues from the sale of
SRAM products.
SRAMS
The Company offers a family of CMOS SRAMs in various densities, speeds
and packaging configurations. SRAM densities include 64K (8K x 8), 256K (32K x
8), 512K (64K x 8 and 32K x 16), 1 megabit (128K x 8, 64K x 16, 32K x 32), 2
megabit (64K x 32), and 4 megabit (64K x 64 and 128K x 32). The Company produces
both asynchronous SRAMs and synchronous SRAMs. The Company's 2 megabit 64K x 32
synchronous SRAM currently achieves clock speeds of 166MHz. Leading speeds for
the Company's asynchronous SRAMs vary according to density. The 1 megabit 128K x
8 SRAM currently achieves 12 nanoseconds. The 256K SRAM achieves as low as an 8
nanosecond access time.
The Company's asynchronous SRAMs are used in applications such as LANs,
telecommunications, bridges, routers, modems, multimedia products, and
industrial instrumentation. Additional SRAM products are under development and
are expected to include performance-leading features in speed, configuration,
power levels, density and packaging. The Company's synchronous SRAMs are used
primarily in networking applications. The Company is also developing embedded
memory products, which will combine certain logic functions with SRAM.
DRAMS
The Company's DRAM products focus on very high speed and low to medium
density devices. The Company currently offers 2, 4, 8, and 16 megabit Fast Page
Mode (FPM), Extended Memory Out (EDO), SDRAM and SGRAM. Applications for such
devices currently include 3D graphics, disk drives, networking, modems,
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telecommunications base stations, and set top box applications. Such devices are
not targeted at the main memory DRAM market.
NONVOLATILE MEMORY PRODUCTS
The Company's NVM products include high performance serial EEPROMs and
EPROMS. The Company's selection of serial EEPROM devices are used in
applications that require nonvolatile storage of data or code and allow the
information to be modified during system operation. Applications for serial
EEPROMs include pagers, networking systems, modems, telephone sets, security
systems, smart cards, video games and other consumer products. The Company's
EPROM product offerings include 256K, 512K, 1 megabit, and 2 megabit devices.
EPROM applications include modems, printers, digital phones, and
instrumentation.
Flash memory business, which was transferred to NexFlash, includes
Serial Flash, Parallel Flash and Embedded Flash. The Serial Flash family
includes Serial Flash Memory products ranging in density from 1M-bit to 16M-bit,
and Serial Flash Module products (removable Flash cards) ranging in density from
128K-byte to 4M-byte. Ultra-low-power Serial Flash devices are designed for
storing voice, images or data in applications such as voice recorders, digital
cameras, hand-held terminals, internet appliances, and data loggers. The
Parallel Flash line includes a 1M-bit Flash memory that is the first in a family
of high performance, industry compatible devices used in modems, graphics cards,
and industrial systems. Embedded Flash includes high density Flash memory blocks
that, in conjunction with Foundry partners, are licensed for use in Embedded
Flash applications such as microcontrollers, digital signal processors, and ASIC
controllers.
The Company has also developed a memory intensive 8051 microcontroller.
Microcontrollers are used in a broad array of electronic equipment for the
command and control logic of appliances, toys or cellular phones. The Company
also produces a voice-recording chip that combines voice algorithm technology in
a Flash based recording chip. Initial applications for this device are in
consumer electronics such as voice recorded greeting cards. Revenue from both of
these products has been immaterial.
DESIGN AND PROCESS TECHNOLOGY
The Company has invested in advanced process technology that allows it to
design at leading edge geometries such as 0.18 micron for SRAMs. Memory products
are particularly well suited for the development of advanced process technology.
The Company's technology development engineers work closely with the Company's
design engineers and manufacturing partners, such as TSMC and Chartered
Semiconductor, to develop new process technologies, refine existing process
technologies and to reduce the circuit geometries of its products. During 1998,
the Company and TSMC began development of 0.18 micron, 3.3-volt high speed SRAM
process technology. In addition, the Company has developed a six transistor cell
SRAM for low power applications. SRAMs that do not require low power typically
use four transistor cell structures.
The Company's design efforts focus on product specification, memory cell
and array structure, logic and circuit design, simulation and layout. The
Company has invested in advanced computer aided design ("CAD") systems to ensure
that the design team has state-of-the-art design tools and employs innovative
and rigorous design methodologies. The Company leverages its memory expertise to
design embedded memory products that combine memory and logic.
MANUFACTURING
The Company combines its process technology expertise, foundry
partnership strategy and equity investment arrangements with TSMC and UMC to
form a hybrid of the fab and fabless business models which it calls
Fab-Lite(TM). The Company does not own or operate its own wafer foundry but
because memory products are particularly well suited for the development of
advanced process technology, the Company actively participates in developing and
refining the process technology used to manufacture many of its products. The
Company believes that this strategy enables it to achieve the early introduction
of advanced geometries for its high performance memory products, which results
in increased performance and lower manufacturing costs. To date, the Company's
principal manufacturing relationship has been with TSMC. The Company also has a
collaborative technology development relationship with Chartered Semiconductor
in Singapore.
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In 1995, the Company entered into a business venture, United Integrated
Circuits Corp ("UICC") with UMC and other investors to build a wafer fabrication
facility in Hsinchu, Taiwan. The Company currently has an investment in UICC of
approximately $16.5 million and no additional investment payments are due. The
UICC facility was severely damaged by fire in October 1997. It is the Company's
understanding that the damage was covered by insurance. UICC has undertaken a
clean up of the facility, but reconstruction has not commenced as an alternative
site is being evaluated. A decision as to whether to build on the existing site
or the alternative site has not yet been made. The Company believes that its
investment of $16.5 million is recoverable.
In 1996, the Company entered into a business venture agreement with
Altera Inc., Analog Devices Inc. and TSMC wherein TSMC, as the general partner,
would construct a wafer fabrication facility in the state of Washington. The
fabrication facility is intended to be a very advanced process technology
facility capable of 0.35, 0.30, 0.25 and 0.18 micron process technology. The
joint venture, named WaferTech LLC, began production in 1998 and is expected to
increase production levels in 1999 and 2000. The Company currently has an
investment in the business venture of $31.2 million and no additional investment
payments are due. In December 1998, the Company agreed to sell approximately 33%
of its investment in WaferTech to TSMC for approximately $10.0 million. The
transaction is expected to close in January 1999. Upon completion of the
transaction, the Company will have a 2.67% interest in WaferTech.
The manufacturing of the Company's products is coordinated primarily by
ISSI-Taiwan, which is located in close proximity to TSMC and UMC in the Hsinchu
Science-Based Industrial Park, a government-sponsored technology development
zone. After receiving wafers from its independent wafer foundry partners,
ISSI-Taiwan performs wafer probe testing, laser repair, and final testing. The
Company's U.S. headquarters develops and debugs test programs and tests
procedures used in Taiwan. Both the Taiwan and U.S. facilities have clean rooms
that are equipped for the wafer probe segment of the testing process. Packaging
and assembly operations are performed by subcontractors, principally in Taiwan.
A comprehensive quality control program is in place in both facilities. The
Company has adopted ISO 9000 as its quality management standard. The Company's
U.S. facility has received certification under ISO 9001 standards. ISSI-Taiwan
has received certification under ISO 9002 standards.
Each of the Company's wafer suppliers also fabricates for other
integrated circuit companies, including certain of the Company's competitors. In
addition, UMC subsidiaries manufacture integrated circuits, including SRAMs, for
their own account. Although the Company has written commitments specifying wafer
capacities, if a wafer supplier chose to prioritize capacity for other use or
reduce or eliminate deliveries to the Company, there can be no assurance that
the Company could enforce fulfillment of the delivery commitments. The equity
investment arrangements and related purchase agreements by the Company with TSMC
and UMC will provide the Company with guaranteed capacity, and thus are expected
to mitigate this delivery risk in the future. However, since the construction of
a wafer fabrication facility is a lengthy and complex endeavor, there can be no
assurance that the TSMC business venture fabrication facility or the UMC
business venture fabrication facility will be capable of meeting their
commitments. In this regard, the UMC business venture facility was severely
damaged by fire in October 1997 resulting in a delay in wafer production.
There can be no assurance that the foundries used by the Company will not
encounter construction or production difficulties or that they will allocate
sufficient wafer capacity to satisfy the Company's wafer requirements,
especially in times of wafer capacity shortages. Moreover, there can be no
assurance that the Company would be able to qualify additional manufacturing
sources for existing or new products in a timely manner or that such additional
manufacturing sources would be able to produce an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.
Although the Company's policy is to work closely with its manufacturing
sources there are certain risks associated with the use of independent
foundries, including the absence of a controlled source of supply, or delays in
obtaining adequate wafer supplies. In addition, the manufacture of integrated
circuits is a highly complex and technically demanding process. Production
yields and device reliability can be affected by a large number of factors. As
is typical in the semiconductor industry, the Company's outside foundries have
from time to time experienced lower than anticipated manufacturing yields and
device reliability problems, particularly in connection with the introduction of
new products and changes in such foundry's processing steps. There can be no
assurance that the Company's foundries will not experience lower than expected
manufacturing yields or device reliability problems in the future, which could
materially and adversely affect the Company's business and operating results.
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The Company has certain minimum wafer purchasing commitments to its
foundry partners in exchange for wafer capacity commitments. Although the
Company has rights to re-schedule or assign capacity to another party, there can
be no assurance that such re-schedule or assignment would be successfully
accomplished. Should the Company fail to re-schedule or assign unneeded
capacity, the Company's business and operating results could be adversely
affected.
CUSTOMERS AND MARKETING
The Company's customers include a broad range of electronic system
manufacturers such as Cisco Systems, Compaq Computer, 3Com, IBM, Motorola, and
Seagate. The Company's SRAM products are used primarily in high-speed modems,
local area networks, bridges and routers, PC cache, disk drives, cellular
phones, base stations, and adapter cards. The Company's NVM products have a wide
range of memory applications including high-speed modems, local area networks,
adapter cards, cellular telephones and electronic games. In fiscal 1998, 1997,
and 1996, one customer, 3Com/U.S. Robotics, accounted for approximately 19%,
19%, and 22% of the Company's net sales, respectively.
In the United States, the Company markets its products through a direct
sales force and independent sales representatives. In addition, the Company has
four distributors in North America. The Company is continuing to expand its
marketing and sales activity in Europe. The Company has sales offices in the
United States, Europe, Japan, Hong Kong, Taiwan and the Peoples Republic of
China.
ISSI-Taiwan has a direct sales and marketing organization based in
Taipei, Taiwan that is primarily responsible for the Asian market. To date, a
majority of the Company's Asian sales have been to Taiwan customers. The Company
markets and distributes its products on a worldwide basis. In fiscal 1998,
approximately 43% of the Company's net sales were attributable to customers
located in the United States, 18% were attributable to customers located in
Europe and 39% were attributable to customers located in Asia. In fiscal 1997,
approximately 45% of the Company's net sales were attributable to customers
located in the United States, 13% were attributable to customers located in
Europe, and 42% were attributable to customers located in Asia. In fiscal 1996,
approximately 53% of the Company's net sales were attributable to customers
located in the United States, 10% were attributable to customers located in
Europe, and 37% were attributable to customers located in Asia. In fiscal 1998,
1997, and 1996, international sales (sales by ISSI-Taiwan and export sales by
ISSI-U.S.) comprised approximately 57%, 55%, and 47% of the Company's net sales,
respectively. See Note 13 of Notes to Consolidated Financial Statements.
The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws and,
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. Substantially all of the Company's foundries and assembly and test
operations are located in Asia. The Company transacts business predominately in
U.S. and New Taiwan ("NT") dollars. Such transactions expose the Company to the
risk of exchange rate fluctuations. The Company periodically monitors its
exposure to foreign currency fluctuations, and has from time to time taken
action to hedge against such exposure, but has not to date adopted any formal
hedging strategy. There can be no assurance that exchange rate fluctuations will
not materially and adversely affect its business and operating results in the
future.
The Company manufactures and markets primarily standard products and
sales are generally made pursuant to standard purchase orders, which can be
revised to reflect changes in the customer's requirements. Generally, purchase
orders and OEM agreements allow customers to reschedule delivery dates and
cancel purchase orders without significant penalties. For these reasons, the
Company believes that its backlog, while useful for scheduling production, is
not necessarily a reliable indicator of future revenues.
COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by an oversupply of product, price erosion, rapid technological
change, short product life cycles, cyclical market patterns and heightened
foreign and domestic competition. The ability of the Company to compete
successfully in the high performance memory market depends on factors both
within and outside of its control, including imbalances in supply and demand,
product pricing, the rate at which OEM customers incorporate the Company's
products into their systems,
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access to advance process technologies at competitive prices, product
functionality, performance, and reliability, successful and timely product
development, wafer supply, wafer costs, achievement of acceptable yields of
functional die, the gain or loss of significant customers, the nature of its
competitors and general economic conditions. There can be no assurance that the
Company will be able to compete successfully in the future as to any of these
factors. The failure of the Company to compete successfully in these or other
areas could materially and adversely affect the Company's business and operating
results. In addition, the Company is vulnerable to technology advances utilized
by competitors to manufacture higher performance or lower cost products.
The high performance SRAM market is generally a fragmented market and
specific competitors and competitive factors vary based on geographic regions
and market segments. In the high performance SRAM market, the Company competes
with several major domestic and international semiconductor companies including
Cypress Semiconductor, Integrated Device Technology ("IDT"), Mitsubishi,
Motorola, Samsung, Sony, Toshiba, UMC and Winbond. The Company also competes
with new and emerging companies, such as Galvantech and Giga Semiconductor,
which have recently entered or may in the future enter the market. The Company
also may face significant competition from other domestic and foreign integrated
circuit manufacturers, which have advanced technological capabilities but have
not previously participated in the SRAM market sector. There can be no assurance
that the Company will be able to compete successfully against any of these
competitors.
In the high speed DRAM area, the Company competes primarily with Silicon
Magic, E-toon, and G-Link. Other main memory DRAM companies could potentially
enter the high-speed market in the future. In the low to medium density DRAM
area, where speed is not the critical factor, the Company competes with
Mosel-Vitelic, Vanguard and Oki. There can be no assurance that the Company will
be able to compete successfully against any of these competitors. In the
nonvolatile memory market, the Company's primary competitors include Advanced
Micro Devices ("AMD"), Atmel, Intel and SGS-Thomson Microelectronics. The
Company also competes with many small to medium-sized companies in one or more
segments of the market.
Certain of the Company's competitors offer broader product lines and have
greater financial, technical, marketing, distribution and other resources than
the Company. There can be no assurance that the Company will be able to compete
successfully against any of these competitors.
The process technology used by the Company's manufacturing sources,
including process technology that the Company has developed with its foundries,
can be used by such manufacturers to produce products for other companies,
including the Company's competitors. Although the Company believes that its
participation in the development of the processes provides it the advantage of
early access to such processes, there can be no assurance that the knowledge of
the manufacturer will not be used to benefit the Company's competitors.
PRODUCT WARRANTY
Consistent with semiconductor memory industry practice, the Company
generally provides a limited warranty that its semiconductor memory devices are
in compliance with specifications existing at the time of delivery. Liability
for a stated warranty period is usually limited to replacement of defective
items or return of amounts paid.
RESEARCH AND DEVELOPMENT
Rapid technological change and continuing price competition require
research and development efforts on both new products and advanced processes
employing smaller geometries. The Company's research and development activities
are focused primarily on the development of advanced process technologies and
new memory circuit designs. The Company currently designs most of its high
performance memory products and jointly develops advanced process technology
with its manufacturing partners from its headquarters in Santa Clara,
California. The Company's Taiwan and Hong Kong subsidiaries are responsible for
the development of the Company's microcontroller products, voice products and
certain EEPROM products.
The Company is currently designing new SRAM, DRAM, Embedded Memory and
NVM products. SRAM products under development include low power SRAMs and
additional memory configurations. DRAM products under development include
synchronous graphics DRAMs. Nonvolatile memory products include the development
of additional EEPROM devices and, through NexFlash, Serial Flash products. The
Company's research and development expenditures in fiscal 1998, 1997 and 1996
were $36.9 million, $31.9 million, and $21.4 million, respectively.
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PATENTS
As of September 30, 1998, the Company held 27 U.S. patents, of which 13
were acquired with the acquisition of Nexcom Technology, Inc. ("Nexcom"). These
patents expire between 2010 and 2018. The Company has approximately 41
additional patent applications pending and expects to continue to file patent
applications where appropriate to protect its proprietary technologies. Although
patents are an important element of the Company's intellectual property, the
Company believes that its continued success depends primarily on factors such as
the technological skills and innovation of its personnel rather than on its
patents. The process of seeking patent protection can be expensive and time
consuming. There can be no assurance that patents will be issued from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to the Company. Moreover,
there can be no assurance that any patent rights will be upheld in the future or
that the Company will be able to preserve any of its other intellectual property
rights.
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results. Furthermore, there can be no assurance
that the Company will not become involved in protracted litigation regarding the
alleged infringement by the Company of third party intellectual property rights
or litigation to assert and protect patents or other intellectual property
rights of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company which could materially and adversely affect the
Company's business and operating results.
ACQUISITION OF NEXCOM TECHNOLOGY, INC.
In December 1997, the Company completed its acquisition of Nexcom in
exchange for the issuance of 772,693 shares of Common Stock, $0.5 million in
cash, and the assumption of $1.2 million of net liabilities (total consideration
of approximately $8.5 million). Nexcom was formed in 1990 and has been engaged
primarily in the research and development of non-volatile flash memory
technology. As a result of the merger, the Company acquired 13 patents which
were held by Nexcom. This Flash memory business has been transferred to
NexFlash. See "Recent Developments".
EMPLOYEES
As of September 30, 1998, the Company had approximately 150 employees in
the U.S. (of which 30 were transferred to NexFlash), 8 in the People's Republic
of China and 14 in Hong Kong. ISSI-Taiwan had approximately 270 employees at
September 30, 1998. The Company's future success will largely be dependent on
its ability to attract, retain and motivate highly qualified technical and
management personnel. The employment market for such personnel is extremely
competitive and there can be no assurance that the Company will successfully
staff all necessary positions. The Company's employees are not represented by
any collective bargaining agreements and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.
7
<PAGE> 10
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of September 30,
1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jimmy S.M. Lee 43 Chairman, Chief Executive Officer, President, and Director
Kong-Yeu Han 43 Executive Vice President, Office of the President, General Manager-Taiwan
and Director
Gary L. Fischer 47 Executive Vice President, Office of the President and Chief Financial Officer
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS
Jimmy S.M. Lee has served as Chief Executive Officer, President and a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From 1985 to
1988, Mr. Lee was engineering manager at International CMOS Technology, Inc., a
semiconductor company, and from 1983 to 1985, he was a design manager at
Signetics Corporation, a semiconductor company. Prior thereto, Mr. Lee was a
project manager at Toshiba Semiconductor Corporation and a design engineer at
National Semiconductor Corporation. Mr. Lee holds an M.S. degree in electrical
engineering from Texas Tech University and a B.S. degree in electrical
engineering from National Taiwan University.
Kong-Yeu Han has served as the Company's Executive Vice President since
April 1995, as General Manager, ISSI-Taiwan since September 1990 and as a
director of the Company since he co-founded the Company in October 1988. He has
also served as a director of ISSI-Taiwan since September 1990. From October 1988
to September 1990, he also served as Vice President, Engineering of the Company.
From 1985 to 1988, Mr. Han was design engineering manager at Vitelic
Corporation, a semiconductor company, and from 1984 to 1985 he was a staff
engineer at Signetics Corporation. From 1980 to 1984, Mr. Han was a senior
engineer at AMD and its subsidiary Monolithic Memories, Inc. ("MMI"), both of
which are semiconductor companies. Mr. Han holds an M.S. degree in electrical
engineering from the University of California, Santa Barbara and a B.S. degree
in electrical engineering from National Taiwan University.
Gary L. Fischer has served as the Company's Executive Vice President
since April 1995 and as Vice President and Chief Financial Officer since June
1993. He also served as Vice President, Finance and Administration from December
1993 to April 1995. From December 1992 to April 1993, Mr. Fischer was Vice
President, Finance and Chief Financial Officer of Shaman Pharmaceuticals, Inc.,
a pharmaceutical company. From January 1989 to December 1992, Mr. Fischer was
Chief Financial Officer of Synergy Semiconductor Corporation, a manufacturer of
high performance SRAM and logic integrated circuits. Mr. Fischer holds an M.B.A.
degree from the University of Santa Clara and a B.A. degree from the University
of California, Santa Barbara.
Officers serve at the discretion of the Board and are appointed annually.
There are no family relationships between the directors or officers of the
Company.
8
<PAGE> 11
ITEM 2. PROPERTIES
The Company's U.S. headquarters occupy a two story building, totaling
approximately 93,400 square feet, in Santa Clara, California in which its
executive offices, marketing, technology, product development groups and some
R&D testing facilities are located. The Company's minority owned business,
NexFlash, is located within this facility. The lease on this building expires in
February 2007. The Company subleases approximately 24,000 square feet to a third
party. The sublease expires in March 2000. ISSI-Taiwan occupies approximately
145,000 square feet of a newly constructed 500,000 square feet facility in the
Hsin-Chu Science-Based Industrial Park, which is owned by ISSI-Taiwan.
Approximately 155,000 square feet is leased to other tenants.
ITEM 3. LEGAL PROCEEDINGS
On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.
The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.
On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1998.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's common stock has been quoted on the Nasdaq National Market
under the symbol ISSI since the Company's initial public offering in February
1995. Prior to such date, there was no public market for the common stock. The
following table sets forth, for the fiscal quarters indicated, the high and low
sale prices per share for the Common Stock as reported on the Nasdaq National
Market. These prices are over-the-counter market quotations which reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year ending September 30, 1998 High Low
------------- ------------
<S> <C> <C>
Fourth quarter $ 7.125 $ 2.75
Third quarter 10.75 6.656
Second quarter 12.25 7.313
First quarter 14.50 7.00
<CAPTION>
Fiscal Year ending September 30, 1997 High Low
------------- ------------
<S> <C> <C>
Fourth quarter $ 16.375 $ 7.563
Third quarter 9.875 6.50
Second quarter 10.625 8.031
First quarter 12.375 8.00
</TABLE>
HOLDERS OF RECORD
As of December 1, 1998, there were approximately 13,900 beneficial
holders of the Company's common stock.
DIVIDENDS
The Company has never declared or paid cash dividends. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends on its capital stock in the foreseeable
future. The Company is subject to legal restrictions related to distribution of
earnings of its Taiwan subsidiary. See Note 10 of Notes to Consolidated
Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
On December 3, 1997, in connection with the merger of Nexcom with and
into the Company, the Company issued an aggregate of 772,693 shares of its
Common Stock to the Nexcom shareholders. The shares were issued pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated under the Securities Act
of 1933, as amended.
10
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(As restated)(2) (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 131,132 $ 108,261 $ 132,039 $ 123,201 $ 60,836
Gross margin 4,338 32,156 31,855 62,252 20,553
Operating income (loss) (53,053) (10,776) (4,683) 34,476 4,994
Net income (loss) (50,607) (7,686) 1,015 29,653 4,612
Basic income (loss) per share(1) (2.67) (0.43) 0.06 1.98 0.37
Diluted income (loss) per share(1) (2.67) (0.43) 0.06 1.80 0.34
Working capital 32,549 75,544 107,929 120,839 16,648
Total assets 202,168 195,596 178,039 204,441 33,243
Total long-term obligations, notes payable,
and current portion of long-term obligations 33,791 20,101 14,534 33,888 1,526
Stockholders' equity 90,920 134,567 142,435 139,909 21,187
Dividends paid -- -- -- -- --
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate net income (loss) per share. Pro forma income per
share is presented for fiscal 1994.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the Company's restatement of its fiscal 1998 financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As a result of the restatement of the Company's financial statements
for year ended September 30, 1998, certain information contained in this item
has been changed from that which appeared in the Company's originally filed Form
10-K for such year. Readers should carefully review the "Gain on Sale of
Investment" and "Liquidity and Capital Resources" sections included herein to
reflect the modified numbers.
RESULTS OF OPERATIONS
The Company's financial results for fiscal 1998 are presented on a
consolidated basis and include the results of the operations which were
transferred to NexFlash and as well as those of ISSI-Taiwan. In fiscal 1999, the
Company's financial results will not consolidate the results of NexFlash, as the
Company's ownership of NexFlash is less than 50%. The Company will account for
NexFlash on the equity basis and will include in its financial statements its
percentage share of NexFlash's financial results. This change is expected to
have a minimal effect on the Company's consolidated revenue and will result in a
decrease in the Company's consolidated research and development expenses. The
Company expects to sell up to an additional 18% of its interest in ISSI-Taiwan
in fiscal 1999 and, as a result, the Company's ownership interest in ISSI-Taiwan
will be less than 50%. At such time, the Company's financial statements will not
consolidate the results of ISSI-Taiwan but will account for ISSI-Taiwan on the
equity basis and will include its percentage share of ISSI-Taiwan's financial
results. At such time as the Company's consolidated results no longer include
ISSI-Taiwan, there will be a significant decline in the Company's consolidated
revenue, a decline in operating expenses, and there may be an increase in the
Company's effective tax rate. See Note 13 of Notes to Consolidated Financial
Statements.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
Net Sales. Net sales consist principally of total product sales less
estimated sales returns. Net sales increased by 21% to $131.1 million in fiscal
1998 from $108.3 million in fiscal 1997. The increase in sales was principally
due to shipments of the Company's newer products, specifically its 64K x 16, 64K
x 32, and 64K x 64 SRAMs and its 256K x 16 DRAM. Additionally, shipments of the
Company's more mature 128K x 8 SRAM product increased, more than offsetting the
lower average selling price for such product and shipments of the more mature
32K x32 SRAM increased while its average selling price increased. Shipments of
certain of the Company's NVM products, principally its EPROMs and EEPROMs,
declined significantly in fiscal 1998 compared to fiscal 1997. The Company
anticipates that the average selling prices of substantially all of its existing
products will continue to decline although the rate of decline may fluctuate for
certain products. There can be no assurance that such declines will be offset by
higher volumes or by higher prices on newer products. See "Certain Factors -
Declines in Average Selling Prices". Sales to 3Com/U.S. Robotics accounted for
approximately 19% of total net
11
<PAGE> 14
sales for both fiscal 1998 and fiscal 1997. As sales to this customer are
executed pursuant to purchase orders and no purchasing contract exists, the
customer can cease doing business with the Company at any time.
Gross Profit. The Company's cost of sales includes die cost from the
wafers acquired from foundries, subcontracted package and assembly costs, costs
associated with in-house product testing, quality assurance and import duties.
Gross profit decreased 87% to $4.3 million in fiscal 1998 from $32.2 million in
fiscal 1997. As a percentage of net sales, gross profit decreased to 3.3% in
fiscal 1998 from 29.7% in fiscal 1997. In fiscal 1998, the Company recorded
inventory write-downs of $23.0 million, including $9.6 million in the September
quarter. The inventory write-downs were predominately for lower of cost or
market issues on certain of the Company's products, primarily SRAMs. The
September 1998 quarter included a $2.9 million write-down of certain Flash
inventories due to obsolescence resulting from the decision to spin off the
Company's Flash product business to form NexFlash. In addition, in the December
1997 quarter, the Company wrote-off $0.8 million worth of a specific DRAM
product, for which the Company's six month forecast showed minimal demand at
December 31, 1997 and for which the Company has had minimal sales to date. It is
the Company's practice to write-down to zero carrying value inventory on hand in
excess of six months estimated sales volumes to cover estimated exposures unless
adjustments are made to the forecast based on management's judgments for newer
products, end of life products or planned inventory increases. Management's
judgments take into account the product life cycles which can range from 6 to 24
months, the maturity of the product as to whether it is newly introduced or is
approaching its end of life, the impact of competitor announcements and product
introductions on the Company's products and purchasing opportunities due to
excess wafer capacity. The Company believes that six months is an appropriate
period for sales forecasts and inventory exposure calculations because it is
difficult to accurately forecast for a specific product beyond this time frame
due to potential introduction of products by competitors, technology
obsolescence or fluctuations in demand. The policy has resulted in inventory
write-downs of approximately $5.4 million, $0, and $15 million for fiscal year
1998, 1997 and 1996, respectively, and recoveries of written-down inventory of
approximately $0, $13.9 million, and $0.3 million in fiscal 1998, 1997 and 1996,
respectively. Excluding the inventory write-downs of $23.0 million for fiscal
1998, the decrease in gross profit dollars was primarily the result of a
continuing decline in the average selling prices of the Company's products
without a commensurate decline in product cost, particularly in the second half
of the fiscal year. The Company believes that the average selling price of its
products will continue to decline and, unless the Company is able to reduce its
cost per unit to the extent necessary to offset such declines, the decline in
average selling prices will result in a material decline in the Company's gross
margin. Although the Company has product cost reduction programs in place for
certain products that involve efforts to reduce internal costs and supplier
costs, there can be no assurance that product costs will be reduced or that such
reductions will be sufficient to offset the expected declines in average selling
prices. The Company does not believe that such cost reduction efforts are likely
to have a material adverse impact on the quality of its products or the level of
service provided by the Company.
Research and Development. Research and development expenses increased
by 22% to $31.9 million in fiscal 1998 from $26.2 million in fiscal 1997. As a
percentage of net sales, research and development expenses increased to 24.3% in
fiscal 1998 from 24.2% in fiscal 1997. The increase in absolute dollars was
primarily the result of an increase in engineering personnel and payroll related
expenses and increased expenses related to the development of new products.
During fiscal 1998, the Company's development efforts principally focused on
wider width SRAMs such as the 64K x 64, 64K x 32, 64K x 36 and 128K x 64
configurations, specialty EDO DRAMs, specialty DSP support SRAMs, serial Flash
and other memory related devices. The Company anticipates that its research and
development expenses will decline in fiscal 1999 primarily as a result of its
transfer of Flash development efforts to NexFlash, as well as its expense
reduction efforts, which include a reduction in force, salary cuts, and
limitations on discretionary spending, although such expenses may fluctuate as a
percentage of net sales.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 10% to $18.4 million in fiscal 1998 from
$16.8 million in fiscal 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 14.0% in fiscal 1998, from 15.5% in fiscal
1997. The increase in absolute dollars was primarily the result of increased
payroll related expenses from the addition of marketing and sales personnel and
increased selling commissions associated with higher revenues partially offset
by decreases in bad debt expenses and legal expenses associated with antidumping
proceedings. The Company expects its selling, general and administrative
expenses will decline in fiscal 1999 as a result of its expense reduction
efforts, although such expenses may fluctuate as a percentage of net sales.
12
<PAGE> 15
In-process Technology. In December 1997, the Company completed its
acquisition of Nexcom in exchange for the issuance of 772,693 shares of Common
Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). In addition,
the Company incurred approximately $400,000 in other costs related to this
transaction. The transaction was accounted for as a purchase and resulted in an
in-process technology charge of $7.1 million in the Company's December 31, 1997
quarter.
Gain on sale of investment. In June 1998, the Company sold
approximately 46% of ISSI-Taiwan to a group of private investors. The price was
privately negotiated between the parties. Cash proceeds from the transaction
totaled $35.5 million net of withholding and transaction taxes. The transaction
resulted in a pre-tax gain of $10.5 million which is recorded in the Company's
June 30, 1998 quarter.
Interest and other income (loss), Net. Other income (loss), net
decreased to $(3.5) million in fiscal 1998 from $1.9 million in fiscal 1997,
primarily due to exchange losses as well as decreased interest earnings as a
result of lower cash and short-term investment balances and increased interest
expense as a result of increased short-term and long-term borrowings.
Provision (benefit) for Income Taxes. The income tax provision for
fiscal 1998 is comprised mainly of foreign withholding taxes related to the sale
of ISSI-Taiwan stock and a reversal of previously recorded federal deferred tax
assets which management has now determined should be subject to a valuation
allowance based on historical and future earnings trends. The income tax benefit
for fiscal 1997 was the result of losses which were carried back for refunds of
prior federal taxes paid and Taiwan tax credits offset by a partial valuation
allowance set up for U.S. deferred tax assets.
As a result of its Hsinchu Science-Based Industrial Park in Taiwan,
ISSI-Taiwan has received a significant tax exemption for taxable income
beginning October 1, 1992. This tax exemption is extended each time ISSI-Taiwan
expands its capital assets and uses the capital to purchase qualified machinery.
The precise amount of the exemption is calculated annually based upon the extent
of ISSI-Taiwan's net operating taxable income and measured by certain factors,
including use of qualified manufacturing equipment, self-manufacturing costs and
qualified sales revenue. The portion of ISSI-Taiwan's taxable income which is
not subject to exemption is taxed at a flat 20% tax rate. There can be no
assurances that the Company's current tax status in Taiwan will not change in
the future due to changes in the regulatory environment, the inability to
qualify for exempt status or other factors.
Under Statement of Financial Accounting Standards No. 109 (FAS 109),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Management has established a valuation allowance
covering the U.S. portion of the gross deferred tax assets based on management's
belief that the realization of the U.S. deferred tax assets is not realizable on
a more likely than not basis. Management has determined, based on ISSI-Taiwan's
history of prior operating earnings and its expectation of future taxable
income, that a partial valuation allowance for ISSI-Taiwan's deferred tax assets
should be provided. Although realization of the ISSI-Taiwan deferred tax assets
is not assured, management believes that it is more likely than not that the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended September 30,
1996
Net Sales. Net sales decreased by 18% to $108.3 million in fiscal 1997
from $132.0 million in fiscal 1996. The decrease in sales was principally due to
significant deterioration in the average selling prices of the Company's SRAM
and NVM products. The decreased revenue resulting from lower average selling
prices was partially offset by increased unit shipments of SRAM products,
specifically the Company's 256K, 512K, 1024K products, cache module products,
and NVM products. Sales to one customer, 3Com/U.S. Robotics, accounted for
approximately 19% and 22% of total net sales for fiscal 1997 and fiscal 1996,
respectively.
Gross Profit. Gross profit increased 1% to $32.2 million in fiscal 1997
from $31.9 million in fiscal 1996. As a percentage of net sales, gross profit
increased to 29.7% in fiscal 1997, from 24.1% in fiscal 1996. Fiscal 1996
included a $15.0 million write down of inventory during the June quarter related
to various SRAM products (primarily 8Kx8, 32Kx8 and 128Kx8) as well as some NVM
products (EPROM and EEPROM) that the Company anticipated as being non-salable
based on its six month sales forecast. Excluding the $15.0 million inventory
write-
13
<PAGE> 16
down, gross profit was $46.9 million or 35.5% of net sales in fiscal 1996.
Excluding the inventory write-down in the 1996 period, the decrease in the
fiscal 1997 gross profit was primarily the result of significantly lower average
selling prices for the Company's SRAM and NVM products in fiscal 1997 compared
to fiscal 1996. Although product unit costs were lower in fiscal 1997 compared
to fiscal 1996, such reductions did not offset the declines in average selling
prices, resulting in lower gross margins. Gross profit for fiscal 1997 reflects
a $13.9 million benefit related to inventory sold during 1997 that had been
written-down in June 1996. Gross margin would have been $18.2 million or 16.8 %
without the benefit from the sale of the previously written down product. Late
in the first quarter of fiscal 1997, the Company began to realize that, due to
changes in industry conditions, its estimate of the June 30, 1996 sales forecast
and inventory write-down may not have been accurate. Sales continued to decline
in the September 1996 quarter, but thereafter the Company experienced sequential
quarterly revenue growth throughout fiscal 1997 moving from $23.1 million for
the September 1996 quarter to $32.3 million for the September 1997 quarter. The
sales forecast used to estimate the June 1996 quarter write-down changed on a
quarterly basis throughout fiscal 1997 as demand for the written-down products
strengthened or was extended. This change was not attributable to any single
event, but rather an overall strengthening of demand in the industry. Revenues
for the product categories that were written down in June 1996, totaled
approximately $80.3 million in fiscal 1997 compared to approximately $118.7
million in fiscal 1996. The Company continued to sell these product categories
throughout fiscal 1997, but at prices that declined significantly during the
quarters.
Research and Development. Research and development expenses increased by
23% to $26.2 million in fiscal 1997 from $21.4 million in fiscal 1996. As a
percentage of net sales, research and development expenses increased to 24.2% in
fiscal 1997 from 16.2% in fiscal 1996. These increases were primarily the result
of an increase in engineering personnel, increased payroll related expenses and
increased expenses related to the development of new products and, to a lesser
extent, the write-off of obsolete engineering equipment and software. During
fiscal 1997, the Company's development efforts principally focused on wider bus
width SRAMs such as the 64K x 32, 64K x 16 and 32K x 16 configurations, 2
megabit Flash memory, geometry reductions for its memory products, EPROMs, and
other memory related devices. In this regard, the Company developed its initial
DRAM devices, specialty high speed 4 megabit and 2 megabit DRAMs during fiscal
1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 10% to $16.8 million in fiscal 1997 from $15.2 million in
fiscal 1996. As a percentage of net sales, selling, general and administrative
expenses increased to 15.5% in fiscal 1997 from 11.5% in fiscal 1996. These
increases were primarily the result of increases in legal expenses associated
with antidumping proceedings and increased payroll related expenses from the
addition of marketing and sales personnel, partially offset by decreased selling
commissions associated with lower revenues.
Interest and other income, Net. Interest and other income, net decreased
to $1.9 million in fiscal 1997 from $4.5 million in fiscal 1996, primarily due
to decreased net interest earnings as a result of lower cash and short-term
investment balances.
Benefit for Income Taxes. The Company recorded a tax benefit of $1.1
million for fiscal year 1997 which was primarily attributable to investment tax
credits generated by ISSI-Taiwan during the year ended September 30, 1997. The
Company recorded a tax benefit of $1.2 million for fiscal year 1996 which was
primarily attributable to lower than expected profit before income taxes and tax
benefits relating to tax-exempt interest income and the dividends deduction. In
addition, ISSI-Taiwan generated significant investment tax credits during the
year ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's principal sources of
liquidity included cash, cash equivalents, restricted cash and short-term
investments of approximately $35.9 million, of which approximately $5.0 million
was held by ISSI-Taiwan. Approximately $0.3 million of the cash held by the
Company is restricted as of September 30, 1998 for purposes of securing
available short-term lines of credit and letters of credit. During fiscal 1998,
operating activities used cash of approximately $34.5 million. Cash used by
operations was primarily due to net loss adjusted for the gain on the partial
sale of ISSI-Taiwan, depreciation, in-process technology charge and other
non-cash items and increases in inventory partially offset by increases in
accounts payable and decreases in other assets.
14
<PAGE> 17
Inventory increased to $46.5 million at September 30, 1998 from $40.7
million at September 30, 1997. The increase in inventory was predominately due
to increases in the Company's newer SRAM products earlier in the year in
anticipation of stronger future demand that did not materialize and increases in
the inventory of wafers purchased by the Company.
Accounts payable increased to $40.6 million at September 30, 1998
from $23.1 million at September 30, 1997. The increase in accounts payable is
principally related to increases in inventory.
In fiscal 1998, the Company was provided with $18.1 million from
investing activities compared to $5.6 million in fiscal 1997. The cash provided
from investing activities was primarily the result of $37.6 million from the
partial sale of ISSI-Taiwan and $17.8 million from the sale of
available-for-sale securities offset by $19.2 million used for the acquisition
of fixed assets, $12.5 million invested in WaferTech, and $4.7 million invested
in UICC.
The Company made capital expenditures of approximately $19.2 million
in fiscal 1998, of which approximately $11.2 million was for the construction of
ISSI-Taiwan's new facility and $8.0 million was for the purchase of test
equipment and design and engineering tools. The Company expects to spend
approximately $7.0 million to purchase capital equipment during the next twelve
months, principally for the purchase of additional test equipment, design and
engineering tools, and computer hardware and software. Additionally, the Company
expects to spend approximately $5.0 million during the next twelve months for
the completion of construction of the ISSI-Taiwan facility. A portion of this
construction cost is expected to be financed through loans. Although
construction is still continuing, ISSI-Taiwan took occupancy of the building in
August 1998.
In June 1998, the Company sold approximately 46% of ISSI-Taiwan to a
group of private investors. The price was privately negotiated between the
parties. Cash proceeds from the transaction totaled $35.5 million net of
withholding and transaction taxes. The transaction resulted in a pre-tax gain of
$10.5 million which is recorded in the Company's June 30, 1998 quarter. The
Company expects to sell up to an additional 18% of its interest in ISSI-Taiwan
during fiscal 1999.
In June 1996, the Company entered into a business venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and as of September 30, 1998 all
of this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. In December 1998, the
Company agreed to sell approximately 33% of its investment in WaferTech to TSMC
for approximately $10.0 million. The transaction is expected to close in January
1999. Upon completion of the transaction, the Company will have a 2.67% interest
in WaferTech. The Company has also agreed to certain minimum wafer purchase
commitments with its foundry partners in exchange for wafer capacity
commitments. In fiscal 1995, the Company entered into an agreement with TSMC
pursuant to which the Company agreed to acquire specified wafer capacity through
2001. The Company also agreed to make certain annual payments totaling
approximately $19.2 million through 2001 to TSMC for additional capacity above
the annual base capacity. Wafer purchases in any given year are first applied to
the base capacity and then to the Company's $19.2 million obligation. As a
result, the $19.2 million may be subject to forfeiture if the Company does not
purchase the base capacity and additional capacity for which it has contracted.
The Company also has minimum purchase obligations to TSMC related to WaferTech
LLC. The Company is obligated to purchase from WaferTech or TSMC a minimum of
3.4% of WaferTech's installed capacity. Initial wafer outs occurred in the
second half of calendar 1998. Additionally, in fiscal 1995, the Company entered
into a business venture "United Integrated Circuits Corp" ("UICC") with UMC and
other investors to build a wafer fabrication facility in Hsinchu, Taiwan. The
Company has invested approximately $16.5 million (subject to fluctuations in the
New Taiwanese Dollar) for a 4% equity interest in the venture of which UMC
retains 55% ownership. The final payment of approximately $4.7 million was made
to UICC in December 1997. The UICC facility was severely damaged by fire in
October 1997. It is the Company's understanding that the damage was covered by
insurance. UICC has undertaken a clean up of the facility but reconstruction has
not commenced as an alternative site is being evaluated. A decision as to
whether to build on the existing site or the alternative site has not yet been
made. The Company believes that its investment of $16.5 million is recoverable.
The Company was provided $23.9 million from financing activities
during fiscal 1998, as compared to $9.2 million in fiscal 1997, of which $15.9
million was for net borrowings under short-term and long-term lines of credit,
$4.8 million resulted from the decrease in restricted cash and $3.1 million was
for proceeds from the issuance of common stock under stock option and stock
purchase plans. The Company has $23.5 million available through a
15
<PAGE> 18
number of short-term lines of credit with various financial institutions in
Taiwan. As of September 30, 1998, the Company had outstanding borrowings of
approximately $18.2 million under these short-term lines of credit.
ISSI-Taiwan has a number of long-term lines of credit with various
financial institutions in Taiwan to finance the purchase of machinery, equipment
and building construction in Taiwan. Total obligations related to these
borrowings as of September 30, 1998 were $15.5 million, of which $3.4 million is
included in the current portion of long-term obligations. These obligations bear
interest at rates from 6.82% to 8.82% and are payable in quarterly installments
through 2004. As of September 30, 1998, the Company had available long-term
lines of credit of approximately $7.0 million of which approximately $2.8
million is for the construction financing of the Company's new facility in the
Hsinchu Science-Based Industrial Park.
On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited, depending on whether the DOC
conducts an administrative review of imports entered after the imposition of the
antidumping order, and if so, on the results of the DOC review. The decision on
whether to conduct a review will be made in 1999, and the results of the review
would be issued in the year 2000.
The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.
On October 22, 1998, Micron Technology filed an antidumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.
The Company believes that its existing funds together with available
financing will satisfy the Company's anticipated working capital and other cash
requirements through the next 12 months. The Company may evaluate actions to
further increase its cash position such as bank borrowings, sales of additional
shares of ISSI-Taiwan, the disposition of certain assets, equity financing, and
debt financing.
The Company, from time to time, evaluates potential acquisitions and
equity investments complementary to its memory expertise and market strategy. To
the extent the Company pursues such transactions, any such transactions could
require the Company to seek additional equity or debt financing to fund such
activities. There can be no assurance that any such additional financing could
be obtained on terms acceptable to the Company, if at all.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS OR FUTURE OPERATING
RESULTS
DEPENDENCE ON SRAM PRODUCTS; DECLINE IN AVERAGE SELLING PRICES FOR SRAM PRODUCTS
A substantial majority of the Company's net sales are derived from
the sale of SRAM products, which are subject to unit volume fluctuations and
declines in average selling prices. For example, in the June 1998 quarter, the
Company's net sales decreased by 38% to $25.0 million from $40.7 million in the
March 1998 quarter, principally due to a decrease in unit shipments of the
Company's SRAM products. In fiscal 1997, the Company's net sales decreased by
18% to $108.3 million from $132.0 million in fiscal 1996. This decrease in sales
was principally due to significant deterioration in the average selling prices
of the Company's SRAM and NVM products. The Company anticipates that the average
selling prices of its existing products will continue to decline over time,
although the rate of decline may fluctuate for certain products. There can be no
assurance that such declines will be offset by higher volumes or by higher
prices on newer products.
16
<PAGE> 19
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The Company's future quarterly and annual operating results are
subject to fluctuations due to a wide variety of factors, many of which are
outside of its control, including declines in average selling prices of the
Company's products, oversupply of memory products in the market, failure to
introduce new products and to implement technologies on a timely basis, the
timing and announcement of new product introductions by the Company and its
competitors, market acceptance of the Company's and its customers' products, the
failure to anticipate changing customer product requirements, fluctuations in
manufacturing yields, disruption in delivery and order fulfillment, and
disruption in the supply of wafers or assembly services. Other factors include
changes in product mix, seasonal fluctuations in customer demand for the
Company's products, the timing of significant orders, increased expenses
associated with new product introductions or process changes, the ability of
customers to make payments to the Company, increases in material costs,
increases in antidumping duties, increases in costs associated with the
expansion of sales channels, increases in general and administrative expenses,
and certain production and other risks associated with using independent
manufacturers. In this regard, in the June 1998 quarter, the Company's net sales
decreased by 38% to $25.0 million from $40.7 million in the March 1998 quarter
principally due to a decrease in unit shipments of the Company's SRAM products.
In addition, in fiscal 1997, the Company's net sales decreased by 18% to $108.3
million from $132.0 million in fiscal 1996. This decrease in sales was
principally due to significant deterioration in the average selling prices of
the Company's SRAM and NVM products. In fiscal 1998, approximately 43% of the
Company's net sales were attributable to customers located in the United States,
18% was attributable to customers located in Europe and 39% was attributable to
customers located in Asia. In fiscal 1997, approximately 45% of the Company's
net sales were attributable to customers located in the United States, 13% was
attributable to customers located in Europe and 42% was attributable to
customers located in Asia. In fiscal 1998 and 1997, international sales (sales
by ISSI-Taiwan and export sales by ISSI-U.S.) comprised approximately 57% and
55% of the Company's net sales, respectively. Accordingly, the Company's future
operating results will also depend in part on general economic conditions in
Asia, the United States and its other markets. In this regard, since late 1997
many Asian countries, including Korea, Japan and Thailand, have experienced
significant economic downturns and significant declines in the value of their
currencies relative to the U.S. dollar. The Company is unable to predict what
future effect, if any, these factors will have on its ability to maintain or
increase its sales in these markets. In addition, there can be no assurance that
the markets for the Company's products, which are highly cyclical, will continue
to grow.
DECLINES IN AVERAGE SELLING PRICES
Competitive pricing pressures due to an industry-wide oversupply of
wafer capacity resulted in significant price decreases for the Company's
products during 1996, 1997 and 1998. Historically, average selling prices for
semiconductor memory products have declined and the Company expects that average
selling prices will decline in the future. Accordingly, the Company's ability to
maintain or increase revenues will be highly dependent upon its ability to
increase unit sales volume of existing products and introduce and sell new
products which compensate for the anticipated declines in the average selling
prices of its existing products. Declining average selling prices will also
adversely affect the Company's gross margins and profits unless the Company is
able to introduce new products with higher margins or reduce its cost per unit
to offset declines in average selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In this regard, the Company has a cost
reduction program in place, which involves efforts to reduce internal costs and
supplier costs, in an effort to reduce its cost per unit for certain products.
The Company does not believe that such cost reduction efforts are likely to have
a material adverse impact on the quality of its products or the level of service
provided by the Company.
RISK OF INVENTORY WRITE-DOWNS
Shifts in industry-wide capacity from shortages to oversupply or from
oversupply to shortages may result in significant fluctuations in the Company's
quarterly or annual operating results. The semiconductor industry is highly
cyclical and is subject to significant downturns resulting from excess capacity,
overproduction, reduced demand or technological obsolescence. These factors can
result in a decline in average selling prices and the stated value of inventory.
In fiscal 1998, the Company recorded inventory write-downs of $23.0 million,
including $9.6 million in the September quarter. The inventory write-downs were
predominately for lower of cost or market issues on certain of the Company's
products, primarily SRAMs. The September 1998 quarter included a $2.9 million
write-down of certain of the Company's Flash inventories due to obsolescence
resulting from the Company's
17
<PAGE> 20
decision to spin off the Flash product business to form NexFlash. In addition,
in the December 1997 quarter, the Company wrote-off $0.8 million worth of a
specific DRAM product, for which the Company's six month forecast showed minimal
demand at December 31, 1997 and for which the Company has had minimal sales to
date. It is the Company's practice to write-down to zero carrying value
inventory on hand in excess of six months estimated sales volumes to cover
estimated exposures unless adjustments are made to the forecast based on
management's judgments for newer products, end of life products or planned
inventory increases. Management's judgments take into account the product life
cycles which can range from 6 to 24 months, the maturity of the product as to
whether it is newly introduced or is approaching its end of life, the impact of
competitor announcements and product introductions on the Company's products and
purchasing opportunities due to excess wafer capacity. The Company believes that
six months is an appropriate period because it is difficult to accurately
forecast for a specific product beyond this time frame due to potential
introduction of products by competitors, technology obsolescence or fluctuations
in demand. In this regard, in the June 1996 quarter, the Company recorded a $15
million write-down for various SRAM and NVM products that the Company's forecast
indicated would not be sold in the next six months. The Company did not expect
to sell the excess inventory at the time because the volume and price declines
from the December 1995 quarter to the June 1996 quarter resulted in a decrease
in revenues of 38%. During this period, market conditions were extremely
uncertain. Furthermore, during the fourth fiscal quarter of 1996 the Company
experienced a continued decline in revenue of 16% from the June 1996 quarter.
While the Company continued to focus on the selling of this product, sales
reached a bottom in its decline in the September 1996 quarter and stayed
relatively flat in the December 1996 quarter. Subsequently, as market conditions
improved in the latter part of the December 1996 quarter, the Company was able
to sell certain of these products. As a result of improving market conditions
during fiscal 1997, the Company was able to sell $13.9 million of the
written-off product. However, the Company considers such sales unusual and there
can be no assurance that in the future written-off inventory can be sold.
Historically, the Company has consistently applied this practice in valuing
inventory and, until the events that transpired in the first through third
quarters of fiscal 1996, had never recorded material write-downs or recoveries.
The Company believes that based on the factors noted above, its six month
write-off policy is still appropriate as a method to identify and estimate
inventory exposure. There can be no assurance that in the future additional
inventory write-downs will not occur.
PRODUCT CONCENTRATION AND DEPENDENCE ON PERSONAL COMPUTER INDUSTRY
A majority of the Company's products are incorporated into products
such as modems, networking equipment, disk drives and PC cache. The PC and PC
peripherals industry has from time to time experienced cyclical, depressed
business conditions, often in connection with, or in anticipation of, a decline
in general economic conditions. Such industry downturns have resulted in reduced
product demand and declining average selling prices. The Company's business and
operating results would be materially and adversely affected by any future
downturns in the peripherals industry or in PCs.
CUSTOMER CONCENTRATION
The Company's sales are concentrated within a limited customer base.
In both fiscal 1998 and fiscal 1997, one customer, 3COM, accounted for
approximately 19% of net sales. As sales to this customer are executed pursuant
to purchase orders and no purchasing contract exists, the customer can cease
doing business with the Company at any time. The Company expects a significant
portion of its future sales to remain concentrated within a limited number of
strategic customers. There can be no assurance that the Company will be able to
retain its strategic customers or that such customers will not otherwise cancel
or reschedule orders, or in the event of canceled orders, that such orders will
be replaced by other sales. In addition, sales to any particular customer may
fluctuate significantly from quarter to quarter. The occurrence of any such
events could have a material adverse effect on the Company's business and
operating results.
DEPENDENCE ON INDEPENDENT WAFER FOUNDRIES
The Company has combined its fabless manufacturing strategy with
technology partnerships and equity investments. This hybrid approach, which the
Company calls "Fab-Lite(TM)", has provided advanced process technology and a
committed wafer supply. To date, the Company's principal manufacturing
relationship has been with TSMC, from which the Company has obtained a
substantial majority of its wafers. The Company also receives wafers from
Chartered Semiconductor and UMC. Each of the Company's wafer suppliers also
fabricates for other integrated circuit companies, including certain of the
Company's competitors. Although the Company has written commitments specifying
wafer capacities from its suppliers, if these suppliers experience manufacturing
failures or
18
<PAGE> 21
yield shortfalls, choose to prioritize capacity for other use or reduce or
eliminate deliveries to the Company there can be no assurance that the Company
could enforce fulfillment of the delivery commitments. There can be no assurance
that the Company would be able to qualify additional manufacturing sources for
existing or new products in a timely manner or that such additional
manufacturing sources would agree to deliver an adequate supply of wafers. If
the Company were unable to obtain an adequate supply of wafers from its current
or any alternative sources in a timely manner, its business and operating
results would be materially and adversely affected.
The Company has certain minimum wafer purchase commitments with its
foundry partners in exchange for wafer capacity commitments. The Company has
agreed to make certain annual purchases totaling, in aggregate, approximately
$19.2 million through 2001 from TSMC for additional capacity above the annual
base capacity. Wafer purchases in any given year are first applied to the base
capacity and then to the Company's $19.2 million obligation. As a result, the
$19.2 million may be subject to forfeiture if the Company does not purchase the
base capacity and additional capacity for which it has contracted. The Company
has minimum purchase obligations to TSMC related to WaferTech LLC, a business
venture in which the Company is an investor. The Company is obligated to
purchase from WaferTech or TSMC a minimum of 3.4% of WaferTech's installed
capacity. Although the Company has rights to re-schedule or assign capacity to
another party, there can be no assurance that such re-schedule or assignment
would be successfully accomplished. Should the Company fail to re-schedule or
assign unneeded capacity, the Company will be required to make payments for the
unused capacity and its business and operating results would be materially and
adversely affected.
INTERNATIONAL OPERATIONS
The Company is subject to the risks of conducting business
internationally, including economic conditions in Asia, particularly Taiwan,
changes in trade policy and regulatory requirements, tariffs and other trade
barriers and restrictions, the burdens of complying with foreign laws, and
possibly, political instability. The Company anticipates that sales to
international customers will continue to represent a significant percentage of
net sales. In addition, substantially all of the Company's foundries and
assembly and test operations are located in Asia. The Company transacts business
predominately in U.S. and New Taiwan ("NT") dollars. Such transactions expose
the Company to the risk of exchange rate fluctuations. The Company monitors its
exposure to foreign currency fluctuations, and has from time to time taken
action to hedge against such exposure, but has not to date adopted any formal
hedging strategy. The Company's business and results of operations have been
negatively impacted by exchange rate fluctuations in the past and there can be
no assurance that exchange rate fluctuations will not materially and adversely
affect its business and operating results in the future.
COMPETITION
The semiconductor memory market is intensely competitive and has been
characterized by an oversupply of product, price erosion, rapid technological
change, short product life cycles, cyclical market patterns and heightened
foreign and domestic competition. The ability of the Company to compete
successfully in the high performance memory market depends on factors both
within and outside of its control, including imbalances in supply and demand,
product pricing, the rate at which OEM customers incorporate the Company's
products into their systems, access to advance process technologies at
competitive prices, product functionality, performance, and reliability,
successful and timely product development, wafer supply, wafer costs,
achievement of acceptable yields of functional die, the gain or loss of
significant customers, the nature of its competitors and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the future as to any of these factors. The failure of the
Company to compete successfully in these or other areas could materially and
adversely affect the Company's business and operating results. In addition, the
Company is vulnerable to technology advances utilized by competitors to
manufacture higher performance or lower cost products.
CLAIMS REGARDING INTELLECTUAL PROPERTY
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
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<PAGE> 22
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's business and operating results.
RISK OF INCREASED TAXES
The Company's tax rate could fluctuate for a number of reasons. For
example, if the proportions of taxable income shifted such that a greater
proportion of taxable income is earned by U.S. operations, the Company's
effective tax rate may increase. It is possible that the Taiwan tax exemption
applicable to the earnings of ISSI-Taiwan could be modified by changes in law or
otherwise reduced. In addition, the Company's taxes would increase if all or a
portion of the earnings of ISSI-Taiwan were to become subject to U.S. tax as the
result of actual dividends or through U.S. rules for taxing controlled foreign
corporations. Further, if profits of ISSI-Taiwan are distributed to the Company
as dividends they become subject to Taiwan withholding tax as well as U.S. tax
(with an offset for underlying Taiwan taxes paid) and the tax rate would
increase.
ISSI-Taiwan is a controlled foreign corporation ("CFC") for U.S.
income tax purposes. Under U.S. rules for taxing CFCs, all or a portion of the
earnings of ISSI-Taiwan may become subject to U.S. tax as inclusions in the U.S.
taxable income of the Company (with a credit for foreign taxes paid by
ISSI-Taiwan) if one or more of a number of events occur. Such events include,
but are not limited to, ISSI-Taiwan lending funds to the Company or otherwise
investing in certain proscribed assets and ISSI-Taiwan engaging in various types
of transactions defined in the Subpart F provisions of the U.S. Internal Revenue
Code. The Company believes that its existing plans will minimize the impact of
the CFC rules for the immediate future, subject to such changes in U.S. tax laws
as may occur. However, over time the CFC rules may cause the Company's tax rate
to increase.
YEAR 2000 ISSUES
The Company is aware of the issues associated with computer systems
as the Year 2000 approaches. The Year 2000 issues are the result of common
computer programming techniques that result in systems that do not function
properly when manipulating dates later than December 31, 1999. The problem may
affect internal information technology (IT) systems used by the Company for
product design, product test, accounting, distribution and planning. The problem
may also affect non-IT systems such as security systems, communication equipment
and other equipment.
The Company has done an initial assessment of its critical IT systems
and has identified at least one area (accounting software) that is not Year 2000
compliant. The Company is currently evaluating alternative software packages and
intends to have implementation completed by October 1999. However, there can be
no assurance that there will not be a delay in the implementation of such
systems. It is estimated that the cost of implementing the new software will
range between $0.1 million to $0.5 million. With respect to critical non-IT
systems, the Company has assessed the compliance of these systems and believes
that these systems are Year 2000 compliant. There can be no assurance that the
Company has successfully identified all its internal Year 2000 issues. The
failure to identify and address internal Year 2000 issues in a timely fashion
could have a material adverse affect on the Company's business and results of
operations.
The Company could possibly be adversely impacted by Year 2000 issues
faced by major suppliers, subcontractors, and customers. The Company is in the
process of determining the potential impact on its operations as a result of the
Year 2000 readiness of these third parties. Their failure to address Year 2000
issues could have an impact on the Company's operations and financial results.
The extent of this impact, if any, is not known at this time.
The above discussion regarding costs, risks and estimated completion
dates for the Year 2000 is based on the Company's best estimates given
information that is currently available, and is subject to change. As the
Company proceeds with this project, it may discover that actual results will
differ materially from these estimates.
20
<PAGE> 23
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, announcements by the Company or its competitors, increases or decreases
in wafer capacity, general conditions in the semiconductor or computer
industries, governmental regulations, trade laws and import duties, litigation,
new or revised earnings estimates, comments or recommendations issued by
analysts who follow the Company, its competitors or the semiconductor industry
and other events or factors. In addition, stock markets have experienced extreme
price and trading volume volatility in recent years. This volatility has had a
substantial effect on the market prices of securities of many high technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial StatementS
<TABLE>
<S> <C>
Report of Independent Auditors...............................................23
Financial Statements:
Consolidated Statements of Operations
For Fiscal Years Ended September 30, 1998,
September 30, 1997, and September 30, 1996......................24
Consolidated Balance Sheets
As of September 30, 1998, and September 30, 1997................25
Consolidated Statements of Stockholders' Equity
For Fiscal Years Ended September 30, 1998,
September 30, 1997, and September 30, 1996......................26
Consolidated Statements of Cash Flows
For Fiscal Years Ended September 30, 1998.......................27
September 30, 1997, and September 30, 1996
Notes to Consolidated Financial Statements............................28
</TABLE>
22
<PAGE> 25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Silicon Solution, Inc.
We have audited the accompanying consolidated balance sheets of
Integrated Silicon Solution, Inc. as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Integrated Silicon Solution, Inc. at September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1, the accompanying 1998 financial statements have
been restated to correctly include the impact of the cumulative translation
adjustment in the calculation of the Company's gain on sale of investment.
ERNST & YOUNG LLP
San Jose, California
October 23, 1998
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<PAGE> 26
Integrated Silicon Solution, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(As restated)
<S> <C> <C> <C>
Net Sales $ 131,132 $ 108,261 $ 132,039
Cost of sales (other than item below) 103,794 76,105 85,184
Inventory write-down 23,000 -- 15,000
--------- --------- ---------
Total cost of sales 126,794 76,105 100,184
--------- --------- ---------
Gross profit 4,338 32,156 31,855
--------- --------- ---------
Operating expenses
Research and development 31,911 26,179 21,350
Selling, general and administrative 18,402 16,753 15,188
In-process technology charge 7,078 -- --
--------- --------- ---------
Total operating expenses 57,391 42,932 36,538
--------- --------- ---------
Operating loss (53,053) (10,776) (4,683)
Interest and other income (expense) (1,697) 2,535 4,803
Interest expense (1,795) (607) (335)
Gain on sale of investment 10,494 -- --
--------- --------- ---------
Loss before income taxes and
minority interest (46,051) (8,848) (215)
Provision (benefit) for income taxes 4,668 (1,144) (1,158)
--------- --------- ---------
Income (loss) before minority interest (50,719) (7,704) 943
Minority interest in net loss of
consolidated subsidiary (112) (18) (72)
--------- --------- ---------
Net income (loss) $ (50,607) $ (7,686) $ 1,015
========= ========= =========
Basic income (loss) per share $ (2.67) $ (0.43) $ 0.06
========= ========= =========
Shares used in basic per share calculation 18,940 17,748 17,457
========= ========= =========
Diluted income (loss) per share $ (2.67) $ (0.43) $ 0.06
========= ========= =========
Shares used in diluted per share calculation 18,940 17,748 18,356
========= ========= =========
</TABLE>
See the accompanying notes to consolidated financial statements
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<PAGE> 27
Integrated Silicon Solution, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
--------- ---------
(As restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,776 $ 22,334
Restricted cash 333 5,202
Short-term investments 7,800 25,600
Accounts receivable, net of allowance for doubtful
accounts of $1,804 in 1998 and $2,268 in 1997 19,069 18,478
Inventories 46,484 40,730
Other current assets 4,938 7,472
--------- ---------
Total current assets 106,400 119,816
Property, equipment, and leasehold improvements, net 44,316 27,693
Construction in progress -- 6,343
Other assets 51,452 41,744
--------- ---------
Total assets $ 202,168 $ 195,596
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 18,325 $ 6,152
Accounts payable 40,642 23,138
Accrued compensation and benefits 2,945 3,424
Accrued expenses 8,036 8,725
Income tax payable 524 582
Current portion of long-term obligations 3,379 2,251
--------- ---------
Total current liabilities 73,851 44,272
Income tax payable - noncurrent 4,996 5,059
Long-term obligations 12,087 11,698
Minority interest in consolidated subsidiary 20,314 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value: Authorized shares -
5,000 in 1998 and 1997. No shares outstanding -- --
Common stock, $0.0001 par value: Authorized shares -
70,000 in 1998 and 1997. Issued and outstanding shares -
19,417 in 1998 and 17,938 in 1997 2 2
Additional paid-in capital 116,199 106,769
Retained earnings (accumulated deficit) (18,341) 32,266
Cumulative translation adjustment (6,787) (4,248)
Unearned compensation (153) (222)
--------- ---------
Total stockholders' equity 90,920 134,567
--------- ---------
Total liabilities and stockholders' equity $ 202,168 $ 195,596
========= =========
</TABLE>
See the accompanying notes to consolidated financial statements
25
<PAGE> 28
Integrated Silicon Solution, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Retained Total
Common Stock Additional Earnings Cumulative Stock-
----------------------- Paid-In (Accumulated Translation Unearned holders'
Shares Amount Capital Deficit) Adjustment Compensation Equity
--------- --------- ---------- ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 17,225 $ 2 $ 102,376 $ 38,937 $ (1,302) $ (104) $ 139,909
Stock options exercised 253 -- 952 -- -- -- 952
Shares issued under stock
purchase plan 129 -- 1,357 -- -- -- 1,357
Amortization of unearned
compensation -- -- -- -- -- 43 43
Tax benefits from sale of
common stock
-- -- 103 -- -- -- 103
Translation adjustment -- -- -- -- (944) -- (944)
Net income -- -- -- 1,015 -- -- 1,015
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1996 17,607 2 104,788 39,952 (2,246) (61) 142,435
Stock options exercised 197 -- 665 -- -- -- 665
Shares issued under stock
purchase plan 134 -- 1,112 -- -- -- 1,112
Unearned compensation -- -- 204 -- -- (204) --
Amortization of unearned
compensation -- -- -- -- -- 43 43
Translation adjustment -- -- -- -- (2,002) -- (2,002)
Net loss -- -- -- (7,686) -- -- (7,686)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1997 17,938 2 106,769 32,266 (4,248) (222) 134,567
Stock options exercised 461 -- 1,674 -- -- -- 1,674
Shares issued under stock
purchase plan 245 -- 1,379 -- -- -- 1,379
Amortization of unearned
compensation -- -- -- -- -- 69 69
Shares issued for purchase of
Nexcom Technology, Inc. 773 -- 6,377 -- -- -- 6,377
Translation adjustment
(As restated) -- -- -- -- (2,539) -- (2,539)
Net loss (As restated) -- -- -- (50,607) -- -- (50,607)
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998
(As restated) 19,417 $ 2 $ 116,199 $ (18,341) $ (6,787) $ (153) $ 90,920
========= ========= ========= ========= ========= ========= =========
</TABLE>
See the accompanying notes to consolidated financial statements
26
<PAGE> 29
Integrated Silicon Solution, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(As restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (50,607) $ (7,686) $ 1,015
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 9,065 11,408 7,586
In-process technology charge 7,078 -- --
Gain on partial sale of ISSI-Taiwan (10,494) -- --
Provision for losses on accounts receivable -- 675 714
Net foreign currency transaction (gains) losses 3,188 17 (311)
Minority interest in net loss of consolidated subsidiary (112) (18) (72)
Changes in operating assets and liabilities:
Accounts receivable (386) (8,007) 6,581
Inventories (13,515) (19,446) (11,592)
Other assets 7,458 4,328 (7,710)
Accounts payable 16,350 13,939 (6,721)
Accrued expenses (2,553) 227 (3,104)
--------- --------- ---------
Net cash used in operating activities (34,528) (4,563) (13,614)
Cash flows from investing activities:
Acquisition of property, equipment, and leasehold improvements (19,218) (13,985) (20,423)
Purchases of available-for-sale securities (42,750) (174,400) (197,800)
Sales of available-for-sale securities 60,550 211,000 215,900
Investment in WaferTech, LLC (12,480) (9,360) (9,360)
Investment in United Integrated Circuits Corp. (4,730) (12,983) --
Investment in Nexcom Technology, Inc. (869) -- --
Partial sale of ISSI-Taiwan 37,594 -- --
Proceeds from employees for UICC shares -- 5,345 --
--------- --------- ---------
Net cash provided by (used in) investing activities 18,097 5,617 (11,683)
Cash flows from financing activities:
Proceeds from issuance of stock 3,122 1,820 2,352
Borrowings under notes payable and long-term obligations 81,816 28,659 28,018
Principal payments of notes payable and long-term obligations (65,884) (23,092) (16,172)
Decrease (increase) in restricted cash 4,800 1,821 (6,037)
--------- --------- ---------
Net cash provided by financing activities 23,854 9,208 8,161
Effect of exchange rate changes on cash and cash equivalents (1,981) (165) (79)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 5,442 10,097 (17,215)
Cash and cash equivalents at beginning of year 22,334 12,237 29,452
========= ========= =========
Cash and cash equivalents at end of year $ 27,776 $ 22,334 $ 12,237
========= ========= =========
</TABLE>
See the accompanying notes to consolidated financial statements
27
<PAGE> 30
Notes to Consolidated Financial Statements
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Integrated Silicon Solution, Inc. (the "Company") was incorporated in
California on October 27, 1988 and reincorporated in Delaware on August 9, 1993.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Integrated Silicon Solution, Inc. and its majority owned subsidiaries, after
elimination of all significant intercompany accounts and transactions.
CASH EQUIVALENTS AND SHORT -TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" all affected debt
securities must be classified as held-to-maturity, trading, or
available-for-sale and equity securities must be classified as trading or
available-for-sale. Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates such designation
as of each balance sheet date.
At September 30, 1998 and 1997, all debt and equity securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The amortized cost for available-for-sale
debt securities is adjusted for the amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 1998 and 1997, the cost of
these securities approximated the fair value and the amount of unrealized gain
or loss was not significant. There were no gains or losses on the sale of
securities for the twelve months ended September 30, 1998 and 1997.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's inventory valuation process is done on a part-by-part
basis. Lower of cost or market adjustments, specifically identified on a
part-by-part basis, reduce the carrying value of the related inventory and take
into consideration reductions in sales prices, excess inventory levels and
obsolete inventory. Once established, these adjustments are considered permanent
and are not reversed until the related inventory is sold or disposed.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at the beginning of the lease term. Depreciation and amortization are
computed using the straight-line method, based upon the shorter of the estimated
useful lives ranging from three to seven years, or the lease term of the
respective assets, if applicable, except the building in Taiwan which is being
depreciated over fifty years.
28
<PAGE> 31
Notes to Consolidated Financial Statements
REVENUE RECOGNITION
The Company recognizes revenue to non-distributor customers upon
shipment. The Company provides for estimated sales returns on sales to these
customers. Sales made to distributors, under terms allowing certain rights of
return and price protection on unsold merchandise held by the distributor, are
deferred until the merchandise is sold by the distributor.
FOREIGN CURRENCY TRANSLATION
The Company uses the local currency as its functional currency for all
foreign subsidiaries. Translation adjustments, which result from the process of
translating foreign currency financial statements into U.S. dollars, are
included as a separate component of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company operates in one business segment, which is to design,
develop, and market high performance SRAM and NVM integrated circuits. The
Company markets and distributes its products on a worldwide basis, primarily to
original equipment manufacturers and personal computer motherboard
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral. In fiscal 1998, 1997
and 1996, one customer accounted for approximately 19%, 19% and 22% of net
sales, respectively.
The Company maintains cash, cash equivalents, and short-term investments
with various financial institutions. The Company's investment policy is designed
to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy. To date, the Company has
not incurred losses related to these investments.
SEMICONDUCTOR INDUSTRY RISKS
To date the Company has derived substantially all of its revenues from
the sale of SRAM products. The Company has diversified into other product areas
such as specialty DRAMs, NVM products, and embedded memories, but a substantial
majority of the Company's revenue is still derived from SRAM products. If the
market for SRAM products should decline and the Company has not successfully
diversified, such decline would have a material adverse affect on the Company's
financial performance.
The semiconductor industry is characterized by rapid technological
change, intense competitive pressure and cyclical market patterns. The Company's
results of operations are affected by a wide variety of factors, including
declines in average selling prices of the Company's products, oversupply of
memory products in the market, failure to introduce new products and to
implement technologies on a timely basis, the timing and announcement of new
product introductions by the Company and its competitors, market acceptance of
the Company's and its customers' products, the failure to anticipate changing
customer product requirements, fluctuations in manufacturing yields, disruption
in delivery and order fulfillment, and disruption in the supply of wafers or
assembly services. Other factors include changes in product mix, seasonal
fluctuations in customer demand for the Company's products, the timing of
significant orders, increased expenses associated with new product introductions
or process changes, the ability of customers to make payments to the Company,
increases in material costs, increases in antidumping duties, increases in costs
associated with the expansion of sales channels, increases in general and
administrative expenses, and certain production and other risks associated with
using independent manufacturers. As a result, the Company may experience
substantial period-to-period fluctuations in future operating results due to the
factors mentioned above or other factors.
29
<PAGE> 32
Notes to Consolidated Financial Statements
NET INCOME (LOSS) PER SHARE
Basic income per share is computed using the weighted number of
common shares outstanding during the period. Diluted income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options under the
treasury stock method.
Basic and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding during the period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (FAS No. 130) and Statement No. 131
"Disclosures About Segments of An Enterprise and Related Information" (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The Company does not believe that the adoption of either FAS
No. 130 or FAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position. However, comprehensive income
will differ from net income.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain reclassifications have been made to prior year's financial
statements to conform to the current year presentation.
RESTATEMENT OF 1998 FINANCIAL STATEMENTS
Subsequent to the filing of its Annual Report on Form 10-K for the year
ended September 30, 1998 with the Securities and Exchange Commission, the
Company became aware that the financial statements for the year ended September
30, 1998 had incorrectly omitted the impact of the cumulative translation
adjustment from the calculation of its gain on sale of investment (related to
the partial sale of its Taiwan Subsidiary) during the June 1998 quarter.
Accordingly, the Company's financial statements have been restated as follows:
<TABLE>
<CAPTION>
AS AS
REPORTED RESTATED
-------- ---------
<S> <C> <C>
FOR THE YEAR ENDING SEPTEMBER 30, 1998
Gain on sale of investment $ 17,168 $ 10,494
Loss before income taxes and
minority interest (39,377) (46,051)
Income (loss) before minority interest (44,045) (50,719)
Net income (loss) (43,933) (50,607)
Basic income (loss) per share $ (2.32) $ (2.67)
Diluted income (loss) per share $ (2.32) $ (2.67)
AS OF SEPTEMBER 30, 1998
Retained earnings (accumulated deficit) $(11,667) $(18,341)
Cumulative translation adjustment (13,461) (6,787)
Total stockholders' equity 90,920 90,920
</TABLE>
NOTE 2. CASH, CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, restricted cash, and short-term investments
consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Cash $23,893 $21,953
Money market instruments 195 480
Certificates of deposit 4,021 5,103
Auction preferred stock 1,000 13,200
Municipal bonds due in more than 3 years 6,800 12,400
------- -------
Total $35,909 $53,136
======= =======
</TABLE>
NOTE 3. INVENTORIES
Inventories consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Purchased components $ 5,447 $10,444
Work-in-process 14,868 10,199
Finished goods 26,169 20,087
======= =======
$46,484 $40,730
======= =======
</TABLE>
In fiscal 1998, the Company recorded inventory write-downs of $23.0
million, including $9.6 million in the September quarter. The inventory
write-downs were predominately for lower of cost or market issues on certain of
the Company's products, primarily SRAMs.
30
<PAGE> 33
Notes to Consolidated Financial Statements
NOTE 4. OTHER ASSETS
Other assets consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Investment in United Integrated Circuits Corp. (see Note 14) $16,486 $19,012
Investment in WaferTech LLC. (see Notes 14 and 20) 31,200 18,720
Other 3,766 4,012
======= =======
$51,452 $41,744
======= =======
</TABLE>
NOTE 5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment, and leasehold improvements consisted of the following
at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Machinery and equipment $52,462 $49,463
Furniture and fixtures 1,969 1,409
Building and improvements 19,205 2,050
------- -------
73,636 52,922
Less accumulated depreciation and amortization 29,320 25,229
======= =======
$44,316 $27,693
======= =======
</TABLE>
NOTE 6. ACCRUED EXPENSES
Accrued liabilities consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In thousands)
<S> <C> <C>
UICC shares due employees $ -- $5,345
Other 8,036 3,380
====== ======
$8,036 $8,725
====== ======
</TABLE>
The Company has an equity investment of approximately $16 million
(subject to fluctuations in the New Taiwanese Dollar) in UICC, a wafer
fabrication business venture led by UMC. In fiscal 1997, the Company elected to
re-sell a portion of this investment to its employees at cost, which
approximated fair value, generating a cash inflow to the Company of
approximately $5,345,000. The UICC shares were transferred to the employees in
fiscal 1998 after final approval by UICC and the government of the Republic of
China.
NOTE 7. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
At September 30, 1998, ISSI-Taiwan had short-term lines of credit with
various financial institutions whereby it could borrow in aggregate up to
approximately $23,510,000 denominated in a combination of U.S. and New Taiwan
dollars. As of September 30, 1998, the Company had borrowings of approximately
$18,225,000 outstanding under these lines of credit. These lines of credit
expire at various times through September 1999. These lines of credit are
secured by time deposits of approximately $333,000, which are recorded as
restricted cash, as well as approximately $5.8 million at cost of UICC stock.
Commitment fees relating to these lines are not material. At September 30, 1998,
the weighted average interest rate on borrowing under these lines was 8.4%.
31
<PAGE> 34
Notes to Consolidated Financial Statements
Long-term obligations consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Notes payable to bank, due in quarterly installments through 2004
with interest at 6.82% to 8.82% and secured by the Company's
property and equipment $15,466 $13,949
Less current portion 3,379 2,251
------- -------
$12,087 $11,698
======= =======
</TABLE>
At September 30, 1998, future minimum principal payments on notes payable
and long-term obligations were as follows (in thousands):
<TABLE>
<S> <C>
1999 3,379
2000 3,077
2001 3,077
2002 3,077
2003 2,290
Thereafter 566
-------
Total $15,466
=======
</TABLE>
Interest of $913,000, $280,000, and $235,000 was capitalized in 1998,
1997, and 1996, respectively, and is included in fixed assets.
NOTE 8. CAPITAL STOCK
The Company's Restated Certificate of Incorporation provides for
70,000,000 authorized shares of Common Stock and 5,000,000 authorized shares of
preferred stock. The terms of the preferred stock may be fixed by the Board of
Directors, who have the right to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders of the Company. The rights of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
NOTE 9. STOCK PLANS
1989 STOCK OPTION PLAN
During 1989, the Company adopted a stock option plan (the "Plan") that
provides for incentive stock options for employees and nonstatutory stock
options for employees, consultants and nonemployee directors of the Company.
Incentive stock options and nonstatutory options granted under the Plan
have five or ten-year terms. All incentive stock option grants and nonstatutory
stock option grants must be at prices of at least 100% and 85%, respectively, of
the fair market value of the stock on the date of grant, as determined by the
Board of Directors.
The options are exercisable as determined by the Board of Directors.
Generally, the stock options vest ratably over a four-year period. The options
expire upon the earlier of five or ten years from the date of grant or 30 days
following termination of employment. Options to purchase 1,120,000 shares,
1,164,000 shares, and 791,000 shares were exercisable as of September 30, 1998,
1997, and 1996, respectively.
In the event of certain changes in control of the Company, the Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the Plan provides for the full acceleration
of the exercisability of all outstanding options.
32
<PAGE> 35
Notes to Consolidated Financial Statements
1996 STOCK OPTION PLAN
On October 18, 1996, the Company adopted a stock option plan (the "1996
Plan") that provides for non-statutory stock options for non-executive employees
and consultants of the Company.
Under the terms of the plan, the exercise price and exercise period of
non-statutory stock option grants is determined by the Board of Directors on the
date of grant. Generally, the stock options vest ratably over a four year
period. The options expire upon the earlier of ten years from the date of grant
or 30 days following termination of employment or consultancy. Options to
purchase 430,000 shares and 33,000 shares were exercisable as of September 30,
1998 and 1997, respectively.
In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; however, if such successor refuses to
assume the then outstanding options, the 1996 Plan provides for the full
acceleration of the exercisability of all outstanding options.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors and stockholders approved the 1995 Director Stock
Option Plan ("Director Plan") in December 1995 and January 1996, respectively.
Under the terms of the Plan, 50,000 shares of Common Stock were authorized for
issuance. Each director who has been a non-employee director for at least six
months will automatically receive a non-statutory option to purchase 2,500
shares of Common Stock upon such director's annual reelection to the Board by
the stockholders. Options to purchase 26,000 shares, 13,000 shares and 6,000
shares were exercisable at September 30, 1998, 1997 and 1996, respectively.
The following table summarizes activity of the 1989, 1996 and Director
Plans:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------
Options Number Weighted-
Available Of Price Average
For Grant Shares Per Share Exercise Price
--------- ------ --------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Balance at September 30, 1995 342 2,051 $0.20 - $59.50 $15.56
Authorized 1,050 -- -- --
Granted (1,609) 1,609 $9.625- $26.00 18.73
Exercised -- (253) $0.20 - $13.00 3.76
Canceled 907 (907) $0.28 - $59.50 33.42
-----------------------------------------------------------------
Balance at September 30, 1996 690 2,500 $0.20 - $27.50 12.31
Authorized 775 -- -- --
Granted (2,340) 2,340 $5.00 - $10.125 8.72
Exercised -- (197) $0.20 - $12.25 3.37
Canceled 1,095 (1,095) $0.20 - $27.50 19.98
-----------------------------------------------------------------
Balance at September 30, 1997 220 3,548 $0.28 - $26.00 8.07
Authorized 2,218 -- -- --
Granted (1,463) 1,463 $3.00 - $11.00 8.08
Exercised -- (461) $0.28 - $10.48 3.63
Canceled 1,254 (1,254) $3.00 - $26.00 8.39
-----------------------------------------------------------------
Balance at September 30, 1998 2,229 3,296 $3.00 - $14.50 $ 8.57
-----------------------------------------------------------------
</TABLE>
For certain options granted in 1997, 1995 and 1994, the Company
recognized as unearned compensation the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such options
over the aggregate exercise price of such options. The deemed value for
accounting purposes represents the fair value at the date of grant. The
compensation expense is being amortized ratably over the vesting period of the
option. Compensation expense amounting to $69,000, $43,000 and $43,000 was
recognized for the years ending September 30, 1998, 1997, and 1996,
respectively.
33
<PAGE> 36
Notes to Consolidated Financial Statements
Outstanding and exercisable options presented by price range at September
30, 1998 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Number of Wtd. Average Number of
Range of Options Remaining Life Wtd. Average Options Wtd. Average
Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
- --------------------- ------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.00 - 7.59 589,000 7.81 $ 5.53 307,000 $ 4.56
7.75 - 8.00 775,000 9.06 7.92 129,000 7.85
8.56 - 9.13 381,000 8.66 8.86 159,000 8.91
9.25 - 9.25 867,000 8.37 9.25 538,000 9.25
9.38 - 12.25 614,000 7.87 10.69 391,000 10.74
12.75 - 14.50 70,000 7.05 13.02 52,000 13.09
==========================================================================================================
$ 3.00 - 14.50 3,296,000 8.34 $ 8.57 1,576,000 $ 8.68
==========================================================================================================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In March 1993, the Company adopted an Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code. Under the
Company's Purchase Plan, eligible employees may purchase shares of the Company's
common stock through payroll deductions. The shares are purchased at a price
equal to 85% of the lesser of the fair value of the Company's common stock as of
the first day of the 24-month offering period or the last day of each six-month
purchase period. A total of 1,450,000 shares of common stock is reserved for
issuance under the plan, of which 508,000 had been issued as of September 30,
1998.
STOCK-BASED COMPENSATION
As permitted under FAS 123, the Company has elected to follow APB 25 and
related Interpretations, in accounting for stock-based awards to employees.
Under APB 25, the Company generally recognized no compensation expense with
respect to such awards.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for awards granted or modified after September 30,
1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of FAS 123. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS ESPP
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 5.0 5.0 5.0 0.5 0.5 0.5
Expected volatility .76 .70 .70 .72 .53 .73
Risk-free interest rate 5.50 6.43 6.11 5.33 5.50 5.34
</TABLE>
The weighted-average fair value of options granted at market value during
fiscal 1998, 1997 and 1996 was $3.81, $4.02 and $9.75 per share, respectively.
The weighted-average fair value of employee stock purchase rights during fiscal
1998, 1997 and 1996 was $3.89, $5.33 and $5.20 per share, respectively.
34
<PAGE> 37
Notes to Consolidated Financial Statements
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information for the years ended September 30, is
as follows (in thousands, except for income (loss) per share information):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(As restated)
<S> <C> <C> <C>
Net income (loss)
As reported $ (50,607) $ (7,686) $ 1,015
Pro forma $ (55,564) $ (14,814) $ (4,754)
Basic and diluted income (loss) per share
As reported $ (2.67) $ (0.43) $ 0.06
Pro forma $ (2.93) $ (0.83) $ (0.27)
</TABLE>
Because FAS 123 is applicable only to awards granted subsequent to
September 30, 1995, its pro forma effect will not be fully reflected until
fiscal 1999 and is not expected to be indicative of the effects on net income
(loss) and net income (loss) per share in future years.
NOTE 10. STOCKHOLDERS' EQUITY
The Company is subject to legal restrictions related to its distribution
of ISSI-Taiwan earnings. In accordance with the Corporate Law of the Republic of
China, before ISSI-Taiwan declares any part of net income as dividends and/or
bonuses, ISSI-Taiwan must transfer 10% of its statutory net income to a legal
reserve until such reserve is equal to ISSI-Taiwan's capital. At September 30,
1998, such restricted equity amounted to approximately $5,022,000. The legal
reserve is not available for distribution; however, when the reserve exceeds 50%
of ISSI-Taiwan's capital, 50% of the legal reserve in excess of 50% of
ISSI-Taiwan's capital may be distributed in the form of stock. The reserve may
be utilized at any time to offset a deficit. In addition, any distribution of
equity of ISSI-Taiwan must allocate 1% of the related distribution to employees
of ISSI-Taiwan.
NOTE 11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for
the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 114 $(2,558) $ 3,137
State 36 1 335
Foreign 2,377 116 200
------- ------- -------
Total current $ 2,527 $(2,441) $ 3,672
Deferred:
Federal 2,289 2,584 (3,062)
State -- -- (614)
Foreign (148) (1,287) (1,154)
------- ------- -------
Total deferred 2,141 1,297 (4,830)
------- ------- -------
Total provision (benefit) $ 4,668 $(1,144) $(1,158)
======= ======= =======
</TABLE>
Pretax income from foreign operations was approximately $200,000,
$9,207,000, and $153,000 for 1998, 1997 and 1996, respectively.
35
<PAGE> 38
Notes to Consolidated Financial Statements
The Company's provision (benefit) for income taxes differs from the
amount computed by applying the U.S. federal statutory rate (35%) to income
before taxes and minority interest as follows for the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(As adjusted)
(In thousands)
<S> <C> <C> <C>
Income taxes computed at the U.S. federal statutory rate $(16,118) $ (3,097) $ (75)
Valuation of deferred tax assets 11,105 6,546 1,104
Net operating loss utilized (2,898) -- --
Foreign earnings taxed at lower than U.S. rate (62) (4,368) (1,006)
Foreign withholding taxes 2,373 -- --
Tax exempt interest income (93) (328) (694)
Gain on sale of ISSI-Taiwan stock 7,890 -- --
In-process research and development 2,477 -- --
Other individually immaterial items (6) 103 (487)
======== ======== ========
Total provision (benefit) $ 4,668 $ (1,144) $ (1,158)
======== ======== ========
</TABLE>
As of September 30, 1998 the Company has federal net operating loss
carryforwards of approximately $9,000,000. The Company has federal research and
development credit carryforwards, foreign tax credits and alternative minimum
tax credit carryforwards of approximately $2,600,000, $2,500,000 and $500,000,
respectively. The Company also has state research and manufacturers' investment
tax credit carryforwards of approximately $900,000 and $250,000. The net
operating losses, research credit carryforwards, foreign tax credit
carryforwards and state manufacturers' investment tax credit carryforwards will
expire at various dates beginning in 2003 through 2013, if not utilized. In
addition, ISSI-Taiwan has investment tax credit carryforwards of approximately
$5,000,000 that will expire at various dates beginning in 1999 through 2002, if
not utilized.
Utilization of the net operating loss carryforwards and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of deferred taxes consisted of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Depreciation $ 577 $ 607
Reserves and write-downs not currently deductible 11,961 3,159
Accrued expenses 2,983 2,053
Taiwan - investment tax credit carryforwards 5,383 4,480
Federal and state credit carryforwards 6,548 2,040
Federal and state net operating loss carryforwards 3,204 6,236
Other, net 1,185 13
-------- --------
Total deferred tax assets 31,841 18,588
Valuation allowance (29,667) (13,858)
-------- --------
Net deferred tax assets $ 2,174 $ 4,730
======== ========
</TABLE>
Management has established a valuation allowance for the U.S. portion
of the gross deferred tax assets based on management's belief that the
realization of the U.S. deferred tax assets is not realizable on a more likely
than not basis. Management has determined, based on ISSI-Taiwan's history of
prior operating earnings and its expectation of future taxable income, that a
partial valuation allowance for ISSI-Taiwan's deferred tax assets should be
provided. Although realization of the ISSI-Taiwan deferred tax assets is not
assured, management believes that it is more likely than not that the deferred
tax asset will be realized. The amount of the deferred tax asset considered
36
<PAGE> 39
Notes to Consolidated Financial Statements
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. The valuation
allowance for deferred tax assets increased by $15,809,000 and $6,695,000 during
1998 and 1997, respectively. Approximately, $2,450,000 of the valuation
allowance is attributable to tax benefits of stock option deductions, which will
be credited to paid in capital when recognized.
As a result of its location in the Hsinchu Science-Based Industrial
Park in Taiwan, ISSI-Taiwan has received a tax exemption for taxable income
beginning October 1, 1992. ISSI-Taiwan continuously extends this 4-year
exemption each time it expands its capital assets and uses the capital to
purchase qualified machinery. The precise amount of the exemption is calculated
annually based upon the extent of ISSI-Taiwan's net operating taxable income and
measured by certain factors, including use of qualified manufacturing equipment,
self-manufacturing costs and qualified sales revenue. The portion of
ISSI-Taiwan's taxable income which is not subject to exemption is taxed at a
flat 20% tax rate.
Cumulative net undistributed earnings of ISSI-Taiwan for which no
residual U.S. taxes have been provided aggregate approximately $28,000,000 at
September 30, 1998. These earnings are considered to be permanently invested in
non-U.S. operations. Upon distribution of these earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding tax payable to the foreign country. Determination of the amount
of unrecognized deferred U.S. tax liability is not practical because of the
complexities associated with its hypothetical calculation. However, a U.S.
foreign tax credit for the withholding tax payable on the distribution would be
available to reduce U.S. taxes.
NOTE 12. PER SHARE DATA
The calculations of basic and diluted income (loss) per share for
each of the three years ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
-------- -------- --------
(As restated)
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) $(50,607) $ (7,686) $ 1,015
======== ======== ========
Denominator for basic income (loss) per share:
Weighted average common shares
outstanding 18,940 17,748 17,457
Denominator for basic income (loss) per share 18,940 17,748 17,457
-------- -------- --------
Dilutive stock options -- -- 899
-------- -------- --------
Denominator for diluted income (loss) per share 18,940 17,748 18,356
======== ======== ========
Basic income (loss) per share $ (2.67) $ (0.43) $ 0.06
======== ======== ========
Diluted income (loss) per share $ (2.67) $ (0.43) $ 0.06
======== ======== ========
</TABLE>
The above diluted calculation for the years ended September 30, 1998,
1997 and 1996, does not include approximately 2,497,000, 1,418,000 and 797,000
shares attributable to options as of September 30, 1998, 1997 and 1996,
respectively, as their impact would be anti-dilutive.
37
<PAGE> 40
Notes to Consolidated Financial Statements
NOTE 13. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
develop, and market high-performance SRAM and NVM integrated circuits. The
following table summarizes the Company's operations in different geographic
areas:
<TABLE>
<CAPTION>
Year Ended September 30, 1998
-------------------------------------------------------------------
Adjustments/
United States Taiwan Eliminations Consolidated
------------- ---------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 83,223 $ 47,909 $ -- $ 131,132
Transfers between geographic areas 2,155 69,495 (71,650) --
---------- ---------- ---------- ----------
Total net sales $ 85,378 $ 117,404 $ (71,650) $ 131,132
========== ========== ========== ==========
Operating income (loss) $ (56,374) $ 3,266 $ 55 $ (53,053)
========== ========== ========== ==========
Identifiable assets $ 84,399 $ 128,115 $ (10,346) $ 202,168
========== ========== ========== ==========
Cash, cash equivalents, restricted cash
and short-term investments $ 30,072 $ 5,837 $ -- $ 35,909
========== ========== ========== ==========
Accounts receivable from third-party
customers $ 10,170 $ 8,899 $ -- $ 19,069
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30, 1997
-------------------------------------------------------------------
Adjustments/
United States Taiwan Eliminations Consolidated
------------- ---------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 63,247 $ 45,014 $ -- $ 108,261
Transfers between geographic areas 3,586 69,795 (73,381) --
---------- ---------- ---------- ----------
Total net sales $ 66,833 $ 114,809 $ (73,381) $ 108,261
========== ========== ========== ==========
Operating loss $ (20,504) $ 8,995 $ 733 $ (10,776)
---------- ---------- ---------- ----------
Identifiable assets $ 115,477 $ 123,676 $ (43,557) $ 195,596
========== ========== ========== ==========
Cash, cash equivalents, restricted cash
and short-term investments $ 40,737 $ 12,399 $ -- $ 53,136
========== ========== ========== ==========
Accounts receivable from third-party
customers $ 10,705 $ 7,773 $ -- $ 18,478
========== ========== ========== ==========
</TABLE>
38
<PAGE> 41
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended September 30, 1996
-----------------------------------------------------------------------
Adjustments/
United States Taiwan Eliminations Consolidated
------------- ----------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 85,676 $ 46,363 $ -- $ 132,039
Transfers between geographic areas 6,250 70,450 (76,700) --
----------- ----------- ----------- -----------
Total net sales $ 91,926 $ 116,813 $ (76,700) $ 132,039
=========== =========== =========== ===========
Operating loss $ (3,751) $ (615) $ (317) $ (4,683)
---------- ---------- ---------- ----------
Identifiable assets $ 115,331 $ 76,976 $ (14,268) $ 178,039
=========== =========== =========== ===========
Cash, cash equivalents, restricted cash
and short-term investments $ 74,498 $ 6,962 $ -- $ 81,460
=========== =========== =========== ===========
Accounts receivable from third-party
customers $ 6,910 $ 4,406 $ -- $ 11,316
=========== =========== =========== ===========
</TABLE>
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with rules and regulations of governing tax
authorities. Such transfers are eliminated in the consolidated financial
statements.
Identifiable assets by geographic area are those assets used in the
Company's operations in each area.
Total assets and liabilities for ISSI-Taiwan amounted to approximately
$128,115,000 and $84,089,000, respectively, at September 30, 1998. Included in
the assets and liabilities of ISSI-Taiwan were intercompany receivables
amounting to approximately $2,697,000 at September 30, 1998. Pre-tax income for
ISSI-Taiwan for the year ended September 30, 1998 was approximately $195,000.
Export sales by the U.S. operating company were approximately
$26,393,000, $14,125,000, and $15,741,000, for the years ended September 30,
1998, 1997, and 1996, respectively.
Net foreign currency transaction gains (losses) of approximately
$(3,188,000), $(17,000), and $311,000 for the years ended September 30, 1998,
1997 and 1996, respectively, were primarily the result of the settlement of
intercompany transactions and are included in the determination of net income.
NOTE 14. COMMITMENTS AND CONTINGENCIES
PATENTS AND LICENSES
In the semiconductor industry it is typical for companies to receive
notices from time to time alleging infringement of patents or other intellectual
property rights of others. The Company has been, and from time-to-time expects
to be, notified of claims that it may be infringing patents, maskwork rights or
copyrights owned by third parties. Although none of these companies have pursued
a claim against the Company, there can be no assurance that other companies will
not in the future pursue claims against the Company with respect to the alleged
infringement of patents, maskwork rights, copyrights or other intellectual
property owned by third parties. If it appears necessary or desirable, the
Company may seek licenses under patents that it is alleged to be infringing.
Although patent holders commonly offer such licenses, there is no assurance that
any licenses will be offered or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain a license under a key patent or
intellectual property right from a third party for technology used by the
Company could cause the Company to incur substantial liabilities and to suspend
the manufacture of the products utilizing the invention or to attempt to develop
non-infringing products, any of which could materially and adversely affect the
Company's
39
<PAGE> 42
Notes to Consolidated Financial Statements
business and operating results. Furthermore, there can be no assurance that the
Company will not become involved in protracted litigation regarding the alleged
infringement by the Company of third party intellectual property rights or
litigation to assert and protect patents or other intellectual property rights
of the Company. Any litigation relating to patent infringement or other
intellectual property matters could result in substantial cost and diversion of
resources by the Company which could materially and adversely affect the
Company's business and operating results.
LITIGATION
On April 22, 1998, the U.S. Department of Commerce ("DOC") published
an amended antidumping duty order on imports of SRAMs from Taiwan from where the
Company currently imports a majority of its SRAMs. As a consequence of this
antidumping duty order, the Company is required to post a cash deposit on
imports of Taiwan fabricated SRAM wafers or devices, at the ad valorem rate of
7.56%. The cash deposits subsequently could be returned to the Company or,
alternatively, the Company could forfeit amounts deposited and owe duties and
interest in addition to the amounts deposited. The outcome is dependent on
whether the DOC conducts an administrative review of imports entered after the
imposition of the antidumping order, and if so, on the results of the DOC
review. The decision on whether to conduct a review will be made in 1999 and the
results of the review will be issued in the year 2000.
The Company has retained legal counsel to defend and assist in its
interests in the antidumping proceedings. In addition, certain aspects of the
antidumping determination are being challenged in federal court proceedings by
some of the respondents to the investigation, and these proceedings could result
in the termination of this antidumping case. Duties calculated and assessed by
the government could have a material adverse affect on the Company's gross
margins and profits. There can be no assurance that any reviews or proceedings
will mitigate or eliminate antidumping duties.
On October 22, 1998, Micron Technology filed an anti-dumping petition
against DRAMs fabricated in Taiwan. Currently, the Company's DRAM products are
fabricated in Taiwan. The case is expected to take from 12 to 18 months to
complete. If the petition is upheld, the Company could face DRAM duties, unless
it is able to secure DRAM from outside of Taiwan. Currently, DRAM accounts for
less than 10% of the Company's revenue.
LEASES
The Company leases its facilities and the land upon which ISSI-Taiwan is
constructing its new Taiwan facility under operating lease agreements that
expire at various dates through 2016. The Company entered into a ten year lease
effective December 1, 1996 for its headquarters facility in Santa Clara,
California. The Company has subleased approximately 25% of the Santa Clara
facility and the sublease expires in March 2000. Minimum rental commitments
under these leases are as follows (in thousands):
<TABLE>
<S> <C>
1999 (net of sublease income of $501) $ 1,045
2000 (net of sublease income of $285) 1,231
2001 1,367
2002 1,423
2003 1,479
Thereafter 6,247
-------
Total minimum rental commitments $12,792
=======
</TABLE>
Total rental expense for the years ended September 30, 1998, 1997, and
1996 was approximately $1,078,000 (net of sublease income of $375,000),
$1,372,000 (net of sublease income of $148,000), and $637,000, respectively.
40
<PAGE> 43
Notes to Consolidated Financial Statements
COMMITMENTS TO WAFER FABRICATION FACILITIES
In June 1996, the Company entered into a business venture "WaferTech,
LLC" with TSMC, Altera, Analog Devices, and private investors to build a wafer
fabrication facility in Camas, Washington. The Company agreed to invest $31.2
million for a 4% equity interest in the venture and as of September 30, 1998 all
of this amount had been paid. The last scheduled payment to WaferTech by the
Company of $12.5 million was made in November 1997. The Company is accounting
for this investment on the cost basis. In December 1998, the Company agreed to
sell approximately 33% of its investment in WaferTech to TSMC for approximately
$10.0 million. The transaction is expected to close in January 1999. Upon
completion of the transaction, the Company will have a 2.67% interest in
WaferTech.
The Company has also agreed to certain minimum wafer purchase commitments
with its foundry partners in exchange for wafer capacity commitments. In fiscal
1995, the Company entered into an agreement with TSMC pursuant to which the
Company agreed to acquire specified wafer capacity through 2001. The Company
also agreed to make certain annual payments totaling approximately $19.2 million
through 2001 to TSMC for additional capacity above the annual base capacity.
Wafer purchases in any given year are first applied to the base capacity and
then to the Company's $19.2 million obligation. As a result, the $19.2 million
may be subject to forfeiture if the Company does not purchase the base capacity
and additional capacity for which it has contracted. To date, the Company has
never forfeited any amounts under this agreement. The Company also has minimum
purchase obligations to TSMC related to WaferTech LLC. The Company is obligated
to purchase from WaferTech or TSMC a minimum of 3.4% of WaferTech's installed
capacity. Initial wafer outs occurred in the second half of calendar 1998.
Although the Company has rights to re-schedule or assign capacity to another
party, there can be no assurance that such re-schedule or assignment would be
successfully accomplished. Should the Company fail to re-schedule or assign
unneeded capacity, the Company's business and operating results could be
adversely affected.
In fiscal 1995, the Company entered into a business venture "United Integrated
Circuits Corp" ("UICC") with UMC and other investors to build a wafer
fabrication facility in Hsinchu, Taiwan. The Company has invested approximately
$16.5 million (subject to fluctuations in the New Taiwanese Dollar) for a 4%
equity interest in the venture of which UMC retains 55% ownership. The final
payment of approximately $4.7 million was made to UICC in December 1997. The
Company is accounting for this investment on the cost basis. The UICC facility
was severely damaged by fire in October 1997. It is the Company's understanding
that the damage was covered by insurance. UICC has undertaken a clean up of the
facility, but reconstruction has not commenced as an alternative site is being
evaluated. A decision as to whether to build on the existing site or the
alternative site has not yet been made. The Company believes that its investment
of $16.5 million is recoverable.
NOTE 15. EMPLOYEE BENEFIT PLAN
In August 1992, the Company established a defined contribution retirement
plan with 401(k) plan features. The plan covers all United States employees 18
years and older. Employees may make contributions by a percentage reduction in
their salaries, up to $10,000 for 1998. The Company elected to make no
contributions during the years ended September 30, 1998, 1997 and 1996.
Administrative expenses relating to the plan are insignificant.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash paid for interest $ 2,896 $ 1,431 $ 478
Cash paid (refunded) for income taxes 2,561 (5,004) 8,603
Notes payable issued for other assets -- -- (31,200)
Tax benefit from sale of common stock -- -- 103
Fixed assets acquired for accounts payable 4,440 -- --
Stock issued in acquisition of Nexcom 6,377 -- --
Assets acquired from Nexcom 2,515 -- --
Liabilities assumed from Nexcom 3,762 -- --
</TABLE>
41
<PAGE> 44
Notes to Consolidated Financial Statements
NOTE 17. TRANSACTIONS
On December 3, 1997, the Company completed its acquisition of Nexcom
Technology, Inc. ("Nexcom") in exchange for the issuance of 772,693 shares of
Common Stock, $0.5 million in cash, and the assumption of $1.2 million of net
liabilities (total consideration of approximately $8.5 million). The transaction
was accounted for as a purchase and resulted in an in-process technology charge
of approximately $7.1 million in the Company's December 31, 1997 quarter. Nexcom
was formed in 1990 and has been engaged primarily in the research and
development of non-volatile flash memory technology.
On June 29, 1998, the Company sold approximately 46% of ISSI-Taiwan
to a group of private investors. The price was privately negotiated between the
parties. Cash proceeds from the transaction totaled $35.5 million net of
withholding and transaction taxes. The transaction resulted in a pre-tax gain of
$10.5 million which is recorded in the Company's June 30, 1998 quarter.
NOTE 18. RELATED PARTY TRANSACTIONS
For the year ended September 30, 1996, the Company purchased
approximately $1,342,000 of services from Taicera Electronics Company, an
assembly plant that is an affiliate of the Fu Sheng Industrial Group, whose
chairman was a member of the Company's Board of Directors until April 1997. At
September 30, 1996, the Company had no balance due to Taicera Electronics
Company.
NOTE 19. SPIN-OFF OF NEXFLASH TECHNOLOGIES, INC.
Effective October 1, 1998, the Company transferred certain employees
and joint ownership of certain patents and related Flash technology to a newly
formed company, NexFlash Technologies, Inc. The Company and NexFlash jointly own
existing Flash related patents and NexFlash will continue development of Flash
products. The Company owns approximately 32% of NexFlash, and ISSI-Taiwan owns
approximately 17%, which includes approximately 6% of NexFlash purchased for
$1,000,000. The Company's President is the acting Chief Executive Officer of
NexFlash.
In connection with the NexFlash transaction, the Company issued
warrants to purchase an aggregate of 981,659 shares of ISSI Common Stock at an
exercise price of $3.76 per share to the NexFlash investors. The warrants expire
on November 4, 2000.
NOTE 20. SUBSEQUENT EVENTS (UNAUDITED)
1998 ISSI-TAIWAN STOCK PLAN
On October 29, 1998, the Company adopted the 1998 ISSI-Taiwan Stock
Plan "Taiwan Stock Plan" that provides for non-statutory stock options in the
common stock of ISSI-Taiwan for employees, consultants, and directors of the
Company. Upon exercise, if any, the Company would sell its shares in ISSI-Taiwan
to the optionee. Under terms of the Taiwan Stock Plan, the maximum aggregate
number of shares of ISSI-Taiwan stock which may be optioned and sold is twelve
million. This represents approximately 10% of the outstanding shares of
ISSI-Taiwan.
Under the terms of the plan, the exercise price, which is deemed to
be fair value, and the exercise period of the non-statutory stock option grants
are determined by the Board of Directors on the date of grant. Generally, the
stock options vest one-third annually on the anniversary of the date of grant.
The options expire upon the earlier of ten years from the date of grant or 30
days following termination of employment or consultancy.
In the event of an optionee's termination of status as an employee or
consultant of the Company, without cause, within twelve months of certain
changes of control of the Company, the Taiwan Stock Plan provides for full
acceleration of the exercisability of all outstanding options.
42
<PAGE> 45
Notes to Consolidated Financial Statements
PARTIAL SALE OF INVESTMENT IN WAFERTECH
In December 1998, the Company agreed to sell approximately 33% of its
investment in WaferTech to TSMC for approximately $10.0 million. The transaction
is expected to close in January 1999. Upon completion of the transaction, the
Company will have a 2.67% interest in WaferTech.
REPRICE OF STOCK OPTIONS
On December 2, 1998, the Board of Directors approved the repricing of
certain options outstanding previously granted to employees of the Company.
Approximately 2,007,000 shares with an aggregate exercise price of approximately
$17.3 million were repriced to an exercise price of $3.1562 per share. In
connection with the repricing, certain vesting and exercise rights were
surrendered.
43
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on January 29, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers - See the section entitled "Executive Officers"
in Part I, Item 1 hereof.
(b) Directors - The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in the
Proxy Statement
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report.
44
<PAGE> 47
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Integrated Silicon
Solution, Inc. are contained in Part II, Item 8 of this Report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule of Integrated Silicon
Solution, Inc. is contained in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
All other schedules for which provision is made in the Applicable
Accounting Regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2.1(6) Agreement and Plan of Reorganization dated November 5,
1997 by and among the Company, Nexcom Technology, Inc.
and certain shareholders of Nexcom Technology, Inc.
3.1(2) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)*** Form of 1993 Employee Stock Purchase Plan, as amended,
and form of Subscription Agreement.
10.3(1)*** Form of 1989 Stock Plan, as amended, and form of Stock
Option Agreements.
10.4(1) Information and Registration Rights Agreement dated as
of March 17, 1993 among the Registrant and certain
holders of the Registrant's Common Stock, as amended.
10.5(1)* Letter Agreement dated September 14, 1994 between
Taiwan Semiconductor Manufacturing Company, Ltd.
("TSMC") and the Registrant.
10.6(1)* Joint Development Contract between Chartered
Semiconductor Manufacturing Pte.Ltd. and the
Registrant dated July 21, 1994.
10.7(1) Subscription and Shareholders Agreement Relating to
Valery Limited dated March 30, 1994.
10.8(1) Long term line of credit between Bank of Communication
and Registrant.
10.9(1) Short term line of credit between International
Commercial Bank of China and Registrant.
10.10(1)*** 1995 Director Stock Option Plan.
10.11(2)* Option I Agreement between the Registrant and TSMC
dated April 21, 1995.
10.12(2)* Option II Agreement between the Registrant and TSMC
dated April 21, 1995.
10.13(3)* UMC/ISSI-Taiwan Foundry Venture Agreement dated August
31, 1995.
10.14(3)* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement
dated August 31, 1995.
10.15 Second Amended and Restated Limited Liability Company
Agreement of WaferTech, LLC, a Delaware limited
liability company, dated as of October 28, 1997.
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
10.16(4)** Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Corporation, as Seller, and Analog
Devices, Inc., Altera Corporation and Integrated
Silicon Solution, Inc., as Buyers.
10.17(5)* Amendment to Option I and Option II Agreement between
the Company and TSMC dated September 23, 1996.
10.18(5) Sublease Agreement for facility located at 2231 Lawson
Lane, Santa Clara, California.
10.19(7)*** Nonstatutory Stock Plan
10.20*** 1998 ISSI-Taiwan Stock Plan
21.1(1) Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedule
</TABLE>
- ----------
* Confidential treatment granted for certain portions of this exhibit.
** Confidential treatment requested for certain portions of this exhibit.
The portions of this exhibit for which confidential treatment is being
requested have been blacked out in the copies filed with the related
report and the confidential portions so omitted have been filed
separately with the Securities and Exchange Commission.
*** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
this report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-72960).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-91520).
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1995.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 30, 1997.
(b) Reports on Form 8-K
On July 14, 1998, the Company filed a Form 8-K for the purpose of
disclosing the sale of certain shares of ISSI-Taiwan to a group
of private investors.
(c) Exhibits
See (a) above
(d) Financial statement schedules
See (a) above
46
<PAGE> 49
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/A
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Santa Clara, State of California, on the 12th day of February, 1999.
INTEGRATED SILICON SOLUTION, INC.
By /s/ Gary L. Fischer
--------------------
Gary L. Fischer
Executive Vice President,
Office of the President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K/A has been signed below on February 12, 1999 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
- ------------------------------- --------------------------------------------------
<S> <C>
/s/ Jimmy S.M. Lee * Chairman of the Board, Chief Executive Officer,
- ------------------------------- and President (Principal Executive Officer)
(Jimmy S.M. Lee)
/s/ Kong-Yeu Han * Executive Vice President, General Manager,
- ------------------------------- Taiwan and Director
(Kong-Yeu Han)
/s/ Gary L. Fischer Executive Vice President, Office of the President
- ------------------------------- and Chief Financial Officer (Principal Financial
(Gary L. Fischer) and Accounting Officer)
/s/ Pauline L. Alker * Director
- -------------------------------
(Pauline L. Alker)
/s/ Lip-Bu Tan * Director
- -------------------------------
(Lip-Bu Tan)
/s/ Hide Tanigami * Director
- -------------------------------
(Hide Tanigami)
/s/ Chun Win Wong * Director
- -------------------------------
(Chun Win Wong)
</TABLE>
* By: /s/ Gary L. Fischer
- -------------------------------
Gary L. Fischer
Attorney-in-Fact
47
<PAGE> 50
ITEM 14(d). FINANCIAL STATEMENT SCHEDULE
INTEGRATED SILICON SOLUTION, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Addition
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Allowance for doubtful accounts ........... 1,297 714 (9)(1) 2,002
Sales returns reserve ..................... 2,701 665 (1,133) 2,233
Year ended September 30, 1997:
Allowance for doubtful accounts ........... 2,002 675 (409)(1) 2,268
Sales returns reserve ..................... 2,233 1,713 (1,510) 2,436
Year ended September 30, 1998:
Allowance for doubtful accounts ........... 2,268 -- (464)(1) 1,804
Sales returns reserve ..................... 2,436 858 (1,419) 1,875
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
48
<PAGE> 51
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2.1(6) Agreement and Plan of Reorganization dated November 5,
1997 by and among the Company, Nexcom Technology, Inc.
and certain shareholders of Nexcom Technology, Inc.
3.1(2) Restated Certificate of Incorporation of Registrant.
3.3(1) Bylaws of Registrant.
4.2(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)*** Form of 1993 Employee Stock Purchase Plan, as amended,
and form of Subscription Agreement.
10.3(1)*** Form of 1989 Stock Plan, as amended, and form of Stock
Option Agreements.
10.4(1) Information and Registration Rights Agreement dated as
of March 17, 1993 among the Registrant and certain
holders of the Registrant's Common Stock, as amended.
10.5(1)* Letter Agreement dated September 14, 1994 between
Taiwan Semiconductor Manufacturing Company, Ltd.
("TSMC") and the Registrant.
10.6(1)* Joint Development Contract between Chartered
Semiconductor Manufacturing Pte.Ltd. and the
Registrant dated July 21, 1994.
10.7(1) Subscription and Shareholders Agreement Relating to
Valery Limited dated March 30, 1994.
10.8(1) Long term line of credit between Bank of Communication
and Registrant.
10.9(1) Short term line of credit between International
Commercial Bank of China and Registrant.
10.10(1)*** 1995 Director Stock Option Plan.
10.11(2)* Option I Agreement between the Registrant and TSMC
dated April 21, 1995.
10.12(2)* Option II Agreement between the Registrant and TSMC
dated April 21, 1995.
10.13(3)* UMC/ISSI-Taiwan Foundry Venture Agreement dated August
31, 1995.
10.14(3)* UMC/ISSI-Taiwan Fabven Foundry Capacity Agreement
dated August 31, 1995.
10.15 Second Amended and Restated Limited Liability Company
Agreement of WaferTech, LLC, a Delaware limited
liability company, dated as of October 28, 1997.
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
<S> <C>
10.16(4)** Purchase Agreement by and between Taiwan Semiconductor
Manufacturing Corporation, as Seller, and Analog
Devices, Inc., Altera Corporation and Integrated
Silicon Solution, Inc., as Buyers.
10.17(5)* Amendment to Option I and Option II Agreement between
the Company and TSMC dated September 23, 1996.
10.18(5) Sublease Agreement for facility located at 2231 Lawson
Lane, Santa Clara, California.
10.19(7)*** Nonstatutory Stock Plan.
10.20*** 1998 ISSI-Taiwan Stock Plan.
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedule.
</TABLE>
- ----------
* Confidential treatment granted for certain portions of this exhibit.
** Confidential treatment requested for certain portions of this exhibit.
The portions of this exhibit for which confidential treatment is being
requested have been blacked out in the copies filed with the related
report and the confidential portions so omitted have been filed
separately with the Securities and Exchange Commission.
*** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to form 14(c) of
this report.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-72960).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (file no. 33-91520).
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1995.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1996.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed April 30, 1997.
<PAGE> 1
EXHIBIT 10.15
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>
<S> <C> <C>
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>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
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
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<S> <C> <C>
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>
-v-
<PAGE> 7
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
-vi-
<PAGE> 8
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.
-2-
<PAGE> 10
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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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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<PAGE> 76
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 10.20
INTEGRATED SILICON SOLUTION, INC.
1998 ISSI-TAIWAN STOCK PLAN
1. Purposes of the Plan. The purposes of this Plan are to attract and
retain the best available personnel for positions of substantial responsibility
to provide additional incentive to Employees and Consultants of the Company and
its Subsidiaries and to promote the success of the Company's business. Only
nonstatutory stock options for shares of Integrated Silicon Solution (Taiwan),
Inc. ("ISSI-Taiwan") may be granted under the Plan.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its
Committees appointed pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to
the administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, the laws of the Republic of China
applicable to ISSI-Taiwan, any stock exchange or quotation system on which the
Common Stock is listed or quoted and the applicable laws of any other country or
jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as
amended.
(e) "Committee" means the Committee appointed by the Board
of Directors in accordance with paragraph (a) of Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of Integrated
Silicon Solution (Taiwan), Inc., a company formed under the laws of the Republic
of Taiwan.
(g) "Company" means Integrated Silicon Solution, Inc., a
Delaware corporation.
(h) "Consultant" means any person, including an advisor,
who is engaged by the Company or any parent, subsidiary or affiliate to render
services, and any director of the Company whether compensated for such services
or not.
(i) "Continuous Status as an Employee or Consultant" means
the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Company; (iv) transfer between
locations of
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<PAGE> 2
the Company or between the Company, its subsidiaries, successors or
affiliates; or (v) change in status from Employee to Consultant or Consultant to
Employee.
(j) "Employee" means any person, including officers and
directors, employed by the Company or any parent, subsidiary or affiliate of the
Company. The payment of a director's fee by the Company shall not be sufficient
to constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national market system including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall
be the closing sales price for such stock (or the closing bid, if no sales were
reported, as quoted on such system or exchange, for the last market trading day
prior to the time of determination) as reported in the Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the
NASDAQ System (but not on the National Market System thereof) or regularly
quoted by a recognized securities dealer but selling prices are not reported,
its Fair Market Value shall be the mean between the high and low asked prices
for the Common Stock or;
(iii) In the absence of an established market
for the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Administrator.
(m) "Option" means a nonstatutory stock option granted
pursuant to the Plan. Such option is not intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code.
(n) "Optioned Stock" means the Common Stock subject to an
Option.
(o) "Optionee" means an Employee or Consultant who receives
an Option.
(p) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Plan" means this Nonstatutory Stock Plan.
(r) "Share" means a share of the Common Stock, as adjusted
in accordance with Section 12 of the Plan.
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<PAGE> 3
(s) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of shares which may be optioned and
sold under the Plan is Twelve Million (12,000,000) shares of Common Stock. The
shares may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i)
the Board or (ii) a Committee designated by the Board, which Committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions
of the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the
Common Stock;
(ii) to select the Consultants and Employees
to whom Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent
Options, are granted hereunder;
(iv) to determine the number of shares of
Common Stock to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use
under the Plan;
(vi) to determine the terms and conditions,
not inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option and/or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator shall determine, in its sole
discretion);
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<PAGE> 4
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section 9(e) instead of
Common Stock;
(viii) to determine whether, to what extent and
under what circumstances Common Stock and other amounts payable with respect to
an award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the amount,
if any, of any deemed earnings on any deferred amount during any deferral
period); and
(ix) to reduce the exercise price of any
Option to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option shall have declined since the date the
Option was granted.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
(a) Options may be granted to Employees or Consultants.
(b) The Plan shall not confer upon any Optionee any right
with respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's right
to terminate his employment or consulting relationship at any time, with or
without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
the Board of Directors. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated
in the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant thereof.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be no less than 85% of the Fair
Market Value per Share on the date of grant; provided, however, that Shares
granted to an Employee or Consultant who, at the time of grant of such option,
owns stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the exercise price
shall be no less than 110% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator and may consist
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<PAGE> 5
entirely of (1) cash, (2) check, (3) promissory note, (4) delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price; (5) any combination of the foregoing methods of
payment, (6) or such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan. Except in the case of Options granted to Officers and
Consultants, Options shall become exercisable at a rate of no less than 20% per
year over five (5) years from the date the Options are granted. Unless the
Administrator provides otherwise, vesting of Options granted hereunder to
Officers shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board, consist
of any consideration and method of payment allowable under Section 8(b) of the
Plan. Until the issuance (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent for ISSI-Taiwan) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
ISSI-Taiwan or its transfer agent to issue) such stock certificate promptly upon
exercise of the Option. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result
in a decrease in the number of Shares which thereafter may be available, both
for purposes of the Plan and for sale under the Option, by the number of Shares
as to which the Option is exercised.
(b) Termination of Employment. In the event of termination
of an Optionee's Continuous Status as an Employee or Consultant, such Optionee
may, but only within thirty (30) days (or within such longer period of time as
is determined by the Board), after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his Option to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of such termination, or if
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
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<PAGE> 6
(c) Disability of Optionee. Notwithstanding the provisions
of Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within twelve (12) months from the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of the death of an Optionee while Optionee is
an Employee or Consultant, the Option may be exercised at any time within twelve
(12) months following the date of death (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise the Option at the date of death. To the extent
that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(e) Buyout Provisions. The Administrator may at any time
offer to buy out for a payment in cash or Shares, an Option previously granted,
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. Unless otherwise provided for by
the Administrator, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, if any, that number of
Shares having a Fair Market Value equal to the amount required to be withheld.
The Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
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<PAGE> 7
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator;
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger
or Asset Sale.
(a) Changes in Capitalization. Subject to the Company
having the number of shares of ISSI-Taiwan owned by the Company adjusted, the
number of shares of Common Stock covered by each outstanding Option, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by ISSI-Taiwan; provided, however,
that conversion of any convertible securities of ISSI-Taiwan shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
ISSI-Taiwan of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to an Option.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, the Board shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the extent
it has not been previously exercised, the Option will terminate immediately
prior to the consummation of such proposed action.
(c) Merger or Asset Sale.
(i) In the event an Optionee's Continuous Status
as an Employee or Consultant is terminated by the Company without cause (as
determined by the Administration) within 12 months following (i) a merger of the
Company with or into another corporation, or (ii) the sale of substantially all
of the assets of the Company, the Optionee shall fully vest in and have the
right to exercise the Option as to all of the Optioned Stock, including Shares
as to which the Optionee would not otherwise be vested or exercisable. If the
Option becomes fully vested and exercisable, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested
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<PAGE> 8
and exercisable for a period of fifteen (15) days from the date of such notice.
For the purposes of this paragraph, the Option shall be considered assumed if,
following the merger or sale of assets, the option confers the right to purchase
or receive, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the consideration (whether stock, cash,
or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share or Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
(ii) In the event of (i) a merger of ISSI-Taiwan with or
into another corporation where ISSI-Taiwan is not the surviving corporation, or
(ii) the sale of substantially all of the assets of ISSI-Taiwan, the Option
shall be exercisable (in accordance with the terms of the Option Agreement,
including the vesting schedule) for the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
Company, or if the Company is not a holder at such time, by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
13. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent.
(b) Shareholder Approval. The Board shall obtain
shareholder approval of any Plan amendment to the extent necessary and desirable
to comply with Applicable Laws.
-8-
<PAGE> 9
(c) Effect of Amendment or Termination. Any such amendment
or termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended (the "Securities Act"), the Exchange Act, the rules and
regulations promulgated thereunder, the requirements of any stock exchange upon
which the Shares may then be listed and any laws or regulations then applicable
to ISSI-Taiwan, and shall be further subject to the approval of counsel for the
Company and ISSI-Taiwan with respect to such compliance.
As a condition to the exercise of an Option, the Company or
ISSI-Taiwan may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company or ISSI-Taiwan, such a
representation is required by any of the aforementioned relevant provisions of
law.
16. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company or ISSI-Taiwan to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel or counsel for ISSI-Taiwan to be necessary to
the lawful issuance and sale of any Shares hereunder, shall relieve the Company
of any liability in respect of the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements in
such form as the Board shall approve from time to time.
18. Rule 701. The issuer of the securities under this Plan within the
meaning of Rule 701 under the Securities Act is ISSI-Taiwan.
19. Shareholder Approval. The Plan shall be subject to approval by
the shareholders of ISSI-Taiwan within twelve (12) months after the date the
Plan is adopted. Such shareholder approval shall be obtained in the degree and
manner required under Applicable Laws.
20. Information to Optionees. The Company shall provide to each
Optionee and to each individual who acquires Shares pursuant to the Plan, not
less frequently than annually during the period such Optionee or purchaser has
one or more Options outstanding, and, in the case of an
-9-
<PAGE> 10
individual who acquires Shares pursuant to the Plan, during the period such
individual owns such Shares, copies of annual financial statements. The Company
shall not be required to provide such statements to key employees whose duties
in connection with the Company assure their access to equivalent information.
-10-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 No. 333-42245 pertaining to shares issued in connection with the
acquisition of Nexcom Technology, Inc., and Form S-8 (including registration of
shares for resale by means of a Form S-3 prospectus) Nos. 333-95282, 333-3438,
333-21635, and 333-50679 pertaining to the 1993 Employee Stock Purchase Plan,
the 1995 Director Stock Option Plan, the 1989 Stock Plan and the Nonstatutory
Stock Plan of Integrated Silicon Solution, Inc. of our report dated October 23,
1998, with respect to the consolidated financial statements and schedule of
Integrated Silicon Solution, Inc. included in its Annual Report (Form 10-K/A)
for the year ended September 30, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
February 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 28,109
<SECURITIES> 7,800
<RECEIVABLES> 20,873
<ALLOWANCES> 1,814
<INVENTORY> 46,484
<CURRENT-ASSETS> 106,400
<PP&E> 73,636
<DEPRECIATION> 29,320
<TOTAL-ASSETS> 202,168
<CURRENT-LIABILITIES> 73,851
<BONDS> 12,087
0
0
<COMMON> 2
<OTHER-SE> 90,918
<TOTAL-LIABILITY-AND-EQUITY> 202,168
<SALES> 131,132
<TOTAL-REVENUES> 131,132
<CGS> 126,794
<TOTAL-COSTS> 126,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,795
<INCOME-PRETAX> (46,051)
<INCOME-TAX> 4,668
<INCOME-CONTINUING> (50,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,607)
<EPS-PRIMARY> (2.67)
<EPS-DILUTED> (2.67)
</TABLE>
