<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number 0-26312
TELCOM SEMICONDUCTOR, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3186995
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1300 Terra Bella, Mt. View, California 94039
(415) 968-9241
(address, including zip code, and telephone number, including
code, of issuer's principle executive offices)
Check whether the issuer (1) 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
----- -----
The number of shares outstanding of the issuer's Common Stock as of May 3, 1996
was 15,583,545.
<PAGE>
TELCOM SEMICONDUCTOR, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
Mar. 31, Mar. 31,
1996 1995
-------- --------
<S> <C> <C>
Net sales $ 9,167 $ 8,629
Cost of sales 5,608 5,750
------- -------
Gross profit 3,559 2,879
------- -------
Operating expenses:
Research and development 1,251 613
Selling, general and administrative 1,911 1,583
------- -------
Total operating expenses 3,162 2,196
------- -------
Income from operations 397 683
Interest income, net 112 8
------- -------
Income before income taxes 509 691
Provision for income taxes 138 173
------- -------
Net income $ 371 $ 518
======= =======
Net income per share $ 0.02 $ 0.03
======= =======
Number of shares used to compute per
share data 16,882 14,930
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,928 $15,849
Marketable securities 10,692 7,990
Accounts receivable, less allowance
for doubtful accounts of $195 and $156 5,700 6,233
Inventory 8,395 6,882
Deferred income taxes 1,145 1,145
Other current assets 354 174
------- -------
Total current assets 34,214 38,273
Property and equipment, net 12,253 11,532
Other assets 3,000 -
------- -------
$49,467 $49,805
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,459 $ 1,265
Accounts payable 2,548 2,167
Accrued liabilities 1,686 1,908
Deferred distributor income 1,572 1,652
Income taxes payable 760 1,925
------- -------
Total current liabilities 8,025 8,917
Notes payable 3,485 3,328
Deferred income taxes 501 501
------- -------
Total liabilities 12,011 12,746
------- -------
Stockholders' equity:
Common stock 16 15
Additional paid-in capital 32,748 32,740
Notes receivable from stockholders (29) (46)
Retained earnings 4,721 4,350
------- -------
Total stockholders' equity 37,456 37,059
------- -------
$49,467 $49,805
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 371 $ 518
Adjustments to reconcile net income to
net cash
provided by (used for) operating
activities:
Depreciation and amortization 758 266
Provision for uncollectible 39 (13)
accounts
Changes in assets and liabilities:
Accounts receivable 494 (557)
Inventory (1,513) (38)
Other current assets (180) 51
Accounts payable 381 465
Accrued liabilities (222) (71)
Deferred distributor income (80) 395
Income taxes payable (1,165) 13
Net cash provided by (used for)
operating
activities (1,117) 1,029
------- -------
Cash flows from investing activities:
Purchases of property and (1,484) (2,804)
equipment
Proceeds from sale of equipment 5 -
Investment in IC WORKS, Inc. 3,000 -
Net purchases of marketable
securities (2,702) -
------- -------
Net cash used for investing activities (7,181) (2,804)
------- -------
Cash flow from financing activities:
Proceeds from sale of common stock 9 1
Notes receivable from stockholders 17 6
Borrowings on notes payable 756 1,516
Payments on notes payable (405) (124)
------- -------
Net cash provided by financing
activities 377 1,399
------- -------
Net increase (decrease) in cash and cash
equivalents (5,219) (376)
Cash and cash equivalents at the
beginning of year 15,849 6,297
------- -------
Cash and equivalents at the end of year $ 7,928 $ 5,921
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(amounts in thousands)
1. The Company and Basis of Presentation:
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs,
develops, manufactures and markets a diversified portfolio of high performance
analog integrated circuits for use in a wide variety of electronic systems. The
Company operates and reports financial results on a 52-53 week fiscal year
ending on the last Friday of December. For convenience, the Company has
presented its fiscal year as ending December 31, and its fiscal quarter as
ending March 31.
In the opinion of management, the unaudited condensed consolidated
interim financial statements have been prepared on the same basis as the
December 31, 1995 financial statements and include all adjustments, consisting
only of normal recurring adjustments, necessary to fairly state the information
set forth herein.
This report on Form 10-QSB for the period ended March 31, 1996 should
be read in conjunction with the Company's 1995 Annual Report on Form 10-KSB.
2. Net Income per Share
Net income per share is computed using the weighted average number of
shares of common stock and, when dilutive, common equivalent shares from
mandatorily redeemable convertible preferred stock (using the if-converted
method) and from stock options and warrants (using the treasury stock method).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares, warrants and options issued by the Company
during the twelve-month period prior to the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods presented.
6
<PAGE>
3. Balance Sheet Details:
<TABLE>
<CAPTION>
Mar. 31, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
Marketable securities:
U.S. Government agency obligations $ 7,232 $ 1,509
Municipal Government obligations 3,460 6,481
-------- -------
$10,692 $ 7,990
======== =======
Inventory:
Raw Material $ 963 $ 1,014
Work in Process 4,921 3,172
Finished Goods 2,511 2,696
-------- -------
$ 8,395 $ 6,882
======== =======
Property and equipment:
Equipment $13,439 $12,110
Leasehold improvements 1,935 1,785
-------- -------
15,374 13,895
Accumulated depreciation (3,121) (2,363)
-------- -------
$12,253 $11,532
======== =======
Accrued liabilities:
Payroll and related $ 1,227 $ 1,251
Accrued rent 161 186
Professional fees 105 176
Other 193 295
-------- -------
$ 1,686 $ 1,908
======== =======
</TABLE>
4. Income Taxes
The provision for income taxes reflects the estimated annualized
effective rate applied to earnings for the interim period. The effective rate
differs from the U. S. statutory rate primarily due to earnings of foreign
subsidiaries being taxed at lower rates.
5. Additional Foundry Agreement
In November 1995, the Company entered into a foundry agreement with IC
WORKS, Inc. whereby the Company will obtain guaranteed production capacity for
certain of the Company's integrated circuits. The agreement requires TelCom to
provide approximately $10 million in capital equipment to IC WORKS and to
purchase up to a maximum of $3 million of preferred stock of IC WORKS, Inc.
During the three months ended March 31, 1996, the Company purchased $3 million
of such preferred stock.
7
<PAGE>
6. Sale of Common Stock
On August 2, 1995, the Company completed its initial public offering
of 4,140,000 shares of its Common Stock, of which 2,496,666 shares were issued
and sold by the Company. Net proceeds to the Company aggregated approximately
$19.0 million. As of the closing date of the offering, all of the mandatorily
redeemable convertible preferred stock outstanding prior to the offering was
automatically converted into an aggregate of 9,561,668 shares of common stock.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report on Form-10QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
Overview
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs,
develops, manufactures and markets a diversified portfolio of high-performance
standard analog integrated circuits for a wide variety of applications in the
industrial, communications, computer, automotive and medical markets. The
Company's products comprise three principal product families: mixed signal
products, which are analog devices with some digital control functionality, such
as display analog/digital converters: power management products, such as switch
node power supply controllers, whose function is to conserve power, and smart
sensors, such as solid state thermal management devices. Within each family, the
Company markets proprietary and selected second source products offering a range
of performance, functionality and price. Average selling prices for the
Company's proprietary products have tended to decline at a slower rate than have
those for the Company's second source products, which are more susceptible to
competitive pricing pressures. The Company generally recognizes higher gross
margins on its proprietary products than on its second source products. Most of
the Company's revenues during 1995 were from products introduced prior to 1994.
Since December 1993, the Company has focused its product development efforts on
new proprietary products and second source products and the Company introduced
six of these products in late 1995.
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect net sales,
gross margins and operating income. These factors include the volume and timing
of orders received, changes in the mix of proprietary and second source products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to introduce new products
on a timely basis, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, the Company's access to advanced process technologies and the timing
and extent of process development costs. Historically in the semiconductor
industry, average selling prices of products have decreased over time. If the
Company is unable to introduce new products with higher margins, maintain its
product mix between proprietary and second source products or reduce
manufacturing costs to offset decreases in the prices of its existing products,
the Company's operating results will be adversely affected. The Company's
business is characterized by short term orders and shipments schedules, and
customer orders typically can be canceled or rescheduled without penalty to the
customer. Since most of the Company's backlog is cancelable without penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, because of the high fixed costs in the semiconductor
industry, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls. As a result of the forgoing or other
factors, the Company may experience material adverse fluctuations in future
operating results on a quarterly or annual basis, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
On August 2, 1995, the Company completed its initial public offering
of 4,140,000 shares of its common stock, of which 2,496,666 shares were issued
and sold by the Company. Net proceeds to the Company aggregated approximately
$19 million. Earnings per share computations for future periods will reflect the
additional dilution for the full effect of the 2,496,666 shares sold by the
Company.
In November 1995, the Company entered into a foundry agreement with IC
WORKS, Inc., a privately-held company located in San Jose, California. The terms
of the agreement require TelCom to provide approximately $10 million in capital
equipment to IC WORKS and to purchase up to a maximum of $3 million of preferred
stock of IC WORKS. In the first quarter of 1996, the Company purchased $3
million
9
<PAGE>
of such preferred stock. In return for this investment, TelCom will
receive guaranteed submicron wafer capacity for a period of five years,
projected to start in 1997.
Results of Operations
Net Sales
Net sales for the three month period ended March 31, 1996 increased
$538,000, or 6.2%, from the corresponding period in the prior fiscal year. The
increase in sales was primarily due to higher unit volumes of the Company's
standard products in its power management and smart sensor product families in
all geographical areas. International sales accounted for approximately 57% of
the Company's net sales for the three months ended March 31, 1996 and March 31,
1995. In absolute dollars, sales in the Asian market increased with higher unit
volumes in power management and sensors as well as higher unit prices in mixed
signal products. During the three months ended March 31, 1996, two OEM
customers, Motorola and Compaq Computer, accounted for approximately 8% and 9%
of net sales, respectively, compared to 13% and 9% respectively for the three
months ended March 31, 1995. In addition, Future Electronics, one of the
Company's distributors, accounted for 11% and 14% of the Company's net sales
during the three months ended March 31, 1995 and during the three months ended
March 31, 1996, respectively.
Gross Margin
Gross margin for the three month period ended March 31, 1996 increased
as a percentage of sales to 38.8% compared to 33.4% in the corresponding period
in the prior fiscal year. The increase in gross margins was primarily due to the
increases in shipments of proprietary products, which generally have higher
gross margins and increases in the sales prices on certain second source
products.
Research and Development Expenses
Research and development expenses for the three month period ended
March 31, 1996 increased to $1.3 million or 13.6% of sales compared to $613,000
or 7.1% of sales for the corresponding period in the prior year, representing an
increase of $638,000. This increase was primarily due to (i) wafer costs
associated with new product development, (ii) increased staffing in design
engineers and layout technicians, (iii) the use of consultants for design and
layout of second source products, and (iv) the additional costs associated with
manufacturing support for test development of new products. The Company expects
research and development expenses generally to increase in absolute dollars in
future periods although such expenses may fluctuate as a percentage of net
sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month
period ended March 31, 1996 increased to $1.9 million or 20.8% of sales compared
to $1.6 million or 18.3% of sales for the corresponding period in the prior
year. Selling, general and administrative expenses increased primarily due to
the hiring of additional personnel in the selling organization in the United
States and Europe and increased staffing to operate the Company's management
information systems. The Company expects selling, general and administrative
expenses generally to increase in absolute dollars in future periods although
such expenses may continue to fluctuate as a percentage of net sales.
10
<PAGE>
Interest Income, Net
Interest income, net for the three month period ended March 31, 1996
was $112,000 compared to $8,000 for the corresponding period in the prior year.
The increased net interest income is the result of interest earned from the
increased level of investments from the proceeds of the Company's initial public
offering less interest expense associated with equipment financing.
Income Taxes.
The effective tax rate for the three month period ended March 31, 1996
is approximately 27% which reflects a blended rate of United States, Hong Kong,
and German tax rates. This effective rate compares to 25% from the corresponding
period in the prior year. The increase to the effective rate is due to the
anticipated change in taxes due for each of the operating entities.
Liquidity and Capital Resources.
As of March 31, 1996 the Company had $18.6 million of cash, cash
equivalents and marketable securities. The Company used $1.1 million of cash
from operating activities during the three months ended March 31, 1996 primarily
reflecting net income of $371,000 and depreciation of $758,000, offset by a net
increase of $2.2 million in working capital. The increase in working capital
primarily reflects increases in net inventories of $1.5 million, primarily due
to lower sales from the three months ended December 31, 1995, and a decrease of
taxes payable of $1.2 million, reflecting payment of 1995 income tax
liabilities. During the period ended March 31, 1996, the Company reduced it's
production to maintain the inventory levels to current forecasted orders.
At March 31,1996, the Company had notes payable of $4.9 million, the
proceeds of which were utilized to purchase certain equipment securing such
notes. These notes bear interest ranging from 12% to 13% per annum and are
payable in monthly installments of principal and interest.
At March 31, 1996, the Company had $3 million of preferred stock
purchased from IC WORKS, Inc., as part of an agreement entered into with IC
WORKS in November 1995.
The Company believes that its current cash, cash equivalent and
marketable securities balances, together with anticipated cash flow from
operations, will be sufficient to meet the Company's needs for the next twelve
months.
11
<PAGE>
Certain Factors Affecting Future Results of Operations
The Company's future results of operations are dependent upon a number
of factors, including those described below:
Dependence on New Products. The Company's success depends upon its
ability to develop new analog circuits for existing and new markets, to
introduce such products in a timely manner and to have such products gain market
acceptance. Most of the Company's revenues during 1994 and 1995 have been from
products introduced prior to 1994. Since December 1993, the Company has focused
its product development efforts on new proprietary products. The development of
new analog circuits is highly complex and from time to time the Company has
experienced delays in developing and introducing new products. Successful
product development and introduction depends on a number of factors including
proper new product definition, timely completion of design and testing of new
products, achievement of acceptable manufacturing yields and market acceptance
of the Company's and its customers' products. Moreover, successful product
design and development is dependent on the Company's ability to attract, retain
and motivate qualified analog design engineers, of which there is a limited
number. There can be no assurance that the Company will be able to meet these
challenges or adjust to changing market conditions as quickly and cost-
effectively as necessary to compete successfully. Due to the complexity and
variety of analog circuits, the limited number of analog circuit designers and
the limited effectiveness of computer-aided design systems in the design of
analog circuits, there can be no assurance that the Company will be able to
continue to successfully develop and introduce new products on a timely basis.
Although the Company seeks to design products that have the potential to become
industry standard products, there can be no assurance that any products
introduced by the Company will be adopted by such market leaders, or that any
product initially accepted by the Company's customers that are market leaders
will become industry standard products. The Company's failure to continue to
develop and introduce new products successfully could materially and adversely
affect its business and operating results.
The Company's results of operations are dependent on the balance
between sales of relatively higher margin but lower volume proprietary products
and relatively higher volume but lower margin second source products. In order
to improve its margins, sales of proprietary products must in the future
represent a greater percentage of the Company's net revenues, requiring the
Company to successfully develop, introduce and market new proprietary products.
There can be no assurance that the Company will be successful in developing new
proprietary products with the features and functionality that customers in its
key markets will demand.
Manufacturing Risks. The fabrication of integrated circuits is a
highly complex and precise process. Minute impurities, contaminants in the
manufacturing environment, difficulties in the fabrication process, defects in
the masks used to print circuits on a wafer, manufacturing equipment failures,
wafer breakage or other factors can cause a substantial percentage of wafers to
be rejected or numerous die on each wafer to be nonfunctional. The majority of
the Company's costs of manufacturing are relatively fixed, and, consequently,
the number of shippable die per wafer for a given product is critical to the
Company's results of operations. To the extent the Company does not achieve
acceptable manufacturing yields or experiences product shipment delays, its
financial condition or results of operations would be materially and adversely
affected. The Company has from time to time in the past experienced lower than
expected production yields, which have delayed product shipments and adversely
affected gross margins. For example, in the quarter ended December 31, 1994, the
Company experienced lower than expected production yields due to difficulties
encountered in increasing manufacturing volume. As the Company continues to
increase its manufacturing output, there can be no assurance that the Company
will not experience a decrease in manufacturing yields. Moreover, there can be
no assurance that the Company will be able to maintain acceptable manufacturing
yields in the future. In order to meet anticipated future demand, the Company
believes that it will need to increase its manufacturing capacity. Failure to do
so could result in a loss of customers, which could materially and adversely
affect the Company's financial condition or results of operations.
12
<PAGE>
The Company currently manufactures substantially all of its products
at its wafer fabrication facility in Mountain View, California. Given the
complex nature of the Company's products, it would be difficult for the Company
to arrange for independent manufacturing facilities to supply such products.
Any prolonged inability to utilize the Company's manufacturing facility as a
result of fire, natural disaster or otherwise would have material adverse effect
on the Company's financial condition and results of operations. During periods
of decreased demand, high fixed wafer fabrication costs could have a material
adverse effect on the Company's financial condition or results of operations.
Furthermore, the Company is dependent on a number of local subcontractors for
certain of its manufacturing processes. The failure of any of these
subcontractors to perform these processes on a timely basis could result in
manufacturing delays, which could materially and adversely affect the Company's
results of operations.
Dependence on New Technologies; Technological Change. The markets
for the Company's products are characterized by rapid technological change and
frequent new product introductions. To remain competitive, the Company must
develop or obtain access to new semiconductor process technologies in order to
reduce die size, increase die performance and functional complexity and improve
manufacturing yields. Semiconductor designs and process methodologies are
subject to rapid technological change, requiring large expenditures for research
and development. If the Company is unable to define, design, develop and
introduce competitive new products on a timely basis, its future operating
results will be materially and adversely affected. In addition, the Company's
ability to compete successfully depends on being able to use advanced analog
process technologies to manufacture its products. There can be no assurance
that the analog process technology utilized by the Company will not become
obsolete.
Intense Competition. The analog semiconductor industry is highly
competitive and subject to rapid technological change. Significant competitive
factors in the analog market include product features, performance, price, the
timing of product introductions, the emergence of new computer standards and
other customer systems, product quality and customer support. Because the
standard products market for analog integrated circuits is diverse and highly
fragmented, the Company encounters different competitors in its various product
markets. The Company's principal competitors include Linear Technology
Corporation, Maxim Integrated Products and Harris Semiconductor in one or more
of its product areas. Other competitors include Motorola, National
Semiconductor Corporation, Unitrode Corporation and certain Japanese
manufacturers. Each of these competitors has substantially greater technical,
financial and marketing resources and greater name recognition than the Company.
The Company expects intensified competition from existing analog circuit
suppliers and the possible entry of new competition. Increased competition
could adversely affect the Company's financial condition or results of
operations. There can be no assurance that the Company will be able to compete
successfully in the future or that competitive pressures will not adversely
affect the Company's financial condition and results of operations. Competitive
pressures could reduce market acceptance of the Company's products and result in
price reductions and increases in expenses that could adversely affect the
Company's financial condition or results of operations.
Dependence on International Sales and Operations. International sales
accounted for approximately 57% of the Company's net sales for the three months
ended March 31, 1996 and March 31, 1995. The Company expects international sales
to continue to represent a significant portion of product sales. International
sales and operations involve various risks, including unexpected changes in
regulatory requirements, delays resulting from difficulty in obtaining export
licenses for certain technology, tariffs and other barriers and restrictions,
and the burdens of complying with a variety of foreign laws. The Company is
also subject to general political risks in connection with its international
operations, such as political and economic instability and changes in diplomatic
and trade relationships. In addition, because a substantial majority of the
Company's international sales are denominated in United States dollars,
increases in the value of the dollar would increase the price in local
currencies of the Company's products in foreign markets and make the Company's
products relatively more expensive than competitors' products, the sales of
which are denominated in local currencies. There can be no assurance that
regulatory, political and other factors will not adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
13
<PAGE>
Customer and Distributor Concentration. A limited number of customers
and distributors has accounted for a significant portion of the Company's net
sales. During the three month ended March 31, 1996, the Company's top two
customers (excluding distributors), Motorola and Compaq Computer, accounted for
approximately 8% and 9% of net sales, respectively. In addition, Future
Electronics, one of the Company's distributors, accounted for 14% of the
Company's net sales during the three months ended March 31, 1996. The Company
anticipates that it will continue to be dependent or may increase its dependence
on a number of key customers and distributors for a significant portion of its
net sales. The reduction, delay or cancellation of orders from one or more
significant customers for any reason could materially and adversely affect the
Company's operating results. The Company is also dependent on sales
representatives and distributors for the sale of its products to many of its
customers. Such distributors sell competitors' products and are not within the
control of the Company. Loss of one or more of the Company's current
distributors or disruption of the Company's sales and distribution channels
could materially and adversely affect the Company's business and operating
results.
Dependence on Key Suppliers; Outsourcing of Assembly Operations. The
packaging of the Company's products is performed by a limited group of
subcontractors and certain of the raw materials included in such products are
obtained from a limited group of suppliers. For example, 5 inch silicon
substrates, which are a key component of the Company's products, are currently
available from only two suppliers and are subject to long ordering lead times.
Although the Company seeks to reduce its dependence on its sole and limited
source suppliers, disruption or termination of any of these sources could occur
and such disruptions could have a material adverse effect on the Company's
financial condition or results of operations. Moreover, a prolonged inability
to obtain raw materials could have a material adverse effect on the Company's
financial condition or results of operations and could result in damage to
customer relationships.
The Company depends on and may in the future depend on third party
subcontractors. For example, all of the Company's products are currently
assembled by independent third parties in Asia. In the event that any of the
Company's subcontractors were to experience financial, operational, production
or quality assurance difficulties resulting in a reduction or interruption in
supply to the Company, the Company's operating results would be adversely
affected until alternative subcontractors, if any, became available.
Patents and Intellectual Property. The Company's success depends in
part in its ability to obtain patents and licenses and to preserve other
intellectual property rights covering its manufacturing processes, products and
development and testing tools. The Company seeks patent protection for those
inventions and technologies for which it believes such protection is suitable
and is likely to provide a competitive advantage to the Company. The process of
seeking patent protection can be long and expensive and there can be no
assurance that its current patents or any new patents that may be issued will be
of sufficient scope or strength to provide any meaningful protection or any
commercial advantage to the Company. The Company may in the future be subject
to or initiate interference proceedings in the United States Patent and
Trademark office, which can demand significant financial and management
resources.
The Company regards elements of its manufacturing process, product
design and equipment as proprietary and seeks to protect its proprietary rights
through a combination of employee and third party non-disclosure agreements,
internal procedures and patent protection. Notwithstanding the Company's
attempts to protect its proprietary rights, the Company believes that its future
success will depend primarily upon the technical expertise, creative skills and
management abilities of its officers and key employees rather than on patent and
copyright ownership. The Company also relies substantially on trade secrets and
proprietary technology to protect technology and manufacturing know-how, and
works actively to foster continuing technological innovation to maintain and
protect its competitive position. There can be no assurance that the Company's
competitors will not independently develop or patent substantially equivalent or
superior technologies.
14
<PAGE>
Although the Company is not currently a party to any material
litigation, the semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. There can be no
assurance that any patent owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending or
future patent applications will be issued with the scope of the claims sought by
the Company, if at all. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.
As is typical in the semiconductor industry, the Company has from time
to time received, and may in the future receive, communications from third
parties asserting patents, mask work rights, or copyrights on certain of the
Company's products and technologies. Although the Company is not currently a
party to any material litigation, in the event a third party were to make a
valid intellectual property claim and a license was not available on
commercially reasonable terms, the Company's operating results could be
materially and adversely affected. Litigation, which could result in
substantial cost to the Company and diversion of its resources, may also be
necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse effect on the Company's business and
operating results. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products.
Environmental and Other Governmental Regulations. Federal, state and
local regulations impose various controls on the storage, handling, discharge
and disposal of chemicals and gases used in the Company's manufacturing process
and on the facility leased by the Company in Mountain View, California. The
Company believes that its activities conform to present governmental regulations
applicable to its operations and its current facilities including those related
to environmental, land use, public utility utilization and fire code matters.
Increasing public attention has, however, been focused on the environmental
impact of semiconductor operations and the risk to neighbors of chemical
releases from such operations. There can be no assurance that such governmental
regulations will not in the future impose the need for additional capital
equipment or other process requirements upon the Company or restrict the
Company's ability to expand its operations. In this regard, the City of
Mountain View, where the Company's wafer fabrication facility is located,
recently adopted an ordinance which restricts the storage and use of hazardous
materials within the proximity of certain sensitive uses, including hospitals,
day care facilities and schools. Although the Company's existing operations are
not affected by the ordinance, there can be no assurance that this ordinance
will not materially adversely affect the Company's future operations. The
adoption of this ordinance or similar measures or any failure by the Company to
comply with applicable environmental and land use regulations or to restrict the
discharge of hazardous substance could subject the Company to future liability
or could cause its manufacturing operations to be curtailed or suspended.
The Company acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at the Company's facility. The
semiconductor manufacturing operations conducted by Teledyne at the facility
allegedly contaminated the soil and groundwater of the facility and the
groundwater of properties located down-gradient of the facility. Although the
Company was indemnified by Teledyne as part of the acquisition transaction
against, among other things, any liabilities arising from any such
contamination, there can be no assurance that claims will not be made against
the Company or that such indemnification will be available or will provide
meaningful protection at the time any such claim is brought. To the extent the
Company is subject to a claim which is not covered by the indemnity from
Teledyne or as to which Teledyne is unable to provide indemnification, the
Company's financial condition or results of operations could be materially and
adversely affected.
Semiconductor Industry. The semiconductor industry is characterized
by rapid technological change, cyclical market patterns, significant price
erosion, periods of over-capacity and production shortages, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. The industry has from time to time
experienced depressed business conditions. There can be
15
<PAGE>
no assurance that any future downturn in the industry will not be severe or
that any such downturn will not have a material adverse effect on the Company's
results of operations. There can be no assurance that the Company will not
experience substantial period-to-period fluctuations in operating costs due to
general semiconductor industry conditions or other factors.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report.
10.14 Operating Agreement between TelCom Semiconductor, Inc.
and IC WORKS Inc. dated as of November 2, 1995
10.15 Wafer Production Agreement between TelCom Semiconductor,
Inc. and IC Works, Inc. dated as of November 2, 1995
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the second quarter for
which this report is filed.
17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELCOM SEMICONDUCTOR, INC.
(Registrant)
Date: May 9, 1996 By: /s/ Phillip M. Drayer
--------------------------
Phillip M. Drayer
President
Chief Executive Officer
Date: May 9, 1996 By: /s/ R. Michael O'Malley
--------------------------
R. Michael O' Malley
Chief Financial Officer
18
<PAGE>
EXHIBIT 10.14
11/2/95
OPERATING AGREEMENT
-------------------
THIS OPERATING AGREEMENT (this "Agreement"), dated as of November 2, 1995,
between Telcom Semiconductor, Inc. , a Delaware corporation with its principal
address at 1300 Terra Bella Avenue, Mountain View, California 94039 ("Owner"),
and IC WORKS, Inc., a California corporation with its principal address at 3725
North First Street, San Jose, California 95134-1700 ("Operator").
RECITALS
Owner desires to acquire, either by purchase or lease, certain foundry
equipment, as set forth in this Agreement. Operator is willing to install and
operate Owner's foundry equipment at Operator's foundry under the terms of this
Agreement, and to use such equipment to manufacture and supply integrated
circuit wafers, on a nonexclusive basis, to Owner under the terms of the Wafer
Production Agreement between Owner and Operator that is dated as of the same
date as this Agreement (the "Wafer Production Agreement").
NOW, THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS
Unless the context otherwise requires, the capitalized terms used in this
Agreement shall have the following meanings:
1.1 "Agreement Term" shall mean the period that commences on the date of
--------------
this Agreement and that ends sixty (60) months after the Foundry Ramp Completion
Date, as defined below.
1.2 "Calculated Value" shall mean the Final Equipment Price less the
----------------
Depreciation Discount, as defined in the Wafer Production Agreement, property
taxes are included in the definition of Depreciation Discount calculated as of a
particular point in time during the Agreement Term.
1.3 "Equipment" shall mean the personal property (together with all
---------
attachments, replacement parts, substitutions, additions, repairs, accessions
and accessories, incorporated therein and/or affixed thereto) that is listed on
the Equipment Schedule that is attached as Exhibit A to this Agreement which may
be modified by the parties from time to time in accordance with Section 2.1 of
this Agreement.
1.4 "Equipment Price" shall mean the total amount paid for all Equipment by
---------------
Owner or Owner's Lessor, as applicable, as set forth in Section 2.3 below.
1.5 "Lien" shall mean with respect to the Equipment, any mortgage, lien,
----
pledge, claim, charge, security interest, title defect or encumbrance of any
kind, including any conditional sale or other title retention agreement, any
lease in the nature thereof, or the filing of or agreement to give any financing
statement.
1.6 "Owner's Lessor" shall mean an entity or entities from which Owner
--------------
leases one or more items of Equipment.
1
<PAGE>
1.7 "Owner's Lien" shall mean a Lien that results from acts of or claims
------------
against Owner or Owner's Lessor that is not related to the ownership of the
Equipment.
1.8 "Operator's Foundry" shall mean Operator's wafer fabrication facility
------------------
located at 3725 North First Street, San Jose, California.
1.9 "Permitted Lien" shall mean (i) an Owner's Lien, (ii) the respective
--------------
rights and interests of Operator and Owner as provided in this Agreement and
(iii) liens for taxes either not yet due or being contested by Operator in good
faith by appropriate proceedings, so long as such proceedings do not involve any
material danger of the sale, forfeiture or loss of any part of the Equipment,
the value or operation of the Equipment, title to the Equipment or any interest
in the Equipment and do not materially interfere with the use, operation or
disposition of any part of the Equipment.
1.10 "Foundry Ramp Completion Date" shall mean the date when installation
-----------------------------
of the Equipment is complete as set forth in Section 2.5 below.
1.11 "Wafer(s)" shall mean a "Wafer" as defined in Section 1.11 of the
--------
Wafer Production Agreement.
SECTION 2. PURCHASE, ACCOUNTING
AND INSTALLATION OF EQUIPMENT
2.1 Purchase of Equipment. Because of Operator's familiarity with the
---------------------
requirements needed to increase wafer production capacity at Operator's Foundry,
Operator shall select the specific models and configurations of the Equipment
that Owner is to lease or purchase. Except for Owner's warranty of quiet
enjoyment, Operator has not relied upon Owner in selecting the Equipment and
acknowledges that Owner has made no representation or warranty of any kind,
expressed or implied, with respect to the Equipment, including without
limitation its condition, merchantability or fitness for any particular purpose.
Upon completion of Equipment selection by Operator, the parties will modify
Exhibit A to include a final Equipment list. Owner shall procure the Equipment,
with a scheduled delivery date to Operator's Foundry no later than the date set
forth in Exhibit A to this Agreement for each item of Equipment.
2.2 Acceptance Testing. Operator will perform all acceptance testing for
------------------
Equipment during the acceptance period for such Equipment and will give Owner
written notice of acceptance.
2.3 Price of Equipment. The price Owner pays, or, in the case of leased
------------------
Equipment, Owner's Lessor pays, for Equipment shall include the cost of all
transportation expenses to Operator's Foundry, sales and excise taxes. Such
total price shall not exceed $10 Million, plus or minus 10% ((plus/minus)10%).
2.4 Accounting for Equipment. Owner or Owner's Lessor shall carry the
------------------------
Equipment in the fixed assets of the Owner's balance sheet or Owner's Lessor's
balance sheet, as applicable, and shall have all state and federal tax
depreciation rights with respect to the Equipment. The Equipment will not be
carried on Operator's balance sheet. Operator's use of the Equipment shall be
under the terms and conditions of this Agreement, which shall constitute an
operating lease under Financial Accounting Standard 13.
2.5 Installation and Qualification of Equipment at Operator's Foundry.
-----------------------------------------------------------------
Operator shall install and qualify the Equipment at the Operator's Foundry, in
accordance with the Foundry Ramp Schedule that is attached as Exhibit B to this
Agreement. For purposes of this Agreement, the Foundry Ramp will be complete
when Operator notifies Owner that Operator can begin supplying the ICW Capacity
Commitment to Owner under the Wafer Production Agreement.
2
<PAGE>
SECTION 3. AGREEMENT
3.1 Agreement. Owner hereby agrees to cause each item of Equipment to be
---------
delivered to Operator, in accordance with the Schedule that is attached as
Exhibit A, and Operator agrees to install, operate and maintain the Equipment in
accordance with the terms and conditions of this Agreement and the
manufacturer's instructions.
3.2 Assignment of Warranties. During the Agreement Term, Operator shall
------------------------
have the benefit of and shall be entitled to enforce, either in its own name or
in the name of Owner or Owner's Lessor for the use and benefit of Operator and
Owner or Owner's Lessor, any and all contractor's, dealer's, manufacturer's,
installer's or subcontractor's warranties (whether express or implied) in
respect of all or any part of the Equipment. Owner hereby appoints Operator as
Owner's agent and attorney in fact during the Agreement Term to assert and
enforce, from time to time, in the name and for the account of Owner and
Operator, as their interests may appear, but in all cases at the sole cost, risk
and expense of Operator, whatever claims and rights Owner may have as owner or
lessee of the Equipment against any contractor, dealer, manufacturer, installer
or subcontractor. Any amounts recovered from a contractor, dealer,
manufacturer, installer or subcontractor shall be paid either (a) to Operator,
if such amounts will be used by Operator to repair the Equipment in accordance
with Section 11.1 below, or if Operator shall demonstrate to Owner's reasonable
satisfaction that any excess over the cost of repair is allocable to the loss or
decrease in value of Operator's rights under this Agreement, or (b) if not
applied to repair of the Equipment or allocable to the loss or decrease in value
of Operator's rights under this Agreement, paid to Owner.
Operator shall apply any amounts paid to Operator under this Section 3.2 to
repair of the Equipment and for no other purpose unless Operator has so
demonstrated to Owner that such amount is allocable to the loss or decrease in
value of Operator's rights under this Agreement.
(a) Liability. OPERATOR ACKNOWLEDGES THAT OWNER IS NOT THE MANUFACTURER,
---------
SUPPLIER OR DISTRIBUTOR OF THE EQUIPMENT, THAT SAID ENTITIES ARE NOT AGENTS
OF OWNER, AND THAT OWNER HAS ACCEPTED NO RESPONSIBILITY FOR THE
TRANSPORTATION, INSTALLATION OR REQUIRED LICENSING NECESSARY FOR THE
TRANSFER, INSTALLATION OR USE OF THE EQUIPMENT. OPERATOR HEREBY WAIVES ANY
CLAIM (INCLUDING ANY CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT)
WHICH IT MIGHT HAVE AGAINST OWNER FOR ANY LOSS, DAMAGE (INCLUDING
INCIDENTAL OR CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED DIRECTLY OR
INDIRECTLY BY THE EQUIPMENT, ITS USE OR MAINTENANCE, OR ANY DELAY IN
PROVIDING ANY UNIT OF EQUIPMENT, OR ANY INTERRUPTION SERVICE OR LOSS OF USE
OF THE EQUIPMENT. If any Equipment is unsatisfactory for any reason,
Operator shall make any claim solely against the manufacturer or supplier
of the Equipment. Owner shall not be liable for specific performance of
this Agreement or for damages if for any reason a supplier declines, delays
or fails to fill any order.
SECTION 4. PAYMENT MECHANISMS
4.1 Payment Mechanisms. In consideration for Owner's purchase or lease of
------------------
the Equipment, as the case may be, and Operator's right to use the Equipment in
Operator's Foundry to manufacture Wafers for all of Operator's customers,
Operator will provide to Owner a discount to the Wafer purchase price under the
terms of the Wafer Production Agreement.
SECTION 5. TITLE
5.1 Title. As to each item of Equipment, Owner shall at all times hold
-----
title to the Equipment or hold a valid lease from Owner's Lessor, in which case
Owner's Lessor shall at all time hold title to such Equipment.
3
<PAGE>
5.2 Personal Property. The Equipment shall remain personal property
-----------------
regardless of its attachment to realty, and Operator agrees to take such action
at its expense as may be necessary to prevent any third party from acquiring any
interest in the Equipment as a result of attachment to realty.
5.3 Labeling. Operator will mark the Equipment to indicate Owner's
--------
interest in the Equipment. Operator will keep all Equipment free from any other
marking or labeling, other than that of Owner's Lessor, that might be
interpreted as a 3rd party claim on ownership.
5.4 Right of Inspection. Owner shall have the right to designate a
-------------------
representative to enter the Operator's Foundry, upon reasonable notice to
Operator and at reasonable times that do not interfere with Operator's use of
the Equipment, to inspect and examine the Equipment to ensure Operator's
compliance with the terms and conditions of this Agreement. Operator may
restrict such inspections to times when the Equipment is being used to
manufacture Wafers for Owner. Owner shall be responsible for and indemnify and
hold harmless Operator against any loss or damage arising out of its acts and
omissions with respect to such inspections, including but not limited to loss
arising from injury to person or property, while at the Operator's Foundry.
Owner acknowledges that the Operator's Foundry processes, Equipment
configuration and wafer production for ICW customers constitute confidential
information of ICW and its customers, and Owner agrees that it will sign a
nondisclosure agreement in a form satisfactory to Operator, before Owner may
enter the Operator's Foundry. Operator shall be responsible for and indemnify
and hold harmless Owner against any loss or damage that Owner's representative
suffers during the course of such an inspection to the extent that such loss or
damage is caused by Operator's negligence or willful misconduct; provided,
however, that Operator shall only be liable if Owner's Worker's Compensation
insurance does not cover the claim.
SECTION 6. END OF TERM OPTIONS
6.1 Purchase Option. Unless the Equipment shall have been previously sold
---------------
or otherwise disposed of in accordance with any provision of this Agreement,
Operator shall have the option to purchase the Equipment "AS IS" on the last day
of the Agreement Term for a purchase price of Two Million Dollars (U.S.
$2,000,000), plus any applicable use or sales tax. Such option shall be
exercised by irrevocable written notice from Operator to Owner at least six (6)
months prior to the last day of the Agreement Term. If at the time of
Operator's receipt of such notice Owner is the lessee of any of the items of
Equipment, then as to such Equipment, Operator shall promptly take such steps as
are necessary to enable Operator to purchase such Equipment from Owner's Lessor.
If Operator exercises the purchase option in this Section 6.1 then Operator
shall purchase and pay for the Equipment on the last day of the Agreement Term.
Upon receipt of such payment, Owner shall transfer to Operator free and clear of
any Owner's Lien, all of Owner's right, title and interest in and to the
Equipment as to which Owner holds title, and as to any remaining Equipment,
Owner shall cause each Owner's Lessor to transfer to Operator all of such
Owner's Lessor's right, title and interest in and to such Equipment. Owner
hereby agrees to indemnify Operator against any loss, claims or damages arising
out of a failure by an Owner's Lessor to transfer such right, title and interest
to Operator in an amount equal to the greater of the replacement cost or
Calculated Value (as of the last day of the Agreement Term) of such leased
Equipment.
6.2 Return Option. If Operator fails to exercise its purchase option under
-------------
Section 6.1 then upon termination of this Agreement, Operator at its expense,
shall be responsible for conducting a sale of the Equipment as expeditiously as
possible. Operator shall be responsible for preparing the Equipment for sale,
and, if necessary, de-installing the Equipment. If the Equipment sells for less
than Two Million Dollars ($2,000,000) then Operator will pay up to One Million
Five Hundred Thousand Dollars ($1,500,000) to Owner on a dollar for dollar basis
to make up the difference between the sales price and Two Million Dollars. For
example, if the sales price is $1.8 Million, then Operator will pay $200,000 to
Owner. If the sales price is $800,000 then Operator will pay $1,200,000 to
Owner.
4
<PAGE>
SECTION 7. INDEMNIFICATION
7.1 Operator agrees to indemnify and defend Owner and hold it harmless from
and against any and all losses, damages or claims (including injury to third
persons or property of third persons) that Owner incurs as a result of:
(a) Operation of the Equipment. Operator's installation, use and
--------------------------
maintenance of the Equipment at the Operator's Foundry including strict or
absolute liability in tort.
(b) Related Transactions or Laws. Any violation by Operator of any
----------------------------
applicable law affecting the Equipment or any action or transaction by
Operator with respect to the Equipment or pursuant to this Agreement; or
(c) Hazardous Substances. The existence, use, generation, manufacture,
--------------------
storage, disposal, handling during the Agreement Term of any hazardous
substances in any way connected with the Equipment, or any violation of any
environmental laws involving the Equipment, including all expenses of
investigation and monitoring, costs of containment, abatement, removal,
repair, cleanup, restoration and remedial work, penalties and fines,
attorneys' fees and disbursements, and other response or remedial costs.
7.2 Limitations on Indemnity Obligations. Operator's obligations under
------------------------------------
Section 7.1 above are subject to Owner giving Operator prompt written notice of
any claims against Owner, Operator having sole control over the defense and
settlement of the matter and Owner and Owner's Lessors' providing reasonable
cooperation and assistance to Operator, subject to Operator's payment of Owner's
and Owner's Lessors' reasonable out-of-pocket expenses. In no case will
Operator's indemnity obligations under this Section apply to claims that arise
as a result of Owner's or any of Owner's Lessors' negligence or willful
misconduct.
SECTION 8. TAXES, ASSESSMENTS AND FEES
8.1 Responsibility for Taxes. Owner shall pay when due all property taxes
------------------------
on the Equipment and on Owner's net income. Operator shall pay all taxes on
Operator's net income and taxes during the Agreement Term. Each party hereby
indemnifies the other against any damages, losses or claims arising out of the
indemnifying party's failure to pay taxes when due in accordance with this
Section.
8.2 Payment of Taxes. With respect to Equipment related taxes for which
----------------
Owner is responsible under applicable laws, Owner shall file all declarations,
forms and returns and shall pay the applicable governmental authority directly.
8.3 Limitations. Operator shall not be entitled to claim any investment
-----------
tax credits or depreciation deduction or any tax benefits normally associated
with ownership in respect of any of the Equipment. Operator agrees that it will
not claim or attempt to claim any such investment tax credit, depreciation
deduction or other such tax benefit except deductions for deductible taxes paid
by Operator as provided in Section 8.1 above.
SECTION 9. REPRESENTATIONS AND WARRANTIES
Each party hereby represents and warrants to the other as follows:
9.1 Existence and Power. The party is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the jurisdiction of its
formation and has the requisite power and authority to own, lease, and operate
its business and to carry on its business as now being conducted or proposed to
be conducted.
5
<PAGE>
9.2 Authorization. The party has the power and authority to execute and
-------------
deliver this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery by such party of this Agreement and the
consummation of the transactions contemplated by this Agreement, have been duly
authorized by such party; no other action on the part of such party, whether
pursuant to its certificate or sections of incorporation or bylaws, or
otherwise, is necessary to authorize it to enter into this Agreement or to
consummate the transactions contemplated by this Agreement.
9.3 No Violations, Etc. Neither the execution, delivery nor performance of
------------------
this Agreement by the party (a) requires any filing with, or consent,
authorization, approval of, or waiver or exemption by, any governmental
authority on the part of the party; or (b) violates or will violate any
applicable law; or (c) in the case of Owner's representation and Warranty to
Operator, violates or will violate or be inconsistent with any lease agreement
between Owner and any Owner's Lessor. Owner further represents and warrants
that each lease agreement between Owner and an Owner's Lessor with respect to
Equipment shall contain terms sufficient to enable Owner to carry out each of
its obligations with respect to such Equipment under this Agreement.
9.4 Governmental Actions. No authorization or approval or other action by,
--------------------
and no notice to or filing or registration with, any governmental authority is
or will be required in connection with the execution, delivery or performance by
the party, or the consummation by it of the transactions contemplated by this
Agreement except, for such approvals and authorizations that would not have a
material adverse effect on the value and utility of any item of Equipment.
9.5 Binding Effect. This Agreement is the legal, valid and binding
--------------
obligation of the party enforceable against such party in accordance with its
terms, subject, however, to the application by a court of general principles of
equity and to the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally.
9.6 Litigation. There are no proceedings or investigations pending or, so
----------
far as any of the officers of the party know, threatened before any court or
arbitrator or before or by any governmental authority which if, in any one case
or in the aggregate, determined adversely to its interests would have a material
adverse effect on the Equipment or on such party's ability to enter into or
carry out its obligations under this Agreement.
9.7 No Other Security. No effective security agreement, financing
-----------------
statement, equivalent security or lien instrument or continuation statement
covering all or any part of the Equipment is or will be on file or of record in
any public office, at any time during the Agreement term, other than a purchase
money security interest (including a UCC-1 Financing Statement) filed in
connection with the purchase and financing of the Equipment by Owner or by an
Owner's Lessor, as applicable.
9.8 Commercial Use. The Equipment is being delivered to Operator under
--------------
this Agreement solely for commercial use and not for personal, family or
household purposes.
SECTION 10. RESTRICTION ON LIENS
Operator shall not directly or indirectly create, incur, assume or suffer to
exist any Lien on or with respect to the Equipment, title thereto or any
interest therein, except Permitted Liens. Operator shall promptly, at its own
expense, take such action as may be necessary duly to discharge or eliminate or
bond in a manner satisfactory to Owner any Lien not excepted above if the same
shall arise at any time.
6
<PAGE>
SECTION 11. OPERATION AND MAINTENANCE; ALTERATIONS
MODIFICATIONS AND ADDITIONS
11.1 Operation and Maintenance. Operator, at its own expense, shall at all
--------------------------
times during this Agreement, operate, maintain, service and repair the Equipment
in accordance with applicable industry standards and, in any event, to the
extent required to (i) maintain the Equipment in good operating condition and
repair, ordinary wear and tear excepted, (ii) cause the Equipment to continue to
have the capacity and functional ability to perform, on a continuing basis, in
normal commercial operation, as contemplated in the Wafer Production Agreement,
subject to ordinary wear and tear, including, without limitation, the
performance of all major repairs, non-routine maintenance activities and
overhauls of the Equipment as required by equipment manufacturers or by prudent
industry practice as applicable in the industry, as necessary in order to
maintain the desired Wafer production levels as specified in the Wafer
Production Agreement.
11.2 Replacement of Parts.
--------------------
(a) Operator's Responsibility. Operator, at its own expense shall
-------------------------
promptly replace all parts incorporated in the Equipment and that may from time
to time fail to function or become worn out, destroyed, damaged beyond repair,
lost, condemned, confiscated, stolen or seized for any reason whatsoever. Owner
hereby authorizes Operator, to install such parts as part of the Equipment.
Orders made by Operator pursuant to the immediately preceding sentence shall not
require the Owner's prior consent provided that Operator reasonably believes
that such repairs are necessary to achieve or maintain the Foundry Ramp Schedule
set forth in Exhibit B.
(b) Title to Replacement Parts. Title to each part of the Equipment
--------------------------
once incorporated in the Operator's Foundry pursuant to this Section 11.2 shall
without further act vest in Owner or Owner's Lessor, as the case may be, and
shall be deemed to constitute a part of the Equipment and be subject to this
Agreement. All parts at any time removed from the Equipment shall remain the
property of Owner or Owner's Lessor, as the case may be, no matter where
located, until such time as such parts shall be replaced by parts that have been
incorporated in the Equipment and that meet the requirements for replacement
parts specified in this Section. Immediately upon any replacement part becoming
incorporated in the Equipment, without further act, title to the removed part
shall thereupon vest in such person as shall be designated by Operator.
11.3 Alterations Required by Law.
---------------------------
(a) Operator's and Owner's Responsibilities. Operator shall make such
---------------------------------------
alterations to the Equipment as may be required from time to time to meet the
requirements of law or of any governmental authority having jurisdiction as soon
as practicable after any such requirements shall arise. To be mutually agreed,
either Operator shall pay for such alterations or Owner shall be responsible for
paying the cost of such alterations, in which case the cost of such alterations
will be added to the Final Equipment Price for purposes of calculating the
Depreciation Discount for remaining Agreement Periods.
(b) Title to Alterations. Title to each part of the Equipment
--------------------
(including any non-severable part to be incorporated in the Equipment as a
result of any alteration pursuant to this Section 11.3) once incorporated in the
Operator's Foundry pursuant to this Section 11 shall without further act vest in
Owner or Owner's Lessor, as the case may be, and shall be deemed to constitute a
part of the Equipment and be subject to this Agreement. If Operator has paid
for the alteration, then title to any Equipment removed or replaced as part of
such alteration shall vest in Operator.
7
<PAGE>
11.4 Optional Alterations and Replacement.
------------------------------------
(a) Operator's Responsibilities. In addition to Sections 11.2 and 11.3,
---------------------------
Operator may make alterations to or replacement of the Equipment as Operator may
deem desirable in the proper conduct of its business, so long as such
alterations shall not diminish the value or utility of the Equipment. Operator
shall be responsible for the costs of such alterations or replacement.
(b) Title to Optional Alterations and Replacement Parts. Title to each
---------------------------------------------------
part of the Equipment (including any non-severable part to be incorporated in
the Equipment as a result of any alteration pursuant to this Section 11.4) once
incorporated in the Operator's Foundry pursuant to this Section 11 shall remain
the property of Owner or Owner's Lessor, as the case may be. All parts at any
time removed from the Equipment shall without further act vest in Operator.
11.5 Permitted Contest. Notwithstanding Section 11.3 (a) above, Operator
-----------------
shall not be required to comply with a governmental rule or regulation relating
to the operation or maintenance of the Equipment for so long as: (a) Operator is
prosecuting in good faith a test, challenge, appeal or proceeding for review of
such rule or regulation and such prosecution shall not involve material danger
of foreclosure, sale, forfeiture or loss of, or imposition of any Lien other
than a Permitted Lien on any part of the Equipment or of impairment of the
operation of the Equipment or (b) compliance with such requirement shall have
been excused or exempted by a non-conforming use permit, waiver, extension or
forbearance excusing or exempting Operator from such rule. If the provisions of
any applicable governmental rule or regulation require that such test,
challenge, appeal or proceeding be brought by or in the name of Owner or Owner's
Lessor, then Owner shall join in any such test, challenge, appeal or proceeding
or permit the same to be brought in its name, or in the name of Owner's Lessor.
SECTION 12. INSURANCE
12.1 Coverage. Without limiting any of the other obligations or
--------
liabilities of Operator under this Agreement, at all times during the Agreement
Term Operator shall maintain at Operator's sole expense such insurance as is
customarily maintained by owners, operators and lessees of foundry facilities
and in all events shall carry and maintain the following minimum insurance
coverage with respect to the Equipment. All insurance carried pursuant to this
Section 12.1 shall be with such insurers, in such amounts, with deductibles or
self-insured retentions and in such form as shall be reasonably satisfactory to
Owner.
(a) Physical Loss. Operator shall maintain risk property insurance,
-------------
covering physical loss or damage to the Equipment, and any and all materials,
equipment and machinery intended for the Equipment including fire and extended
coverage, collapse, liquid damage, earthquake and flood. At all times during
the Agreement Term the amount of such insurance shall not be less than the then
applicable Calculated Value.
(b) General Liability. Operator shall maintain comprehensive general
-----------------
liability insurance written on an occurrence basis and with a combined single
limit of not less than Ten Million Dollars ($10,000,000). Such coverage shall
include but not be limited to premises/operations, explosion, collapse and
underground hazard, products/completed operations, independent contractors,
broad form property damage and personal injury.
(c) Business Interruption. Operator shall maintain business
---------------------
interruption insurance covering loss of net profits and continuing expense and
extra expense insurance covering additional expenses incurred to continue the
normal operation of business following an interruption.
8
<PAGE>
(d) Workers' Compensation. Operator shall maintain workers'
---------------------
compensation insurance in compliance with applicable laws and employer's
liability insurance in an amount not less than Twelve Million Six Hundred
Thousand Dollars ($12,600,000) covering all employees engaged in connection with
the Equipment. Such employer's liability insurance shall not contain an
exclusion for occupational disease.
(e) Endorsement. Any insurance carried in accordance with this Section
-----------
12.1 shall be endorsed as follows:
(i) Payable to Owner. Owner shall be a named insured and sole
----------------
loss payee with respect to insurance carried on the Equipment pursuant to
Section 12.1(a); Owner shall be named as an additional named insured with
respect to insurance carried pursuant to Section 12.1(b); and with a
provision setting forth the understanding that any obligation imposed upon
the insured (including, without limitation, the liability to pay premiums)
shall be the sole obligation of Operator and not that of Owner;
(ii) Multiple Insured. Any insurance carried in accordance with
----------------
Section 12.1(b) shall be endorsed to provide that, inasmuch as the policy is
written to cover more than one insured, all terms, conditions, insuring
agreements and endorsements, with the exception of limits of liability,
shall operate in the same manner as if there were a separate policy covering
each insured;
(iii) Validity of Owner's Interest. Owner's interest shall not
----------------------------
be invalidated by any action or inaction of Operator or any other person,
and Owner shall be insured regardless of any breach or violation by Operator
or any other person of any warranties, declarations or conditions in such
policies; and
(iv) Notice of Cancellation or Change. If such insurance is
--------------------------------
canceled for any reason whatsoever, including nonpayment of premium, or any
substantial change or amendment is made in the coverage which affects
Owner's interest, such cancellation or change shall not be effective as to
Owner or for forty-five (45) days after receipt by Owner of written notice
sent by registered mail from such insurer of such cancellation or change.
Owner shall have the right to continue the coverage provided herein at
Operator's expense.
12.2 Adjustment of Losses. The loss, if any, under any insurance required
--------------------
to be carried by this Section 12 shall be adjusted with the insurance companies
or otherwise collected, including the filing of appropriate proceedings, by
Operator. All such policies shall provide that the loss, if any, under such
insurance shall be adjusted and paid as provided in this Agreement.
12.3 Application of Insurance Proceeds. All insurance proceeds received on
---------------------------------
account of any damage to or destruction of the Equipment or any part thereof
(less the actual costs, fees and expenses incurred in the collection thereof)
shall be paid to Operator, and Operator shall apply such proceeds as follows:
(a) Payment to Operator for Restoration Expenses. All such proceeds
--------------------------------------------
actually received as a result of any such damage or destruction to the
Equipment, other than in connection with an Event of Loss (as defined in Section
13.1 below), shall be paid over to Operator. At Owner's request, an officer of
Operator shall prepare a Certificate showing in reasonable detail the nature of
such restoration, the actual cash expenditures made to date for such restoration
and the estimated cost to complete such restoration.
9
<PAGE>
(b) Balance Paid to Operator Absent Lien or Default. Upon the written
-----------------------------------------------
request of Operator, accompanied by evidence satisfactory to Owner that
restoration, as described in section (a) above has been completed and the costs
of such restoration paid in full and that there are no Liens (other than
Permitted Liens) in connection therewith, the balance, if any, of such proceeds
shall be paid over or assigned to Operator as it may direct.
12.4 Additional Disposition.
----------------------
(a) Proceeds of Business Interruption. All proceeds of business
----------------------------------
interruption insurance shall be paid to Operator.
12.5 Evidence of Coverage. Prior to the effective date of this Agreement
--------------------
and at least twenty (20) days prior to each policy renewal date, Operator shall
furnish Owner with certification of all required insurance in form and substance
reasonably satisfactory to Owner. Such certification shall be executed by each
insurer or by an authorized representative of each insurer. Upon request,
Operator will furnish Owner with copies of all insurance policies, binders and
cover notes or other evidence of such insurance relating to the Equipment.
12.6 Maintenance of Insurance by Owner. Owner may at its sole option
---------------------------------
obtain the insurance required under this Section 12 if not provided, maintained,
kept in force or delivered and furnished to Owner by Operator, and in such
event, Operator shall reimburse Owner promptly upon demand for the cost thereof,
and until such payment is made by Operator the amount of all such premiums.
Operator further agrees, upon Owner request, to thereafter cause all bills,
statements or other documents relating to the foregoing insurance premiums to be
sent or mailed directly to Owner.
12.7 Additional Insurance. Nothing in this Agreement shall prohibit Owner
--------------------
at its expense from obtaining insurance for their own benefit in addition to
that obtained by Operator pursuant to this Section 12, but Operator shall have
no right to or interest in any such additional insurance or proceeds thereof.
Operator shall have the right to obtain insurance for its own benefit in
addition to the insurance required under this Section 12, provided that Owner
shall have no right to or interest in any such additional insurance or proceeds
thereof. Not withstanding the above, the insured proceeds referred to in
Section 12 shall not be reduced by proceeds received by one party under Section
12.7.
SECTION 13 LOSS; DESTRUCTION; CONDEMNATION OR DAMAGE
13.1 Event of Loss. shall mean with respect to any item of Equipment, any
-------------
of the following events with respect to such Equipment prior to the termination
of this Agreement, (i) permanent loss of such Equipment or of the use of such
Equipment due to disappearance or destruction of or damage to such Equipment
that renders repair uneconomic or that renders such Equipment permanently unfit
for normal use by Operator for its intended use in the Operator's Foundry; (ii)
any damage to such Equipment or other event that results in an insurance
settlement with respect to such Equipment on the basis of an actual or
constructive total loss; or (iii) any seizure, condemnation, confiscation or
taking of, or such Equipment, but, only if such loss of use continues for a
period reasonably anticipated to exceed the remaining portion of the Agreement
Term.
10
<PAGE>
13.2 Payment of Calculated Value on an Event of Loss. If at any time prior
-----------------------------------------------
to the expiration or termination of the Agreement Term an Event of Loss shall
occur, Operator shall pay as compensation for such Event of Loss the insurance
proceeds received with respect to such Event of Loss as set forth in Section
12.1 (a) above. Upon payment in full of such proceeds (a) the Agreement Term
shall end and the obligations of Operator hereunder (other than any such
obligations expressed herein as surviving termination or expiration of this
Agreement) shall terminate as of the date of such payment, and (b) Owner shall
transfer to Operator, without recourse or warranty, but free and clear of Owner
Liens, all right, title and interest of Owner in and to the Equipment as to
which Owner holds title, and as to any remaining Equipment, Owner shall cause
Owner's Lessor to transfer to Operator all of Owner's Lessor's right, title and
interest in and to such Equipment, and Owner shall assign to Operator all of
Owner's interest in the Wafer Production Agreement. Owner hereby agrees to
indemnify Operator against any loss, claims or damages arising out of a failure
by Owner's Lessor to transfer such right, title and interest to Operator in an
amount equal to the greater of the Calculated Value (as of the date of the Event
of Loss) or the replacement cost of such leased Equipment.
13.3 Application of Payments Not Relating to an Event of Loss. Payments
--------------------------------------------------------
received at any time by Owner or Operator from any governmental authority or
other person with respect to any loss, condemnation, confiscation, theft or
seizure of, or requisition of title to or use of, or damage to, the Equipment or
any part thereof not constituting an Event of Loss shall be paid to Owner, and
Owner shall apply such payments as follows: first, directly in payment for
repairs or replacement in accordance with the provisions of Section 11, if not
already paid for by Operator, or if already paid for by Operator, to reimburse
Operator for such payment; and second, the balance remaining, if any, shall be
divided between Owner and Operator as their interests may appear.
SECTION 14. ASSIGNMENT AND SUBLEASE; LOCATION
14.1 Assignment and Sublease. Neither party shall delegate any obligations
-----------------------
under this Agreement or assign this Agreement or any interest or rights
hereunder without the prior written consent of the other party, which consent
shall not unreasonably be withheld. Either party may assign this Agreement to a
successor to all or substantially all of its assets or to a majority of its
voting stock. The surviving party is bound to the terms of this Agreement. Any
sublease pursuant to this Section shall provide that such assignee or sublessee
shall assume all of the obligations of Operator under this Agreement, and that
such sublease shall be expressly subject and subordinate to this Agreement and
the rights and interests of Owner under this Agreement. No such sublease or
assignment shall release Operator from any of its obligations or liabilities of
any nature whatsoever arising under this Agreement and shall not, in Owner's
opinion, result in any adverse tax consequences to Owner. The rights and
obligations of Owner and Operator hereunder shall inure to the benefit of, and
be binding upon, the permitted successors and assigns of Owner and Operator,
respectively.
14.2 Location. Operator shall not remove, or permit to be removed, the
--------
Equipment or any part thereof from the Operator's Foundry without the prior
written consent of Owner, except that Operator or any other person may remove
any part of the Equipment in accordance with the provisions of Section 11.
SECTION 15. REPORTS
15.1 Liens. Operator shall promptly and in no event later than ten (10)
-----
business days after it shall have obtained knowledge of the attachment of any
Lien that it shall be obligated to discharge or eliminate pursuant to Section
10, notify Owner of the attachment of such Lien and the full particulars thereof
unless the same shall have been removed or discharged by Operator.
11
<PAGE>
SECTION 16. AGREEMENT EVENTS OF DEFAULT
16.1 Agreement Events of Default. The following events shall constitute
---------------------------
Events of Default (whether any such event shall be voluntary or involuntary or
come about or be effected by operation of law or pursuant to or in compliance
with any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(a) Insurance. Operator shall fail to maintain insurance as provided
---------
in Section 12 above and fails to cure such default within thirty (30) days of
receipt of written notice of such default;
(b) Material Condition. Either party shall fail in any respect to
------------------
perform or observe any material covenant, condition or agreement to be performed
or observed by it under this Agreement; and does not cure such failure within
thirty (30) days of receipt of written notice of such breach from the other
party, unless such failure cannot be remedied in thirty (30) days, the remedy of
such failure is commenced within fifteen (15) days after written notice from the
non-breaching party to the breaching party and is diligently prosecuted to
completion within six (6) months after such written notice;
(c) Wafer Production Agreement. Any event or condition which
--------------------------
constitutes a default under the Wafer Production Agreement; provided, however,
that if such event or condition is remedied within the time limit set forth in
the Wafer Production Agreement, such event or condition shall not an Event of
Default;
(d) Misrepresentation. Any representation or disclosure in this
-----------------
Agreement made by Owner or Operator proves to be false or misleading in any
material respect on the date as of which made; or
(e) Transfer. Owner or Operator shall make or permit any assignment or
--------
transfer of this Agreement, or any interest herein, or of the right to
possession of the Equipment not permitted or contemplated by this Agreement.
16.2 Notice of Event of Default. Immediately upon the occurrence of any
--------------------------
event or condition that constitutes an Events of Default, the breaching party
shall notify the non-breaching party of such condition or event and the period
of existence thereof and the action that the breaching party has taken or
proposes to take with respect thereto, and the date, if any, on which it is
estimated that such event or condition will be remedied or terminated.
SECTION 17. ENFORCEMENT
17.1 Remedies. Upon the occurrence of any Event of Default and at any time
--------
thereafter so long as the same shall be continuing, the non-breaching party, at
its option, by notice to the breaching party declare this Agreement to be in
default, and at any time thereafter the non-breaching party may do one or more
of the following as it, in its sole discretion, shall determine:
(a) Termination of Agreement. The non-breaching party may, by notice
------------------------
to the breaching party, rescind or terminate this Agreement;
(b) Return of Equipment. In the case of a breach by Operator, Owner
-------------------
may demand that Operator, and Operator shall upon the written demand of Owner,
return the Equipment promptly to Owner. Operator shall be liable for the any
costs and expenses of de-installation and delivery to Owner that Operator incurs
in connection therewith.
12
<PAGE>
(c) Sale of Equipment and Payment of Guaranteed Amount by Operator. In
--------------------------------------------------------------
case of a breach by Operator, Owner may sell all or any part of the Equipment at
public or private sale, as Owner may determine, free and clear of any rights of
Operator. Owner shall conduct the sale fairly and in good faith so as to
realize the highest possible sales price. If during any of the Agreement
Periods specified below, the Equipment sells for an amount less than the
Calculated Value, then within thirty (30) days of the date of such sale,
Operator will pay Owner the difference between the sales price and the
Calculated Value, up to the Guaranteed Residual, as specified for each Agreement
Period below:
<TABLE>
<CAPTION>
Agreement Period Calculated Value Guaranteed Residual
- - ---------------- ---------------- -------------------
<S> <C> <C>
Foundry Ramp Completion
Date through 12 months later $ varies daily * $5 Million
13 months - 24 months $ varies daily $4 Million
25 months - 36 months $ varies daily $3 Million
37 months - 48 months $ varies daily $2 Million
49 months - 60 months $ varies daily $1 Million
</TABLE>
* If the Equipment is sold before Owner has paid for all Equipment
specified in Exhibit A, then the Calculated Value shall be adjusted to reflect
only the amounts actually paid by Owner or Owner's Lessor, as the case may be,
for the Equipment sold, and the Guaranteed Residual shall be fifty percent (50%)
of that amount.
(d) Other Legal Remedies. Operator's payment of the Guaranteed Residual
--------------------
shall be Owner's sole remedy for Operator's default under this Section.
SECTION 18. QUIET ENJOYMENT
Owner warrants that, so long as Operator is complying with each and every
provision of this Agreement, neither Owner nor Owner's Lessor will not disturb
Operator and its permitted successors and assigns in their peaceable, quiet and
undisputed enjoyment of the Equipment.
SECTION 19. MISCELLANEOUS
19.1 Severability. If any one or more of the provisions contained in this
------------
Agreement shall be determined to be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired hereby.
19.2 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
19.3 Notices. All notices required or permitted to be sent by either party
-------
to the other party under this Agreement shall be sent by registered mail postage
prepaid, or by personal delivery, or by fax. Any notice given by fax shall be
followed by a confirmation copy within ten (10) days. Notices shall be deemed
given upon receipt by the intended recipient. Unless changes by written notice
given by either party to the other, the addresses and fax numbers of the
respective parties shall be as follows:
13
<PAGE>
To IC Works: IC Works, Inc.
3725 North First Street
San Jose, CA 95134-1700
Tel: (408) 922-0202
Fax: (408) 922-0833
To Owner: Telcom Semiconductor, Inc.
1300 Terra Bella Avenue
Mountain View, CA 94039-7267
Tel: (415) 968-9241
Fax: (415) 940-9633
Attention: ________________
19.4 Amendments. No amendment, modification or waiver of any provision
----------
of this Agreement, nor consent to any departure by either party from this
Agreement, shall in any event be effective unless the same shall be in writing
and signed by the parties to this Agreement.
19.5 Headings. The headings of the various sections of this Agreement
--------
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement for any purpose.
19.6 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, each of which shall be deemed an original and all of
which, when taken together, shall constitute one and the same agreement.
19.7 No Publicity. No publicity or information regarding the existence
------------
or contents of this Agreement shall be given or released by either party without
the prior written consent of the other party, except to the extent required
under applicable securities laws to the party's certified public accountant and
attorneys, or in response to a valid subpoena, provided that the responding
party shall first give notice of and the other party shall have an opportunity
to request a protective order preventing the release of information. Promptly
upon execution of this Agreement, the parties shall agree to a joint press
release, announcing the existence of this Agreement.
19.8 Governing Law, Jurisdiction and Dispute Resolution. This Agreement
--------------------------------------------------
shall be governed by and construed in accordance with the laws of the State of
California. The parties consent to the exclusive jurisdiction and venue of the
state courts located in and serving Santa Clara County, California. The parties
intend to carry out the provisions of this Agreement in accordance with
principles of good faith and fair dealing and to respect and observe the spirit
as well as the letter of this Agreement. Senior executives of the parties shall
exercise their best efforts to settle between themselves in an amicable way any
dispute which may arise out of or in connection with this Agreement.
19.9 Attorneys' Fees. If any action at law or in equity, including an
---------------
action for declaratory relief or injunctive relief, is brought to enforce or
interpret the provisions of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees in addition to any other relief to which
the party may be entitled.
19.10 Exhibits. The following exhibits are attached to this Agreement
--------
and incorporated by reference:
Exhibit A Fab Expansion--Major Equipment
Exhibit B Foundry Ramp Schedule
14
<PAGE>
19.11 Entire Agreement. This Agreement and the Wafer Production
----------------
Agreement constitute the entire agreement and understanding between the parties
hereto and supersede any and all prior agreements and understandings, oral or
written, relating to the subject matter hereof.
19.12 Cancellation. The parties acknowledge that the Owner's Equipment
------------
purchase will be part of Operator's foundry expansion program which will require
additional equipment purchases. As a result, notwithstanding anything to the
contrary in this Agreement or in any other Agreement, either Party may terminate
(without any penalty or liability) this Agreement if by January 31, 1996,
Operator has not received commitments of at least Thirty Million ($30,000,000)
to fund such fab expansion (including Equipment) and does not have at least two
(2) Participating Customers.
SECTION 20. TERMS TO OTHER PARTICIPATING CUSTOMERS
Operator agrees that the terms and conditions of the Wafer Production
Agreement signed by other Participating Customers will be no more favorable, in
any material respects, to such Participating Customers than the terms of this
Agreement are to Owner.
IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to
be executed by their respective duly authorized officers or representatives as
of the date first above written.
Owner: Telcom Semiconductor, Inc. Operator: IC WORKS, Inc.
By: /s/ PHILLIP M. DRAYER By: /s/ ILBOK LEE
------------------------------- ---------------------------------
Name: Phillip M. Drayer Name: Ilbok Lee
----------------------------- -------------------------------
Title: CEO Title: President and CEO
---------------------------- ------------------------------
Date: November 2, 1995 Date: November 2, 1995
----------------------------- ------------------------------
15
<PAGE>
Exhibit A
FAB EXPANSION - MAJOR EQUIPMENT
(Tentative as of 9/19/95)
<TABLE>
<CAPTION>
PROCESS STEP QUANTITY EQUIPMENT DELIVERY
- - ------------ -------- --------- --------
<S> <C> <C> <C>
Oxide Etch 2 1. AMT MxP + (d/b chamber) on P5000 March, May, July 96
or 3 2. LAM 4520 ESC
Metal Etch 1 1. AMT Centura (2 proc 2 Ash chamber) April 96
or 1 2. LAM TCP 9600 ESC
Poly Etch 1 1. LAM TCP 9400 June 96
or 1 2. AMT MxP (d/b chamber) on P5000
Asher 5 1. Gasonics Aura 1001 March to Aug. 96
or 5 2. Matrix System One
Pattern Inspect 1 1. Tencor AIT March 96
or 1 2. KLA 2131
Silicide 1 1. AMT 5000 April 96
or 1 2. Genus 8700
or 1 3. Genus 7000
or 1 4. AMT Centura
Plasma CVD 1 1. Novellus Concept 1 May 96
or 1 2. AMT 5000 Mark 2
Stepper 3 1. ASM 5500/100D June, Sept, Dec. 96
or 3 2. Nikon 2205 111D
SEM 1 1. Hitachi 8620 May 96
or 1 2. KLA 8000
or 1 3. Opel 7830 i
Tracks 4 DNS 60A Dec. 95, March 96
Diffusion 4 BTI BDF-1 Jan., Feb., Mar., April 96
BPSG 1 WJ999 Dec. 96
or 1 Novellus Concept 1
Epi 1 AMT Centura TBD
or 1 ASM Epsilon One Model E???
SOG 1 Semix Aug. 96
W Plug 1 AMT 5000 Oct. 96
CMP 1 TBD Oct. 96
Bulk Chem System 10 FSI/Chem Systems March-July 96
Chemical Clean 4 FSI Mercury/Wet Benches March-July 96
Isotropic Etch 1 Matrix 303/Gasonics Aura 2001 July 96
</TABLE>
<PAGE>
Exhibit B
FOUNDRY RAMP SCHEDULE
[INSERT WAFER START PLAN DURING 5" TO 6" CONVERSION CHART]
<PAGE>
EXHIBIT 10.15
11/2/95
IC WORKS
--------
WAFER PRODUCTION AGREEMENT
--------------------------
THIS WAFER PRODUCTION AGREEMENT (this Agreement) is entered into as of
November 2, 1995 (the "Effective Date"), by and between IC WORKS Inc., a
corporation organized under the laws of California, with offices at 3725 North
First Street, San Jose, California 95134-1700 ("ICW"), and Telcom Semiconductor,
Inc., organized under the laws of Delaware, with offices at 1300 Terra Bella
Avenue, Mountain View, California 94039 ("Customer").
RECITALS:
A. Customer has designed integrated circuits and wishes to have an
additional manufacturing source for certain of such integrated circuits.
B. ICW is in the business of manufacturing such integrated circuit Wafers
and desires to manufacture such integrated circuit Wafers for Customer.
C. Customer and ICW have agreed to a Stock Purchase Agreement and an
Operating Agreement under which Customer will purchase certain foundry equipment
to be installed and operated by ICW at the ICW foundry. The Operating Agreement
is dated as of the same date as this Agreement and will enable ICW to increase
its foundry capacity and to supply integrated circuit Wafers to Customer.
NOW THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS.
1.1 "Agreement Periods" shall mean the following periods during the terms
-----------------
of this Agreement:
First Period Commencement of the Foundry Ramp through the end of the
12 month period that commences on the Foundry Ramp
Completion Date
Second Period 13th month through 24th month after the Foundry Ramp
Completion Date
Third Period 25th month through 36th month after the Foundry Ramp
Completion Date
Fourth Period 37th month through 48th month after the Foundry Ramp
Completion Date
Fifth Period 49th month through 60th month after the Foundry Ramp
Completion Date
1.2 "Final Equipment Price" shall mean the total price that Customer pays
---------------------
for all Equipment that Customer purchases or that is purchased and leased to
Customer as per the Operating Agreement, including sales tax and shipping.
1.3 "Foundry Ramp" shall mean the process of implementing the increase in
------------
the ICW foundry capacity as described in Exhibit A to this Agreement.
1.4 "Foundry Ramp Completion Date" shall mean the date when the Foundry
----------------------------
Ramp is complete and the ICW foundry has been qualified as set forth in Section
2.5 of the Operating Agreement.
1.5 "Acceptance Criteria" shall mean the electrical and visual
-------------------
specifications described in Section 5.3 below and Exhibit D attached to this
Agreement.
1
<PAGE>
1.6 "ICW Capacity Commitment" shall mean ICW's commitment to provide the
-----------------------
number of Wafer starts for Customer each month as set forth in Section 3.1
below.
1.7 "Participating Customers" shall mean those ICW customers who, like
-----------------------
Customer, also are parties to the Stock Purchase Agreement and Operating
Agreement referred to in Recital C above.
1.8 "Process" shall mean the process used by ICW according to this
-------
Agreement to manufacture the Products, which may be either Customer's Process
set forth in Exhibit B, as modified if necessary, or any other process
subsequently made available to Customer by ICW for use in the manufacture of the
Products, or any equivalent process developed by ICW that meets with Customer's
approval.
1.9 "Product(s)" shall mean Customer's integrated circuits which ICW
----------
provides and manufactures in Wafer form.
1.10 "Proprietary Information" shall mean information that the disclosing
-----------------------
party considers to be proprietary and/or confidential, including but not limited
to, trade secrets, discoveries, ideas, concepts, know-how, techniques, designs,
specifications, drawings, diagrams, data, computer programs, business activities
and operations, reports, studies and other technical and business information.
1.11 "Wafer(s)" shall mean silicon wafers manufactured by ICW and sold
--------
exclusively to Customer using the Process agreed upon by the parties.
SECTION 2. WAFERS AVAILABLE TO CUSTOMER.
2.1 Wafer Size and Geometry. All Wafers manufactured for Customer under
-----------------------
this Agreement will be 6-inch Wafers, except that if ICW makes Wafers available
to Customer before commencement of the Foundry Ramp, as set forth in Section 3.3
below, such Wafers will be five (5) inch Wafers. ICW will use commercially
reasonable best efforts to reduce the Wafer geometry from 0.6(mu) to 0.35(mu)
and to achieve reasonable process compatibility with mutually agreed foundries
over time as per the Technology Roadmap that is attached to this Agreement as
Exhibit C.
2.2 Process Technical Description. For each Process, ICW shall provide
-----------------------------
Customer in writing with all technical information that Customer reasonably
requires to develop circuit simulation models or data bases, or both. The
information to be supplied by ICW shall include but not limited to the
following:
(a) Detailed Design Rules;
(b) Process Flow Outline;
(c) Process Parameter Specifications;
(d) Electric Parameter Specifications;
(e) Quality Control Monitor Flow;
(f) SPICE Model Parameters; and
(g) Other information, as mutually agreed by both Parties.
2
<PAGE>
SECTION 3. WAFER CAPACITY AVAILABLE TO CUSTOMER.
3.1 Wafer Starts Available. Effective as of the Foundry Ramp Completion
----------------------
Date, the "ICW Capacity Commitment" will be the number of Wafer starts per month
set forth in Exhibit E to this Agreement. ICW shall use commercially reasonable
best efforts to complete the Foundry Ramp by the dates specified in Exhibit A.
The ICW Capacity Commitment is based on the Process(es) specified in Exhibit B,
and will be subject to adjustment when and if such Process changes or Processes
change as per the formula set forth in Exhibit E.
3.2 Duration of Wafer Availability. The ICW Capacity Commitment shall
------------------------------
remain in effect for five (5) years from the Foundry Ramp Completion Date. Upon
termination of such five (5) year period, ICW expects to maintain sufficient
capacity such that it can continue to support Wafer starts for Customer, and;
therefore, ICW and the Customer may continue a foundry relationship, subject to
the parties' agreement on Wafer start levels, prices and such other terms that
the parties are to negotiate in good faith at that time.
3.3 Wafers Prior to Commencement of Foundry Ramp. The schedule for the
--------------------------------------------
Foundry Ramp, set forth in Exhibit A to this Agreement, anticipates a lead time
of approximately twelve (12) months from the date of this Agreement before the
Foundry Ramp will begin. During such period, ICW will make available on a
commercially reasonable best efforts basis, engineering and production five (5)
inch Wafers from ICW's existing capacity. The purchase price for such five (5)
inch Wafers shall be agreed upon by the parties using the following criteria:
(a) process technology, (b) wafer volumes per month, and (c) cycle times. All
other terms of this Agreement, other than Sections 6.1, 6.2, 6.3 and 6.4 shall
apply to such Wafer purchases.
3.4 Wafers During Foundry Ramp Period. After commencement of the Foundry
---------------------------------
Ramp, Customer may purchase from ICW six (6) inch Wafers from ICW, sharing
proportionately with other Participating Customers in the Wafers available
during the Foundry Ramp. The Purchase Price for such six (6) inch Wafers shall
be the Net Price, defined in Section 6.1 below.
3.5 Reject Wafer Protection. After stable yields have been achieved, the
-----------------------
parties shall agree on the standard yield per wafer, below 50% of which, Wafers
may be rejected by the Customer for economic or reliability reasons. If ICW
produces Wafers which can be shown by Customer's documented sort results and
analysis to fall below this reject threshold, then ICW will credit Customer for
the price Customer paid for the rejected wafers. If Customer requests Wafers to
replace those rejected, ICW will, for two or fewer rejected lots, restart the
lots within two weeks of the rejection. For greater numbers of Wafer lots, ICW
will allocate capacity among ICW and all customers over a reasonable period of
time until such time as the rejected Wafers are replaced.
SECTION 4. MASK TOOLING SETS.
4.1 Mask Ownership. ICW acknowledges and agrees that data base and mask
--------------
tooling sets are proprietary to Customer, and shall be and remain the property
of Customer; be treated as Customer's confidential materials; be used only for
the purpose of filling Customer's needs and for no other purpose; and will at
all times contain Customer's trademark, mask work and copyright notices. ICW is
responsible for replacing damaged or broken masks.
4.2 Care and Confidentiality of Masks. ICW agrees to exercise the same
---------------------------------
degree of care in protecting the property of Customer mask tooling sets as is
exercised by ICW for information which ICW considers highly confidential and
proprietary to ICW.
4.3 Return of Masks. Customer's tooling sets are to be returned to
---------------
Customer, with prior Customer notification, if ICW does not receive Customer
forecasts for Wafers during any three (3) month period, or if Customer requests
of ICW, in writing, the return of Customer's mask tooling sets.
4.4 Vendor Selection. ICW and Customer to jointly agree on mask
----------------
vendor selection.
3
<PAGE>
SECTION 5. QUALIFICATION AND MODIFICATION.
5.1 Engineering Lots. ICW will manufacture engineering Wafers for such
----------------
Products as is specified in the purchase order described in Section 8 below.
The Wafer lot size for expedited Engineering Lots shall not be more than twelve
(12) Wafers. ICW will perform the electrical testing specified in the
Acceptance Criteria and supply the test data to Customer with the engineering
Wafers. Customer will promptly inspect the engineering Wafers and notify ICW of
the results. If the engineering Wafers do not meet the Acceptance Criteria,
Customer will give ICW reasonable detail of the problems, and the parties will
cooperate to determine the reason for such failure. After the creation of new
masks, if necessary, ICW will produce one new lot of engineering Wafers. If the
analysis shows that ICW misprocessed the Engineering lot, the replacement lot
will be run at ICW's expense; otherwise, Customer will pay the Net Price or
Engineering Lot Price specified in Section 6 below.
5.2 Successful Qualification. Customer will notify ICW as soon as is
------------------------
practicable after delivery of prototype Wafers, of Customer's determination that
the prototype Wafers meet the Acceptance Criteria set forth in Exhibit D.
5.3 Agreement Upon Acceptance Criteria. As part of the completion of the
----------------------------------
qualification process for each Product, the parties will agree on the Acceptance
Criteria to be used for the acceptance of production lots of Wafers. Such
Acceptance Criteria shall be reduced to writing and attached to this Agreement
as Exhibit D and shall constitute the contractual standards according to which
Customer shall conduct acceptance of the Wafers.
5.4 Production Wafers Prior to Qualification. The parties do not expect
----------------------------------------
that production quantities of Wafers of a Product will be manufactured prior to
completion of the qualification process under Sections 5.1 through 5.3 above.
However, if Customer wants ICW to manufacture production quantities of Wafers
prior to qualification, the parties will agree on the terms before ICW accepts
the purchase order, including the warranty, cancellation and rescheduling terms
to apply to such order.
5.5 Modifications After Qualification.
---------------------------------
(a) Changes to Acceptance Criteria. If Customer or ICW desire to make any
------------------------------
changes to the Acceptance Criteria for any Product, they shall notify the other
party in writing and negotiate the changes in good faith, including any changes
in prices required by such modifications.
(b) Changes to Process.
-------------------
(i) Changes to Process that ICW Requests. If, after qualification is
------------------------------------
completed successfully for any Product to be manufactured under this Agreement,
ICW desires to make Process changes affecting the Product's form, fit or
function, ICW will advise Customer of the intended change. If the proposed
changes are unacceptable to Customer, Customer and ICW shall work together, in
good faith, to resolve the issues and qualify the changed Process for making
Wafers.
(ii) Changes to Process that Customer Requests. If, after
-----------------------------------------
Qualification is completed successfully for any product to be manufactured under
this Agreement, Customer desires to make a change to the Process, Customer shall
make a written request to ICW. After reviewing the requested changes, ICW shall
consider such request and, if appropriate, propose a development and
qualification plan and associated charges. After completion of the development,
ICW shall propose a Wafer price change, if any, associated with the Process
change.
SECTION 6. PRICES, CHARGES AND PAYMENTS.
6.1 Net Price. ICW shall charge Customer, and Customer shall pay, the "Net
---------
Price" for each Wafer. The "Net Price" shall be the Reference Price as defined
in Sections 6.2 and 6.3 below less the Depreciation Discount described in
Section 6.4 below. The Reference Price(s) negotiated as of the time of the
signing of this Agreement are provided on Exhibit E.
4
<PAGE>
6.2 Reference Price. The Reference Price shall be the agreed-to market
---------------
price for Wafers that are comparable to those to be supplied by ICW in terms of
the following criteria: (a) wafer size, (b) process technology, (c) wafer
volumes per month, and (d) cycle times as set forth in Section 9.1 below.
6.3 Reference Price Adjustments. The Reference Price will remain fixed
---------------------------
during the term of this Agreement unless either party believes that market
prices for comparable wafers, determined in accordance with the criteria in
Section 6.2 above, have changed during the preceding three (3) month period by
more than five percent (5%).
If either party believes that prices have changed by more than five percent
(5%), it can initiate renegotiation of the Reference Price based on documented
new market prices based on the comparability criteria set forth in Section 6.2
above; provided, however, that the Reference Price shall not increase or
decrease by more than ten percent (10%) in any twelve month period or by more
than twenty percent (20%) from the original Reference Price set forth in Exhibit
E over the term of the Agreement. If the parties cannot agree on a new
Reference Price, then until such time as both parties otherwise agree, the
Reference Price shall be the lowest price ICW has negotiated for comparable
wafers at comparable volumes.
6.4 Depreciation Discount. The Depreciation Discount shall be calculated
---------------------
as follows:
(a) Amount. The Depreciation Discount shall be calculated for each
------
Agreement Period using the following factors and formula:
Factors:
. 20% of the Final Equipment Price plus 100% of the Property Tax to be paid
by Customer during the then current Agreement Period. During the First
Period the Final Equipment Price shall be deemed to be the amount set
forth in Exhibit E, and shall be adjusted once the actual Final Equipment
Price can be calculated.
. ICW Capacity Commitment during the then current Agreement Period
. Wafer Yield
Formula:
20% Final Equipment Price Plus 100% Property Tax
- - ------------------------------------------------ = Depreciation Discount/Wafer
ICW Capacity Commitment x Wafer Yield
For example: If the Final Equipment Price is $10 Million Dollars; the Property
taxes for the applicable Agreement Period are $100,000; the ICW Capacity
Commitment is 12,000 Wafers and the Wafer Yield is 95%, then the formula would
be as follows:
2,100,000
--------------------- = $184.00/Wafer
12,000 x 95% = 11,400
(b) Maximum Cumulative Depreciation Discount. During each of the Agreement
----------------------------------------
Periods, Customer shall receive a Depreciation Discount on each Wafer that
Customer purchases or otherwise pays for under this Agreement, up to a maximum
Discount amount that is equal to twenty percent of the Final Equipment Price
plus property taxes on the Equipment that Customer is to pay during the
Agreement Period.
(c) Depreciation Discount for Wafers ICW Sells from Customer's Unused
-----------------------------------------------------------------
Capacity. If ICW sells any of Customer's unused Wafer capacity to other ICW
- - --------
customers in accordance with Section 7.2(e) below, then ICW shall pay Customer
for each such Wafer sold in an amount equal to the Depreciation Discount that
Customer would have been entitled to receive if Customer had purchased such
Wafer. Such payments shall count toward the maximum annual Depreciation
Discount specified in Section 6.4(b) above.
5
<PAGE>
(d) Unused Depreciation Discount. Customer may apply any unused
----------------------------
Depreciation Discount incurred in any Agreement Period (under either Sections
6.4(b) or 6.4(c) above) during the next Agreement Period only, subject to the
following limitations: (i) the amount of the unused Depreciation Discount
applied to Customer's excess Wafer purchases shall not exceed twenty percent
(20%) of the total Depreciation Discount that Customer was to receive during the
preceding Agreement Period (not including Depreciation carried forward from
other Agreement Periods); and (ii) in no case will ICW be obligated to supply a
quantity of Wafers that is greater than the ICW Committed Capacity plus 5
percent during any Agreement Period. If Customer has not received the total ICW
Capacity Commitment during the term of this Agreement, then:
(i) to the extent the shortfall is attributable to Customer's failure
to place Purchase Orders for the full ICW Capacity Commitment amount, Customer
may carry forward the Depreciation Discounts that Customer would have been
entitled to carry forward under Sections 6.4(b), (c) and (d) and 7.4 of this
Agreement, had the Agreement remained in effect, and apply such amount as a per
wafer discount agreement entered into between ICW and Customer in accordance
with Section 3.2 above; and
(ii) to the extent the shortfall is attributable to ICW's failure to
supply the full ICW Capacity Commitment amount whether by reason of Force
Majeure or otherwise, Customer may carry forward the Depreciation Discounts
described in subsection (i) above, plus any additional Depreciation Discount
amount up to maximum amount set forth in section 6.4 (b) above that was not
available to Customer during the Agreement term because of ICW's failure, and
apply such amount as a per wafer discount against wafer purchases under a
subsequent wafer production agreement in accordance with Section 3.2 above.
6.5 Hot Lots. Prices for Engineering Lots ordered by Customer to be
--------
delivered in less than the normal cycle times determined as per Section 9 below,
will be as shown on Exhibit E attached.
6.6 Setup Charges. Standard setup for each Product is provided by ICW free
-------------
of additional charges. The standard setup includes preparation of the lot
traveler and photo stepper files. Any additional setup required by the Customer
shall be defined by the Customer and ICW and the charge then agreed between ICW
and Customer.
6.7 Charges for Wafers Put on Hold or Scrapped. Customer agrees that it
------------------------------------------
will submit all Purchase Orders for Wafer starts in good faith, with the intent
to complete the Wafer production. However, if Customer finds it necessary to
scrap Wafers or place on hold and then scrap Wafers for which processing has
begun, then Customer shall pay the Percentage of Net Prices for such wafers set
forth in 6.7(b) below. These charges reflect the cost to ICW and the degree of
difficulty in filling the hole created in the production line by the held
Wafers.
(a) Minimum Wafers. If Customer places two (2) or fewer lots of the same
--------------
mask set on hold for ten (10) days or less, there will be no charges above the
Net Price.
6
<PAGE>
(b) Partial Completion Charges. If Customer directs ICW to place on hold
--------------------------
Wafers started pursuant to purchase orders that Customer issued in accordance
with Section 8 below, then unless the hold was for the minimum number of lots
and days specified in Section 6.7(a) above, ICW shall invoice Customer in the
week in which such Wafers were scheduled to be delivered at the percentages of
Net Price shown below:
<TABLE>
<CAPTION>
Number of Wafers Held
% ----------------------------------------------------
Completion 25-150 151-250 251-500 501-750 751-1,000
- - ---------- ------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
0-20% 20% 35% 50% 75% 100%
21-40% 40% 50% 65% 85% 100%
41-60% 60% 65% 70% 90% 100%
61-80% 80% 85% 90% 95% 100%
81-100% 100% 100% 100% 100% 100%
</TABLE>
The above percentages of Net Price vary with the indicated percentage of Wafer
completion and the number of Wafers Customer ordered, held or scrapped.
Percentage completion will be determined by dividing the number of masking steps
completed at the time of holding by the total masking steps in a finished Wafer.
(c) Wafers Restarted and Completed.
------------------------------
(i) Wafer Completion Charges. If after placing Wafers on hold,
------------------------
Customer directs ICW to process the Wafers to completion, then Customer will pay
a completion charge which will be calculated by multiplying the Net Price by a
percentage to complete represented by the ratio of the number of masking steps
to be completed at the time of the hold to the total masking steps in a finished
wafer.
(ii) Daily Hold Charges Customer shall pay a Hold Charge equal to one
------------------
percent (1%) of the Net Price for each day that Wafers are on hold, limited to
the number of processing days remaining to completion. For example, maximum
chargeable hold days would be as follows:
- Wafers held at Metal 2 7.5 days
- Wafers held at Metal 1 15 days
- Wafers held at Poly 28 days
(d) Notice of Hold Charges and New Purchase Order. When Customer releases
---------------------------------------------
Wafers from hold, ICW will notify Customer of: (i) the amount of the Wafer
Completion Charges under 6.7(c) (i) above, (ii) the Daily Hold Charges, if any,
under 6.7(c) (ii) above and (iii) the date(s) on which the Wafers are scheduled
for completion. Customer will acknowledge these charges and will issue to ICW a
new purchase order to cover the above charges. When the Wafers are delivered to
the Customer ICW will issue an invoice to the Customer against this purchase
order.
(e) Payment of Hold Charges. The invoices that ICW issues to Customer for
-----------------------
all charges related to Wafers placed on hold and scrapped or restarted and
completed shall be payable in accordance with the payment terms set forth in
Section 6.10 below.
7
<PAGE>
6.8 Scrapped Wafers Impact on Supply and Purchase Commitments. One hundred
---------------------------------------------------------
percent (100%) of Wafers scrapped by Customer will count as Wafer Starts towards
ICW's satisfaction of the ICW Capacity Commitment; however, only the percentage
Customer pays for scrapped Wafers will count towards Customer's satisfaction of
its minimum purchase requirements under Section 7.2 below. Customer's maximum
Depreciation Discount amount for the applicable Agreement Period also will be
reduced on a pro rata basis to reflect the percentage of the Depreciation
Discount included in the Net Price for purposes of calculating the scrapping
charge. If ICW causes wafers to be scrapped, replacement wafers do not count
against Customer's Capacity Commitment.
6.9 Performance Payment. On or before the last day of this Agreement, if
-------------------
during the Agreement Term ICW has supplied to Customer the ICW Capacity
Commitment, or such fewer number of Wafers as Customer ordered during the
Agreement Term and ICW has otherwise performed its obligations under this
Agreement and the Operating Agreement, then Customer shall pay ICW a performance
payment of U.S. $2 Million.
6.10 Payment Terms. Unless otherwise agreed upon by the parties, payment
-------------
terms shall be net due thirty (30) days after the later of the date of ICW's
invoice or delivery of the Products FOB ICW's factory, and shall be deemed late
if not received within 10 business days thereafter. Late payments shall be
subject to interest at the Bank of America Prime Rate in effect on the day that
payment was due, plus one and one half percent (1 1/2%), or if such amount
exceeds the maximum interest rate allowed by law, then such maximum interest
rate shall apply. Each invoice submitted by ICW to customer shall contain the
quantity and price of Wafers purchased and have the applicable Depreciation
Discount, if any, applied to the order.
SECTION 7. FORECASTS, PURCHASE COMMITMENTS AND PRODUCTION REPORTS.
7.1 Rolling Forecasts. By the fifteenth work day of each month, Customer
-----------------
will provide ICW a rolling forecast of its monthly volume requirement for the
following six (6) months for Wafers by Process manufactured by ICW (the "Six
Month Forecast"), the first three (3) months of which are binding on both
parties, subject to the maximum ICW Capacity Commitment and adjustments under
Section 7.2 below. By the fifteenth working day of each second month in each
calendar quarter, Customer will provide ICW a rolling forecast of its volume
requirements for Wafers by Process for the following twelve (12) months. ICW
will make its commercially reasonable best effort to produce Wafers as requested
by the Customer's forecast.
7.2 Purchase Commitments. Customer and ICW agree that:
--------------------
(a) The first month of the Six Month Forecast is binding by Product and by
-----------------------------------------
Quantity and is equivalent to an actual purchase order.
(b) In the second month of the Six Month Forecast, Customer may adjust
---------------------------------------------
orders up or down five percent (5%) from the forecast. Customer may also make
adjustments to the mix of Products.
(c) In the third month of the Six Month Forecast, Customer may adjust orders
--------------------------------------------
up or down ten percent (10%) from the forecast. Customer may also make
adjustments to the mix of Products.
(d) Forecasts beyond the first three (3) months represent Customer's best
-------------------------------------------
estimate of Customer's Wafer requirement for the periods covered and do not
constitute binding purchase commitments from Customer. However, Customer is
subject to liability for Wafer orders that are less than eighty percent (80%) of
the ICW Capacity Commitment, as described in Section 7.3 below.
(e) Unused Wafers.
--------------
(i) During the first three months. If any of the forecasts for the
-----------------------------
first three (3) months of a Six Month Forecast are for less than one hundred
percent (100%) of the ICW Capacity Commitment, then ICW may offer the unused
Wafers to other customers.
8
<PAGE>
(ii) During the second three months. If any of the forecasts for the
------------------------------
fourth, fifth or sixth months of a Six Month Forecast are for less than the ICW
Capacity Commitment, then ICW may offer the difference between the forecast
amount and the ICW Capacity Commitment to other customers.
(iii) Revenues From Sales of Unused Wafers. Any revenue ICW receives
------------------------------------
by selling Customer's unused Capacity Commitment to other ICW customers will be
applied as follows:
(i) first, to pay ICW the Net Price that it would have received
from Customer;
(ii) then, to Customer as a Depreciation Discount if applicable;
(iii) any balance shall be payable in its entirety, to ICW.
7.3 Take or Pay: Canceled Orders, and Forecasts and Purchases Below
----------------------------------------------------------------
Minimum Commitment. If within the first three (3) month commitment window
- - ------------------
described in Section 7.2 above, Customer cancels orders or reduces forecasts
below the minimum number of Wafers called for by the first three (3) month
commitment criteria in Section 7.2, and if ICW is unable to sell the canceled
Wafers or unused capacity to other customers, then ICW will invoice Customer and
Customer shall pay ICW for the Wafers below minimum Purchase Commitment levels
at Net Prices. If for months beyond the first three months Customer purchases
less than eighty percent (80%) of the ICW Capacity Commitment, and if ICW is
unable to sell such unused capacity to other customers, then Customer will be
liable to ICW for any revenue shortfall below that which ICW would have received
had Customer purchased at least eighty percent (80%) of the ICW Capacity
Commitment.
7.4 Production Reports. ICW will provide a weekly production status report
------------------
to Customer indicating the quantity of Customer's Wafers by product at each
production stage and the projected Wafer-out dates. ICW shall report weekly to
Customer any projected late deliveries.
SECTION 8. PURCHASE ORDERS.
8.1 Placement of Purchase Orders. Customer shall place purchase orders
----------------------------
("Purchase Orders") for such quantities of the Product(s) as and when it
requires, subject to the requirements of Section 7.2 above. The Purchase Orders
shall be open purchase orders for a fixed quantity of Wafer lots, and shall
cover the next calendar month. Maximum lot sizes for expedited Engineering Lots
shall be twelve (12) Wafers, and standard lot sizes for production Wafers shall
be twenty-five (25) Wafers. Such Purchase Orders constitute firm purchase
obligations on the part of Customer and shall be final subject to acceptance by
ICW. ICW will accept the Purchase Order offer by written acknowledgment of the
Purchase Orders placed. A partial shipment shall indicate acceptance only of
that part of the Purchase Order. Any such written acknowledgment by ICW may
vary the terms of the Purchase Order consistent with the terms and conditions of
this Agreement.
8.2 Content of Purchase Orders. Each Purchase Order shall contain:
--------------------------
(a) Products to be purchased;
(b) Quantities of Wafer Lots for each Product;
(c) Requested Shipment Date;
(d) Destination and requested carrier; and
(e) Confirmation of the Net Price for each Wafer.
9
<PAGE>
SECTION 9. PRODUCTION LEAD TIMES.
9.1 Cycle Times. Unless otherwise agreed to in writing by ICW, cycle times
-----------
from ICW's acceptance of Customer's Purchase Order until delivery of the Product
to Customer's selected transportation carrier shall vary by Process and shall be
agreed to by the parties for each Product as part of the Process Descriptions in
Exhibit B. For example, the Product lead times below are for fourteen (14) mask
0.6(mu), two (2) Metal six, (6) inch CMOS wafers:
<TABLE>
<CAPTION>
Production Engineering
---------- ------------------------------------
Lightning Blast Standard
--------- ----- --------
<S> <C> <C> <C> <C>
Full Cycle 7 weeks 21 days 32 days 7 weeks
Poly 4 weeks 12 days 18 days 4 weeks
Metal 1 15 days 7 days 10 days 15 days
</TABLE>
9.2 Holidays. ICW observes ten (10) national holidays. These days and
--------
other planned ICW foundry shut downs must be added to the cycle times shown
above. ICW will provide Customer with a schedule of holidays and planned
foundry shutdowns six (6) months in advance.
9.3 Delivery Consistency. ICW shall use its commercially reasonable best
--------------------
efforts to achieve scheduled delivery times. However, since these delivery
times correspond to the actual production cycles for Wafers, recovery in the
case of misprocessing of Wafer lots may be incomplete and may occur in periods
subsequent to those in which the wafers were originally scheduled to be
delivered.
SECTION 10. ON-SITE INSPECTION AND MANUFACTURING INFORMATION.
10.1 Right of Inspection. Customer shall have the right to designate a
-------------------
representative to enter ICW's Foundry, upon reasonable notice to ICW and at
reasonable times that do not interfere with ICW's use of the Equipment, to
inspect and examine the Equipment to ensure ICW's compliance with the terms and
conditions of this Agreement. ICW may restrict such inspections to times when
the Equipment is being used to manufacture Wafers for ICW. Customer shall be
responsible for and indemnify and hold harmless Customer against any loss or
damage arising out of its acts and omissions with respect to such inspections,
including but not limited to loss arising from injury to person or property,
while at the ICW's Foundry. Customer acknowledges that ICW's Foundry processes,
Equipment configuration and wafer production for ICW customers constitute
confidential information of ICW and its customers, and Customer agrees that it
will sign a nondisclosure agreement in a form satisfactory to ICW, before
Customer may enter ICW's Foundry. ICW shall be responsible for and indemnify and
hold harmless Customer against any loss or damage that Customer's representative
suffers during the course of such an inspection to the extent that such loss or
damage is caused by ICW's negligence or willful misconduct; provided, however,
that ICW shall only be liable if Customer's Worker's Compensation insurance does
not cover the claim.
10.2 Manufacturing Information. Upon Customer's written request, ICW will
-------------------------
make available for review, process control information, including but not
limited to: Process and electrical test yield results, calibration schedules
and parametric test results.
10
<PAGE>
SECTION 11. DELIVERY OF ORDERS.
11.1 Transfer of Ownership. Unless otherwise agreed to in writing between
---------------------
the parties, ICW shall deliver the Products to Customer or Customer's carrier
FOB ICW Foundry. Title and risk of loss shall pass to Customer upon this
delivery. ICW shall package the Products for secure shipment according to
standard industrial manufacturing practices in consideration of the method of
shipment chosen. The date of the bill of lading or other receipt issued by the
carrier shall be conclusive proof of the date and fact of shipment of the
Products.
11.2 Partial Shipments. Partial shipments are allowed, so long as full
-----------------
shipment of the appropriate quantities are made by the delivery dates specified
in the Purchase Order acknowledgment. Such partial shipments may be invoiced
individually or in combination with all the other partial shipments made for the
same Purchase Orders. Invoices for Wafers put on hold under Section 6.7 above
shall be treated as a partial shipment and paid according to the terms in
Section 6.10 above.
SECTION 12. ACCEPTANCE, TESTING AND INSPECTION.
12.1 Notification of Acceptance. Customer shall accept all Wafers
--------------------------
delivered under this Agreement that meet the Acceptance Criteria and the minimum
good die yield thresholds established by the parties for such Wafers, and shall
notify ICW in writing, within forty-five (45) days following the delivery of any
Wafers, as to rejection thereof. If no notification indicating rejection is
received by ICW within the above time period, then such Wafers shall be deemed
accepted. If Customer rejects Wafers, then the Limited Warranty provisions of
Section 14 below, shall apply to such rejected Wafers.
12.2 Customer Inspection of Product. Customer may inspect the Product and
------------------------------
carry out testing, prior to acceptance, at its own facilities. Customer shall
perform the inspection and testing pursuant to the methods set forth in the
Acceptance Criteria provided in Sections 5.1, 5.2. and 5.3 above.
SECTION 13. PROPRIETARY INFORMATION.
13.1 Restrictions on Use and Disclosure of Proprietary Information. Both
-------------------------------------------------------------
parties agree to maintain Proprietary Information in strict confidence, not to
make use thereof other than for the performance of this Agreement, to release it
only to the receiving party's employees who have a reasonable need to know the
same, and not to release or disclose it to any third parties, without the prior
written consent of the disclosing party. The obligations set forth in this
Section shall not apply to any information that: (a) is now or hereafter in
public domain or otherwise becomes available to the public other than by breach
of this Agreement by the receiving party, (b) has been rightfully in the
receiving party's possession prior to receipt from the disclosing party, (c) is
rightfully received by the receiving party from a third party, (d) is
independently developed by the receiving party, and (e) is authorized by the
disclosing party to be released or disclosed.
13.2 Ownership. All Proprietary Information and any copies thereof shall
---------
remain the property of the disclosing party, and no license or other rights is
granted or implied hereby. The receiving party shall, upon the disclosing
party's request, return the original and all copies of tangible Proprietary
Information. Any masks generated by ICW from Customer's database tapes shall be
the property of Customer, and will be returned to Customer upon request. ICW
reserves all rights to any modifications or improvements to the Process and to
any of its own Proprietary Information received or acquired during the course of
performance of this Agreement.
13.3 Survival of Obligation. Obligations under this Section shall survive
----------------------
the termination or expiration of this Agreement for three (3) years from the
date of termination or expiration.
11
<PAGE>
SECTION 14. LIMITED WARRANTY.
14.1 Product Warranty. ICW warrants that the Products delivered under this
----------------
Agreement shall be free from defects in material and workmanship under normal
use for a period of one (1) year from the date of shipment. If, during the one
(1) year period, (a) ICW is notified promptly in writing upon discovery of any
defect in the Products, including a detailed description of the alleged defect,
(b) Customer obtains a Return Material Authorization number for such Products
and returns the Products to ICW with the RMA marked on the outside of the
package, and (c) ICW's examination of such Products reveals that such Products
are indeed defective and the claimed defect is not caused by accident, abuse,
misuse, neglect, improper installation, assembly, repair or alteration by
someone other than ICW, or improper testing, then ICW shall, at its option,
either repair, replace, or credit Customer for such defective Products.
ICW shall return any Products repaired or replaced under this warranty to
Customer transportation prepaid. The performance of this warranty shall not act
to extend the one (1) year warranty period for any Products repaired or replaced
beyond that period applicable to such Products as originally delivered.
14.2 Limitation on Warranty. The foregoing warranty constitutes ICW's
----------------------
exclusive liability, and Customer's exclusive remedy for any defects in
material, workmanship or performance of the Products.
THE FOREGOING WARRANTY SHALL BE EXCLUSIVE AND IN LIEU OF ANY AND ALL OTHER
WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ALL OF
WHICH ARE HEREBY EXPRESSLY DISCLAIMED.
14.3 ICW Inspection of Defective Products. Prior to Customer's return of
------------------------------------
allegedly defective Products by Customer pursuant to Section 14.1 Customer shall
first afford ICW the opportunity upon ICW's request, to inspect the allegedly
defective Products at Customer's facilities. If ICW thereby determines that the
alleged Product defects are caused by defects in material or workmanship of ICW,
then Customer shall be entitled to repair, replacement or credit under Section
14.1.
SECTION 15. INTELLECTUAL PROPERTY.
15.1 Indemnity. Subject to Sections 15.2 and 15.3 below, ICW shall,
---------
at its expense and at Customer's request, defend any claim, or suit or
proceeding brought against Customer, to the extent that it is based solely on a
claim that one or more of the Processes used by ICW pursuant to this Agreement
infringes any patent, copyright, trade secret or other proprietary rights of a
third party under the laws of the United States, and ICW shall pay any costs and
damages awarded against Customer by a final, non-appealable court judgment or by
a settlement entered into by ICW, to the extent that such costs and damages are
attributable to such claim, suit or proceeding provided that:
(a) Customer gives ICW reasonably prompt notice in writing of any such
claim or, suit or proceeding; and permits ICW, through counsel of its choice, to
answer the charge of infringement and defend such claim, or suit or proceeding
(b) Customer provides ICW information, assistance and authority, at ICW's
expense, to enable ICW to defend such suit or proceeding; (c) ICW shall have
sole authority to settle the claim, suit or proceeding and shall not be
responsible for any settlement made by Customer without ICW's prior written
permission; and (d) if the claim, suit or proceeding alleges infringement by
both a Product and the Process, ICW will have no obligations under this Section
15.1, unless the Product infringement is alleged to have been cause solely by
the Process used to manufacture such Product.
12
<PAGE>
15.2 Liability for Compliance with Customer Instructions. ICW shall have
---------------------------------------------------
no liability under this Agreement for any claim, suit or proceedings where
infringement is directly attributable to ICW's compliance with or implementation
of any of Customer's instructions, specifications, design or requirements which
deviate from or modify ICW's Process, the Process (insofar as the Process or any
part thereof has been provided by Customer to ICW), or other information or
materials provided by Customer to ICW, for the performance of this Agreement.
Customer shall, at its expense and ICW's request, defend any such claim, suit or
proceeding brought against ICW alleging infringement under the laws of the
United States, and Customer shall pay any costs and damages awarded against ICW
by a final non-appealable court judgment or by a settlement entered into by
Customer, to the extent that such costs and damages are attributable to such
claim, suit or proceeding, provided that:
(a) ICW gives Customer reasonably prompt notice in writing of any such
claim, suit or proceeding, and permits Customer, through counsel of its choice,
to answer the charge of infringement and defend such claim, suit or proceeding;
(b) ICW provides Customer information, assistance and authority, at Customer's
expense, to enable Customer to defend such claim, suit or proceeding; and (c)
Customer shall not be responsible for any settlement made by ICW without
Customer's written permission.
15.3 Disputes Concerning Process Rights. If the court or a settlement
----------------------------------
enjoins the use of the Process by ICW or if, in ICW's opinion, the Process is
likely to become the subject of a claim of infringement, ICW shall have the
option to modify such Process so that it becomes non-infringing, or substitute a
substantially equivalent non-infringing process. ICW shall have no obligation
under Section 15.1 above for any claim or suit if ICW has offered a modification
or replacement of the Process, and the claim or suit or liability results from
Customer's failure to permit the use of the modified or replacement Process or
to otherwise modify its Product so as to enable ICW to use such modified or
replaced Process.
15.4 Entire Liability. The foregoing states the entire liability and
----------------
exclusive remedies of ICW and Customer for infringement by the Products, the
Process and the production of the Products furnished under this Agreement.
SECTION 16. LIMITATION OF LIABILITY.
ICW shall have no liability to Customer or to any end user with respect to
claims arising out of the use of the Products for ultrahazardous activities,
such as airplane navigation systems, life support systems, or nuclear
facilities, and Customer hereby indemnifies ICW and holds ICW harmless from any
and all claims, damages, liabilities, cost and expenses arising out of the use
of the products for such activities. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS
OF PROFITS AND LOSS OF USE) RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH
SUCH PARTY'S PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, OR
RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH ICW'S PRODUCING, SUPPLYING,
AND/OR SALE OF THE PRODUCTS OR WAFERS OR ANY PART THEREOF, WHETHER DUE TO A
BREACH OF CONTRACT, BREACH OF WARRANTY, TORT, OR NEGLIGENCE OF ICW, OR
OTHERWISE. This section does not eliminate ICW's liability for actual damages,
but in no event shall the aggregate amount of damages payable by ICW for claims
arising out of this Agreement other than for claims under Sections 10 or 15
above, exceed the actual cost to Customer of acquiring up to 6,000 replacement
Wafers up to a maximum dollar amount of $300 per such replacement Wafer.
SECTION 17. EXPORT CONTROL.
Export of Products may require export authorization from the U.S. Department
of Commerce. Customer will indemnify ICW against any cost of liability
resulting from Customer's failure to obtain such authorization.
SECTION 18. TERM AND TERMINATION.
18.1 Term. The term of this Agreement shall be five (5) years commencing
----
from the Foundry Ramp Completion Date.
13
<PAGE>
18.2 Termination. This Agreement may be terminated by either party if the
-----------
other party (a) breaches any material provision of this Agreement and does not
cure or remedy such breach within six (6) months of written notice of breach;
(b) becomes the subject of a voluntary or involuntary petition in bankruptcy or
any proceeding relating to insolvency, receivership, liquidation, or composition
for the benefit of creditors if such petition or proceeding is not dismissed
with prejudice within sixty (60) days after filing. ICW shall not be in
material breach of this Agreement if during an Agreement Period it is able to
supply Wafer Starts equal to at least seventy percent (70%) of the ICW Capacity
Commitment for that Agreement Period.
If Customer is the breaching party under this Section 18.2, then ICW shall
be entitled to stop the production of Wafers upon giving notice to Customer, and
Customer shall be obligated to pay for all finished Wafers and work-in-process
(partially finished Products) which are identifiable to this Agreement, at the
purchase prices set forth in Section 6 without prejudice to damages that may be
claimed by ICW due to Customer's breach.
If ICW is the breaching party under this Section 18.2, then, at Customer's
request, ICW will complete all outstanding Purchase Orders and accept three
months of additional Purchase Orders for a "last time" buy, provided that such
Purchase Orders shall be subject to the terms and conditions of this Agreement.
The parties acknowledge that ICW will need to complete its fab expansion
program to provide the wafers under this Agreement. The parties further
acknowledge that such fab expansion will require additional Equipment purchases,
and that Customer will fund only a portion of such costs. As a result,
notwithstanding anything to the contrary (whether in this Agreement or any other
agreement), either party may terminate (without any penalty or liability) this
Agreement if by January 31, 1996, ICW has not received commitments of at least
Thirty Million ($30,000,000) to fund such fab expansion (including Equipment)
and does not have at least two (2) Participating Customers.
18.3 Survivability of Specific Sections. Sections 4, 6, 13, 14, 15, 16,
----------------------------------
18.3, 20, 22 and 23 shall survive the termination or expiration of this
Agreement.
SECTION 19. FORCE MAJEURE.
Neither party shall be responsible for any delay or failure to perform under
this Agreement (other than with respect to payments due under this Agreement) if
such delay or failure is caused by unforeseen circumstances or to causes beyond
its control, including but not limited to acts of God, war, riot, embargoes,
labor stoppages, acts of civil and military authorities, fire, floods,
earthquakes or accidents beyond the control of the party.
SECTION 20. NON-PUBLICITY.
No publicity or information regarding the existence or contents of this
Agreement shall be given or released by either party without the prior written
consent of the other party, except to the extent required under applicable
securities laws, to the party's certified public accountant and attorneys, or in
response to a valid subpoena, provided that the responding party, shall first
give notice of and a copy of the subpoena to the other party, and the other
party shall have an opportunity to request a protective order preventing the
release of information. Promptly upon execution of this Agreement, the parties
shall agree to a joint press release, announcing this Agreement.
SECTION 21. ASSIGNMENT.
Neither party shall delegate any obligations under this Agreement or assign
this Agreement or any interest or rights hereunder without the prior written
consent of the other party, which consent shall not unreasonably be withheld.
Either party may assign this Agreement to a successor to all or substantially
all of its assets or to a majority of its voting stock. The surviving party is
bound to the terms of this Agreement.
14
<PAGE>
SECTION 22. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California. The parties consent to the exclusive
jurisdiction and venue of the state courts located in and serving Santa Clara
County, California.
SECTION 23. NOTICE
All notices required or permitted to be sent by either party to the other
party under this Agreement shall be sent by registered mail postage prepaid, or
by personal delivery, or by fax. Any notice given by fax shall be followed by a
confirmation copy within ten (10) days. Notices shall be deemed given upon
receipt by the intended recipient. Unless changes by written notice given by
either party to the other, the addresses and fax numbers shall be:
To IC Works: 3725 North First Street
San Jose, CA 95134-1700
Tel: (408) 922-0202
Fax: (408) 922-0833
To Customer: TELCOM SEMICONDUCTOR, INC.
1300 Terra Bella Avenue
Mountain View, CA 94039-9267
Tel: (415) 968-9241
Fax: (415) 940-9833
Attention: ___________________
SECTION 24. TERMS TO OTHER PARTICIPATING CUSTOMERS
ICW agrees that the terms and conditions of the Wafer Production Agreement
signed by other Participating Customers will be no more favorable, in any
material respects, to such Participating Customers than the terms of this
Agreement are to Customer.
SECTION 25. HEADINGS
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement for any purpose.
SECTION 26. EXECUTION IN COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original and all of which, when taken together, shall
constitute one and the same agreement.
15
<PAGE>
SECTION 27. ATTORNEYS' FEES.
If any action at law or in equity, including an action for declaratory relief or
injunctive relief, is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees
in addition to any other relief to which the party may be entitled.
SECTION 28. ENTIRE AGREEMENT.
This Agreement and attached Exhibits A, B, C, D and E and the Stock
Purchase Agreement and Operating Agreement constitute the entire agreement
between the parties with respect to the subject matter hereof and supersedes and
replaces all prior or contemporaneous understandings, agreements, dealings, and
negotiations, oral or written, regarding the subject matter. Any terms and
conditions listed in the Purchase Orders placed by Customer under this Agreement
shall not constitute part of this Agreement, nor affect or revise the terms and
conditions of this Agreement, even in cases such Purchase Orders are signed and
returned by ICW, unless both parties expressly agree in writing to include any
such terms or conditions in the Agreement. No modification, alteration or
amendment of this Agreement shall be effective unless in writing and signed by
both parties. No waiver of any breach or failure by either party to enforce any
provision of this Agreement shall be deemed a waiver of any other or subsequent
breach or a waiver of future enforcement of that or any other provision.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
duly executed in duplicate on their behalf by their duly authorized officers and
representatives on the date given above.
IC WORKS, Inc. CUSTOMER
By /s/ ILBOK LEE By /s/ PHILLIP M. DRAYER
------------------------- ---------------------------
Name Ilbok Lee Name Ilbok Lee
----------------------- -------------------------
Title President & CEO Title CEO
---------------------- ------------------------
Date November 2, 1995 Date November 2, 1995
----------------------- --------------------------
16
<PAGE>
EXHIBITS LIST
-------------
Exhibit A Foundry Ramp
Exhibit B Process Description
Exhibit C Technology Road Map
Exhibit D Acceptance Criteria
Exhibit E Reference Production Prices and Engineering Lot Prices
17
<PAGE>
Exhibit A
FOUNDRY RAMP SCHEDULE
[INSERT WAFER START PLAN DURING 5" TO 6" CONVERSION CHART]
<PAGE>
Exibit B
PROCESS DESCRIPTION
<TABLE>
<CAPTION>
PROCESS CYCLE TIME
------- ----------
<S> <C>
0.6(mu) 1P/2M CMOS 7 Weeks
</TABLE>
<PAGE>
TECHNOLOGY ROAD MAP
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CMOS Design Rule 0.6(mu) 0.5(mu) 0.45(mu) 0.35(mu)
- - ------------------------------------------------------------------------------------------------------------------------------
Poly Layers 1 or 2 1 or 2 1 or 2 1 or 2
- - ------------------------------------------------------------------------------------------------------------------------------
Metal Layers 1 or 3 1 or 3 1 or 3+ 1 or 3+
- - ------------------------------------------------------------------------------------------------------------------------------
Gate Oxide Thickness 140A/120A 100-120A 100A 80-90A
- - ------------------------------------------------------------------------------------------------------------------------------
Operating Voltage 5 0V/3 3V 3.3V/2.5 5V/5 0V 3.3V/2.5V 3.3V/2.5V
- - ------------------------------------------------------------------------------------------------------------------------------
Comments Poly Capacitor Enhanced LOCOS CMP
Poly Resistor Isolation W-Plus
SOG
Hot Metal
- - ------------------------------------------------------------------------------------------------------------------------------
Masking Steps (w/o ESD) 14 14 14 15 (Estimated)
(1-Poly, 2 Metal)
- - ------------------------------------------------------------------------------------------------------------------------------
BICMOS Design Rule 0.8(mu) 0.7(mu) 0.6(mu) TBD
- - ------------------------------------------------------------------------------------------------------------------------------
Poly Layers 2 2 2
- - ------------------------------------------------------------------------------------------------------------------------------
Metal Layers 2 2 2
- - ------------------------------------------------------------------------------------------------------------------------------
IT 12 GHz 18 GHz 22 GHz
- - ------------------------------------------------------------------------------------------------------------------------------
Operating Voltage 5.0V 5.0V/3V 3V
- - ------------------------------------------------------------------------------------------------------------------------------
Comments Poly Resistor Complementary Bipolar
Metal Capacitor Trench Isol.
Self-aligned Emitter
Scollky Diode
- - ------------------------------------------------------------------------------------------------------------------------------
Masking Steps 24 25-29 TBD
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[LOGO OF IC WORKS]
<PAGE>
EXHIBIT ?
ELECTRICAL SPECIFICATION & ACCEPTANCE CRITERIA
For each production lot or prototype lot, five wafers, shall be tested
electrically by IC WORKS upon completion of processing. In the case where less
than five wafers are present in the lot, all wafer shall be tested. For each
wafer, one test site shall be measured. Acceptance of te lot shall be based on
all measured parameters to fall with the specified limits in the following
table.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------
Parameter 0.8(mu) 0.6(mu) 0.5(mu) 0.35(mu)
CMOS 1P3M 2P3M 2P3M
CMOS CMOS CMOS
==============================================================================
<S> <C> <C> <C> <C>
Vtn (Volts) 0.7 -- 0.9 0.55 -- 0.75 TBD TBD
- - ------------------------------------------------------------------------------
Idsatn (uA/.um) 360 -- 420 390 -- 450 TBD TBD
- - ------------------------------------------------------------------------------
Idsatn (uA/.um) 360 -- 420 390 -- 450 TBD TBD
- - ------------------------------------------------------------------------------
Bvdssn (Volts) (greater than) 10 (greater than) 10 TBD TBD
- - ------------------------------------------------------------------------------
Vtp -1.05 -- 0.85 -10 -- 450 TBD TBD
- - ------------------------------------------------------------------------------
TBD TBD
- - ------------------------------------------------------------------------------
</TABLE>
Note:
Above table is for example purposes only. Actual specifications to be provided.
<PAGE>
Exhibit E - Telcom
I. CAPACITY COMMITMENT
-------------------
ICW Capacity Commitment: 1000 0.6(mu) 1P/2M Wafer/month. This 1000 Wafer Start
commitment is denominated in terms of a 14 mask single poly, double metal CMOS
process which entails a manufacturing complexity factor of 1.0. The numbers of
Wafer Starts will be decreased as complexity increases. For example, assuming a
1000 wafer start commitment, the committed wafer starts for a 16 mask single
poly triple metal CMOS process with a complexity factor of 16 over 14 or 1.142,
would be 875, or 1000 divided by 1.142.
II. REFERENCE PRICE FOR PRODUCTION WAFERS
-------------------------------------
<TABLE>
<CAPTION>
Wafer Process Process --------------- Mask Layers -------------
Size Geometry Type 12 14 16 18 20 24 26
- - -------- -------- ------- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6" 0.60(mu) 1P/2M CMOS $950
</TABLE>
III. DEEMED FINAL EQUIPMENT PRICE
----------------------------
$ 10,000,000.00
IV. PRICES FOR ENGINEERING LOTS -- 6"
---------------------------
<TABLE>
<CAPTION>
Process Lightning Blast Standard*
------- --------- ----- ---------
<S> <C> <C> <C>
0.80(mu) 1P/2M $52K $35K $25K
0.60(mu) 1P/2M $52K $35K $25K
0.60(mu) 1P/3M $60K $40K $30K
</TABLE>
* Shall consist of 25 Wafer Lot
<PAGE>
Exhibit 11.1
TELCOM SEMICONDUCTOR, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------
Mar. 31, Mar. 31,
1996 1995
-------- --------
<S> <C> <C>
Weighted average number of common shares outstanding (1) 15,502 3,410
Mandatory redeemable convertible preferred stock (1)(2) - 9,562
Dilutive effect of stock options (1)(3) 1,147 1,724
Dilutive effect of warrants (3) 233 234
------- -------
Number of shares used to compute per share data 16,882 14,930
======= =======
Net income $ 371 $ 518
======= =======
Per Share Data:
Net income $ 0.02 $ 0.03
======= =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent share and options issued by the Company during
the twelve month period prior to the initial public offering of the
Company's common stock (the "Offering") have been included as if they were
outstanding for all periods presented.
(2) For shares issued more than one year prior to the Offering, computed using
the if-converted method assuming conversion at the beginning of the earliest
period presented, or at the time of issuance, if later.
(3) For options and warrants issued more than one year prior to the Offering,
computed using the treasury stock method.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 7,928
<SECURITIES> 10,692
<RECEIVABLES> 5,895
<ALLOWANCES> 195
<INVENTORY> 8,395
<CURRENT-ASSETS> 34,214
<PP&E> 15,374
<DEPRECIATION> 3,121
<TOTAL-ASSETS> 49,467
<CURRENT-LIABILITIES> 8,025
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 37,440
<TOTAL-LIABILITY-AND-EQUITY> 49,467
<SALES> 9,167
<TOTAL-REVENUES> 9,167
<CGS> 5,608
<TOTAL-COSTS> 8,770
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 509
<INCOME-TAX> 138
<INCOME-CONTINUING> 371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 371
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
