-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I5zOVwJwrV3lH3lFG67YC6cskJ9VkMvw4+TeOwSX84cT87CtAaxbWkxEb6EtOQKS BZn9QGM2hZaSHtsV7IUVnA== 0000891618-96-000146.txt : 19960328 0000891618-96-000146.hdr.sgml : 19960328 ACCESSION NUMBER: 0000891618-96-000146 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSI LOGIC CORP CENTRAL INDEX KEY: 0000703360 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942712976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10317 FILM NUMBER: 96539263 BUSINESS ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084334039 MAIL ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 10-K405 1 FORM 10-K FOR LSI LOGIC FOR PERIOD ENDING 12/31/95 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO ______________ COMMISSION FILE NUMBER: 0-11674 LSI LOGIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2712976 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1551 MCCARTHY BOULEVARD MILPITAS, CALIFORNIA 95035 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (408) 433-8000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------------------------- --------------------------------------------- Common Stock, $0.01 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES X NO --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on March 15, 1996 as reported on the New York Stock Exchange, was approximately $3,202,915,081. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 1996, registrant had 128,461,781 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into Parts I, II, III and IV of this Form 10-K Report: (1) Proxy Statement for registrant's 1996 Annual Meeting of Stockholders, and (2) registrant's 1995 Annual Report to Stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL LSI Logic Corporation (the "Company") is a leader in the design, development, manufacture and marketing of high performance application-specific integrated circuits ("ASICs"). The Company uses advanced process technology and design methodology to design and develop highly complex ASICs and other integrated circuits. The Company's sub-micron process technologies, combined with its product libraries, including CoreWare(R) libraries, provide the Company with the ability to integrate system-level solutions on a single chip. The Company's product marketing approach is to focus primarily on original equipment manufacturers in the computer, communications and consumer products industries. Within these industries, the Company emphasizes digital video, networking, desktop and personal computing and wireless communication applications. The Company targets its marketing and selling effort towards acknowledged industry leaders in these markets. The Company has developed and uses complementary metal oxide semiconductor ("CMOS") process technologies to manufacture integrated circuits implementing submicron geometries, including 0.5-micron processes for the Company's advanced product offerings. In 1995, the Company announced its newly developed 0.35-micron G10(TM) process which allows for up to 49,000,000 usable transistors on a single die. As process technology becomes more sophisticated, allowing greater density and increased functionality on a single chip, the system-on-a-chip is becoming the foundation of the Company's approach to the marketplace. The Company's CoreWare methodology and sub-micron process technologies permit customers to combine microprocessor "engines", logic blocks (including industry standard functions, protocols and interfaces) and memory with a customer's proprietary logic on a single chip. This allows the customer to differentiate its product and optimize its application. The Company was incorporated in California on November 6, 1980 and reincorporated in Delaware on June 11, 1987. Its principal offices are located at 1551 McCarthy Boulevard, Milpitas, California 95035, and its telephone number at that location is (408) 433-8000. Except where otherwise indicated, references to the "Company" means LSI Logic Corporation and its majority- and wholly-owned subsidiaries. BUSINESS STRATEGY The Company's objective is to design and manufacture highly integrated, complex semiconductor devices that provide its customers with system-level solutions on silicon thereby allowing customers to get to market rapidly with differentiated systems and products. To achieve this objective, the Company has implemented a business strategy incorporating the following key elements: - Emphasize CoreWare Methodology. The Company's CoreWare product library approach and its sub-micron process technologies permit system-level integration of microprocessors, logic blocks (including industry standard functions, protocols and interfaces), memory and customer specific proprietary logic functions on a single piece of silicon. This methodology enables customers to improve the performance and reliability of their products and differentiate their products while shortening product development cycles and lowering development costs. - Target Growth Markets and Selected Customers. The Company directs its marketing and selling efforts toward selected customers in the computer, consumer and communications 1 3 industries. The Company targets high growth end markets which are characterized by increasingly shortened product cycles and ongoing changes in technological standards and performance requirements. As a result, customers in these markets tend to benefit from the flexibility of the Company's customized ASIC design methodology to help differentiate their products while still complying with existing and emerging global industry standards such as Ethernet and ATM (Asynchronous Transfer Mode) in the networking market, PCI bus interfaces in the computer market and MPEG2 (Motion Picture Experts Group) in the digital video market. - Promote Highly Integrated Design and Manufacturing Technology. The Company's proprietary computer-aided design tools are highly integrated with the Company's manufacturing process requirements, thereby providing high predictability that the product's physical performance will mirror the computer simulation of the chip and affording high predictability of performance of products developed using the Company's design methodology. The Company's sophisticated design tools, advanced process technology and sub-micron manufacturing capability are intended to provide customers highly integrated solutions that work right the first time. - Flexibility in Design Engineering. The Company provides customers with a comprehensive approach and a continuum of solutions for the design and manufacture of ASICs. This allows customers substantial flexibility in how they proceed with an ASIC design project. A customer may establish product specifications for implementation into a particular chip design by the customer's engineers, by the Company's engineers on a "turn-key" basis or through a collaborative effort. The Company's design environment includes expanded interface capabilities to certain third party EDA software design tools from companies such as Cadence Design Systems, Inc., Mentor Graphics Corporation, Synopsys, Inc. and Viewlogic Systems, Inc. - Maintain High-Quality and Cost-Effective Manufacturing. The Company believes that owning its wafer manufacturing facilities improves quality, cost-effectiveness, responsiveness to customers, ability to implement leading-edge process technology and time-to-market as compared to companies that do not own their own wafer fabrication facilities. The Company's manufacturing operations are located in the United States, Japan and Hong Kong. The Company performs substantially all of its packaging, assembly and final test operations through third party subcontractors in various locations. The Company's production operations in the U.S. and Japan are ISO-9002 certified, an important international measure for quality. - Offer Worldwide Services. The Company markets its products and services on a worldwide basis through its direct sales, marketing and field technical staff of approximately 810 employees (including its subsidiaries in Europe, Canada and the Far East), and through independent sales representatives and distributors. The Company operates 22 design centers around the world to assist customers in product design activities. The Company's network of design centers allows the Company to provide its customers with highly experienced engineers to interact with customer engineering management and system architects to develop designs for new products and to provide continuing after-sale customer support. PRODUCTS AND SERVICES Engineering 2 4 The Company's product marketing strategy is to focus on original equipment manufacturers (OEMs) in the computer, consumer and communications products markets. The Company seeks out leaders in these markets with the objective of providing technical support to customers early in their new system product development process. In executing this strategy, the Company offers customers a wide variety of engineering design services. The Company's engineering design service approach allows the customers to determine the level of participation which they will have in the design process. The Company may provide complete "turn-key" engineering support for design projects where the customer provides high-level functional objectives. This type of engineering support is well suited for a customer's system-level design project in which the Company is engaged to utilize one or more of its CoreWare library elements for delivering a system on a single chip. However, the customer may also perform substantial design activity on its own. The Company's design environment includes an expanded interface to various third party EDA vendors' design tools. The Company makes available various library elements (including semiconductor macrocells, the basic silicon structures used in the design of logic circuits, and the larger predefined functional building blocks, "megacells" and "megafunctions"), technology data bases and design automation software programs. The most complex of the Company's library elements are called cores which are comprised of predefined and pretested cells of industry standard functions, protocols and interfaces. The ultimate output of the Company's integrated circuit design system is a pattern generation tape from which the semiconductor "masks" or production tooling is made. The system also produces a test tape which is readable by standard industry semiconductor testing equipment. The Company's software design tools support and automatically perform key elements of the design process from circuit concept through physical layout of the circuit design and preparation of pattern generation tapes. After completion of the engineering design effort, the Company produces and tests prototype circuits for shipment to the customer. Thereafter, the Company will commence volume production of integrated circuits that have been developed through one or more of the arrangements described above in accordance with the customer's quantity and delivery requirements. The Company generally does not have long-term volume production contracts with its customers. Whether any specific ASIC design will result in volume production orders and the quantities included in any such orders are factors beyond the control of the Company. Insufficient orders will result in underutilization of the Company's manufacturing facilities which would adversely impact the Company's operating results. Components The Company's vertical market focus permits it to dedicate engineering resources to develop systems expertise in a particular market. This system-level expertise and design methodology in conjunction with a wide range of component product offerings, including the Company's CoreWare libraries, enable customers to achieve rapid time to market system-on-a-chip solutions. The Company's component product offerings are based upon metal programmable array, cell-based and Embedded Array(R) product architectures. The Company offers a wide variety of die sizes and functionality configurations that are available in different feature sizes and are based on different process technologies. A metal programmable array, also known as a gate array, is a matrix of uncommitted transistors contained on a single chip. The gate array is "programmed" (i.e., customized) only in the last steps of the fabrication process. This enables the manufacturer to produce large quantities of uncommitted gate arrays, known as "base arrays," and to benefit from the economies of volume chip production. These basic silicon substrates are designed and manufactured in a fashion similar to standard integrated circuits. The individual elements are interconnected at the metallization step in the manufacturing process to implement user-defined functions. Gate arrays, when compared to many standard logic circuits, provide the system manufacturer with lower cost, higher reliability, lower power consumption, increased performance and smaller end products. 3 5 The Company's cell-based technology allows the customer to combine standard cells, memories such as fully static random access memory (RAM), static multi-port RAM, metal programmable read only memory (ROM) and other dedicated very large scale integration (VLSI) building blocks called megacells on a single chip. Through combinations of these various cell-based structures, the Company can provide the customer with customized solutions to a wide variety of digital design problems. Cell based technology offers customers higher density and enhanced performance as compared to gate array technology. In addition, the Company offers its customers the opportunity to create proprietary base wafers by utilizing a combination of the Company's standard cell technology with gate array technology. This Embedded Array product option can provide the customer with both high performance and density features normally associated with cell-based technology and with fast turnaround times resembling those available only for gate array-based designs. CoreWare library elements are complex VLSI or large system-level pre-designed building blocks of integrated circuit logic functions. CoreWare elements may be either developed by the Company or acquired under technology transfer or licensing agreements between the Company and other developers. In addition, CoreWare elements are highly integrated for use with the Company's proprietary software design tools and those advanced manufacturing processes to which individual cores are targeted. The Company intends the CoreWare libraries it offers to be based upon industry standard functions, protocols and interfaces, thereby positioning them to be useful in a wide variety of systems applications. Representative examples from the Company's CoreWare libraries include implementations of the Ethernet, ATM (Asynchronous Transfer Mode) and SONET standards for the networking market, PCI bus interfaces for the computer market and, MPEG2 (Motion Picture Experts Group) for the digital video market. The Company's MiniRISC(TM) family of MIPS-based RISC (reduced instruction set computing) central processing unit (CPU) cores can be coupled with these other cores and with customer proprietary functionality to realize system-level applications on a single chip. The Company's CoreWare product libraries are designed to be used with the customer's proprietary logic in gate array, cell-based or Embedded Array product designs based upon the Company's design methodology. Expansion of the Company's CoreWare library elements is expected to continue into the foreseeable future. The Company continues to emphasize engineering development and acquisition of CoreWare libraries and integration of CoreWare libraries into its ASIC design capabilities in the Company's transition from manufacturing products substantially based on the customer's proprietary logic design to emphasizing ASIC opportunities that utilize the Company's CoreWare product libraries. There can be no assurance, however, that the cores selected for investment of the Company's financial and engineering resources will enjoy market acceptance or that such cores can be successfully integrated into the Company's ASIC design environment on a timely basis. See "Marketing and Customers." The Company also offers a family of application specific standard product high-speed digital signal and image processing devices that perform a wide variety of common digital signal processing operations. Generally, however, even new standard products developed by the Company are implementations of emerging industry standard functions that the Company is targeting for inclusion in its CoreWare library as well. MANUFACTURING The Company's manufacturing operations convert a customer's design into packaged silicon chips and support customer volume production requirements. Manufacturing begins with fabrication of uncommitted wafers (for gate array ASICs) or custom diffused wafers (for cell-based ASICs). Although base layers for cell-based designs are themselves customized, gate array wafers are not and therefore may be inventoried by the Company pending customization accomplished in the metallization stage of fabrication. In the next 4 6 stage of manufacture, metallization, layers of metal interconnects are diffused onto the wafer using customized masks. Wafers are then tested, cut into die and sorted. The die that have passed initial test are then assembled (embedded in and connected to one of a wide variety of packages) and encapsulated. The finished devices then undergo additional tests before shipment. Currently, the Company's manufacturing facilities are located in the United States, Japan and the Far East. Management and control of manufacturing operations is performed by the Company's Hong Kong affiliate. Substantially all of the Company's wafers are manufactured at its two wafer fabrication facilities in Japan. Final assembly and test operations are conducted by the Company's Hong Kong affiliate through independent subcontractors, and through the Company's Fremont, California facility. In July 1997, Hong Kong will come under the complete control of the Chinese government. There can be no assurance that the Company and its affiliates will not experience a disruption in the flow of products, which could result in a material adverse impact on the Company's operating results, as a result of a reversion of control of Hong Kong to China. In addition to the possible reversion of Hong Kong to Chinese control, any political or economic disruptions in the countries where the subcontractors are located could result in a material adverse impact on the Company's operating results. The Company utilizes various high performance CMOS process technologies in the volume manufacture of its products. The Company's facility in Japan utilizes advanced process technologies in conjunction with computer integrated manufacturing to produce 0.5-micron products containing up to 1.5 million gates (or up to 9 million transistors on a single chip) and offers customers a high-volume, reliable source for manufacturing. This 50,000 square foot facility has a highly automated production line, providing greater productivity and product quality. Decisions such as prioritization of specific customer requirements or maximizing machine efficiencies can be made rapidly with the aid of computer integrated manufacturing. In 1995, the Company completed an upgrade of its Japanese facility, including the installation of chemical mechanical polishing (CMP) equipment in order to improve yields, thereby effectively increasing capacity. The equipment installed at this facility accommodates both current and expected future process requirements and automation standards. In August 1995, the Company began development of a new site in Gresham, Oregon for manufacturing operations and other purposes. The site, which consists of approximately 325 acres, is planned to accommodate expansion requirements the Company may have in the foreseeable future. Construction of a new wafer fabrication facility is in process and is expected to commence volume production during the latter half of 1997. When fully equipped, this manufacturing facility is designed to have the capacity for 4,000 eight-inch wafer starts per week utilizing the Company's 0.35-micron process technology. The Company currently estimates it will spend between $600,000,000 to $800,000,000 to bring this facility to full production capacity. Disruption of operations at any of the Company's primary manufacturing facilities, or at any of its subcontractors for any reason, including work stoppages, fire, earthquake or other natural disasters, would cause delays in shipments of the Company's products. There can be no assurance that alternate capacity would be available on a timely basis or at all, or that, if available, it could be obtained on favorable terms, thereby potentially resulting in a loss of customers. The disruption of operations for these and other reasons could adversely affect the Company's operating results. The Company has in the past and will in the future, consider developing foundry relationships with certain other semiconductor manufacturers whereby the Company may purchase quantities of wafers (both unmetallized and metallized) that are manufactured to the Company's specifications. The semiconductor industry is capital intensive. In order to remain competitive, the Company must continue to make significant investments in new facilities and capital equipment. In 1995, capital expenditures (leases and purchases of plant and equipment) were approximately $385,000,000. The Company expects 1996 capital expenditures to be approximately $400,000,000, and expects significant capital expenditures in 5 7 subsequent years, as well. There can be no assurance that the Company will have the resources available when needed to meet these requirements. The Company may be required to seek additional equity or debt financing to fund further expansion of its fabrication capacity or for other purposes. There can be no assurance that such additional financing will be available when needed or, if available, will be on satisfactory terms. In addition, the level of capital expenditures necessary to enable the Company to remain competitive result in a relatively high level of fixed costs. If demand for the Company's products does not absorb the additional capacity, the increase in fixed costs and operating expenses related to increases in production capacity may materially and adversely affect the Company's results of operations and financial condition. In the assembly process, the fabricated circuit is encapsulated into ceramic or plastic packages. The Company has developed a network of offshore third-party assembly and final test subcontractors for plastic packaging. Plastic packaging is normally associated with lower cost, commercially oriented products. The Company has benefitted from the cost savings associated with these third-party subcontractors. The Company performs ceramic package assembly for its products at its Fremont, California facility. Ceramic packaging is primarily utilized in applications involving the need to protect the circuit against a potentially harsh operating environment, such as in military applications. The Fremont assembly line has been specially equipped to support both the packaging needs of military as well as selected commercial applications. The proportion of ceramic packaging being done by independent assembly plants continues to increase and the Company has begun ceramic packaging offshore. Testing includes final test and final quality assurance acceptance. Dedicated computer systems are used in this comprehensive testing sequence. The test programs utilize the basic functional test criteria from the design simulation which was generated and approved by the customers' design engineers. Most product testing operations are currently conducted in close proximity to the particular facility where assembly activities are performed. The Company intends to continue its use of independent assembly plants to test its products. Certain of the raw materials used in the manufacture of circuits are available from a limited number of suppliers in the United States and elsewhere. For example, for several types of the integrated circuit packages that are purchased by the Company, as well as by the majority of other companies in the semiconductor industry, the Company must rely on one vendor for the majority of its supply. The Company has in the past experienced, and anticipates that it may in the future experience difficulty in obtaining the most advanced plastic or ceramic packaging for integrated circuits, which can cause shipment delays. The Company does not have long-term fixed supply contracts with its suppliers. Shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. If the Company were unable to procure certain of such materials from any source, it would be required to reduce its manufacturing operations. To date, the Company has experienced no significant difficulty in obtaining the necessary raw materials. The Company's operations also depend upon a continuing adequate supply of electricity, natural gas and water. The semiconductor industry historically has been characterized by wide fluctuations in product supply and demand. From time to time the industry also has experienced significant downturns, often in connection with, or in anticipation of maturing product cycles (of both the semiconductor companies and their customers) and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity and subsequent accelerated erosion of average selling prices, and in some cases, have lasted for more than a year. For example, the Company believes that its operating results were adversely affected by an industry-wide downturn in the demand for semiconductors beginning in 1990, culminating in the Company's 1992 restructuring charge and reorganization of its operations. There is no assurance that the levels of demand for semiconductor products experienced in 1995 will continue. The Company may experience substantial period-to-period fluctuations in future operating results due to general industry conditions or events occurring in the general economy and the Company's business could be materially and adversely affected by a significant industry-wide downturn. The Company continues to 6 8 evaluate its worldwide manufacturing operations to effect additional cost-savings and technological improvements. To remain competitive, the Company must develop and implement new process technologies in order to reduce semiconductor die size, increase device performance and improve manufacturing yields, to adapt products and processes to technological changes and adopt emerging industry standards. If the Company is not able to successfully implement new process technologies and to achieve volume production of new products at acceptable yields using new manufacturing processes, the Company's operating results will be adversely affected. Development of advanced manufacturing technologies in the semiconductor industry frequently requires that critical selections be made as to those vendors from which essential equipment (including future enhancements) and after-sales services and support will be purchased. Similarly, procurement of certain types of materials required by the Company's manufacturing technologies are closely linked with certain equipment selections. When the Company implements specific technology choices, it may become dependent upon certain sole-source vendors. Accordingly, the Company's capability to switch to other technologies and vendors may be substantially restricted and may involve significant expense and delay in the Company's technology advancements and manufacturing capabilities. The semiconductor equipment and materials industries also include a number of vendors that are relatively small and have limited resources. Several of these vendors provide equipment and or services to the Company. The Company does not have long-term supply or service agreements with vendors of certain critical items. Additionally, there can be no assurance that disruptions in these vendors' ability to perform will not occur. Should the Company experience such disruptions, the Company's operations could be adversely affected, which could have a material adverse effect on its operating results. In countries in which the Company is conducting business in local currency, currency exchange fluctuations could adversely affect the Company's revenues and costs. A substantial portion of the costs of the Company's manufacturing operations are denominated in Japanese yen. In addition, the Company purchases a substantial portion of its raw materials and equipment from foreign suppliers and incurs labor costs in foreign locations. A portion of these transactions are denominated in currencies other than in U.S. dollars, principally in Japanese yen. International sales are generally denominated in local currencies. The Company also has borrowings and operating lease obligations denominated in yen, which totaled approximately 25 billion yen (approximately $243 million) as of December 31, 1995. Such transactions and borrowings expose the Company to exchange rate fluctuations for the period of time from inception of the transaction until it is settled. In recent years, the yen has fluctuated substantially against the U.S. dollar. The Company has entered and will from time to time enter into hedging transactions in order to minimize exposure to currency rate fluctuations. There can be no assurance that such hedging transactions will minimize exposure to currency rate fluctuations or that fluctuations in the currency exchange rates in the future will not have an adverse impact on the Company's results of operations. In addition, there can be no assurance that inflation rates in countries where the Company conducts operations will not adversely affect the Company's operating results in the future. Both manufacturing and sales of the Company's products may be affected adversely by political and economic conditions abroad. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws or other trade policies, could affect adversely the Company's ability to manufacture or sell in foreign markets. MARKETING AND CUSTOMERS The Company has focused its marketing efforts primarily on the computer, communications and consumer products industries, and within those industries, the Company emphasizes digital video, networking, desktop and personal computing and wireless communication applications. The Company's strategy is to 7 9 leverage its systems-level ASIC strength to shift its emphasis from the small design "glue logic" type of account to the type of account where the Company can bring greater intellectual property to the relationship. The Company, however, expects that this strategy will result in the Company becoming increasingly dependent on a limited number of customers for a substantial portion of its revenues. The Company markets its products and services through its worldwide direct sales and marketing organization which consists of approximately 810 employees (including subsidiaries), and through independent sales representatives and distributors. All of the Company's customer design centers also include a direct sales office. See "Properties." For information concerning foreign operations, see Note 10 of Notes to Consolidated Financial Statements in the Company's 1995 Annual Report to Stockholders. International sales are generally denominated in local currencies. International sales are subject to risks common to export activities, including governmental regulations, trade barriers, tariff increases and currency fluctuations. To date, the Company has not experienced any material difficulties because of these risks. In 1995, Sony Corporation accounted for approximately 12% of the Company's revenues. In 1994 and 1993 Sun Microsystems, Inc. accounted for approximately 14% and 12%, respectively, of the Company's revenues. In 1994, Intel Corporation accounted for approximately 11% of the Company's revenues. BACKLOG Generally, the Company's customers are not subject to long-term contracts, but to purchase orders which are accepted by the Company. Quantities of the Company's products to be delivered and delivery schedules under purchase orders outstanding from time to time are frequently revised to reflect changes in customer needs. In addition, the timing of the performance of design services included in the Company's backlog at any particular time is generally within the control of the customer, not the Company. For these reasons, the Company's backlog as of any particular date is not a meaningful indicator of future sales. COMPETITION The Company's competitors include many large domestic and foreign companies which have substantially greater financial, technical and management resources than the Company, as well as emerging companies attempting to sell products to specialized markets such as those addressed by the Company. Several major diversified electronics companies, including Fujitsu, Ltd., Toshiba Corporation, NEC Corporation and a number of United States semiconductor manufacturers, including Lucent Technologies, Inc. (formerly known as AT&T), Motorola Inc. and Texas Instruments Incorporated, offer ASIC products and/or offer products which are competitive to the product lines of the Company. In addition, there is no assurance that certain large customers, some of whom the Company has licensed to use elements of its process and product technologies, will not develop internal design and production operations to produce their own ASICs. The principal factors on which competition in the ASIC market is based include design capabilities (including both the software design tool features, compatibility with industry standard design tools, CoreWare library and the skills of the design team), quality, delivery time and price. The Company believes that it presently competes favorably with respect to these factors, and that its success will depend on its continued ability to provide its customers with a complete range of design services, products and manufacturing capabilities on competitive terms. There can be no assurance, however, that other custom logic design approaches will not be developed which could have an adverse impact on the Company's business and results of operations. The Company is increasingly emphasizing its CoreWare product offerings and methodology. The Company believes that this strategy presents new business opportunities for which the Company believes it has a present competitive advantage. Although there may be other companies that offer similar types of products, the Company believes it currently offers different capabilities than those companies. As the market 8 10 for the CoreWare approach grows, the Company expects alternative solutions to be offered by its competitors and that competition will intensify. There can be no assurance that the Company's CoreWare product approach will continue to receive market acceptance, that a competitor's product will not achieve greater acceptance or that as competition intensifies, the Company's future operating results will not be adversely impacted. Important competitive factors will include the content, quantity and quality of CoreWare library elements available, the quality of process technology, the ability of a company to offer its customers systems-level expertise and the ability of a customer to customize and differentiate its product. There can be no assurance that the Company will be able to compete favorably in these areas. RESEARCH AND DEVELOPMENT The semiconductor industry is characterized by rapid changes in both product and process technologies. Because of continual improvements in these technologies, the Company believes that its future success will depend, in part, upon its ability to continue to improve its product and process technologies and to develop new technologies in a cost effective manner in order to maintain the performance advantages of its products and processes relative to competitors, to adapt products and processes to technological changes and to adopt emerging industry standards. If the Company is not able to successfully implement these new process technologies and to achieve volume production of new products at acceptable yields using new manufacturing processes, the Company's operating results will be adversely affected. The Company's research and development emphasizes the development of new advanced products, improvements in process technologies, enhancements of design automation software capabilities, and cost reduction of existing products. During 1995, 1994 and 1993, the Company expended $123,892,000, $98,978,000 and $78,995,000, respectively, on its research and development activities. The Company expects to continue to make significant investments in research and development activities and believes such investments are critical to its ability to continue to compete with other ASIC manufacturers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" at page 11 of the Company's 1995 Annual Report to Stockholders, incorporated herein by reference. PATENTS, TRADEMARKS AND LICENSES The Company owns various United States and international patents and has additional patent applications pending relating to certain of its products and technologies. The Company also maintains trademarks on certain of its products and services. Although the Company believes that patent and trademark protection have value, the rapidly changing technology in the semiconductor industry makes the Company's future success dependent primarily upon the technical competence and creative skills of its personnel rather than on patent and trademark protection. As is typical in the semiconductor industry, the Company has from time to time received, and may in the future receive, communications from other parties asserting patent rights, mask work rights, copyrights, trademark rights or other intellectual property rights that such other parties allege cover certain of the Company's products, processes, technologies or information. Several such assertions relating to patents are in various stages of evaluation. The Company is considering whether to seek licenses with respect to certain of these claims. Litigation has arisen with respect to one of these assertions. Based on industry practice, the Company believes that licenses or other rights, if necessary, could be obtained on commercially reasonable terms. Nevertheless, no assurance can be given that licenses can be obtained, or if obtained will be on acceptable terms or that litigation or other administrative proceedings will not occur. The inability to obtain licenses or other rights or to obtain such licenses or rights on favorable terms or litigation arising out of such other parties' assertions could have a material adverse effect on the Company's future operating results. See "Legal Proceedings." 9 11 The Company has also entered into certain license agreements which generally provide for the non-exclusive licensing of design and product manufacturing rights and for cross-licensing of future improvements developed by either party. ENVIRONMENTAL REGULATION Federal, state and local regulations impose various environmental controls on the use and discharge of certain chemicals and gases used in semiconductor processing. The Company's facilities have been designed to comply with these regulations, and the Company believes that its activities conform to present environmental regulations. Increasing public attention has, however, been focused on the environmental impact of electronics and semiconductor manufacturing operations. While the Company to date has not experienced any materially adverse effects on its business from environmental regulations, there can be no assurance that such regulations will not be amended so as to impose expensive obligations on the Company. In addition, violations of environmental regulations or unpermitted discharges of hazardous substances could result in the necessity for additional capital improvements to comply with such regulations or to restrict discharges, liability to Company employees and/or third parties, and business interruptions as a consequence of permit suspensions or revocations or as a consequence of the granting of injunctions requested by governmental agencies or private parties. EMPLOYEES At December 31, 1995, the Company and its subsidiaries had approximately 3,870 employees, including approximately 810 in field marketing and sales, approximately 530 in product marketing and support, approximately 680 in engineering and research and development activities, approximately 1,545 in manufacturing and approximately 305 in executive and administrative activities. The Company's future success depends in large part on the continued service of its key technical and management personnel and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company. The Company has never had a work stoppage, slow-down or strike, and no United States employees are represented by a labor organization. The Company considers its employee relations to be good. RISK FACTORS In addition to the following risk factors, reference is made to those risk factors described elsewhere in this Form 10-K Report, as well as in the other documents incorporated by reference in this Form 10-K Report. Dependence on New Process Technologies and Products. The Company believes that its future success depends, in part, on its ability to improve its existing technologies and to develop and implement new process technologies in order to continue to reduce semiconductor die size, improve device performance and manufacturing yields, adapt products and processes to technological changes and adopt emerging industry standards. If the Company is not able to successfully implement new process technologies and achieve volume production of new products at acceptable yields using new manufacturing processes, the Company's operating results will be adversely affected. In addition, the Company must continue to develop and introduce new products that compete effectively on the basis of price and performance and that satisfy customer requirements. New product development often requires long-term forecasting of market trends, development and implementation of new processes and technologies and a substantial capital commitment. The Company intends the CoreWare library elements it offers to be based upon industry standard functions, protocols and interfaces, thereby positioning them to be useful in a wide variety of systems applications. The Company 10 12 continues to emphasize engineering development and acquisition of CoreWare building blocks and integration of CoreWare libraries into its design capabilities. There can be no assurance, however, that the cores selected for investment of the Company's financial and engineering resources will be developed or acquired in a timely manner or will enjoy market acceptance. Manufacturing Risks. Disruption of operations at any of the Company's primary manufacturing facilities, particularly the Company's Japanese facilities, or any of its subcontractors for any reason, including work stoppages, fire, earthquake or other natural disasters, would cause delays in shipments of the Company's products. There can be no assurance that alternate capacity, particularly wafer production capacity, would be available on a timely basis or at all, or that if available, it could be obtained on favorable terms, thereby potentially resulting in a loss of customers. The disruption of operations for those or other reasons could adversely affect the Company's operating results. Capital Needs. The semiconductor industry is capital intensive. In order to remain competitive, the Company must continue to make significant investments in new facilities and capital equipment. The Company expects 1996 capital expenditures to be approximately $400,000,000, and expects significant capital expenditures in subsequent years, as well. There can be no assurance that the Company will have the resources available when needed to meet these requirements. The Company may be required to seek additional equity or debt financing to fund further expansion of its fabrication capacity or for other purposes. There can be no assurance that such additional financing will be available when needed or, if available, will be on satisfactory terms. In addition, the level of capital expenditures necessary to enable the Company to remain competitive result in a relatively high level of fixed costs. If demand for the Company's products does not absorb the additional capacity, the increase in fixed costs and operating expenses related to increases in production capacity may materially and adversely affect the Company's results of operations and financial condition. Fluctuations in Operating Results. The Company believes that its future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of both the semiconductor industry and the markets addressed by the Company's products, the ability to develop and implement new technologies, the availability and extent of utilization of manufacturing capacity, changes in product mix, fluctuations in manufacturing yields, the timing of new product introductions, price erosion, exchange rate fluctuations and other competitive factors. As a participant in the semiconductor industry, the Company operates in a technologically advanced, rapidly changing and highly competitive environment. The Company predominantly sells custom products to customers operating in a similar environment. Accordingly, changes in the conditions of any of the Company's customers may have a greater impact on the Company than if the Company offered standard products that could be sold to many purchasers. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance and stock price. To the extent the Company's performance may not meet expectations published by external sources, public reaction could result in a sudden and significantly adverse impact on the market price of the Company's securities, particularly on a short-term basis. Competition. The semiconductor industry in general and the markets in which the Company competes in particular are intensely competitive, exhibiting both rapid technological changes and continued price erosion. The Company's competitors include many large domestic and foreign companies which have substantially greater financial, technical and management resources than the Company, as well as emerging companies attempting to sell products to specialized markets such as those addressed by the Company. Several major diversified electronics companies, including Fujitsu, Ltd., Toshiba Corporation and NEC Corporation, and a number of United States semiconductor manufacturers, including Lucent Technologies, Inc. (formerly known as AT&T), Motorola Inc. and Texas Instruments Incorporated, offer ASIC products or other products which are competitive to the product lines of the Company. In addition, there is no assurance that certain large customers, some of whom have licensed elements of the Company's process and product 11 13 technologies, will not develop internal design and production operations to produce their own ASICs. There can be no assurance that the Company will be able to continue to compete effectively with its existing or new competitors. Currency Risks. In countries in which the Company is conducting business in a local currency, currency exchange fluctuations could adversely affect the Company's revenues and costs. A substantial portion of the costs of the Company's manufacturing operations are denominated in Japanese yen. In addition, the Company purchases a substantial portion of its raw materials and equipment from foreign suppliers and incurs labor costs in foreign locations. A portion of these transactions are denominated in currencies other than in U.S. dollars, principally in Japanese yen. International sales are generally denominated in local currencies. The Company also has borrowings and operating lease obligations denominated in yen, which totaled approximately 25 billion yen (approximately $243 million) at December 31, 1995. Such transactions and borrowings expose the Company to exchange rate fluctuations for the period of time from inception of the transaction until it is settled. In recent years, the yen has fluctuated substantially against the U.S. dollar. However, the Company has entered and will from time to time enter into hedging transactions in order to minimize exposure to currency rate fluctuations. There can be no assurance that such hedging transactions will minimize exposure to currency rate fluctuations or that fluctuations in currency exchange rates in the future will not have an adverse impact on the Company's results of operations. In addition, there can be no assurance that inflation rates in countries where the Company conducts operations will not adversely affect the Company's operating results in the future. Customer Concentration. As a result of the Company's strategy to direct its marketing and selling efforts toward selected customers, the Company expects that it will become increasingly dependent on a limited number of customers for a substantial portion of its revenues. During 1995, approximately 53% of the Company's net revenues were from sales to its top ten customers. Loss of new product design wins or cancellation of business from any of these major customers, significant changes in scheduled deliveries to any of these customers or decreases in the prices of products sold to any of these customers could materially adversely affect the Company's results of operations. Intellectual Property and Litigation. Although the Company believes that the protection afforded by its patents, patent applications and trademarks has value, the rapidly changing technology in the semiconductor industry makes the Company's future success dependent primarily upon the technical competence and creative skills of its personnel rather than on patent and trademark protection. As is typical in the semiconductor industry, the Company has from time to time received, and may in the future receive, communications from other parties asserting patent rights, mask work rights, copyrights, trademark rights or other intellectual property rights that such other parties allege cover certain of the Company's products, processes, technologies or information. Several such assertions relating to patents are in various stages of evaluation. The Company is considering whether to seek licenses with respect to certain of these claims. Based on industry practice, the Company believes that licenses or other rights, if necessary, could be obtained on commercially reasonable terms for such existing or future claims. Nevertheless, no assurance can be given that licenses can be obtained, or if obtained will be on acceptable terms or that litigation or other administrative proceedings will not occur. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or litigation arising out of such other parties' assertions, both existing and future, could have a material adverse effect on the Company's future operating results. Cyclical Nature of the Semiconductor Industry. The semiconductor industry is characterized by rapid technological change, rapid product obsolescence and price erosion. The semiconductor industry historically has been characterized by wide fluctuations in product supply and demand. From time to time the industry also has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles (of both the semiconductor companies and their customers) and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity and subsequent accelerated erosion of average selling prices, and in some cases, have lasted 12 14 for more than a year. For example, the Company believes that its operating results were adversely affected by an industry-wide downturn in the demand for semiconductors beginning in 1990, culminating in the Company's 1992 restructuring charge and reorganization of its operations. There is no assurance that levels of demand for semiconductor products experienced in 1995 will continue. The Company may experience substantial period-to-period fluctuations in future operating results due to general industry conditions or events occurring in the general economy, and the Company's business could be materially and adversely affected by a significant industry-wide downturn. The Company continues to evaluate its worldwide manufacturing operations to effect additional cost-savings and technological improvements. ITEM 2. PROPERTIES The following table sets forth certain information concerning the Company's principal facilities. Principal Locations
NO. OF LEASED/ TOTAL BUILDINGS LOCATION OWNED SQ. FT. USE - --------- -------- ----- ------- --- 7 Milpitas, CA Leased 609,410 Corporate Offices, Administration, Engineering, Manufacturing 1 Fremont, CA Leased 74,000 Manufacturing 1 Fremont, CA Owned 65,000 Manufacturing 2 Santa Clara, CA Leased 83,290 Research and Development 1 Fremont, CA Leased 39,246 Shipping and Receiving 1 Bracknell, United Kingdom Leased 18,000 Executive Offices, Design Center, Sales 1 Tokyo, Japan Leased 24,263 Executive Offices, Design Center, Sales 5 Tsukuba, Japan Owned 334,541 Executive Offices, Manufacturing 1 Etobicoke, Canada Leased 14,005 Executive Offices, Design Center, Sales 1 Tsuen Wan, Hong Kong Owned 26,000 Manufacturing, Assembly & Test
13 15 The Company maintains leased regional office space for its field sales offices at the locations described below, some of which also contain design centers as indicated. In addition, the Company maintains design centers at various distributor locations. Sales Offices Design Centers - ------------- -------------- United States United States Atlanta, GA Bethesda, MD Austin, TX Dallas, TX Beaverton, OR Edison, N.J. Bellevue, WA Irvine, CA Bethesda, MD Milpitas, CA Boca Raton, FL Minneapolis, MN Boulder, CO Schaumburg, IL Dallas, TX Waltham, MA Edison, NJ Houston, TX Irvine, CA Milpitas, CA Minneapolis, MN Raleigh, NC San Diego, CA Schaumburg, IL Victor, NY Waltham, MA International International Etobicoke, Ontario, Canada Etobicoke, Ontario, Canada Kanata, Ontario, Canada Kanata, Ontario, Canada Montreal, Quebec, Canada Montreal, Quebec, Canada Paris, France Paris, France Munich, Germany Munich, Germany Stuttgart, Germany Stuttgart, Germany Ramat Hasharon, Israel Ramat Hasharon, Israel Milan, Italy Milan, Italy Osaka, Japan Osaka, Japan Seoul, Korea Seoul, Korea Madrid, Spain Madrid, Spain Kista, Sweden Kista, Sweden Taipei, Taiwan Taipei, Taiwan Bracknell, U.K. Bracknell, U.K. Leased facilities described above are subject to operating leases which expire in 1996 through 2005. See Note 11 of Notes to Consolidated Financial Statements in the Company's 1995 Annual Report to Stockholders. Although the Company has plans to acquire additional equipment, the Company believes that its existing facilities and equipment are well maintained, in good operating condition and are adequate to meet its current requirements. 14 16 ITEM 3. LEGAL PROCEEDINGS On July 9, 1990, Texas Instruments Incorporated ("TI") filed a complaint in the United States District Court in Dallas, Texas and with the International Trade Commission ("ITC") against the Company and four other defendants, Analog Devices, Inc., Integrated Device Technology, Inc., VLSI Technology, Inc. and Cypress Semiconductor Corporation. In these complaints, TI alleged that the Company's manufacturing processes relating to device encapsulation in certain types of plastic packages infringe certain of TI's patents. In the ITC action, TI sought to prohibit the importation into the U.S. of such plastic encapsulated devices assembled offshore and to enjoin the sale of any inventory of such devices which were previously imported. On October 15, 1991, the Administrative Law Judge ("ALJ") determined that the TI patent was valid and that the plastic encapsulation process used by the Company referred to as "opposite-side" gated encapsulation infringed the TI patent. The ALJ also determined that the plastic encapsulation process referred to as "same-side" gated encapsulation did not infringe the TI patent. On December 3, 1991, the ITC issued a notice of its intent not to review the ALJ's determination on non-infringement by the "same-side" gated process, thereby confirming the ALJ's determination. On February 19, 1992, the ITC issued its final order which confirmed the ALJ's determination regarding validity of the TI patent and infringement by the "opposite-side" gated process. Pursuant thereto, the ITC issued a limited exclusion order applicable to future imports of integrated circuits manufactured using the "opposite-side" gated process into the United States and a cease and desist order applicable to sales of previously imported integrated circuits manufactured using the "opposite-side" gated process. Since August 23, 1994, the expiration date of the TI patent, the ITC final order no longer operates to exclude from importation any integrated circuit devices regardless of the manner in which they are packaged. Since the beginning of 1992, the Company's plastic encapsulation operations have only used the non-infringing "same-sided" gating process. The Court of Appeals for the Federal Circuit affirmed the ruling of the ITC in all respects in March 1993. In TI's United States District Court action, TI sought damages in an unspecified amount for alleged prior patent infringement. In May 1995, at the conclusion of a jury trial, a verdict was rendered against the Company, holding the patents valid and finding wilful infringement. Damages against the Company were set by the jury at $14.6 million. In July 1995, the District Court judge granted the Company's motions, overturned the jury verdict and set aside all assessed damages. TI has filed an appeal in the United States Court of Appeals for the Federal Circuit, which is still pending. The Company has adequate reserves for the damages originally assessed. Because both of the patents involved in the litigation have expired, the verdict would have had no effect upon the manufacture or sale of the Company's present or future products. The Company continues to believe that the final outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that this matter will be resolved without the payment of damages and other costs or that damages will not be increased to an amount in excess of the Company's reserves with the potential for having an adverse effect on the Company. The Company is a party to other litigation matters and claims which are normal in the course of its operations, and while the results of such litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a materially adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to page 43 of the Company's 1995 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference to pages 38 through 40 of the Company's 1995 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to pages 11 through 17 of the Company's 1995 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to pages 18 through 37 of the Company's 1995 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 16 18 PART III Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders to be held May 10, 1996, and certain of the information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference to "ELECTION OF DIRECTORS--Nominees" in the Company's Proxy Statement. The executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, are as follows:
EMPLOYED NAME AGE POSITION SINCE - ---- --- -------- ----- Wilfred J. Corrigan 58 Chairman, Chief Executive Officer 1981 Bruce L. Entin 45 Vice President, Investor Relations, Corporate Communications and Geographic Markets Support 1984 Moshe N. Gavrielov 41 Senior Vice-President, General Manager, International Marketing and Sales 1988 Brian L. Halla 49 Executive Vice President, LSI Logic Products 1988 Cyril F. Hannon 57 Executive Vice President, Worldwide Operations 1984 W. Richard Marz 52 Senior Vice-President, General Manager, North American Marketing and Sales 1995 Albert A. Pimentel 40 Senior Vice President, Finance and Chief Financial Officer 1992 David E. Sanders 48 Vice President, General Counsel and Secretary 1986 Lewis C. Wallbridge 52 Vice President, Human Resources 1984
Except as set forth below, all of the officers have been associated with the Company in their present position or other capacities for more than the past five years. Moshe N. Gavrielov has been employed with the Company since November 1988. In February 1996, Mr. Gavrielov was appointed Senior Vice-President and General Manager of International Marketing and Sales. From November 1994 until February 1996, Mr. Gavrielov held the position of Senior Vice-President, General Manager, for the Company's European subsidiary, LSI Logic Europe plc. Mr. Gavrielov was named Vice-President, ASIC Engineering, in January 1991. From January 1991 until December 1991, Mr. Gavrielov was Director, MIPS Engineering. 17 19 In September 1995, W. Richard Marz was named Senior Vice-President, North American Marketing and Sales. From June 1986 until September 1995, Mr. Marz was Vice-President, Sales & Marketing/The Americas, at Advanced Micro Devices, Inc., a semiconductor manufacturer. Albert A. Pimentel joined the Company in July 1992 as Senior Vice President, Finance and Chief Financial Officer. From December 1990 until February 1991, Mr. Pimentel served as Vice President of Finance, Chief Financial Officer and Secretary of Momenta Corporation, a start up company in the pen computing business. As the result of a corporate reorganization, Momenta Corporation became a wholly-owned subsidiary of Momenta International Ltd. and Mr. Pimentel assumed the same positions for Momenta International Ltd. until July 1992. In August 1992, Momenta International Ltd. and its subsidiaries filed a petition for relief in Federal bankruptcy court. From May 1986 until December 1990, Mr. Pimentel served as Vice President, Finance of Conner Peripherals, Inc., a manufacturer of disk drives. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to "EXECUTIVE COMPENSATION" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to "SECURITY OWNERSHIP-Principal Stockholders and Security Ownership of Management" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to "CERTAIN TRANSACTIONS" in the Company's Proxy Statement. 18 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following Consolidated Financial Statements of LSI Logic Corporation and Report of Independent Accountants are incorporated by reference to the Company's 1995 Annual Report to Stockholders:
Page in Annual Report Consolidated Balance Sheets--As of December 31, 1995 and 1994 18 Consolidated Statements of Operations--For the Three Years Ended December 31, 1995 19 Consolidated Statement of Stockholders' Equity--For the Three Years Ended December 31, 1995 20 Consolidated Statements of Cash Flows--For the Three Years Ended December 31, 1995 21 Notes to Consolidated Financial Statements 22 Report of Independent Accountants 37
Effective beginning 1990, the Company changed its fiscal year end from December 31 to the 52 or 53 week period which ends on the Sunday closest to December 31. For presentation purposes, the consolidated financial statements, notes and financial statement schedules will continue to refer to December 31 as the year end. Fiscal 1995 was a 52 week year that ended on December 31, 1995. 2. Financial Statement Schedules. For years ended December 31, 1995, 1994 and 1993: Schedule Page - -------- ---- II Valuation and Qualifying Accounts and Reserves S-1 Report of Independent Accountants on Financial Statement Schedules. S-2 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits: 3.1 Restated Certificate of Incorporation of Registrant.(1) 19 21 3.2 By-laws of Registrant.(2) 4.2 Indenture dated April 14, 1987 between LSI Logic Corporation and United States Trust Company of New York, Trustee, covering $125,000,000 principal amount of 6 1/4% Convertible Subordinated Debentures due 2002 (including form of Debenture).(3) 4.3 Preferred Shares Rights Plan dated November 16, 1988.(4) 4.4 Indenture dated March 23, 1994, between LSI Logic Corporation and The First National Bank of Boston, Trustee, covering $143,750,000 principal amount of 5 1/2% Convertible Subordinated Notes due 2001 (including form of Note).(13) 10.1 Lease dated March 26, 1981 for 1601 McCarthy Boulevard between the Registrant and McCarthy Industrial Investors.(5) 10.1A First Amendment to Lease dated May 1, 1991 to Lease dated March 26, 1981 for 1601 McCarthy Boulevard between the Registrant and McCarthy Industrial Investors.(12) 10.2 Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement.(10) 10.3 Registrant's Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.6 Series B Preferred Shares Purchase Agreement for 1,395,864 shares of Series B Preferred Stock dated as of February 8, 1982.(5) 10.7 Modification Agreement dated as of February 8, 1982 between the Registrant and holders of its Series A Preferred Stock.(5) 10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the Registrant and Bankamerica Realty Investors.(7) 10.19 Registrant's 1985 Nonstatutory Stock Option Plan for Shares of LSI Logic Europe plc and form of Nonstatutory Stock Option Agreement.(6) 10.20 LSI Logic Europe plc 1984 Nonstatutory Stock Option Plan and form of Nonstatutory Share Option Agreement.(6) 10.21 Registrant's 1985 Nonstatutory Stock Option Plan for Shares of LSI Logic Corporation of Canada, Inc. and form of Nonstatutory Stock Option Agreement.(6) 10.24 Registrant's 1986 Directors' Stock Option Plan and forms of Stock Option Agreements.(8) 10.25 LSI Logic Europe plc 1986 Share Option Scheme.(8) 10.26 LSI Logic Europe plc Share Acquisition Scheme.(8) 10.27 LSI Logic Corporation of Canada, Inc. 1985 Stock Option Plan and form of Stock Option Agreement.(8) 20 22 10.29 Form of Indemnification Agreement entered and to be entered into between Registrant and its officers, directors and certain key employees.(9) 10.35 LSI Logic Corporation 1991 Equity Incentive Plan. 10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the Registrant and the Prudential Insurance Company of America.(11) 10.37 Stock Purchase Agreement dated as of January 20, 1995; Promissory Note dated January 26, 1995; Note Purchase Agreement dated as of January 26, 1995 in connection with the Company's purchase of the minority interest in one of its Japanese subsidiaries.(14) 10.38 1995 Director Option Plan. 10.39 (yen)25,000,000,000 Floating Rate Guaranteed Credit Facility dated as of December 27, 1995; Guaranty dated as of December 27, 1995. 11.1 Statement Re: Computation of Earnings Per Share. 13.1 Annual Report to Stockholders for the year ended December 31, 1995 (to be deemed filed only to the extent required by the instructions for Reports on Form 10-K). 21.1 List of Subsidiaries. 23.1 Consent of Independent Accountants (see page 25). 24.1 Power of Attorney (included on page 23). 27.1 Financial Data Schedule. (1) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 33-59981) which became effective June 6, 1995. (2) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 26, 1988. (3) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 27, 1988. (4) Incorporated by reference to exhibits filed with the Registrant's Form 8-A filed on November 21, 1988. (5) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 2-83035) which became effective May 13, 1983. (6) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (No. 33-3612), and Amendment No. 1 thereto, which became effective March 20, 1986. (7) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1983. 21 23 (8) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986. (9) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (10) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (11) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (12) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (13) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1994. (14) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended January 1, 1995. (b) Reports on Form 8-K. None TRADEMARK ACKNOWLEDGMENTS - The LSI Logic logo is a registered trademark of the Company. CoreWare and Embedded Array are also registered trademarks of the Company. - ATMizer, MiniRISC and G10 are trademarks of the Company. - All other brand names or trademarks appearing in the Form 10-K are the property of their respective owners. 22 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LSI LOGIC CORPORATION By: /s/ WILFRED J. CORRIGAN --------------------------- Wilfred J. Corrigan Chairman and Chief Executive Officer Dated: March 27, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Wilfred J. Corrigan and David E. Sanders, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 23 25 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILFRED J. CORRIGAN Chairman of the Board and Chief - --------------------------- (Wilfred J. Corrigan) Executive Officer (Principal March 27, 1996 Executive Officer) /s/ ALBERT A. PIMENTEL Senior Vice President, Finance - --------------------------- (Albert A. Pimentel) and Chief Financial Officer (Principal Financial Officer March 27, 1996 and Principal Accounting Officer) /s/ T.Z. CHU Director March 27, 1996 - --------------------------- (T.Z. Chu) /s/ MALCOLM R. CURRIE Director March 27, 1996 - --------------------------- (Malcolm R. Currie) /s/ JAMES H. KEYES Director March 27, 1996 - --------------------------- (James H. Keyes) /s/ R. DOUGLAS NORBY Director March 27, 1996 - --------------------------- (R. Douglas Norby)
24 26 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-86474, No. 2-91907, No. 2-98732, No. 33-6188, No. 33-6203, No. 33-13265, No. 33-17720, No. 33-30385, No. 33-30386, No. 33-36249, No. 33-41999, No. 33-42000, No. 33-53054, No. 33-66548, No. 33-66546, No. 33-55631, No. 33-55633, No. 33-55697, No. 33-59981, No. 33-59985, No. 33-59987) of LSI Logic Corporation of our report dated January 17, 1996 appearing on page 37 of the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page S-2 of this Form 10-K. PRICE WATERHOUSE LLP San Jose, California March 22, 1996 25 27 SCHEDULE II LSI LOGIC CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (In thousands)
Balance at Beginning of Provisions/ Balance at Period (Recoveries) Writeoffs End of Period Allowance for doubtful accounts: 1995 $2,870 $(118) $551 $2,201 1994 $1,678 $1,450 $334 $2,870 1993 $2,141 $169 $632 $1,678
S-1 28 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Stockholders of LSI Logic Corporation: Our audits of the consolidated financial statements referred to in our report dated January 17, 1996 appearing on page 37 of the 1995 Annual Report to Stockholders of LSI Logic Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of Financial Statement Schedule II on page S-1 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP San Jose, California January 17, 1996 S-2 EX-10.3 2 REGISTRANT'S EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.3 LSI LOGIC CORPORATION EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the Employee Stock Purchase Plan (herein called the "Plan") of LSI Logic Corporation (herein called the "Company".) 1. PURPOSE The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS (a) "BOARD" shall mean the Board of Directors of the Company. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" shall mean the Common Stock, $.01 par value, of the Company. (d) "COMPANY" shall mean LSI Logic Corporation, a Delaware corporation. (e) "COMPENSATION" shall mean all regular straight time earnings, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions or other compensation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (g) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. 1 2 (h) "EMPLOYEE" shall mean any person, including an officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (i) "ENROLLMENT DATE" shall mean the first day of each Offering Period. (j) "EXERCISE DATE" shall mean each March 31 and September 30 of each Offering Period of the Plan. (k) "EXERCISE PERIOD" shall mean a period commencing on April 1 and terminating on the following September 30 or commencing on October 1 and terminating on the following March 31. (l) "OFFERING PERIOD" shall mean a period of twenty-four (24) months commencing on April 1 and October 1 of each year during which an option granted pursuant to the Plan may be exercised. (m) "PLAN" shall mean this Employee Stock Purchase Plan. (n) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. ELIGIBILITY (a) Any Employee, as defined in paragraph 2, who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan, subject to limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 425(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) which permits such Employee's rights to purchase stock under all employee stock purchase plans of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS 2 3 The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on April 1 and October 1 of each year, commencing April 1, 1988, or as otherwise determined by the Board of Directors, and continuing thereafter until terminated in accordance with paragraph 19 hereof. The Board of Directors of the Company shall have the power to change the duration of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. PARTICIPATION (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Enrollment Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. An eligible Employee may participate in an Offering Period only if, as of the Enrollment Date of such Offering Period, such Employee is not participating in any prior Offering Period which is continuing at the time of such proposed enrollment. (b) Payroll deductions for a participant shall commence on the first payroll date following the Enrollment Date and shall end on the last payroll date in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in paragraph 10. 6. PAYROLL DEDUCTIONS (a) At the time a participant files his subscription agreement, he shall elect to have payroll deductions made on each payday during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he receives on each payday during the Offering Period, and the aggregate of such payroll deductions during the Offering Period shall not exceed ten percent (10%) of his aggregate Compensation during said Offering Period. (b) All payroll deductions made by a participant shall be credited to his account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his participation in the Plan as provided in paragraph 10, may lower the rate of his payroll deductions effective immediately or may increase (but not above 10%) the rate of his payroll deductions effective as of the first date of the next Exercise Period within such Offering Period by completing or filing with the Company a new authorization for payroll deductions. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's payroll deductions may 3 4 be decreased to 0% at such time during any Exercise Period which is scheduled to end during the current calendar year that the aggregate of all payroll deductions accumulated with respect to such Exercise Period and any other Exercise Period ending within the same calendar year equal $21,250. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Exercise Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in paragraph 10. 7. GRANT OF OPTION (a) On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the per share option price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated during such Exercise Period by eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower, provided that the number of shares subject to the option shall not exceed 200% of the number of shares determined by dividing 10% of the Employee's Compensation over the Offering Period (determined as of the Enrollment Date) by 85% of the fair market value of a share of the Company's Common Stock on the Enrollment Date, subject to the limitations set forth in Section 3(b) and 12 hereof. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b) herein. (b) The option price per share of the shares offered in a given Offering Period shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company on the Enrollment Date; or (ii) 85% of the fair market value of a share of the Common Stock of the Company on the applicable Exercise Date. The fair market value of the Company's Common Stock on a given date shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per share shall be the closing price of the Common Stock for such date, as reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market System (or, if not so reported, as otherwise reported by the NASDAQ National Market System), or, in the event the Common Stock is listed on a stock exchange, the fair market value per share shall be the closing price on such exchange on such date, as reported in the Wall Street Journal. In the event that a closing price is not available for an Enrollment Date or an Exercise Date, the fair market value of a share of the Common Stock of the Company on such date shall be the fair market value of a share of the Common Stock of the Company on the last business day prior to such date. 8. EXERCISE OF OPTION 4 5 Unless a participant withdraws from the Plan as provided in paragraph 10, his option for the purchase of shares will be exercised automatically on each Exercise Date of the Offering Period, and the maximum number of full shares subject to option will be purchased for him at the applicable option price with the accumulated payroll deductions in his account. During his lifetime, a participant's option to purchase shares hereunder is exercisable only by him. Any amount remaining in the participant's account after an Exercise Date shall be held in the account until the next Exercise Date in such Offering Period, unless the Offering Period has been over-subscribed or has terminated with such Exercise Date, in which event such amount shall be refunded to the participant. 9. DELIVERY As promptly as practicable after each Exercise Date, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his option. 10. WITHDRAWAL; TERMINATION OF EMPLOYMENT (a) A participant may withdraw all but not less than all of the payroll deductions credited to his account under the Plan at any time by giving written notice to the Company. All of the participant's payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal and his participation in the Plan will be automatically terminated, and no further payroll deductions for the purchase of shares will be made. Payroll deductions will not resume on behalf of a participant who has withdrawn from the Plan unless written notice is delivered to the Company within the open enrollment period preceding the commencement of an Exercise Period directing the Company to resume payroll deductions. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Exercise Date of an Offering Period for any reason, including retirement or death, the payroll deductions credited to the participant's account will be returned to the participant or, in the case of death, to the person or persons entitled thereto under paragraph 14, and such participant's option will be automatically terminated. (c) In the event an Employee fails to maintain Continuous Status as an Employee for at least twenty (20) hours per week during an Offering Period in which the Employee is a participant, he will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his account will be returned to him and his option terminated. (d) A participant's withdrawal from an Offering Period will not have any effect upon his eligibility to participate in a succeeding Offering Period or in any similar plan which may hereafter be adopted by the Company. 5 6 11. INTEREST No interest shall accrue on the payroll deductions of a participant in the Plan. 12. STOCK (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 8,475,000 shares (after adjustment for the three-for-three stock splits (in the form of a stock dividend) effected by the Company in April 1983, February 1986 and May 1995 adjustment upon changes in capitalization of the Company as provided in paragraph 18. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available, the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of payroll deductions, if necessary. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 13. ADMINISTRATION The Plan shall be administered by the Board of Directors of the Company or a committee appointed by the Board. The administration, interpretation or application of the Plan by the Board or its committee shall be final, conclusive and binding upon all participants. Members of the Board who are eligible Employees are permitted to participate in the Plan, provided that: (a) Members of the Board who are eligible to participate in the Plan may not vote on any matter affecting the administration of the Plan or the grant of any option pursuant to the Plan. (b) If a committee is established to administer the Plan, no member of the Board who is eligible to participate in the Plan may be a member of the committee. 14. DESIGNATION OF BENEFICIARY (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of 6 7 such participant's death subsequent to the end of the Offering Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the exercise of the option. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. TRANSFERABILITY Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 16. USE OF FUNDS All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. REPORTS Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees semi-annually promptly following each Exercise Date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for 7 8 issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant shall have the right to exercise the option as to all of the optioned stock, including shares as to which the option would not otherwise be exercisable. If the Board makes an option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the participant that the option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the option will terminate upon the expiration of such period. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. AMENDMENT OR TERMINATION The Board of Directors of the Company may at any time terminate or amend the Plan. No such termination can affect options previously granted, nor may an amendment make any change in any option theretofore granted which adversely affects the rights of any participant, nor may an amendment be made without prior approval of the shareholders of the Company if such amendment would: (a) Increase the number of shares that may be issued under the Plan; 8 9 (b) Permit payroll deductions at a rate in excess of ten percent (10%) of the participants' Compensation; (c) Modify the requirements concerning which employees (or class of employees) are eligible for participation in the Plan; or (d) Materially increase the benefits which may accrue to participants under the Plan. 20. NOTICES All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. SHAREHOLDER APPROVAL Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon, which approval shall be: (a) (i) solicited substantially in accordance with Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Act") and the rules and regulations promulgated thereunder, or (ii) solicited after the Company has furnished in writing to the holders entitled to vote substantially the same information concerning the Plan as that which would be required by the rules and regulations in effect under Section 14(a) of the Act at the time such information is furnished; and (b) obtained at or prior to the first annual meeting of shareholders held subsequent to the first registration of Common Stock under Section 12 of the Act. In the case of approval by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company. 22. CONDITIONS UPON ISSUANCE OF SHARES 9 10 Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 10 EX-10.35 3 LSI LOGIC 1991 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.35 LSI LOGIC CORPORATION 1991 EQUITY INCENTIVE PLAN 1. Purpose of the Plan. The purpose of the LSI Logic Corporation 1991 Equity Incentive Plan (the "Plan") is to enable LSI Logic Corporation (the "Company") to provide an incentive to eligible employees, including officers, and consultants whose present and potential contributions are important to the continued success of the Company, to afford them an opportunity to acquire a proprietary interest in the Company, and to enable the Company to enlist and retain in its employ the best available talent for the successful conduct of its business. It is intended that this purpose will be effected through the granting of (a) stock options, (b) stock purchase rights, (c) stock appreciation rights, and (d) stock bonus awards. 2. Definitions. As used herein, the following definitions shall apply: (a) "Award" means any Option, Right or Stock Bonus Award granted. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Committee or Committees referred to in Section 5 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. (e) "Common Stock" means the Common Stock, $0.01 par value (as adjusted from time to time), of the Company. (f) "Company" means LSI Logic Corporation, a corporation organized under the laws of the state of Delaware, or any successor corporation. (g) "Consultant" means any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services, provided the term Consultant shall not include directors who are not compensated for their services or are paid only a director's fee by the Company. (h) "Director" means a member of the Board. (i) "Disability" means a disability, whether temporary or permanent, partial or total, as defined in Section 22(e)(3) of the Code. 2 (j) "Employee" means any person, including officers and directors, employed by the Company or any Subsidiary. The payment of directors' fees by the Company shall not be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) if such Common Stock shall then be listed on a national securities exchange, the closing sales price (or the closing bid, if no sales were reported) as quoted on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or (ii) the closing sales price (or the closing bid, if no sales were reported) as quoted on the NASDAQ National Market System, or (iii) if such Common Stock shall not be quoted on such National Market System nor listed or admitted to trading on a national securities exchange, then the average of the closing bid and asked prices, as reported by The Wall Street Journal for the over-the-counter market, or (iv) if none of the foregoing is applicable, then the Fair Market Value of a share of Common Stock shall be determined by the Board of Directors of the Company in its discretion. (m) "Incentive Stock Option" means an Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (n) "Nonstatutory Stock Option" means any Option that is not an Incentive Stock Option. (o) "Option" means any option to purchase shares of Common Stock granted pursuant to Section 7 below. (p) "Optionee" means any holder of an Option or a Stock Appreciation Right, as the context requires. (q) "Outside Director" means a Director who is not an Employee of the Company. -2- 3 (r) "Plan" means this 1991 Equity Incentive Plan, as hereinafter amended from time to time. (s) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 9 below. (t) "Right" means and includes Stock Appreciation Rights and Stock Purchase Rights granted pursuant to the Plan. (u) "Stock Appreciation Right" means an Award made pursuant to Section 8 below, which right permits the recipient to receive cash or stock equal in value to the difference between the Fair Market Value of Common Stock on the date of grant of the Option and the Fair Market Value of Common Stock on the date of exercise of the Stock Appreciation Right. (v) "Stock Bonus Award" means an Award under Section 10 below. A Stock Bonus Award shall permit the recipient to receive a stock bonus (as determined by the Committee) upon satisfaction of such conditions as are set out in the recipient's individual grant. The receipt of a Stock Bonus Award will be based upon any employment or performance-related criteria as the Committee may deem appropriate. (w) "Stock Purchase Right" means the right to purchase Common Stock pursuant to a restricted stock purchase agreement entered into between the Company and the purchaser under Section 9 below. (x) "Subsidiary" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or by a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or by a Subsidiary. In addition, the terms "Tax Date" and "Insiders" shall have meanings set forth in Section 11. 3. Eligible Participants. Any Employee or Consultant of the Company or of a Subsidiary whom the Committee deems to have the potential to contribute to the future success of the Company shall be eligible to receive Awards under the Plan; provided, however, that any Options intended to qualify as Incentive Stock Options shall be granted only to Employees of the Company or its Subsidiaries. 4. Stock Subject to the Plan. Subject to Sections 12 and 13, the total number of shares of Common Stock reserved and available for distribution pursuant to the Plan shall be 4,000,000 shares. Subject to Sections 12 and 13 below, if any shares of Common -3- 4 Stock that have been optioned under an Option cease to be subject to such Option, or if any shares of Restricted Stock or other shares that are subject to any Right, Option or Stock Bonus Award granted hereunder are forfeited or repurchased or any such award otherwise terminates without a payment being made to the participant in the form of Common Stock, such shares shall again be available for distribution in connection with future Awards under the Plan. 5. Administration. (a) Procedure. The Plan shall be administered by (i) the Board if the Board may administer the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act, or any successor rule thereto ("Rule 16b-3"), with respect to a plan intended to qualify under Rule 16b-3 as a discretionary plan, or (ii) a Committee designated by the Board to administer the Plan, which Committee shall be constituted to permit the Plan to comply with Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. If permitted by Rule 16b-3, the Plan may be administered by different bodies with respect to Employees who are directors, non-director officers, Employees who are neither directors nor officers and Consultants. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time the Board may change the size of the Committee, appoint additional members thereof, remove members (with or without cause), appoint new members in substitution therefor, fill vacancies, however caused and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 with respect to a plan intended to qualify thereunder as a discretionary plan. As used herein, except in Sections 13, 15 and 21, reference to the Committee shall mean such Committee or the Board, whichever is then acting with respect to the Plan. (b) Authority. Subject to the general purposes, terms, and conditions of the Plan, and to the direction of the Board, the Committee, if there be one, shall have full power to implement and carry out the Plan including, but not limited to, the following: (i) to select the Employees and Consultants of the Company and/or its Subsidiaries to whom Options, Rights and/or Stock Bonus Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Options, Rights and/or Stock Bonus Awards, or any combination thereof, are to be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each such Award granted hereunder; -4- 5 (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or other Award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); (vi) to determine whether and under what circumstances an Option may be settled in cash or Restricted Stock under Section 7(j) instead of Common Stock; (vii) to determine the form of payment that will be acceptable consideration for exercise of an Option or Right granted under the Plan; (viii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (ix) to reduce the exercise price of any Option or Right only if the total number of such reduced exercise price Options or Rights (including those described in the proviso to the first sentence of Section 7(a) and the proviso to the first sentence in Section 9(a)) shall not exceed three percent of the total number of shares authorized under the Plan and that any such reduction in exercise price shall be authorized by a committee of the Board of Directors comprised solely of independent non-employee directors; (x) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Rights. The Committee shall have the authority to construe and interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 6. Duration of the Plan. The Plan shall remain in effect until terminated by the Board under the terms of the Plan, provided that in no event may Incentive Stock Options be granted under the Plan later than March 8, 2001, 10 years from the date the Plan was adopted by the Board. -5- 6 7. Stock Options. The Committee, in its discretion, may grant Options to eligible participants and shall determine whether such Options shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be evidenced by a written Option agreement which shall expressly identify the Option as an Incentive Stock Option or as a Nonstatutory Stock Option, and be in such form and contain such provisions as the Committee shall from time to time deem appropriate. Without limiting the foregoing, the Committee may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options including Options in exchange for the surrender and cancellation of any or all outstanding Options or Rights. Option agreements shall contain the following terms and conditions: (a) Option Price; Number of Shares. The Option price, which shall be approved by the Committee, may not be less than the Fair Market Value of the Common Stock at the time the Option is granted; provided however that the Option price may be less than Fair Market Value if the total number of Options (including those described in Section 5(ix) and those described in the proviso to the first sentence in Section 9(a)) to which such price is applicable is not more than three percent of the total number of shares authorized under the Plan and, further, that any such Option price shall be determined by a committee of the Board of Directors comprised solely of independent non-employee directors. Notwithstanding the foregoing, in the case of an Incentive Stock Option, the price shall be not less than 100% of the Fair Market Value of the Common Stock on the date the Option is granted, subject to any additional conditions set out in Section 7(g) below and further provided that the price shall be no less than 50% of the Fair Market Value of the Common Stock on the date the Option is granted. The Option agreement shall specify the number of shares of Common Stock to which it pertains. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Committee will determine the terms and conditions to be satisfied before shares may be purchased, including the dates on which shares subject to the Option may first be purchased. The Committee may specify that an Option may not be exercised until the completion of the waiting period specified at the time of grant. (Any such period is referred to herein as the "waiting period.") At the time an Option is granted, the Committee shall fix the period within which such Option may be exercised, which shall not be less than the waiting period, if any, nor, in the case of an Incentive Stock Option, more than 10 years from the date of grant. (c) Form of Payment. The consideration to be paid for the shares of Common Stock to be issued upon exercise of an Option, including the method of payment, shall be determined by the Committee (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (i) cash, (ii) check, -6- 7 (iii) promissory note, (iv) other shares of Common Stock (including, in the discretion of the Committee, Restricted Stock) which (x) either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares as to which said Option shall be exercised, (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (vi) delivery of an irrevocable subscription agreement for the shares which obligates the option holder to take and pay for the shares not more than 12 months after the date of delivery of the subscription agreement, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment for the issuance of shares to the extent permitted under the Delaware General Corporation Law. (d) Effect of Termination of Employment or Death of Employee Participants. In the event that an Optionee during his or her lifetime ceases to be an Employee of the Company or of any Subsidiary for any reason, including retirement, any Option, including any unexercised portion thereof, which was otherwise exercisable on the date of termination of employment, shall expire within such time period as is determined by the Committee; provided, however, that in the case of an Incentive Stock Option the Option shall expire unless exercised within a period of 90 days from the date on which the Optionee ceased to be an Employee (or such lesser period as is set out in Option agreement), but in no event after the expiration of the term of such Option as set forth in the Option agreement. If in any case the Committee shall determine that an Employee shall have been discharged for Just Cause (as defined below) such Employee shall not thereafter have any rights under the Plan or any Option that shall have been granted to him or her under the Plan. For purposes of this Section, "Just Cause" means the termination of employment of an Employee shall have taken place as a result of (i) willful breach or neglect of duty; (ii) failure or refusal to work or to comply with the Company's rules, policies, and practices; (iii) dishonesty; (iv) insubordination; (v) being under the influence of drugs (except to the extent medically prescribed) or alcohol while on duty or on Company premises; (vi) conduct endangering, or likely to endanger, the health or safety of another Employee; or (vii) conviction of a felony. In the event of the death of an Optionee, that portion of the Option which had become exercisable as of the date of death shall be exercisable by his or her personal representatives, heirs, or legatees within six months of the date of death or such time period as is determined by the Committee (but in the case of an Incentive Stock Option, in no event after the expiration of the term of such Option as set forth in the Option agreement.) In the event of the death of an Optionee within one month after termination of employment, that portion of the Option which had become exercisable as of the date of termination shall be exercisable by his or her personal representatives, heirs, or legatees -7- 8 within six months of the date of death or such time period as is determined by the Committee (but in the case of an Incentive Stock Option, in no event after the expiration of the term of such Option as set forth in the Option agreement.) In the event that an Optionee ceases to be an Employee of the Company or of any Subsidiary for any reason, including death or retirement, prior to the lapse of the waiting period, if any, his or her Option shall terminate and be null and void. (e) Leave of Absence. The employment relationship shall not be considered interrupted in the case of: (i) sick leave, military leave or any other leave of absence approved by the Board; provided that any such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract, statute or pursuant to formal policy adopted from time to time by the Company and issued and promulgated to Employees in writing, or (ii) in the case of transfer between locations of the Company or between the Company, its Subsidiaries or its successor. In the case of any Employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, if any, except that in no event shall an Option be exercised after the expiration of the term set forth in the Option agreement. (f) Acceleration of Vesting or Waiting Period. The Committee may accelerate the earliest date on which outstanding Options (or any installments thereof) are exercisable. (g) Special Incentive Stock Option Provisions. In addition to the foregoing, Options granted to Employees under the Plan which are intended to be Incentive Stock Options under Section 422 of the Code shall be subject to the following terms and conditions: (i) Dollar Limitation. To the extent that the aggregate Fair Market Value of the shares of Common Stock with respect to which Options designated as Incentive Stock Options become exercisable for the first time by any individual during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted and (ii) the Fair Market Value of the shares shall be determined as of the time the Option with respect to such shares was granted. (ii)10% Stockholder. If any person to whom an Incentive Stock Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, the owner of Common Stock (as determined under Section 425(d) of the Code) possessing more than 10% of the total combined voting power of all classes -8- 9 of stock of the Company or of any Subsidiary, then the following special provisions shall be applicable to the Option granted to such individual: (A) The Option price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the date of grant; and (B) The Option shall not have a term in excess of five years from the date of grant. Except as modified by the preceding provisions of this Subsection 7(g) and except as otherwise required by Section 422 of the Code, all of the provisions of the Plan shall be applicable to the Incentive Stock Options granted hereunder. (h) Other Provisions. Each Option granted under the Plan may contain such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Committee. (i) Options to Consultants. Options granted to consultants shall not be subject to Sections 7(b) and 7(d) of the Plan, but shall have such terms and conditions pertaining to waiting period (if any), exercise date, and effect of termination of the consulting relationship as the Committee shall determine in each case. (j) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash or Common Stock (including Restricted Stock), an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Optionee at the time that such offer is made. (k) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 8. Stock Appreciation Rights. (a) Grants With Options. At the sole discretion of the Committee, Stock Appreciation Rights may be granted in connection and concurrently with all or any part of an Option. The following provisions apply to Stock Appreciation Rights that are granted in connection with Options: (i) The Stock Appreciation Right shall entitle the Optionee to exercise the rights by surrendering to the Company unexercised a portion of the -9- 10 underlying Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the Common Stock covered by the surrendered portion of the underlying Option over (y) the exercise price of the Common Stock covered by the surrendered portion of the underlying Option. Notwithstanding the foregoing, the Committee may place limits on the amount that may be paid to the Optionee upon exercise of an Stock Appreciation Right; provided, however, that such limit shall not restrict the exercisability of the underlying Option. (ii)When a Stock Appreciation Right is exercised, the underlying Option, to the extent surrendered, shall no longer be exercisable. (iii)A Stock Appreciation Right shall be exercisable only when and to the extent that the underlying Option is exercisable and shall expire no later than the date on which the underlying Option expires. (iv) A Stock Appreciation Right may only be exercised at a time when the Fair Market Value of the Common Stock covered by the underlying Option exceeds the exercise price of the Common Stock covered by the underlying Option. Notwithstanding the foregoing, neither a Stock Appreciation Right nor any related Option shall be exercisable within the first six (6) months of their terms; provided, however, that this limitation shall not apply in the event that death or Disability of the Optionee occurs prior to the expiration of the six-month period. (v) In the event that a Stock Appreciation Right is granted that relates to an Incentive Stock Option, such Right shall contain such additional or different terms as may be necessary under applicable regulations to preserve treatment of the Incentive Stock Option under Section 422 of the Code. (b) Grants Without Options. At the sole discretion of the Committee, Stock Appreciation Rights may be granted without related Options. The following provisions apply to Stock Appreciation Rights that are granted other than in connection with Options: (i) The Stock Appreciation Right shall entitle the Optionee, by exercising the Stock Appreciation Right, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by the exercised portion of the Stock Appreciation Right, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the Stock Appreciation Right, as of the date on which the Stock Appreciation Right was granted, provided, however, that the Committee may place -10- 11 limits on the amount that may be paid to the Optionee upon exercise of a Stock Appreciation Right by the grantee. (ii) Stock Appreciation Rights shall be exercisable, in whole or in part, at such times as the Committee shall specify in the Optionee's Stock Appreciation Rights agreement. Notwithstanding the foregoing, a Stock Appreciation Right shall not be exercisable within the first six (6) months of its term; provided, however, that this limitation shall not apply in the event that death or Disability of the Optionee occurs prior to the expiration of the six-month period. (c) Form of Payment. The Company's obligation arising upon the exercise of a Stock Appreciation Right may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee, and may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Committee in its sole discretion may determine. Shares of Common Stock issued upon the exercise of a Stock Appreciation Right shall be valued at the Fair Market Value as of the date of exercise. (d) Compliance With Section 16(b). A person who is subject to Section 16(b) of the Exchange Act may only exercise a Stock Appreciation Right during such time or times as are permitted by paragraph (e) of Rule 16b-3 or any successor provision. 9. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan; provided, however, that the total number of Rights (including those described in the Section 5(ix) and in the proviso to the first sentence of Section 7(a)) shall not exceed three percent of the total number of shares authorized under the Plan and that any such Rights shall be awarded by a committee of the Board of Directors comprised solely of independent non-employee directors. After the Committee determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of shares of Common Stock that such person shall be entitled to purchase, the price to be paid, which price in the case of Insiders (as defined in Section 11) shall not be more than the par value of the Company's Common Stock, as adjusted from time to time, and the minimum price permitted by the Delaware General Corporation Law and the time within which such person must accept such offer, which shall in no event exceed 60 days from the date the Stock Purchase Right was granted. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Committee. Shares purchased pursuant to the grant of a Stock Purchase Right shall be -11- 12 referred to herein as "Restricted Stock." (b) Repurchase Option. Unless the Committee determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or Disability). The purchase price for shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Committee may determine. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee in its sole discretion. In addition, the provisions of Restricted Stock purchase agreements need not be the same with respect to each purchaser. 10. Stock Bonus Awards. (a) Administration. Stock Bonus Awards may be granted either alone or in addition to other Awards granted under the Plan. Such awards shall be granted for no cash consideration. The Committee shall determine, in its sole discretion, the terms for each Stock Bonus Award, and shall determine the performance or employment-related factors to be considered in the granting of Stock Bonus Awards and the extent to which such Stock Bonus Awards have been earned. Stock Bonus Awards may vary from participant to participant and between groups of participants. Each Stock Bonus Award shall be confirmed by, and be subject to the terms of, a Stock Bonus Award agreement. (b) Adjustment of Awards. The Committee may adjust the factors applicable to the Stock Bonus Awards to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances in order to avoid windfalls or hardships. (c) Termination. Unless otherwise provided in the applicable Stock Bonus Award agreement, if a participant terminates his or her employment or his or her consultancy prior to full vesting of a Stock Bonus Award which is subject to vesting, the Committee may provide for an earlier payment in settlement of such Award in such amount and under such terms and conditions as the Committee deems appropriate. (d) Form of Payment. The earned portion of a Stock Bonus Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may -12- 13 be determined by the Committee. Payment shall be made in the form of whole shares of Common Stock, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine. If and to the extent the full amount of a Stock Bonus Award is not paid in Common Stock, then the shares of Common Stock representing the portion of the value of the Stock Bonus Award not paid in Common Stock shall again become available for award under the Plan. 11. Stock Withholding to Satisfy Withholding Tax Obligations. When a participant incurs tax liability in connection with the exercise or vesting of any Option, Right or Stock Bonus Award, which tax liability is subject to tax withholding under applicable tax laws, and the participant is obligated to pay the Company an amount required to be withheld under applicable tax laws, the participant may satisfy the withholding tax obligation by electing to have the Company withhold from the shares to be issued that number of shares having a Fair Market Value equal to the amount required to be withheld determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by participant to have shares withheld for this purpose shall be made in writing in a form acceptable to the Committee and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; (ii) once made, the election shall be irrevocable as to the particular shares as to which the election is made; (iii) all elections shall be subject to the disapproval of the Committee; (iv) if the participant is an officer or Director of the Company or other person whose transactions in Common Stock are subject to Section 16(b) of the Exchange Act (collectively "Insiders"), the election may not be made within six months of the date of grant of the Option, Right or Stock Bonus Award; provided, however, that this limitation shall not apply in the event that death or Disability of the Optionee occurs prior to the expiration of the six-month period; and (v) if the participant is an Insider, the election must be made either six months prior to the Tax Date (as determined in accordance with Section 83 of the Code) or in the 10-day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings. 12. Recapitalization. In the event that dividends are payable in Common Stock -13- 14 or in the event there are splits, subdivisions, or combinations of shares of Common Stock, the number of shares available under the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares of Common Stock deliverable in connection with any Option, Right or Stock Bonus Award theretofore granted shall be increased or decreased proportionately, as the case may be, without change in the aggregate purchase price (where applicable). 13. Reorganization. In case the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, or in case the property or stock of the Company is acquired by another corporation, or in case of separation, reorganization, or liquidation of the Company, then the Board, or the board of directors of any corporation assuming the obligations of the Company hereunder, shall, as to outstanding Options, Rights or Stock Bonus Awards either (a) make appropriate provision for the protection of any such outstanding Options, Rights or Stock Bonus Awards by the assumption or substitution on an equitable basis of appropriate stock of the Company or of the merged, consolidated, or otherwise reorganized corporation which will be issuable in respect to the shares of Common Stock, provided that in the case of Incentive Stock Options, such assumption or substitution comply with Section 424 of the Code, or (b) upon written notice to the participant, provide that the Option or Right must be exercised within 30 days of the date of such notice or it will be terminated. In any such case, the Board or the Committee may, in its discretion, advance the lapse of vesting periods, waiting periods, and exercise dates. 14. Employment Relationship. Nothing in the Plan or any Award made hereunder shall interfere with or limit in any way the right of the Company or of any Subsidiary to terminate any recipient's employment or consulting relationship at any time, with or without cause, nor confer upon any recipient any right to continue in the employ or service of the Company or any Subsidiary. 15. General Restriction. Each Award shall be subject to the requirement that, if, at any time, the Board shall determine, in its discretion, that the listing, registration, or qualification of the shares subject to such Award upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, such Award or the issue or purchase of shares thereunder, such Award may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 16. Rights as a Stockholder. The holder of an Option, Right or Stock Bonus Award shall have no rights as a stockholder with respect to any shares covered by the Option, Right or Stock Bonus Award until the date of exercise. Once an Option, Right or Stock Bonus Award is exercised by the holder thereof, the participant shall have the rights -14- 15 equivalent to those of a stockholder, and shall be a stockholder when his or her holding is entered upon the records of the duly authorized transfer agent of the Company. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 17. Nonassignability of Awards. Awards made hereunder shall be assignable or transferable by the recipient in accordance with their terms to the extent permitted by the tax and securities laws, including by will or by the laws of descent and distribution, and as otherwise consistent with the specific Plan provisions relating thereto. 18. Withholding Taxes. Whenever, under the Plan, shares are to be issued in satisfaction of Options, Rights or Stock Bonus Awards granted hereunder, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever, under the Plan, payments are to be made in cash, such payment shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 19. Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board, the submission of the Plan to the stockholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 20. Amendment, Suspension, or Termination of the Plan. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any participant in the Plan without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or under Section 423 of the Code (or any other applicable law or regulation), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. 21. Effective Date of the Plan. The Plan shall become effective upon adoption by the Board and shall be subject to stockholder approval within 12 months of adoption by the Board. Options, Rights and Awards may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws. -15- EX-10.38 4 1995 DIRECTOR OPTION PLAN 1 EXHIBIT 10.38 LSI LOGIC CORPORATION 1995 DIRECTOR OPTION PLAN 1. Purposes of the Plan. The purposes of this 1995 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. The Plan, once approved by stockholders, will replace the 1986 Directors' Stock Option Plan. All options granted hereunder shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Common Stock" means the Common Stock of the Company. (d) "Company" means LSI Logic Corporation, a Delaware corporation. (e) "Continuous Status as a Director" means the absence of any interruption or termination of service as a Director. (f) "Director" means a member of the Board. (g) "Employee" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "Effective Date" means June 1, 1995, with stockholder approval. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: 2 (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the New York Stock Exchange, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (k) "Option" means a stock option granted pursuant to the Plan. (l) "Optioned Stock" means the Common Stock subject to an Option. (m) "Optionee" means an Outside Director who receives an Option. (n) "Outside Director" means a Director who is not an Employee. (o) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "Plan" means this 1995 Director Option Plan. (q) "Share" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (r) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. Stock Subject to the Plan. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 250,000 Shares of Common Stock (the "Pool"). The Shares may be authorized, but unissued, or reacquired Common Stock. 3 If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. Administration and Grants of Options under the Plan. (a) Procedure for Grants. The provisions set forth in this Section 4(a) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options to Outside Directors under this Plan shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) Each Outside Director shall be automatically granted an Option to purchase 15,000 Shares (the "First Option") on the date on which he or she first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy. However, no First Option shall be granted to an Outside Director who was an Outside Director immediately prior to the effective date of this Plan or who, immediately prior to becoming an Outside Director, was a Director. (iii) Each Outside Director shall automatically be granted an Option to purchase 7,500 Shares (a "Subsequent Option") on April 1 of each year, if on such date he or she shall have served on the Board for at least six (6) months. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof. (v) The terms of a First Option granted hereunder shall be as follows: (A) the term of the First Option shall be ten (10) years. 4 (B) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C) the exercise price per Share shall be the Fair Market Value per Share on the date of grant of the First Option. In the event that the date of grant of the First Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the First Option. (D) the First Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the First Option on each anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vi) The terms of a Subsequent Option granted hereunder shall be as follows: (A) the term of the Subsequent Option shall be ten (10) years. (B) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C) the exercise price per Share shall be the Fair Market Value per Share on the date of grant of the Subsequent Option. In the event that the date of grant of the Subsequent Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the Subsequent Option. (D) the Subsequent Option shall become exercisable as to twenty-five percent (25%) of the Shares subject to the Subsequent Option on each anniversary of its date of grant, provided that the Optionee continues to serve as a Director on such dates. (vii) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the Board or the stockholders 5 to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. Eligibility. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4 hereof. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. Term of Plan. Upon approval by the stockholders of the Company, the Plan shall become effective upon the Effective Date. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. Form of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or (v) any combination of the foregoing methods of payment. 8. Exercise of Option. (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the 6 issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Rule 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify Plan transactions, and other transactions by Outside Directors that otherwise could be matched with Plan transactions, for the maximum exemption from Section 16 of the Exchange Act. (c) Termination of Continuous Status as a Director. In the event an Optionee's Continuous Status as a Director terminates (other than upon the Optionee's death or total and permanent disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within three (3) months following the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) Disability of Optionee. In the event Optionee's Continuous Status as a Director terminates as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but only within twelve (12) months following the date of such termination, and only to the extent that the Optionee is entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee is not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 7 (e) Death of Optionee. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee is entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee is not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. Non-Transferability of Options. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset Sale or Change of Control. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it shall terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, 8 each outstanding Option shall be assumed or an equivalent option may be substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation does not agree to assume such Options or to substitute equivalent options, each outstanding Option shall terminate as of the closing date of the transaction. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the Option confers the right to receive or purchase, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). 11. Amendment and Termination of the Plan. (a) Amendment and Termination. Except as set forth in Section 4, the Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention 9 to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. Option Agreement. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. Stockholder Approval. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the granting of an Option hereunder. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law. EX-10.39 5 FLOATING RATE GUANANTEED CREDIT FACILITY 1 EXHIBIT 10.39 DATED 27 December, 1995 AGREEMENT for a (Yen)25,000,000,000 Floating Rate Guaranteed Credit Facility to LSI LOGIC JAPAN SEMICONDUCTOR, INC. Guaranteed by LSI LOGIC CORPORATION Arranged by ABN AMRO BANK N.V. Agent ABN AMRO BANK N.V., TOKYO BRANCH Co-Agent THE INDUSTRIAL BANK OF JAPAN, LIMITED 2 CONTENTS
Clause Heading Page 1. PURPOSE AND DEFINITIONS................................................................................ 1 1.1 Purpose....................................................................................... 1 1.2 Definitions................................................................................... 2 1.3 Guaranty Terms................................................................................ 8 1.4 Headings...................................................................................... 9 1.5 Construction of certain terms................................................................. 9 1.6 Majority Banks............................................................................... 11 2. THE FACILITY.......................................................................................... 11 2.1 Amount....................................................................................... 11 2.2 Obligations several.......................................................................... 11 2.3 Interests several............................................................................ 12 3. CONDITIONS............................................................................................ 12 3.1 Documents and evidence....................................................................... 12 3.2 General conditions precedent................................................................. 12 3.3 Waiver of conditions precedent............................................................... 14 3.4 Further conditions precedent................................................................. 14 4. ADVANCES.............................................................................................. 14 4.1 Drawdown..................................................................................... 14 4.2 Amount....................................................................................... 15 4.3 Maturity..................................................................................... 15 4.4 Notification to Banks........................................................................ 15 4.5 The Expiration Date.......................................................................... 16 4.6 Extension of Expiration Date................................................................. 16 4.7 Application of proceeds...................................................................... 17 5. INTEREST RATES AND INTEREST PERIODS................................................................... 17 5.1 Usual interest rate.......................................................................... 17 5.2 Default interest............................................................................. 17 5.3 Margin....................................................................................... 18 5.4 Reference Bank quotations.................................................................... 19 5.5 Selection of Interest Rate and Interest Periods.............................................. 20 5.6 Determination of Interest Periods............................................................ 21 5.7 Notification of Interest Periods and interest rate........................................... 22 5.8 Market disruption; non-availability.......................................................... 22
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Clause Heading Page 6. REPAYMENT, PREPAYMENT AND CANCELLATION................................................................ 23 6.1 Repayment.................................................................................... 23 6.2 Voluntary prepayment......................................................................... 24 6.3 Additional voluntary prepayment.............................................................. 24 6.4 Timing, amounts and application of prepayments............................................... 24 6.5 Notice and effect of prepayment.............................................................. 25 6.6 Cancellation of Commitments.................................................................. 25 6.7 Collateralization............................................................................ 25 7. FEES AND EXPENSES..................................................................................... 27 7.1 Fees......................................................................................... 27 7.2 Expenses..................................................................................... 28 7.3 Consumption, etc. tax........................................................................ 29 7.4 Stamp and other duties....................................................................... 29 8. PAYMENTS AND TAXES; ACCOUNTS AND CALCULATIONS......................................................... 30 8.1 No set-off or counterclaim; distribution to the Banks........................................ 30 8.2 Payments by the Banks........................................................................ 30 8.3 Netting of Payments.......................................................................... 31 8.4 Agent may assume receipt..................................................................... 31 8.5 Time of payment.............................................................................. 32 8.6 Non-Banking Days............................................................................. 32 8.7 Calculations................................................................................. 32 8.8 Certificates conclusive...................................................................... 33 8.9 Grossing-up for Taxes........................................................................ 33 8.10 Bank accounts................................................................................ 34 8.11 Partial payments............................................................................. 34 8.12 Variation of application..................................................................... 35 9. REPRESENTATIONS AND WARRANTIES........................................................................ 36 9.1 Representations and Warranties............................................................... 36 9.2 Representations and Warranties incorporated by reference..................................... 39 9.3 Repetition................................................................................... 39 10. UNDERTAKINGS.......................................................................................... 39 10.1 Undertakings................................................................................. 39 10.2 Pledges...................................................................................... 41 11. EVENTS OF DEFAULT..................................................................................... 42 11.1 Events of Default............................................................................ 42 11.2 Acceleration................................................................................. 44
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Clause Heading Page 11.3 Demand basis................................................................................. 45 12. INDEMNITIES........................................................................................... 45 12.1 Broken funding and other indemnities......................................................... 45 12.2 Currency indemnity........................................................................... 46 13. UNLAWFULNESS AND INCREASED COSTS...................................................................... 47 13.1 Unlawfulness................................................................................. 47 13.2 Increased costs.............................................................................. 47 14. SET-OFF AND PRO RATA PAYMENTS......................................................................... 48 14.1 Set-off...................................................................................... 48 14.2 Pro rata payments............................................................................ 49 15. ASSIGNMENT, SUBSTITUTION AND LENDING OFFICES.......................................................... 50 15.1 Benefit and burden........................................................................... 50 15.2 No assignment by Borrower.................................................................... 51 15.3 Participation................................................................................ 51 15.4 Substitution................................................................................. 51 15.5 Reliance on Substitution Certificate......................................................... 52 15.6 Authorisation of Agent....................................................................... 53 15.7 Construction of certain references........................................................... 53 15.8 Lending offices.............................................................................. 53 15.9 Disclosure of information; Confidentiality................................................... 54 16. ARRANGER, AGENT AND REFERENCE BANKS................................................................... 55 16.1 Appointment of Agent......................................................................... 55 16.2 Amendments; Waivers.......................................................................... 55 16.3 Rights of Agent as Bank; No partnership...................................................... 56 16.4 No liability of Arranger and Agent........................................................... 56 16.5 Agent's duty to notify and take action....................................................... 58 16.6 Identity of Banks............................................................................ 58 16.7 Non-reliance on Arranger or Agent............................................................ 58 16.8 No Responsibility on Arranger or Agent for Borrower's performance............................ 59 16.9 Other dealings............................................................................... 59 16.10 Reimbursement and indemnity by Banks......................................................... 60 16.11 Retirement of Agent.......................................................................... 60 16.12 Change of Reference Banks.................................................................... 61 16.13 Variation of Exhibits........................................................................ 61 17. NOTICES AND OTHER MATTERS............................................................................. 62
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Clause Heading Page 17.1 Notices...................................................................................... 62 17.2 Notices through the Agent.................................................................... 62 17.3 No implied waivers, remedies cumulative...................................................... 63 17.4 English language............................................................................. 63 18. GOVERNING LAW AND JURISDICTION........................................................................ 63 18.1 Governing Law................................................................................ 63 18.2 Jurisdiction................................................................................. 64
iv. 6 Schedules 1 The Parties and the Commitments 2 Documents and evidence required as conditions precedent Exhibits 1 Form of Drawdown Notice 2 Form of Guaranty 3 Form of Account Pledge 4 Form of Substitution Certificate 5 Form of Margin Certificate 6 Form of Confirmation of Repayment Schedule v. 7 THIS AGREEMENT is dated 27 December, 1995 and made BETWEEN: LSI LOGIC JAPAN SEMICONDUCTOR, INC., as Borrower; ABN AMRO BANK N.V., as Arranger; THE BANKS AND FINANCIAL INSTITUTIONS details of which are set out in Schedule 1; ABN AMRO BANK N.V., TOKYO BRANCH, as Agent, and THE INDUSTRIAL BANK OF JAPAN, LIMITED, as Co-Agent. IT IS AGREED as follows: 1. PURPOSE AND DEFINITIONS 1.1 Purpose This Agreement sets out the terms and conditions on and subject to which the Banks agree, according to their several obligations, to make available to the Borrower a credit facility of up to (Yen)25,000,000,000 (twenty five billion yen) to be used: (a) for the purpose of refinancing part of the Borrower's current long term debt; (b) for the purpose of partly financing expansion of the Borrower's production facilities; and 1. 8 (c) for general corporate purposes. 1.2 Definitions In this Agreement, unless the context otherwise requires: "Account Pledge" means an account pledge agreement substantially in the form of Exhibit 3 executed by the Borrower in favour of, and acknowledged by, each Bank; "Advance" means each borrowing of all or a portion of the Commitments by the Borrower or (as the context may require) the principal amount of such borrowing for the time being outstanding; "Agent" means ABN AMRO Bank N.V., Tokyo Branch (details of which are set out in Schedule 1) or such other Person as may be appointed agent for the Banks pursuant to Clause 16.11; "Arranger" means ABN AMRO Bank N.V.; "Availability Period" means the period from the Closing Date and ending on (but including) the Expiration Date or ending on (but excluding) such earlier date (if any) (i) on which the Borrower cancels the whole of the undrawn Commitments under Clause 6.6 or (ii) on which the Commitments of all the Banks are reduced to zero pursuant to Clause 6.3, 11.2 or 13.1; "Available Facility Amount" means, at any time, the amount by which the total of the Commitments of all the Banks at such time exceeds the Loan outstanding at such time; 2. 9 "Banking Day" means a day (other than Saturday or Sunday) on which banks are open for business in Tokyo; "Banks" means the banks and financial institutions listed in Schedule 1 and includes their successors in title and Substitutes; "Borrower" means LSI Logic Japan Semiconductor, Inc. (details of which are set out in Schedule 1); "Borrower's Account" means the account of the Borrower maintained at ABN AMRO Bank N.V., Tokyo Branch, bearing the number 13-31-957, or such other account as the Borrower from time to time shall designate in a written notice to the Agent for the deposit of funds borrowed under this Agreement. "Closing Date" means the date, not more than five Banking Days nor less than three Banking Days before the Drawdown Date in respect of the first Advance, on which all of the certificates and other documents specified in A(a), A(b), A(c), A(d), A(e), A(f), B(a), B(b), B(c), B(d), B(e), B(f) and B(h) of Schedule 2 shall have been delivered to the Agent or its duly authorised representative; "Collateral" has the meaning given to it in Clause 6.7; "Collateral Agreement" has the meaning given to it in Clause 6.7; "Collateralized Amount" means the amount of each Bank's Contribution equal to the Collateral held by that Bank in accordance with Clause 6.7; 3. 10 "Commitment" means, in relation to a Bank, the amount set opposite its name in Schedule 1 or, as the case may be, in any relevant Substitution Certificate, as reduced by any relevant term of this Agreement; "Contribution" means, in relation to a Bank, the principal amount of the Advances owing to such Bank at any relevant time; "Debt Rating" means, as of any Margin Determination Date, the Guarantor's unsecured senior debt rating from Standard & Poors Rating Group, a division of McGraw Hill, Inc.; "Default" means any Event of Default or any event or circumstance which would, on the giving of a notice by the Agent and/or the expiry of the relevant period and/or the fulfillment of any other condition (in each case as specified in Clause 11.1), constitute an Event of Default; "Drawdown" means the payment of an Advance to the Borrower by the Agent; "Drawdown Closing Date" means, in respect of an Advance, the date being the second Banking Day prior to the proposed Drawdown Date for that Advance; "Drawdown Date" mean the date of a Drawdown; "Drawdown Notice" means a notice substantially in the terms of Exhibit 1; "Event of Default" means any of the events or circumstances described in Clause 11.1; "Expiration Date" means 24 December, 1996, or, if extended pursuant to Clause 4.6, 24 December, 1997; 4. 11 "Facility" means the credit facility granted by the Banks to the Borrower pursuant to this Agreement; "Final Maturity Date" means the fifth anniversary of the Closing Date; "Guaranty" means a guaranty in the form of Exhibit 2, to be given by the Guarantor; "Guarantor" means LSI Logic Corporation, a Delaware corporation, whose current address is at 1551 McCarthy Blvd, MS D-106, Milpitas CA 95035, U.S.A.; "Interest Payment Date" means a date specified for the payment of interest pursuant to Clause 5.1; "Interest Period" means the period determined in accordance with Clause 5.5 and Clause 5.6. "LIBOR" means, in relation to a particular period, the rate at which deposits of Yen are offered for a period equivalent to (or most comparable to) that period at or about 11 a.m. (London time) on the second LIBOR Banking Day before the first day of that period as displayed on Telerate page 3750 (or any successor publication) provided that if on that date no such rate is so displayed, LIBOR for that period shall be the arithmetic mean (rounded upward if necessary to five decimal places of one percent) of the rates respectively quoted to the Agent by each of the Reference Banks at the request of the Agent as such Reference Bank's offered rate for deposits of the relevant currency in an amount approximately equal to the amount in relation to which LIBOR is to be determined for a period equivalent to (or most comparable to) such period to prime banks in the London Interbank Market at or about 11 a.m. (London time ) on the second LIBOR Banking Day before the first day of such period; 5. 12 "LIBOR Banking Day" means a Banking Day on which dealings in Yen deposits are carried on in the London Interbank Market; "LIBOR Loan" means an Advance or, as the case may be, the Loan, during any period when interest thereon is determined by reference to LIBOR; "Loan" means the aggregate of the Advances at any relevant time or, if there is only one Advance, that Advance; "Majority Banks" means Banks the aggregate of whose Contributions at any relevant time equals or exceeds 66 2/3 per cent of the Advances or, if no Advance has been made, the aggregate of whose Commitments equals or exceeds 66 2/3 per cent of the total of the Commitments of all the Banks; "Margin" means a percentage per annum calculated in accordance with Clause 5.3; "Margin Certificate" means a certificate in the form of Exhibit 5; "Margin Determination Date" means the 55th day following the end of any fiscal quarter of the Guarantor; "Margin Period" means, in respect of any Margin Determination Date, the four consecutive fiscal quarters of the Guarantor immediately preceding such Margin Determination Date; "month" in respect of any Interest Period for a TIBOR Loan or a LIBOR Loan means a period beginning in one calendar month and ending in the next calendar month on the day numerically corresponding to the day of the calendar month on which it started, provided 6. 13 that (i) if the period started on the last Banking Day (in the case of a TIBOR Loan) or the last LIBOR Banking Day (in the case of a LIBOR Loan) in a calendar month or if there is no such numerically corresponding day, it shall end on the last Banking Day (in the case of a TIBOR Loan) or the last LIBOR Banking Day (in the case of a LIBOR Loan) in the next calendar month and (ii) if the numerically corresponding day is not a Banking Day (in the case of a TIBOR Loan) or a LIBOR Banking Day (in the case of a LIBOR Loan), the period shall end on the next following Banking Day (in the case of a TIBOR Loan) or the next following LIBOR Banking Day (in the case of a LIBOR Loan) in the same calendar month but if there is no such Banking Day (in the case of a TIBOR Loan) or LIBOR Banking Day (in the case of a LIBOR Loan) it shall end on the preceding Banking Day (in the case of a TIBOR Loan) or the preceding LIBOR Banking Day (in the case of a LIBOR Loan), and "months" and "monthly" shall be construed accordingly; "Pledged Account" means an account of the Borrower with a Bank the subject of an Account Pledge; "Ratio" as of any Margin Determination Date means the ratio of Consolidated EBIT in respect of the relevant Margin Period to Total Debt as of the last day of such Margin Period; "Reference Banks" means the Head Office of The Industrial Bank of Japan, Limited and the principal London office of Barclays Bank PLC and/or any other bank appointed as such pursuant to Clause 16.12; "Repayment Date" means, in respect of the Loan, each of the eight dates for repayment of the Loan as determined in accordance with Clause 6.1; "Substitute" has the meaning given to it in Clause 15.5; 7. 14 "Substitution Certificate" means a certificate substantially in the form of Exhibit 4; "TIBOR" in relation to any period means (i) the average rate at which deposits in Yen are offered to all banks for that period (or a period most comparable to that period) calculated in accordance with Reuter Screen TIBM page or, if that page is no longer published, its successor or equivalent in respect of a deposit for that period (or a period most comparable to that period) at or about 11:00 a.m. on the date falling two Banking Days prior to the first day of that period, or (ii) if no such rate is quoted, the rate which a major Japanese city bank selected by the Agent in its discretion was offering deposits to prime banks in the Tokyo Interbank market for that period (or a period most comparable to that period) at or about 11:00 a.m. on the date falling two Banking Days prior to the first day of that period; "TIBOR Loan" means an Advance or, as the case may be, the Loan, during any period when interest thereon is determined by reference to TIBOR; "Total Debt" means the aggregate of Senior Debt and Subordinated Debt; "written" or "in writing" means any method of representing or reproducing words or characters in permanent visible form; and "Yen" or "(yen)" means the lawful currency for the time being of Japan and, in respect of all payments to be made under this Agreement, means immediately available, freely transferable, cleared funds. 8. 15 1.3 Guaranty Terms Unless the context requires otherwise, terms defined in the Guaranty shall have the same meanings when used in this Agreement. 1.4 Headings Clause headings and the table of contents are inserted for convenience of reference only and shall be ignored in the interpretation of this Agreement. 1.5 Construction of certain terms In this Agreement, unless the context otherwise requires: (a) references to clauses, schedules and exhibits are to be construed as references to the clauses of, and schedules and exhibits to, this Agreement and references to this Agreement include its schedules which form an integral part of this Agreement; (b) references to a "regulation" include any present or future regulation, rule, directive, requirement, request or guideline (whether or not having the force of law) of any agency, authority, central bank or government department or any self-regulatory or other national or supra-national authority; (c) words importing the plural shall include the singular and vice versa and words importing a gender shall include every gender; (d) references to a time of day are to Tokyo time; 9. 16 (e) references to any enactment shall be deemed to include references to such enactment as re-enacted, amended or extended; (f) references to "law" include, without limitation, any legislation or decree or any decision of any court or tribunal in any applicable jurisdiction; (g) references to "consent" include, without limitation, any license, approval, waiver, filing, registration or authorisation; (h) references to a "party" are to a party to this Agreement and "parties" shall be construed accordingly; (i) references to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to; (j) references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of the Loan Documents; (k) the words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement or any other Loan Document as a whole and not merely to the specific Article, Section, subsection, paragraph or clause in which the respective word appears; (l) the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; 10. 17 (m) in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." 1.6 Majority Banks Any matter to be determined by the Majority Banks under this Agreement shall (as between the Banks) only be regarded as having been validly determined if all the Banks have received prior notice of the matter in question and the relevant majority of Banks have given or issued the relevant opinion, consent, request or instructions, as appropriate, though the Borrower shall be entitled (and bound) to assume that that notice was duly received by each Bank and that the relevant majority was obtained to constitute Majority Banks whether or not this is in fact the case. 2. THE FACILITY 2.1 Amount The Banks, relying on each of the representations and warranties in Clause 9, agree to make available to the Borrower during the Availability Period on and subject to the terms of this Agreement a credit facility of up to (yen)25,000,000,000 (twenty five billion Yen). The obligation of each Bank under this Agreement shall be to contribute that proportion of each Advance which its Commitment bears to the total of the Commitments of all the Banks. 11. 18 2.2 Obligations several The obligations of each Bank under this Agreement are several; the failure of any Bank to perform its obligations shall not relieve any other party of any of its respective obligations or liabilities under this Agreement nor shall any party be responsible for the obligations of any other party under this Agreement. 2.3 Interests several The interests of the Agent, the Arranger and the Banks are several and the amount due to the Agent (for its own account), to the Arranger and to each Bank is a separate and independent debt. The Agent, the Arranger and (as provided in Clause 6.7 and Clause 14.1, but otherwise acting through the Agent in accordance with the terms of this Agreement) each Bank shall have the right to protect and enforce its rights arising out of this Agreement and may do so without joining any other party to any proceedings taken for that purpose. 3. CONDITIONS 3.1 Documents and evidence The obligation of each Bank to make its Commitment available is conditional on the Agent, or its duly authorised representative, having received the documents and evidence specified in Schedule 2 in form and substance satisfactory to the Agent by the respective dates specified in that schedule. The Agent shall notify the Banks promptly after receipt by it of the documents and evidence referred to in this Clause 3 in form and substance satisfactory to it. 12. 19 3.2 General conditions precedent The obligation of each Bank to contribute to any Advance is subject to the further conditions that: (a) at the time of the giving of a Drawdown Notice for, and at the time of the making of, such Advance; (i) the representations and warranties set out in Clause 9 (and so that the representation and warranty in Clause 9.1(f) shall for this purpose refer to the then latest audited financial statements delivered to the Agent under Clause 10.1) and in Section 10 of the Guaranty are true and correct on and as of each such time as if each was made with respect to the facts and circumstances then existing; and (ii) no Default shall have occurred and be continuing or would result from the making of such Advance; and (b) the Agent shall have received: (i) confirmation from the Borrower that each of the statements made in paragraphs (i)-(v) of the relevant Drawdown Notice remains true, complete and accurate as at the Drawdown Closing Date; (ii) a certificate from the Guarantor as provided by paragraph B(g) of Schedule 2; and 13. 20 (iii) payment of all fees then due in accordance with the fee letter between the Borrower and the Arranger dated 10 November 1995 and of all expenses (including legal, printing and out-of-pocket expenses) incurred by the Agent and the Arranger in connection with the negotiation, preparation, syndication and execution of this Agreement and the preparation and distribution of the Information Memorandum dated November 1995 in connection with this Agreement, subject to the terms of the letter dated 30 November 1995 between the Arranger and the Borrower. Nothing in this Clause 3.2 constitutes a waiver of any right of the Banks arising from any Event of Default which shall have occurred and be outstanding at the time of the drawing of the relevant Advance. 3.3 Waiver of conditions precedent The conditions specified in this Clause 3 are solely for the benefit of the Banks and may be waived on their behalf in whole or in part and with or without conditions by the Agent acting on the instructions of the Majority Banks in respect of the first or any other Advance without prejudicing the right of the Agent acting on those instructions to require fulfillment of such conditions in whole or in part in respect of any other Advance. 3.4 Further conditions precedent Not later than five Banking Days prior to the date of any Advance, in the case of a TIBOR Loan, or five LIBOR Banking Days prior to the date of any Advance, in the case of a LIBOR Loan, the Agent may request and the Borrower shall, not later than two Banking Days (or two LIBOR Banking Days, as the case may be) prior to that date, deliver to the Agent such further favourable certificates and/or opinions as to any or all of the matters 14. 21 the subject of Clauses 3.1, 9, 10 and 11 as the Agent or the Majority Banks may reasonably require. 4. ADVANCES 4.1 Drawdown Subject to the terms and conditions of this Agreement, an Advance may be made to the Borrower following receipt by the Agent from the Borrower of a Drawdown Notice not later than 10 a.m. on (a) the fifth Banking Day, in the case of a TIBOR Loan (or the third Banking Day, in the case of the first Advance), or (b) the fifth LIBOR Banking Day, in the case of a LIBOR Loan (or the third LIBOR Banking Day, in the case of the first Advance), before the date on which the Advance is intended to be made, which shall be a Banking Day (or LIBOR Banking Day, as the case may be) falling within the Availability Period. A Drawdown Notice shall be effective on actual receipt by the Agent and, once given, shall, subject to Clause 5.8(a), be irrevocable. No Drawdown Notice may be given in respect of an amount which is the subject of a notice of cancellation under Clause 6.6. Not more than one Advance may be made on any one day. The Commitments may be drawn in a single Advance, though not more than ten Advances shall be made. 4.2 Amount Each Advance shall be a minimum of (Yen)1,000,000,000 (one billion Yen) or, if less, the balance of the Available Facility Amount. Each Advance of more than (Yen)1,000,000,000 (one billion yen) shall be an integral multiple of (Yen)100,000,000 (one hundred million yen). 15. 22 4.3 Maturity The Loan shall mature on the Final Maturity Date. 4.4 Notification to Banks The Agent shall promptly notify each Bank of receipt of a Drawdown Notice complying with the terms of this Agreement and of the date on which the Advance is to be made and, subject to Clause 3, each of the Banks shall on that date make available to the Agent its portion of that Advance in accordance with Clause 8.2, and unless other payment instructions are provided by the Borrower, the Agent shall make such Advance available to the Borrower by crediting the Borrower's Account on that date. 4.5 The Expiration Date Without prejudice to any other provision of this Agreement, the Commitments shall in any event be reduced to zero on the Expiration Date and no Advances shall be made to the Borrower under this Agreement after that date. On the Expiration Date, the Borrower shall deliver to each Bank, through the Agent, a confirmation in substantially the form of Exhibit 6 confirming (a) the aggregate amount of all Advances made and the amount of each Bank's Contribution as of the Expiration Date and (b) the repayment schedule with respect to the aggregate amount of the Loan and with respect to each Bank's Contribution. 4.6 Extension of Expiration Date Subject to receipt of the consent of all of the Banks, the Borrower may extend the Expiration Date to the later date specified in the definition "Expiration Date" by: 16. 23 (a) giving the Agent notice to that effect not less than 45 days prior to the original Expiration Date; and (b) subject to all of the Banks having consented to the extension, paying to the Agent, for the benefit of the Banks, on or before the original Expiration Date an amount calculated by the Agent as being equal to 0.10 per cent of the undrawn Commitments as at the original Expiration Date. The Agent shall promptly notify each Bank of receipt of any notice pursuant to Clause 4.6(a) and the Banks shall notify the Agent of whether or not they consent to the proposed extension within 20 days of receipt of that notification; failure to notify the Agent within that period shall be deemed to be a refusal of consent. The Agent shall promptly notify the Borrower of the Banks' decision. 4.7 Application of proceeds Without prejudice to the Borrower's obligations under Clause 10.1(b), none of the Banks, the Arranger or the Agent shall have any responsibility for the application by the Borrower of the proceeds of any Advance. 5. INTEREST RATES AND INTEREST PERIODS 5.1 Usual interest rate The Borrower shall pay interest on each Advance or, as the case may be, the Loan in respect of each Interest Period on the last day of each Interest Period (each an "Interest Payment Date") at the rate per annum determined by the Agent to be the aggregate of (i) the applicable Margin and (ii) TIBOR, if the Borrower has requested such Advance or 17. 24 the Loan to be made as a TIBOR Loan during such Interest Period, or LIBOR, if the Borrower has requested such Advance or the Loan to be made as a LIBOR Loan during such Interest Period. 5.2 Default interest During the existence of an Event of Default the Borrower shall pay interest (both before and after judgment) on (a) the outstanding Advances (or Loan, as the case may be) and (b) on any amount (other than principal of the outstanding Advances) not paid when due at a rate determined by the Agent pursuant to this Clause 5.2. (a) The period beginning on the occurrence of the Event of Default (the "Default Date")and ending on the date any such Event of Default is cured or waived in accordance with the terms hereof shall be divided into successive periods of not more than three months (each a "default period") as selected by the Agent (after consultation with the Banks) each of which (other than the first, which shall commence on the Default Date) shall commence on the last day of the preceding default period, provided that if an amount of principal has become due and payable by reason of a declaration by the Agent under Clause 11.2(b) or a prepayment pursuant to Clause 6.3 or Clause 13.1 prior to the Repayment Date for such amount of principal, the first default period selected by the Agent shall end on that Repayment Date. (b) The rate of interest applicable to each default period shall be the rate per annum determined by adding (i) two per cent and (ii) the applicable Margin or Margins then in effect to TIBOR (or LIBOR, as the case may be) as in effect for each Interest Period. 18. 25 (c) Default interest under this Clause 5.2 shall be due and payable on the last day of each default period or, if earlier, on the date on which the sum in respect of which that default interest is accruing is actually paid. (d) If the Agent is unable to determine a rate in accordance with the foregoing provisions of this Clause 5.2, each Bank shall promptly notify the Agent of the cost of funds to such Bank and interest on any sum not paid on its due date for payment shall be calculated for each Bank at a rate determined by the Agent to be two per cent per annum above the aggregate of the Margin and the cost of funds to such Bank, as determined by such Bank in its sole discretion. 5.3 Margin (a) The Margin shall be, in respect of any period beginning 15 days after the Margin Determination Date and in respect of any portion of any Contribution other than any Collateralized Amount: (i) if, on any Margin Determination Date, the Ratio for the relevant Margin Period is equal to or greater than 1:1 or if the Debt Rating is BB+ or higher, 0.75 per cent per annum; or (ii) if, on any Margin Determination Date, the Ratio for the relevant Margin Period is less than 1:1 (or if the Borrower shall not have delivered a Margin Certificate with respect to the relevant Margin Period in accordance with this Clause 5.3) and the Debt Rating is BB or below, 0.90 per cent per annum. 19. 26 (b) The Margin shall be, in respect of any period during the Availability Period and in respect of each Collateralized Amount (provided that the corresponding Collateral is held by the Banks in accordance with Clause 6.7 and in any event in a manner satisfactory to the relevant Bank for such period), 0.30 per cent per annum. The Borrower shall notify the Agent of the Ratio and the Debt Rating as of each Margin Determination Date and shall submit Margin Certificates (duly completed and signed by a Responsible Officer of the Guarantor), and supporting evidence in respect thereof on or before each Margin Determination Date. 5.4 Reference Bank quotations If any Reference Bank is unable or otherwise fails to furnish a quotation for the purpose of calculating LIBOR the interest rate shall be determined, subject to Clause 5.8, on the basis of the quotations furnished by the remaining Reference Bank. 5.5 Selection of Interest Rate and Interest Periods Before the beginning of the initial Interest Period with respect to any Advance, the Borrower may by notice received by the Agent not later than 10 a.m. on the fifth Banking Day (in the case of a TIBOR Loan) or the fifth LIBOR Banking Day (in the case of a LIBOR Loan) and subject to Clause 5.6 specify whether (i) that Advance is to bear interest at a rate determined by reference to TIBOR or to LIBOR and (ii) that Interest Period shall have a duration of 1, 3 or 6 months. The Borrower may select subsequent Interest Periods with respect to that portion of the Loan equal in amount to the amount of such Advance (or in any such other amount as shall not be larger than such Advance nor smaller than (Yen)1,000,000,000 (one billion Yen)), subject in each case to Clause 5.6, provided that there 20. 27 shall be no more than ten Interest Periods in effect at any time with respect to the Loan (including the initial Interest Period with respect to any Advance). Before the beginning of each subsequent Interest Period, the Borrower may by notice received by the Agent not later than 10 a.m. on the fifth Banking Day (in the case of a TIBOR Loan) or the fifth LIBOR Banking Day (in the case of a LIBOR Loan) and subject to Clause 5.6 specify whether (i) the Loan (or portion thereof subject to such Interest Period) is to bear interest at a rate determined by reference to TIBOR or to LIBOR and (ii) that Interest Period shall have a duration of 1, 3 or 6 months and also specify (x) whether the whole of the Loan or a portion thereof shall be subject to that Interest Period and (y) (if that Interest Period applies to a portion of the Loan) the amount of such portion subject to that Interest Period. If at any time the Borrower fails to specify whether the interest rate with respect to any Interest Period will be determined by reference to TIBOR or to LIBOR, the Borrower will be deemed to have selected TIBOR as the basis for such determination. Also, if at any time the Borrower fails to specify the amount of (the portion of) the Loan subject to any subsequent Interest Period, the Borrower will be deemed to have specified an amount equal to the whole or the portion of the Loan with respect to which the immediately preceding Interest Period ends on the date of beginning of such subsequent Interest Period. 5.6 Determination of Interest Periods Each Interest Period shall be of the duration specified by the Borrower pursuant to Clause 5.5 except that: (a) the initial Interest Period in respect of each Advance will commence on the Drawdown Date for such Advance and each subsequent Interest Period in respect of all or any part of the Loan will commence on the last day of the previous Interest Period for all or such part of the Loan; 21. 28 (b) any Interest Period that would otherwise overrun the Final Maturity Date shall end on the Final Maturity Date; (c) the Borrower may choose an Interest Period of less than one month in order that the Interest Period may end on a Repayment Date; (d) the Borrower may not choose an Interest Period for any part of the Loan if as a result thereof the Borrower would be unable to make the payment due on the next Repayment Date on a day which is an Interest Payment Date; and (e) if the Borrower fails to specify the duration of an Interest Period in accordance with the provisions of Clause 5.5 and this Clause 5.6 that Interest Period shall have a duration of one month or such other period as shall comply with this Clause 5.5. 5.7 Notification of Interest Periods and interest rate The Agent shall notify the Borrower and the Banks promptly of the duration of each Interest Period or other period for the calculation of interest (or, as the case may be, default interest) and of each rate of interest determined by it under this Clause 5. 5.8 Market disruption; non-availability (a) If and whenever, at any time prior to the making or continuation of an Advance: (i) the Agent shall have determined (which determination shall, in the absence of manifest error, be conclusive), that adequate and fair means do not exist for ascertaining TIBOR or LIBOR, as the case may be, in respect of any Interest Period in accordance with this Agreement; or 22. 29 (ii) the Agent shall have received notification from Banks with Contributions aggregating not less than one-third of the total of the Advances (or, if no Advance has been made, Commitments aggregating not less than one third of the Commitments of all the Banks) that deposits in Yen are not available to those Banks in the relevant interbank market in the ordinary course of business in sufficient amounts to fund (or maintain) their Contributions to that Advance or that their funding costs in respect of that Advance are not accurately reflected by TIBOR or LIBOR, as the case may be, having regard to the likely interest rate in respect of such Interest Period, the Agent shall immediately give notice (a "Determination Notice") of that fact to the Borrower and to each of the Banks and that Advance shall not be made or continued. A Determination Notice shall give particulars of the relevant circumstances giving rise to its issue. (b) After the giving of any Determination Notice (i) with respect to the unavailability of deposits in Yen in Tokyo, the affected Advance will be made or continued only as LIBOR Loans, and (ii) with respect to the unavailability of deposits in the London Interbank Market, the affected Advance will be made or continued only as TIBOR Loans, or (iii) with respect to the unavailability of deposits in both of the relevant interbank markets, the undrawn amount of the Commitments of all the Banks shall not be borrowed, and the outstanding amount of the affected Advance shall be repaid and be unavailable for re-borrowing, until notice to the contrary is given to the Borrower by the Agent and the Agent (on behalf of and after consultation with the Banks) shall then negotiate with the Borrower with a view to agreeing on an alternative basis for calculating the interest payable on and/or for making, maintaining and/or funding Advances. Any alternative basis agreed in writing by the Agent (on behalf of and with the consent of all the Banks) and the 23. 30 Borrower within 25 days of the Agent's notification of the event in question shall take effect in accordance with its terms. 6. REPAYMENT, PREPAYMENT AND CANCELLATION 6.1 Repayment The Loan shall be repaid in eight consecutive six-monthly instalments, the first to be paid on the date being 18 months from the Closing Date and the final instalment to be paid on the Final Maturity Date. The first instalment, and unless the Expiration Date has been extended pursuant to Clause 4.6 each subsequent instalment, shall be in an amount equal to one-eighth of the aggregate principal amount borrowed prior to such repayment date, and if the Expiration Date has been extended pursuant to Clause 4.6, each subsequent instalment shall be in an amount equal to one-seventh (1/7) of the aggregate amount of the Loan as of the Expiration Date. 6.2 Voluntary prepayment The Borrower may voluntarily prepay the Loan (in whole or in part) subject to the provisions of this Clause 6 and of Clause 12.1. Any voluntary prepayment shall be a minimum of (Yen)1,000,000,000 (one billion Yen) or a larger sum which is an integral multiple of (Yen)100,000,000 (one hundred million Yen). 6.3 Additional voluntary prepayment The Borrower may also prepay (in whole but not in part only), without premium or penalty, but without prejudice to its obligations under Clause 8.9, Clause 12.1 or 24. 31 Clause 13.2, the Contribution of any Bank to which the Borrower has become obliged to pay additional amounts under Clause 8.9 or Clause 13.2. On notice of such a prepayment being given, the Commitment of the relevant Bank shall be reduced to zero. 6.4 Timing, amounts and application of prepayments Prepayments made on a date other than an Interest Payment Date will be subject to, inter alia, the provisions of Clause 12.1(c). Prepayments under this Agreement shall be made together with: (a) accrued interest to the date of prepayment; (b) any additional amount payable under Clause 8.9 or Clause 13.2; and (c) all other sums payable by the Borrower to the relevant Bank under this Agreement including any accrued commitment or agency fee payable under Clause 7.1 and any amounts payable under Clause 12.1. Prepayments on the Loan shall be applied to such Interest Period or Interest Periods as the Borrower may select (without prejudice to its obligations under Clause 12.1) and in reverse order, beginning with the most remote instalments of principal coming due on the Loan, so that the Borrower's obligation to pay the scheduled instalments of principal hereunder pursuant to Clause 6.1 shall not be affected until the entire outstanding principal of the Loan has been paid in full. 6.5 Notice and effect of prepayment No prepayment may be effected under this Clause 6 unless the Borrower shall have given the Agent at least 30 days' notice of its intention to make such prepayment. Every notice of prepayment shall be effective only on actual receipt by the Agent, shall be irrevocable and shall oblige the Borrower to make such prepayment on the date specified in the notice. On a prepayment being made, the Commitments shall be automatically reduced by an amount equal to the amount so prepaid and sums prepaid may not be reborrowed. 25. 32 6.6 Cancellation of Commitments The Borrower may at any time during the Availability Period by irrevocable notice to the Agent (effective only on actual receipt) cancel with effect from a date not less than 10 days after the receipt by the Agent of that notice the whole or any part (being (Yen)1,000,000,000 (one billion Yen) or a larger sum which is an integral multiple of (Yen)100,000,000 (one hundred million Yen)) of the total of the undrawn Commitments of all the Banks. On that cancellation taking effect the Commitment of each Bank shall be reduced proportionately. 6.7 Collateralization The Borrower may cash collateralize all or part of an Advance by means of making a Yen deposit ("Collateral") with each Bank on the terms of this Clause 6.7 and, if a Bank so selects, pursuant to the relevant Account Pledge. (a) The Borrower shall give the Agent not less than five Banking Days' notice of its intention to deposit Collateral (or 5 LIBOR Banking Days, in the case of a deposit in connection with a LIBOR Loan); that notice shall state the Banking Day or LIBOR Banking Day, as the case may be (which shall be during the Availability Period and shall be a Drawdown Date of an Advance) on which the Collateral is to be deposited, specify the aggregate amount of the Collateral, which shall be an integral multiple of (Yen)100,000,000 (one hundred million yen) or the amount of such Advance, and apportion the Collateral between the Banks. (b) The Borrower shall deposit the Collateral with the Banks pro rata to their Contributions (i) to such account with the relevant Bank as designated by such Bank specifically for such Collateral, or (ii) if the relevant Bank so selects, to the 26. 33 relevant Pledged Account (provided that the relevant Account Pledge shall have been duly executed and delivered) on the Drawdown Date of the relevant Advance, and shall, in the case of (i), take such necessary steps on or before such Drawdown Date as the relevant Bank requires in order to satisfy such Bank that the Collateral is duly pledged or otherwise constitutes security to secure the Loan (in whole or in part) and is duly perfected. (c) The Collateral deposited with each Bank shall be held by that Bank in the designated account or the Pledged Account, as the case may be, only during the Availability Period, subject to paragraph (d) below with respect to withdrawals, and may be applied by the Bank as security against the Borrower's obligations to it under this Agreement, including pursuant to the agreement (the "Collateral Agreement") concerning such account and pledge or security interest over it or pursuant to the relevant Account Pledge, as the case may be, or through the exercise by the Bank against the Collateral of its set-off rights in accordance with Clause 14.1. (d) Subject to the relevant Collateral Agreement or the relevant Account Pledge, as the case may be, Collateral may be withdrawn only on 10 Banking Days' prior notice to the Agent and only on (i) an Interest Payment Date, or (ii) the Expiration Date; withdrawals shall be an integral multiple of (Yen)100,000,000 (one hundred million yen) and apportioned pro rata among the Banks in accordance with their Contributions. When any Collateral is withdrawn in part pursuant to the foregoing provision, a Bank (other than a Bank in favour of which an Account Pledge has been executed and delivered) may require the Borrower to take such steps on or before such date of withdrawal as are necessary to satisfy such Bank that the remaining Collateral is duly pledged or otherwise constitutes a valid security interest to secure such Bank's Contribution (or part thereof) and is duly perfected, 27. 34 and the Borrower shall comply with such requirements. Notwithstanding Clause 17.4, any agreement, instrument or other document (other than the Account Pledge) which the relevant Bank requires pursuant to this Clause 6.7 may be in the Japanese language consistent with such Bank's normal practice for taking and perfecting a pledge or other security interest over deposits. 7. FEES AND EXPENSES 7.1 Fees The Borrower shall pay to the Agent whether or not any part of the Commitments is ever advanced: (a) an arrangement fee, underwriting fee and agency fee, in the amounts and at the times agreed between the Borrower and the Arranger in a letter dated 10 November 1995; and (b) beginning 31 March 1996 and on the last day of each consecutive three month period thereafter, for the account of each Bank, a commitment fee computed in respect of the period then ending at the rate of 0.125 per cent per annum on the daily undrawn and uncancelled amount of that Bank's Commitment during that period calculated based on the actual number of days elapsed and a 365 day year. Any Bank shall have the right not to receive any commitment fee for all or part of any period, without prejudice to such Bank's right to receive such fee for any other part of that period or for any other period. Prior to the Closing Date each Bank wishing to exercise such right not to receive the commitment fee for any period shall notify the Agent of the specifics thereof. 28. 35 7.2 Expenses The Borrower shall pay to the Agent: (a) on or before the Drawdown Closing Date for the first Advance (and, to the extent not paid on or before such Drawdown Closing Date, within the time period provided for in Section 17(a)(i) of the Guaranty), all reasonable expenses (including legal, printing and out-of-pocket expenses) incurred by the Agent and the Arranger in connection with the negotiation, preparation, syndication and execution of this Agreement and the preparation and distribution of the Information Memorandum dated November 1995 in connection with this Agreement whether or not any part of the Commitments is ever advanced but subject to an aggregate limit as agreed to by the Agent and the Borrower in a letter dated 30 November 1995; (b) as soon as reasonably practicable in accordance with the Borrower's customary procedures for reviewing and processing such items, and in any event within 30 days following receipt of the Agent's invoice therefor, all reasonable expenses (including legal and out-of pocket expenses) incurred by the Agent and the Arranger in connection with any amendment or extension of or the granting of any waiver or consent under this Agreement; and (c) on demand, all reasonable expenses (including legal and out-of-pocket expenses) incurred by the Agent, the Arranger, the Banks or any of them in contemplation of, or otherwise in connection with, the enforcement of, or preservation of any rights under, this Agreement, or otherwise in respect of the moneys owing under this Agreement, together with interest at the rate referred to in Clause 5.2 from the 29. 36 date on which such expenses were incurred to the date of payment (as well after as before judgment). 7.3 Consumption, etc. tax All fees and expenses payable pursuant to this Clause 7 shall be paid together with an amount equal to any consumption, sales, value added or similar tax payable by the Agent, the Arranger or any Bank in respect of those fees and expenses. 7.4 Stamp and other duties The Borrower shall pay all stamp, documentary, registration or other like duties or taxes (including any duties or taxes payable by the Banks) imposed on or in connection with this Agreement or the Facility and shall indemnify the Agent, the Arranger and the Banks against any liability arising by reason of any delay or omission by the Borrower to pay such duties or taxes. 8. PAYMENTS AND TAXES; ACCOUNTS AND CALCULATIONS 8.1 No set-off or counterclaim; distribution to the Banks The Borrower acknowledges that, in performing their obligations under this Agreement, the Banks will be incurring liabilities to third parties in relation to the funding of amounts advanced to the Borrower, those liabilities matching the liabilities of the Borrower to the Banks, and that it is reasonable for the Banks to be entitled to receive payments from the Borrower gross on their due date in order that the Banks are put in a position to perform their matching obligations to the relevant third parties. Accordingly all payments to be made by the Borrower under this Agreement shall be made in full, without any set-off or 30. 37 counterclaim whatsoever and, subject to Clause 8.9, free and clear of any deductions or withholdings, in Yen (except for costs, charges or expenses which shall be payable in the currency in which they are incurred) on their due date to the account of the Agent specified in Schedule 1 or such other bank and/or account as the Agent may from time to time specify for this purpose; provided, however, that in the event of an Insolvency Proceeding affecting any Bank, any Collateral deposited in a Pledged Account at such Bank shall be retained as payment for, and shall be credited against, the Borrower's obligations under this Agreement to such Bank, and the Borrower shall have no further obligation to such Bank with respect to the amount so credited. Except where this Agreement specifically provides for a payment to be made for the account of a particular Bank, the Agent or the Arranger, payments to be made by the Borrower under this Agreement shall be for the account of all the Banks and the Agent shall forthwith distribute those payments in like funds as are received by the Agent to the Banks rateably in accordance with their Commitments or Contributions, as the case may be. 8.2 Payments by the Banks Sums to be advanced by the Banks to the Borrower under this Agreement shall be remitted in Yen on the date of the Advance as stated in the relevant Drawdown Notice to the account of the Agent at such bank as the Agent may have notified to the Banks and shall be paid by the Agent on that date in like funds as are received by the Agent to the account of the Borrower specified in the relevant Drawdown Notice. 8.3 Netting of Payments Despite any other provision of this Agreement, if on any date an amount (the "first amount") is to be advanced by a Bank under this Agreement and an amount (the "second amount") is due from the Borrower to that Bank under this Agreement, that Bank and the 31. 38 Borrower shall make their respective sums available to the Agent in accordance with Clauses 8.1 and 8.2, and the Agent shall apply the first amount in or towards payment of the second amount and shall remit to that Bank (or to the Borrower, as the case may be), the excess of one amount over the other amount in accordance with this Agreement. 8.4 Agent may assume receipt Where any sum is to be paid under this Agreement to the Agent for the account of the Borrower or any Bank, the Agent may assume that the payment will be made when due and may (but shall not be obliged to) make that sum available to the Person so entitled. If that payment is then not made to the Agent, then the Person to whom that sum was made available shall on request refund that sum to the Agent together with interest on it sufficient to compensate the Agent for the cost of making the sum available up to the date of repayment and the Person by whom the sum was payable shall indemnify the Agent for all loss or expense which the Agent may sustain or incur as a consequence of that sum not having been paid on its due date. 8.5 Time of payment Any sum payable by the Borrower to the Agent, the Arranger or to any Bank under this Agreement shall be paid so as to be received in immediately available funds in the payee's designated account by 11:00 a.m. for that account. Any payment received by the Agent from the Borrower for the account of the Arranger or any Bank or Banks which is received on its due date but after the time specified above and too late to be made available on that due date to the Arranger or the relevant Bank or Banks, as appropriate, shall be deemed to be received on the next Banking Day (though the Agent shall give credit to the Borrower for any interest earned by the Agent on that sum prior to its distribution). In holding any such sum, the Agent shall not be acting as agent of or trustee for the Borrower 32. 39 and may invest, deposit or otherwise deal with that sum as it may, in its absolute discretion, see fit without any duty or obligation to the Borrower in respect of that sum other than as specifically provided for in this Agreement. 8.6 Non-Banking Days When any payment under this Agreement would otherwise be due on a day which is not a Banking Day (or a LIBOR Banking Day, in the case of payment of principal or interest on a LIBOR Loan), the due date for payment shall be extended to the next following Banking Day (or LIBOR Banking Day, as the case may be) unless that Banking Day falls in the next calendar month in which case payment shall be made on the immediately preceding Banking Day (or LIBOR Banking Day, as the case may be). 8.7 Calculations Except with respect to interest on the Loan and unless provided otherwise, all interest and other payments of an annual nature under this Agreement shall accrue from day to day and be calculated on the basis of actual days elapsed and a 365 day year. Interest on the Loan shall accrue from day to day and be calculated on the basis of actual days elapsed and a 360 day year. 8.8 Certificates conclusive Any certificate or determination of the Agent or any Bank as to any rate of interest or any amount payable under this Agreement shall, in the absence of manifest error, be conclusive and binding on the Borrower and (in the case of a certificate or determination by the Agent) on the Banks; provided that, in the case of expenses required to be paid by the Borrower pursuant to Clause 7.2, the Agent, the Arranger, or any Bank, as the case 33. 40 may be, shall provide such invoices, receipts or other documents evidencing or supporting such determination as is reasonably available to it, and such evidence or support shall be prima facie evidence of the amount payable by the Borrower pursuant to Clause 7.2. 8.9 Grossing-up for Taxes If at any time the Borrower is required to make any deduction or withholding in respect of Taxes from any payment due under this Agreement for the account of any Bank, the Arranger or the Agent (or if the Agent is required to make any such deduction or withholding from a payment to the Arranger or a Bank)(except, in any such case, deductions or withholdings resulting from any Bank which is not a domestic corporation for the purposes of the Japanese Income Tax Law (shotoku zei hou) failing to satisfy the requirements of Article 180 of that law and Articles 304 and 305 of the Ordinance Enforcing the Income Tax Law, as modified by Article 42-2 of the Law Concerning Special Tax Treatment and Article 27-2 of the Ordinance Enforcing the Law Concerning Special Tax Treatment), the sum due from the Borrower in respect of such payment shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, each Bank, the Arranger and the Agent receives on the due date for such payment (and retains, free from any liability in respect of such deduction or withholding) a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made and the Borrower shall indemnify each Bank, the Arranger and the Agent against any losses or costs incurred by any of them by reason of any failure of the Borrower to make any such deduction or withholding or by reason of any increased payment not being made on the due date for such payment. The Borrower shall promptly deliver to the Agent any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any deduction or withholding as aforesaid. 34. 41 8.10 Bank accounts Each Bank shall maintain, in accordance with its usual practices, an account or accounts evidencing the amounts from time to time lent by, owing to and paid to it under this Agreement. The Agent shall maintain a control account showing the Advances and other sums owing by the Borrower under this Agreement and all payments in respect thereof made by the Borrower from time to time. The control account shall, in the absence of manifest error, be conclusive as to the amount from time to time owing by the Borrower under this Agreement. 8.11 Partial payments If, on any date on which a payment is due to be made by the Borrower under this Agreement, the amount received by the Agent from the Borrower falls short of the total amount of the payment due to be made by the Borrower on that date then, without prejudice to any rights or remedies available to the Agent, the Arranger or the Banks under this Agreement, the Agent shall apply the amount actually received from the Borrower in or towards discharge of the obligations of the Borrower under this Agreement in the following order, notwithstanding any appropriation made, or purported to be made, by the Borrower: (a) firstly, in or towards payment of any unpaid fees, costs and expenses of the Agent under this Agreement; (b) secondly, in or towards payment to the Arranger of any portion of the arrangement fee or underwriting fee payable under Clause 7.1(a) which remains unpaid; 35. 42 (c) thirdly, in or towards payment to the Banks, on a pro rata basis, of any accrued commitment fee payable under Clause 7.1(b) which is due but remains unpaid; (d) fourthly, in or towards payment of any default interest which is due but remains unpaid; (e) fifthly, in or towards payment to the Banks, on a pro rata basis, of any accrued interest (other than default interest) which is due but remains unpaid; (f) sixthly, in or towards payment to the Banks, on a pro rata basis, of any principal which is due but remains unpaid; and (g) seventhly, in or towards payment of any other sum which is due but remains unpaid (and, if more than one such sum so remains unpaid, on a pro rata basis). 8.12 Variation of application The order of application set out in Clause 8.11(c) - 8.11(g) may be varied by the Agent only if all the Banks so direct. 9. REPRESENTATIONS AND WARRANTIES 9.1 Representations and Warranties The Borrower represents and warrants to each of the Banks, the Arranger and the Agent that: 36. 43 (a) Due incorporation the Borrower is duly incorporated and validly existing under the laws of Japan as a limited liability stock company and has power to carry on its business as it is now being conducted and to own its property and other assets; (b) Corporate power to borrow the Borrower has power to execute, deliver and perform its obligations under this Agreement and to borrow the Commitments; all necessary corporate, shareholder and other action has been taken to authorise the execution, delivery and performance of the same and no limitation on the powers of the Borrower to borrow will be exceeded as a result of borrowings under this Agreement; (c) Binding obligations this Agreement constitutes valid and legally binding obligations of the Borrower enforceable in accordance with its terms, except insofar as the validity, binding nature and enforceability of the Borrower's obligations hereunder may be limited by the effect of insolvency, reorganization, arrangement, moratorium, and other similar laws, statutes of limitation, and the effect of general principles of equity; (d) No conflict with other obligations the execution and delivery of, the performance of its obligations under, and compliance with the provisions of, this Agreement by the Borrower will not (i) contravene any existing material law or licence to which the Borrower is subject; (ii) conflict with, or result in any breach of any of the terms of, or 37. 44 constitute a default under, any material agreement or other instrument to which the Borrower is a party or is subject or by which it or any of its property is bound; (iii) contravene or conflict with any provision of the Borrower's Articles of Incorporation or (iv) result in the creation or imposition of or oblige the Borrower to create any Lien on any of the Borrower's undertaking, assets, rights or revenues; (e) Consents obtained No authorization, consent, approval, license, exemption of, or notarisation, filing, recordation, registration or enrollment in or with, any Governmental Authority, or approval or consent of any other Person, is required for the due execution, delivery, validity, enforceability or admissibility in evidence of this Agreement or the performance by the Borrower of its obligations under this Agreement; (f) Financial statements correct and complete the audited financial statements of the Borrower in respect of the financial year ended on 31 December 1994 and the unaudited financial statements of the Borrower in respect of the financial quarter ended 30 September 1995, each as delivered to Agent, have been prepared in accordance with generally accepted accounting principles and practices in Japan (in the case of the yearly financial statements) or GAAP (in the case of the quarterly financial statements), which in each case have been consistently applied and present fairly and accurately the financial position of the Borrower as at such dates, respectively, and the results of the operations of the Borrower for the respective financial periods ended on such dates and, as at such dates, the Borrower did not have any significant liabilities 38. 45 (contingent or otherwise) or any unrealised or unanticipated losses which are not disclosed by, or reserved against or provided for in, those financial statements; (g) Choice of law the choice by the Borrower of the laws of Japan to govern this Agreement is valid and binding; (h) No immunity neither the Borrower nor any of its assets is entitled to special immunity (other than those generally available) on the grounds of sovereignty or otherwise from any legal action or proceeding (which shall include, without limitation, suit, attachment prior to judgment, execution or other enforcement); and (i) No withholding Taxes provided that each Bank is incorporated in or has its Lending Office in Japan and, in the latter case, has duly satisfied the requirements of Article 180 of the Income Tax Law of Japan, Articles 304 and 305 of the Ordinance Enforcing the Income Tax Law, as modified by Article 42-2 of the Law Concerning Special Tax Treatment and Article 27-2 of the Ordinance Enforcing the Law Concerning Special Tax Treatment, no Taxes (other than Stamp Tax) are imposed by withholding or otherwise on any payment to be made by the Borrower under this Agreement or are imposed on or by virtue of the execution or delivery by the Borrower of this Agreement or any document or instrument to be executed or delivered under this Agreement. 39. 46 9.2 Representations and Warranties incorporated by reference The Borrower represents and warrants that, as to the Borrower, the statements contained in subsections 10(e), (f), (g), (h), (i) (j), (k), (m), (o), (p), (s) and (t) of the Guaranty are true and complete to the same extent as if such statements were set forth herein as being made by the Borrower, and such representations and warranties, as to the Borrower, are herein incorporated by reference and shall survive the termination or cancellation of the Guaranty. 9.3 Repetition The representations and warranties in Clause 9.1 and Clause 9.2 (and so that the representation and warranty in Clause 9.1(f) shall for this purpose refer to the then latest financial statements delivered to the Agent under Clause 10.1) shall be deemed to be repeated by the Borrower on and as of each Drawdown Date as if made with reference to the facts and circumstances existing on each such day. 10. UNDERTAKINGS 10.1 Undertakings The Borrower undertakes with each of the Banks and the Agent that, from the date of this Agreement and so long as any moneys are owing under this Agreement and while all or any part of the Commitments remains outstanding, it will: 40. 47 (a) Notice of Default promptly inform the Agent of any occurrence of which it becomes aware which might adversely affect its ability to perform its obligations under this Agreement and of any Default immediately on becoming aware of it and will from time to time, if so requested by the Agent, confirm to the Agent that, except as otherwise stated in that confirmation, no Default has occurred and is continuing; (b) Use of proceeds use the Advances exclusively for the purposes specified in Clause 1.1; (c) Pari passu ensure that its obligations under this Agreement shall, without prejudice to the provisions of Clause 10.2, at all times rank at least pari passu with all its other present and future unsecured and unsubordinated Indebtedness; (d) Financial statements prepare financial statements in accordance with generally accepted accounting principles and practices in Japan consistently applied in respect of each financial year and cause the same to be reported on by its auditors and prepare unaudited financial statements in respect of each quarter in accordance with GAAP and deliver sufficient copies of the same to the Agent for distribution to all the Banks as soon as practicable but not later than 100 days (in the case of audited financial statements) or 55 days (in the case of unaudited financial statements) after the end of the financial period to which they relate; 41. 48 (e) Delivery of reports deliver to the Agent, for distribution to the Banks, sufficient copies for all the Banks of every report, circular, notice or like document issued by the Borrower to its creditors generally, at the time of issue thereof; (f) Pension schemes ensure that the levels of contribution to the pension schemes for the time being operated by the Borrower are and continue to be sufficient to cover the liabilities of such schemes in full to the extent contributions to cover such liabilities are permitted or will not result in taxation on participants thereof in the year in which contribution is made; and (g) Additional Undertakings incorporated by reference to the extent provided in the Guaranty as covenants of the Guarantor to cause the Borrower or any Subsidiary to comply with the covenants set forth in subsections 11(b), (c), (d), (e), (f), (g), (h), (i), (k) and (m) of the Guaranty, undertake to comply with such covenants to the same extent as if such covenants were set forth herein as covenants of the Borrower, and such covenants with respect to the Borrower are hereby incorporated herein by reference, mutatis mutandis, as being covenants of the Borrower and shall survive the termination or cancellation of the Guaranty. 10.2 Pledges 42. 49 The Borrower undertakes with each of the Banks and the Agent that, from the date of this Agreement and so long as any moneys are owing under this Agreement and while all or any part of the Commitments remains outstanding, without the prior written consent of the Agent acting on the instructions of the Majority Banks: (a) Negative pledge it will not create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, revenues or assets, whether now owned or hereafter acquired, other than Permitted Liens and other Liens that are not prohibited by Section 12(a) of the Guaranty; and (b) Additional Pledges incorporated by reference to the extent provided in the Guaranty as being covenants of the Guarantor not to permit the Borrower or any Subsidiary to take certain actions, the Borrower will undertake to comply with the covenants set forth in subsections 12(b), (c), (d), (e), (f) and (g) of the Guaranty, to the same extent as if such covenants were set forth herein as covenants of the Borrower, and such covenants with respect to the Borrower are hereby incorporated herein by reference, mutatis mutandis, as being covenants of the Borrower and shall survive the termination or cancellation of the Guaranty. 43. 50 11. EVENTS OF DEFAULT 11.1 Events of Default Each of the events and circumstances set out below is an Event of Default (whether or not caused by any reason outside the control of the Borrower or the Guarantor): (a) Non-payment: the Borrower fails to pay in Yen any principal or interest due from it under this Agreement, at the time and in the manner stipulated in this Agreement, or any other sum due from it under this Agreement, in the manner stipulated in this Agreement and within five Banking Days (each of which shall be a day on which commercial banks are open for business in California) of the due date; or (b) Breach of certain obligations: the Borrower commits any breach of or omits to observe any of the obligations or undertakings expressed to be assumed by it under Clause 10.2 (subject, in the case of the covenants incorporated by reference in Clause 10.2(b), to such grace period, if any, as may be available under the Guaranty with respect to such covenants); or (c) Breach of other obligations: the Borrower commits any breach of or omits to observe any of the obligations or undertakings expressed to be assumed by it under this Agreement (other than failure to pay any sum when due or any breach of the provisions of Clause 10.2) and, in respect of any such breach or omission which in the opinion of the Majority Banks is capable of remedy, such breach or omission shall continue for 30 or more days after the occurrence of such default; or 44. 51 (d) Repudiation: the Borrower repudiates this Agreement or does or causes or permits to be done any act or thing evidencing an intention to repudiate this Agreement; or (e) Guaranty effective: the Guaranty ceases to be (or the Guarantor claims that the Guaranty has ceased to be) in full force and effect; or (f) Guaranty default: any Event of Default (as defined in the Guaranty) occurs under the Guaranty; or (g) Suspension by clearing house: the official clearing house for the settlement of promissory notes in observance of its rules takes procedures for suspension of the Borrower's transactions with banks and similar institutions. 11.2 Acceleration The Agent may, or if so instructed by the Majority Banks, shall, without prejudice to any other rights of the Banks, at any time after the happening of an Event of Default so long as the same is continuing by notice to the Borrower declare that: (a) the obligation of each Bank to make its Commitment available shall be terminated and the Commitments shall then immediately be reduced to zero; and/or (b) all outstanding Advances and all interest, agency fee, and commitment fee accrued and all other sums payable under this Agreement have become immediately due and payable or have become due and payable on demand, whereupon the same shall, immediately or in accordance with the terms of that notice, become so due and payable; 45. 52 provided that, upon the occurrence of any Event of Default described in Section 14(e) or Section 14(f) of the Guaranty, the result which would otherwise occur only upon declaration by the Agent shall occur automatically, without the necessity of any action by the Agent or the Banks. On or at any time after the making of any such declaration, the Agent shall be entitled, to the exclusion of the Borrower (and without prejudice to Clause 5.2), to select the duration of Interest Periods. 11.3 Demand basis If, pursuant to Clause 11.2(b), the Agent declares all outstanding Advances to be due and payable on demand then, at any time thereafter, the Agent may, or, if so instructed by the Majority Banks, shall, by written notice to the Borrower (a) call for repayment of the Advances on such date as may be specified in that notice and the Advances shall become due and payable on the date so specified together with all interest, agency fee, and commitment fee accrued and all other sums payable under this Agreement or (b) withdraw that declaration with effect from the date specified in the notice. 12. INDEMNITIES 12.1 Broken funding and other indemnities The Borrower shall on demand indemnify each Bank, the Arranger and the Agent, without prejudice to any of their other respective rights under this Agreement, against any loss or expense which such Bank, the Arranger or the Agent shall certify as having been sustained or incurred by it as a consequence of: 46. 53 (a) any default in payment by the Borrower of any sum under this Agreement when due; (b) the occurrence of any other Event of Default or any acceleration pursuant to Clause 11.2; (c) any prepayment of any Advance or part thereof being made under Clause 6.2, Clause 6.3 or Clause 13.1 otherwise than on Interest Payment Date; or (d) any Advance not being made for any reason (excluding any default by the Agent, the Arranger or any Bank) after a Drawdown Notice has been given, including, in any such case, any loss or expense sustained or incurred by such Bank in maintaining or funding its Contribution or any part thereof or in liquidating or re-employing deposits from third parties acquired or contracted for to fund its Contribution or any part thereof or any other amount owing to such Bank. 12.2 Currency indemnity If any sum due from the Borrower under this Agreement or any order or judgment given or made in relation hereto has to be converted from the currency (the "first currency") in which the same is payable under this Agreement or under such order or judgment into another currency (the "second currency") for the purpose of (a) making or filing a claim or proof against the Borrower, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to this Agreement, the Borrower shall indemnify and hold harmless the Agent, the Arranger and each Bank from and against any loss suffered as a result of any difference between (i) the rate of exchange used for such purpose to convert the sum in question from the first 47. 54 currency into the second currency and (ii) the rate or rates of exchange at which the Agent, the Arranger or such Bank may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof. Any amount due from the Borrower under this Clause 12.2 shall be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of this Agreement and the term "rate of exchange" includes any premium and costs of exchange payable in connection with the purchase of the first currency with the second currency. 13. UNLAWFULNESS AND INCREASED COSTS 13.1 Unlawfulness If it is or becomes contrary to any law or regulation for any Bank to contribute to Advances or to maintain its Commitment or fund its Contribution, that Bank shall promptly, through the Agent, notify the Borrower and then (a) that Bank's Commitment shall be reduced to zero and (b) the Borrower shall be obliged to prepay the Contribution of that Bank not later than upon expiration of the relevant Interest Period or, if earlier, on such date as may be required by the applicable change in law or regulation. 13.2 Increased costs If the result of any change occurring after December 1, 1995 in, or in the interpretation or application of, or the introduction of, any law (including those relating to Taxation, capital adequacy, liquidity, reserve assets and special deposits) is to: (a) subject any Bank to Taxes or change the basis of Taxation of any Bank with respect to any payment under this Agreement (other than Taxes or Taxation on the 48. 55 overall net income, profits or gains of that Bank imposed in the jurisdiction in which its principal or lending office under this Agreement is located); and/or (b) increase the cost to, or impose an additional cost on, any Bank in making or keeping its Commitment available or maintaining or funding its Contribution; and/or (c) reduce the amount payable or the effective return to any Bank under this Agreement; and/or (d) reduce any Bank's rate of return on its capital by reason of a change in the manner in which it is required to allocate capital resources to its obligations under this Agreement; and/or (e) require any Bank to make a payment or forgo a return on or calculated by reference to any amount received or receivable by it under this Agreement, then and in each such case : (i) that Bank shall notify the Borrower through the Agent in writing of that event promptly upon its becoming aware of the same; and (ii) the Borrower shall on demand, made at any time whether or not the relevant Bank's Contribution has been repaid, pay to the Agent for the account of the Bank the amount which the Bank specifies (in a certificate setting forth the basis of the computation of such amount but not including any matters which that Bank regards as confidential) is required to 49. 56 compensate the Bank for that increased cost, reduction, payment or forgone return. 14. SET-OFF AND PRO RATA PAYMENTS 14.1 Set-off The Borrower authorises each Bank to apply any credit balance to which the Borrower is then entitled on any account of the Borrower with the Bank at any of its branches in or towards satisfaction of any sum then due and payable from the Borrower to the Bank under this Agreement. For this purpose each Bank is authorised to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect that application. None of the Banks shall be obliged to exercise any right given to it by this Clause 14.1. Each Bank shall notify the Agent and the Borrower immediately on the exercise or purported exercise of any right of set-off, giving full details in relation thereto and the Agent shall inform the other Banks. The provisions of this Clause 14.1 shall apply without prejudice to the Banks' rights under the Account Pledges. 14.2 Pro rata payments (a) If at any time any Bank (the "Recovering Bank") receives or recovers any amount owing to it by the Borrower under this Agreement by direct payment, set-off or in any manner other than by exercise of its rights under the relevant Collateral Agreement or the relevant Account Pledge (as the case may be) and other than by payment through the Agent pursuant to Clause 8.1 or Clause 8.11, the Recovering Bank shall, within two Banking Days of such receipt or recovery (a "Direct Receipt") notify the Agent of the amount of the Direct Receipt. If the Direct Receipt exceeds the amount which the Recovering Bank would have received if the 50. 57 Direct Receipt had been received by the Agent and distributed pursuant to Clause 8.1 or Clause 8.11 (as the case may be) then: (i) within two Banking Days of demand by the Agent, the Recovering Bank shall pay to the Agent an amount equal (or equivalent) to the excess; (ii) the Agent shall treat the excess amount so paid by the Recovering Bank as if it were a payment made by the Borrower and shall distribute the same to the Banks (other than the Recovering Bank) in accordance with Clause 8.1 or Clause 8.11, as appropriate; and (iii) as between the Borrower and the Recovering Bank the excess amount so re-distributed shall be treated as not having been paid but the obligations of the Borrower to the other Banks shall, to the extent of the amount so re-distributed to them, be treated as discharged. (b) If any part of the Direct Receipt subsequently has to be wholly or partly refunded by the Recovering Bank each Bank to which any part of such Direct Receipt was so re-distributed shall on request from the Recovering Bank repay to the Recovering Bank its pro rata share of the amount which has to be refunded by the Recovering Bank. (c) Each Bank shall on request supply to the Agent such information as the Agent may from time to time request for the purpose of this Clause 14.2. (d) Any amount received or recovered by a Bank under a novation, assignment, sub-participation (or the like) shall be ignored for the purpose of this Clause 14.2. 51. 58 15. ASSIGNMENT, SUBSTITUTION AND LENDING OFFICES 15.1 Benefit and burden This Agreement shall be binding upon, and enure for the benefit of, the Banks, the Arranger, the Agent and the Borrower and their respective successors and Substitutes. 15.2 No assignment by Borrower The Borrower may not assign, transfer or otherwise dispose of any of its rights or obligations under this Agreement. 15.3 Participation Any Bank may, in its absolute discretion and without any requirement to obtain the consent of or to give notice or any information to any other party, grant one or more participating interests in its proportion of the Loan to any third party (a "Participant"). The granting of such a participating interest shall not affect the relevant Bank's rights and obligations under this Agreement nor shall the Participant acquire any rights or assume any obligations under this Agreement other than with the agreement of the Borrower and the Agent. 52. 59 15.4 Substitution Otherwise than in accordance with this Clause 15.4, each Bank may not assign all or any of its rights hereunder. Each Bank (a "Transferring Bank") may, in its absolute discretion and without any requirement to obtain the consent of any other party (other than the consent of the Agent and the Borrower, which consent shall not be unreasonably withheld or delayed), transfer, by way of novation, all or any part of its rights, benefits and/or obligations under this Agreement to another person (a "Substitute"). Any such novation shall be effected on 5 Banking Days' prior notice by delivery to the Agent of a duly completed Substitution Certificate duly executed by the Transferring Bank and the Substitute (which the Agent shall promptly execute for itself, the Borrower and the other Banks (the "other parties")). Subject to the execution of that Substitution Certificate by all parties to it, on the effective date specified in a Substitution Certificate, to the extent that they are expressed in that Substitution Certificate to be the subject of the novation effected pursuant to this Clause 15.5: (a) the other parties and the Transferring Bank shall be released from their respective obligations towards one another under this Agreement (the "discharged obligations") and their respective rights against one another under this Agreement (the "discharged rights") shall be cancelled; (b) the relevant Substitute and the other parties shall assume obligations towards each other which differ from the discharged obligations only insofar as they are owed to or assumed by that Substitute instead of to or by the Transferring Bank; and (c) the relevant Substitute and the other parties shall acquire rights against each other which differ from the discharged rights only insofar as they are exercisable by or against such Substitute instead of by or against the Transferring Bank 53. 60 and, on the date upon which such novation takes effect, the Substitute shall pay to the Agent for its own account a fee of (yen)250,000. The Agent shall promptly notify the other parties of the receipt by it of any Substitution Certificate and shall promptly deliver a copy of that Substitution Certificate to the Borrower. 15.5 Reliance on Substitution Certificate The Agent and the Borrower may rely on any Substitution Certificate delivered to the Agent in accordance with the foregoing provisions of this Clause 15 which is complete and regular on its face as regards its contents and purportedly signed on behalf of the Transferring Bank and the Substitute and neither the Agent nor the Borrower shall have any liability or responsibility to any party as a consequence of placing reliance on and acting in accordance with any such Substitution Certificate if it proves to be the case that the same was not authentic or duly authorised. 15.6 Authorisation of Agent The Borrower and each Bank irrevocably authorises the Agent to counter-sign each Substitution Certificate on its behalf without any further consent of, or consultation with, the Borrower or such Bank. 15.7 Construction of certain references If any Bank novates any of its rights, benefits and obligations as provided in Clause 15.4 all relevant references in this Agreement to such Bank shall thereafter be construed as a reference to that Bank and/or its Substitute (as the case may be) to the extent of their respective interests. 54. 61 15.8 Lending offices Each Bank shall lend through its office at the address specified in Schedule 1 or, as the case may be, in any relevant Substitution Certificate or through any other office of that Bank selected from time to time by that Bank through which such Bank wishes to lend for the purposes of this Agreement. If the office through which a Bank is lending is changed pursuant to this Clause 15.8, the Bank shall notify the Agent promptly of that change. A Bank shall use its reasonable best efforts (consistent with legal and regulatory restrictions) not to elect a lending office that, at the time of making such election, increases the amounts which would have been payable by the Borrower to such Bank under this Agreement in the absence of such election, unless, in the sole judgment of such Bank, it would be advantageous to the Bank to elect such lending office. 15.9 Disclosure of information; Confidentiality Any Bank may disclose to a prospective transferee or Substitute or to any other Person who may propose entering into contractual relations with that Bank in relation to this Agreement such information about the Borrower as the Bank shall consider appropriate. Each Bank agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information identified as "confidential" or "secret" by the Borrower or the Guarantor and provided to it by the Borrower, the Guarantor or any Subsidiary of the Guarantor in connection with this Agreement, or any other Loan Document, and neither the Bank nor any of its Affiliates shall use any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Agreement or in enforcement of this Agreement or the other Loan Documents; except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, the Guarantor 55. 62 or a Subsidiary of the Guarantor, provided that such source is not bound by a confidentiality agreement with the Borrower; provided, further, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Arranger, Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to any Participant or Substitute, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (G) as to any Bank, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Borrower is party or is deemed party with such Bank; and (H) to such Bank's independent auditors and other professional advisors. The provisions of this Clause 15.9 shall not preclude the Borrower, in any situation described in clauses (B), (C) or (D) above, from contesting in any legal manner any order or requirement to disclose such information or seeking to impose limits on such disclosure. 16. ARRANGER, AGENT AND REFERENCE BANKS 16.1 Appointment of Agent Each Bank irrevocably appoints the Agent as its agent for the purposes of this Agreement and authorises the Agent (whether or not by or through employees or agents) to take such action on such Bank's behalf and to exercise such rights, remedies, powers and discretions as are specifically delegated to the Agent by this Agreement, together with such powers and discretions as are reasonably incidental thereto. Neither the Agent nor the Arranger 56. 63 shall, however, have any duties, obligations or liabilities to the Banks beyond those expressly stated in this Agreement. 16.2 Amendments; Waivers (a) Subject to Clause 16.2(b), the Agent may, with the consent of the Majority Banks (or if and to the extent expressly authorised by the other provisions of this Agreement), (i) agree to amendments or modifications to this Agreement with the Borrower and/or (ii) vary or waive breaches of, or defaults under, or otherwise excuse performance of, any provision of this Agreement by the Borrower. Any such action so authorised and effected by the Agent shall be documented in such manner as the Agent shall (with the approval of the Majority Banks) determine, shall be promptly notified to the Banks by the Agent and shall be binding on all the Banks. (b) Except with the prior written consent of all the Banks, the Agent shall not have authority on behalf of the Banks to agree with the Borrower to any amendment or modification to this Agreement or to grant waivers in respect of breaches or defaults or to vary or excuse performance of or under this Agreement by the Borrower, if the effect of such amendment, modification, waiver, variation or excuse would be to (i) reduce any applicable Margin, (ii) postpone the due date or reduce the amount of any payment of principal, interest or other amount payable by the Borrower under this Agreement, (iii) change the currency in which any amount is payable by the Borrower under this Agreement, (iv) increase any Bank's Commitment, (v) extend the Availability Period, (vi) change the definition of "Majority Banks" in Clause 1.2, (vii) change any provision of this Agreement which expressly or impliedly requires the approval or consent of all the Banks such that the relevant approval or consent may be given otherwise than with the sanction 57. 64 of all the Banks, (viii) change the order of distribution under Clause 8.11, (ix) change Clause 14.2 or (x) change this Clause 16.2. 16.3 Rights of Agent as Bank; No partnership With respect to its own Commitment and Contribution (if any) the Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not performing the duties and functions delegated to it under this Agreement and the term "Banks" shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity as a Bank. This Agreement shall not and shall not be construed so as to constitute a partnership between the parties or any of them. 16.4 No liability of Arranger and Agent Neither the Arranger nor the Agent shall: (a) be obliged to request any certificate or opinion under Clause 3.4 or Clause 10.1 or to make any enquiry as to the use of the proceeds of the Loan unless (in the case of the Agent) so required in writing by any Bank, in which case the Agent shall promptly make the appropriate request of the Borrower, or be obliged to make any enquiry as to any default by the Borrower in the performance or observance of any of the provisions of this Agreement or as to the existence of a Default unless (in the case of the Agent) the Agent has actual knowledge thereof or has been notified in writing thereof by a Bank, in which case the Agent shall promptly notify the Banks of the relevant event or circumstance; or 58. 65 (b) be liable to any Bank for any action taken or omitted under or in connection with this Agreement or the Facility unless caused by its gross negligence or wilful misconduct. For the purposes of this Clause 16 the Agent shall not be treated as having actual knowledge of any matter of which the corporate finance or any other division outside the agency or loan administration department of the person for the time being acting as the Agent may become aware in the context of corporate finance, advisory or lending activities from time to time undertaken by the Agent for the Borrower or any of its Subsidiaries or associated companies or any other person which may be a trade competitor of the Borrower or may otherwise have commercial interests similar to those of the Borrower. 16.5 Agent's duty to notify and take action The Agent shall: (a) promptly notify each Bank of the contents of each notice, certificate or other document received by the Agent from the Borrower under or pursuant to Clauses 10.1(a) or 10.1(e); and (b) (subject to its being indemnified to its satisfaction) take such action or, as the case may be, refrain from taking such action with respect to any Default of which the Agent has actual knowledge as the Majority Banks may reasonably direct. 16.6 Identity of Banks The Agent may deem and treat (a) each Bank as the person entitled to the benefit of the Contribution of such Bank for all purposes of this Agreement unless and until a 59. 66 Substitution Certificate shall have been filed with the Agent, and (b) the office set opposite the name of each Bank in Schedule 1 or, as the case may be, in any relevant Substitution Certificate as such Bank's lending office unless and until a written notice of change of lending office shall have been received by the Agent; and the Agent may act upon any such notice unless and until the same is superseded by a further such notice. 16.7 Non-reliance on Arranger or Agent Each Bank acknowledges that it has not relied on any statement, opinion, forecast or other representation made by the Arranger or the Agent to induce it to enter into this Agreement and that it has made and will continue to make, without reliance on the Agent or the Arranger and based on such documents as it considers appropriate, its own appraisal of the creditworthiness of the Borrower and its own independent investigation of the financial condition and affairs of the Borrower in connection with the making and continuation of any Advances under this Agreement. Neither the Arranger nor the Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect to the Borrower whether coming into its possession before the making of any Advance or at any time or times thereafter, other than (in the case of the Agent) as provided in Clause 16.5(a). 16.8 No Responsibility on Arranger or Agent for Borrower's performance Neither the Arranger nor the Agent shall have any responsibility to any Bank on account of the failure of the Borrower or the Guarantor to perform its obligations under this Agreement or the Guaranty or for the financial condition of the Borrower or the Guarantor or for the completeness or accuracy of any statements, representations or warranties in this Agreement or the Guaranty or the Information Memorandum or any document delivered under this Agreement or for the execution, effectiveness, adequacy, genuineness, validity, 60. 67 enforceability or admissibility in evidence of this Agreement or of any certificate, report or other document executed or delivered under this Agreement or otherwise in connection with the Facility or its negotiation or for acting (or, as the case may be, refraining from acting) in accordance with the instructions of the Majority Banks. The Arranger and the Agent shall be entitled to rely on any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person and shall be entitled to rely as to legal or other professional matters on opinions and statements of any legal or other professional advisers selected or approved by it. 16.9 Other dealings The Arranger and the Agent may, without any liability to account to the Banks, accept deposits from, lend money to, and generally engage in any kind of banking or trust business with, the Borrower or any of its Subsidiaries or associated companies or any of the Banks as if it were not the Arranger or the Agent as the case may be. 16.10 Reimbursement and indemnity by Banks Each Bank shall reimburse the Arranger and the Agent (rateably in accordance with such Bank's Commitment or Contribution), to the extent that the Arranger or the Agent is not reimbursed by the Borrower or the Guarantor, for the charges and expenses incurred by the Arranger and the Agent in connection with the contemplation of, or otherwise in connection with, the enforcement of, or the preservation of any rights under, or in carrying out its duties under, this Agreement including (in each case) the fees and expenses of legal or other professional advisers. Each Bank shall indemnify the Agent (rateably in accordance with its Commitment or Contribution) against all liabilities, damages, costs and claims whatsoever incurred by the Agent in connection with this Agreement or the performance of its duties under this Agreement or any action taken or omitted by the 61. 68 Agent under this Agreement, unless such liabilities, damages, costs or claims arise from the Agent's own gross negligence or wilful misconduct. 16.11 Retirement of Agent (a) The Agent may retire from its appointment as Agent under this Agreement having given to the Borrower and each of the Banks not less than 30 days' notice of its intention to do so, provided that no such retirement shall take effect unless there has been appointed by the Agent as a successor agent: (i) a Bank nominated by the Majority Banks or, failing such a nomination, (ii) any reputable and experienced bank or financial institution with offices in Tokyo and nominated by the Agent, which shall have consented to such appointment. (b) On any such successor being appointed, the retiring Agent shall be discharged from any further obligation under this Agreement and its successor and each of the other parties to this Agreement shall have the same rights and obligations among themselves as they would have had if such successor had been a party to this Agreement in place of the retiring Agent. 16.12 Change of Reference Banks If (a) the whole of the Contribution (if any) of any Reference Bank is prepaid, (b) the Commitment (if any) of any Reference Bank is reduced to zero in accordance with Clause 6.3 or Clause 13.1 or (c) a Reference Bank assigns and/or novates the whole of its 62. 69 rights and obligations (if any) as a Bank under this Agreement or (d) any Reference Bank ceases to provide quotations to the Agent for the purposes of determining LIBOR, the Agent may, acting on the instructions of the Majority Banks (which for this purpose shall not include the relevant Reference Bank), terminate the appointment of such Reference Bank and appoint another Bank to replace such Reference Bank. 16.13 Variation of Exhibits The Agent may require such changes to any of the Exhibits as are reasonable, in the opinion of the Agent after consultation with the Banks, to protect the interests of the Banks under this Agreement. 17. NOTICES AND OTHER MATTERS 17.1 Notices Every notice, request, demand or other communication under this Agreement shall: (a) be in writing delivered personally or by prepaid letter (airmail if the addressee is abroad), telex or telefax; (b) be deemed to have been received, subject as otherwise provided in this Agreement, in the case of a letter when delivered personally or 2 business days after it has been put into the post (7 business days if delivered through international airmail), in the case of a telex, at the time of despatch with confirmed answerback of the addressee appearing at the beginning and end of the transmission and, in the case of a telefax, when a complete and legible copy is received by the addressee (provided that if the date of receipt of a letter is not a business day in the country of the addressee or 63. 70 if the time of receipt of any telex or telefax is after the close of business in the country of the addressee it shall be deemed to have been received at the opening of business on the next such business day); and (c) be sent to the addressee at the relevant address telex number or telefax number stated in Schedule 1 or to such other address, telex number or telefax number as has been notified by the addressee to the other parties. 17.2 Notices through the Agent Every communication under this Agreement to be given by the Borrower to any other party shall be given to the Agent for onward transmission as appropriate and to be given to the Borrower shall (except as otherwise provided in this Agreement) be given by the Agent. 17.3 No implied waivers, remedies cumulative No failure or delay on the part of the Agent, the Arranger, the Banks or any of them to exercise any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by the Agent, the Arranger, the Banks or any of them of any power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. The remedies provided in this Agreement are cumulative and are not exclusive of any remedies provided by law. 17.4 English language This Agreement is made in and shall be construed in the English language; all certificates, instruments and other documents to be delivered under or supplied in connection with this 64. 71 Agreement shall be in the English language; provided that, to the extent that (a) any corporate document of the Borrower is in the ordinary course of its business prepared in Japanese or (b) any instrument or other document issued by a Governmental Authority is in Japanese, such documents shall be delivered hereunder in Japanese and, if appropriate, shall be accompanied by an English translation thereof. Without limiting the generality of the foregoing, the Borrower's certificate of seal impression and the certified copy of the commercial registry of the Borrower need not be accompanied by their English translations. 18. GOVERNING LAW AND JURISDICTION 18.1 Governing Law This Agreement shall be governed by, and construed in accordance with, the laws of Japan. 18.2 Jurisdiction (a) Each party irrevocably agrees that the Tokyo District Court shall have jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with this Agreement and, for those purposes, irrevocably submits to the jurisdiction of that court. (b) Each party irrevocably waives any objection which it might now or hereafter have to the court referred to in Clause 18.2(a) being nominated as the forum to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with this Agreement and agrees not to claim that court is not a convenient or appropriate forum. 65. 72 (c) The submission to the jurisdiction of the court referred to in Clause 18.2(a) shall not (and shall not be construed so as to) limit any right of any party to take proceedings against any other party in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by applicable law. (d) Each party consents generally in respect of any legal action or proceedings arising out of or in connection with this Agreement to the giving of any relief or the issue of any process in connection with such action or proceedings including the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which may be made or given in such action or proceeding. 66. 73 IN WITNESS OF WHICH the parties have caused this Agreement to be duly executed on the date first above written. LSI LOGIC JAPAN SEMICONDUCTOR, INC. By: -------------------------- Name: Title: 67. 74 ABN AMRO BANK N.V., as Arranger By: -------------------------- Name: Title: By: -------------------------- Name: Title: 68. 75 ABN AMRO BANK N.V., Tokyo Branch, as Agent and a Bank By: -------------------------- Name: Title: 69. 76 THE INDUSTRIAL BANK OF JAPAN, LIMITED, as Co-Agent and a Bank By: ---------------------------- Name: Title: 70. 77 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ---------------------------- Name: Title: 71. 78 THE SANWA BANK, LIMITED By: --------------------------- Name: Title: 72. 79 THE BANK OF NOVA SCOTIA, Tokyo Branch By: ---------------------------- Name: Title: 73. 80 BANQUE NATIONALE DE PARIS, Tokyo Branch By: ---------------------------- Name: Michel Cohen-Tannugi Title: Executive Director 74. 81 BARCLAYS BANK PLC, Tokyo Branch By: ---------------------------- Name: Title: 75. 82 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ____________________________________ Name: Title: 76. 83 THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By: ____________________________________ Name: Yoshimasa Osawa Title: Representative Director 77. 84 THE SUMITOMO BANK, LTD. By: ____________________________________ Name: Title: 78. 85 Schedule 1 The Parties and the Commitments A. The Borrower 1) Name: LSI Logic Japan Semiconductor, Inc. 2) Incorporated in: Japan 3) Principal Office: 10, Kitahara Tsukuba-shi Ibaraki, Japan 4) Fax: 81-298-54-0831 5) Notices to: LSI Logic Corporation 1551 McCarthy Boulevard MS D-106 Milpitas, CA 95035 Fax: (408) 433-6896 6) Notices for the attention of: 1. General Counsel 2. Treasurer S-1-1 86 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ ABN AMRO Bank N.V. Lending Office: 4,000,000,000 -------------- Tokyo Branch 13F, Shiroyama JT Mori Building 4-3-1, Toranomon Minato-ku, Tokyo 105 Japan Attn: Structured Finance Tel: 81-3-5401-6319 Fax: 81-3-5401-6361/6363 Notices to: Same as above.
S-1-2 87 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ The Industrial Bank of Lending Office: 3,500,000,000 Japan, Limited -------------- 3-3 Marunouchi 1-chome Chiyoda-ku, Tokyo 100 Japan Attn: Mr. Takahiko Ueda/Ms. Keiko Yamazaki Foreign Corporations Group, Corporate Banking Department (Multinational) Tel: 81-3-5200-7424 Fax: 81-3-3201-3468 Notices to: Same as above.
S-1-3 88 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ Bank of America National Lending Office: 2,000,000,000 Trust and Savings -------------- Association Tokyo Branch ARK Mori Bldg. 1-12-32 Akasaka Minato-ku Tokyo 107, Japan Attn: Ms. Ayako Nishimura Tel: 81-3-3587-3143 Fax: 81-3-3587-3373 Telex: J22272 BANKOAM Notices to: ---------- As to administrative matters and wiring instructions, same as above. As to other matters: ARK Mori Bldg. 1-12-32 Akasaka Minato-ku Tokyo 107, Japan Attn: Satoshi Nemoto Relationship Manager Tel: 81-3-3587-3110 Fax: 81-3-3587-3373
S-1-4 89 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ The Sanwa Bank, Limited Lending Office: 3,000,000,000 -------------- International Finance Dept., Tokyo 1-1-1, Otemachi Chiyoda-ku Tokyo 100, Japan Attn: Structured Finance Group Tel: 81-3-5252-1928 Fax: 81-3-3284-0902 Notices to: Same as above
S-1-5 90 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ The Bank of Nova Scotia Lending Office: 2,000,000,000 -------------- Tokyo Branch Fukoku Seimei Building 21st Floor 2-2 Uchisaiwaicho 2-chome Chiyoda-ku Tokyo 100, Japan Attn: Robert A. Ulmer, Vice President Tel: 81-3-3593-0202 Fax: 81-3-3593-0299 Notices to: Same as above
S-1-6 91 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- -------------- ----- Banque Nationale de Paris Lending Office: 2,000,000,000 Tokyo Branch Shiroyama JT Mori Building, 23rd Floor 3-1 Toranomon 4-chome Minato-ku, Tokyo 105 Japan Attn: Michel Cohen Tannugi, Executive Director and Keiichi Isome, Vice President Tel: 81-3-5473-3520 Fax: 81-3-5473-3510 Notices to: Same as above, with copy to: Banque Nationale de Paris San Francisco Branch 180 Montgomery Street 3rd Floor San Francisco, California Attn: Rafael Lumanlan Tel: 415-956-0707 Fax: 415-296-8954
S-1-7 92 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ Barclays Bank PLC Lending Office: 2,500,000,000 -------------- Tokyo Branch 15th Floor Urbannet Otemachi Building 2-2-2 Otemachi, Chiyoda-ku Tokyo 100, Japan Attn: Satoaki Takahashi Director Tel: 81-3-5255-0151 Fax: 81-3-5255-0157 Telex: 24968 BARGROUPJ J Notices to: Same as above.
S-1-8 93 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ Morgan Guaranty Trust Lending Office: 2,000,000,000 Company of New -------------- York Akasaka Park Building 2-20, Akasaka 5-chome Minato-ku Tokyo 107 Japan Attn: Atsushi Suzuki Vice President, Global Credit Tel: 81-3-5573-1438 Fax: 81-3-5573-1458 Notices to: Same as above.
S-1-9 94 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ The Long-Term Credit Bank Lending Office: 2,000,000,000 of Japan, Ltd. -------------- Tokyo Branch 1-6 Yaesu 2 Chuo-ku Tokyo 104, Japan Attn: Tokyo Corporate Finance Division I Tel: 81-3-3281-5112 Fax: 81-3-5203-7152 Notices to: Same as above
S-1-10 95 B. The Banks and their Commitments
Address, telex and Commitment Name Telefax number (yen) ---- ------------------ ------ The Sumitomo Bank, Ltd. Lending Office: 2,000,000,000 -------------- Yotsuya Branch 2-3-5 Yotsuya Shinjuku-ku Tokyo 160, Japan Tel: 81-3-3356-8131 Fax:_______________ Notices to: Same as above
S-1-11 96 C. The Agent 1) Name: ABN AMRO BANK N.V., Tokyo Branch 2) Incorporated in: 3) Principal Office: 13F, Shiroyama JT Mori Building 4-3-1, Toranomon, Minato-ku Tokyo 105, Japan 4) Telex: 5) Fax: 81-3-5401-6361/6363 6) Notices to: [If different from 3)-5)] 7) Notices for the attention of: Structured Finance 8) Payment Account Bank: The Sakura Bank, Ltd. Branch: Tokyo Main Office (Toukyo Eigyoubu) Address: A/c No: 1008000 (current account) S-1-12 97 Schedule 2 Documents and evidence required as conditions precedent A. Borrower (a) A copy, certified as then true and complete and up-to-date as of the Closing Date by a duly authorised office of the Borrower, of the Articles of Incorporation of the Borrower. (b) A copy, certified as a true copy by a duly authorised officer of the Borrower, of resolutions of the Board of Directors of the Borrower effective as of the Closing Date evidencing approval of this Agreement and authorising its appropriate officers or attorney (as applicable) to execute and deliver this Agreement and to give all notices and take all other action required by the Borrower under this Agreement. (c) Specimen signatures, authenticated by a duly authorised officer of the Borrower, of the Persons authorised in the resolutions of the Board of Directors referred to in paragraph (b) above together with the executed Power of Attorney empowering that Person to execute and deliver this Agreement and to give all notices and take all other action required by the Borrower under this Agreement (if applicable). S-2-1 98 (d) An opinion of legal advisers to the Borrower on Japanese law, dated the Drawdown Closing Date of the first Advance, in a form satisfactory to and previously approved by the Agent. (e) An opinion of Nishimura & Sanada, special legal advisers in Japan to the Agent and the Banks, dated the Drawdown Closing Date of the first Advance, in a form satisfactory to and previously approved by the Agent. (f) A certified copy of the commercial registry and a certificate of seal impression (each as of the Closing Date) of a representative director of the Borrower executing this Agreement or the Power of Attorney referred to above (as the case may be). B. The Guarantor (a) The Guaranty, executed by the Guarantor. (b) Copies of the resolutions of the board of directors of the Guarantor and other necessary corporate action authorizing the Guarantor to enter into the Guaranty and the transactions contemplated thereby, certified as of the Closing Date by the Secretary or Assistant Secretary of the Guarantor; and S-2-2 99 (c) A certificate of the Secretary or Assistant Secretary of the Guarantor certifying as of the Closing Date the names and true signatures of the officers of the Guarantor authorized to execute, deliver and perform, as applicable, the Guaranty, and all other documents to be delivered by it thereunder. (d) The certificate or articles of incorporation and the bylaws of the Guarantor as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Guarantor as of the Closing Date, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation, dated the Closing Date. (e) An opinion dated the Drawdown Closing Date of the first Advance of California counsel to the Guarantor and addressed to the Agent and the Banks, in a form satisfactory to and previously approved by the Agent. (f) An opinion dated the Drawdown Closing Date of the first Advance of California counsel to the Agent and the Banks and addressed to the Agent and the Banks, in a form satisfactory to and previously approved by the Agent. (g) A certificate signed by a Responsible Officer of the Guarantor, dated the Drawdown Closing Date, stating that: S-2-3 100 i. The representations and warranties contained in Section 10 of the Guaranty are true and correct on and as of such date, as though made on and as of such date; ii. no "Default" or "Event of Default" exists or would result from the execution and delivery of the Guaranty; iii. no event or circumstance has occurred since 31 December 1994 that has resulted or could reasonably be expected to result in a "Material Adverse Effect" (as defined in the Guaranty); and iv. each of the documents previously delivered pursuant to this Schedule 2, Part B remains true, complete and accurate. (h) Evidence that as of the Closing Date all approvals or consent of any other Person (including, if any, any necessary shareholder consents), required in connection with the execution, delivery and performance of the Guaranty and any other document to be executed and delivered by the Guarantor shall have been obtained. S-2-4 101 C. General Such other confirmations, information or opinions as the Agent may have previously reasonably requested in writing. D. Delivery Dates (a) Documents required by A(a), A(b), A(c), A(d), A(e), A(f), B(a), B(b), B(c), B(d), B(e), B(f) and B(h) not earlier than the fifth Banking Day nor later than the third Banking Day prior to the date of the first Drawdown Date; (b) The document required by B(g), not later than each Drawdown Closing Date. S-2-5 102 Exhibit 1 Form of Drawdown Notice To: [Name and address of Agent] Attention: [Date] (yen)25,000,000,000 Floating Rate Guaranteed Credit Facility Agreement dated 27 December, 1995 We refer to the above Agreement and hereby give you notice that we wish to draw an Advance of (yen)[ ],([ ] Yen) on 199[ ]. The funds should be credited to [name and number of account] with [details of bank in Tokyo]. The first Interest Period in respect of this Advance shall have a duration of [1][3][6] months and the interest rate thereon shall accrue at a rate determined by reference to [TIBOR] [LIBOR]. 1. 103 We confirm that: (i) no event or circumstance has occurred and is continuing which constitutes a Default, and no Default shall occur as a result of the making of such Advance; (ii) the representations and warranties contained in Clause 9 of the Agreement (and so that the representation and warranty in Clause 9.1(f) refers for this purpose to the audited financial statements of the Borrower in respect of the financial year ended on [ ] 199[ ]) and in Section 10 of the Guaranty are true and correct at the date hereof as if made with respect to the facts and circumstances existing at such date; and (iii) the borrowing to be effected by such Advance will be within our corporate powers, has been validly authorised by appropriate corporate action and will not cause any limit on our borrowings (whether imposed by statute, regulation, agreement or otherwise) to be exceeded; 2. 104 (iv) there has been no material adverse change in our financial position from that set out in the financial statements for and as of 31 December 1994; and (v) as at the most recent Margin Determination Date, the Ratio is [ ] and the Debt Rating is [ ]. Words and expressions defined in the Agreement shall have the same meanings where used herein. For and on behalf of LSI Logic Japan Semiconductor, Inc. .............................. Name: Title: 3. 105 Exhibit 2 Form of Guaranty 106 Exhibit 3 Form of Account Pledge THIS PLEDGE AGREEMENT is dated _______________ between (1) LSI LOGIC JAPAN SEMICONDUCTOR, INC. (the "Pledgor") and (2) _______________ acting through its _______________ (the "Pledgee"). It is hereby agreed as follows: SECTION 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Agreement: "Account" means the Japanese yen account (Account No.__________) of the Pledgor maintained with the Pledgee and evidenced, if applicable, by a deposit certificate issued by the Pledgee. "Collateral" means, collectively, all of the right, title and interest present or future of the Pledgor in and to (i) the Account and all amounts now or hereafter from time to time 1. 107 deposited therein or credited thereto, (ii) (if applicable) the deposit certificate from time to time evidencing the Account and (iii) all proceeds of the foregoing, including all cash and other property at any time and from time to time receivable or distributable in respect of or in exchange for the foregoing. "Facility Agreement" means the Facility Agreement dated 27 December, 1995 among LSI Logic Japan Semiconductor, Inc., the Banks parties thereto, ABN AMRO Bank N.V., as Arranger, and ABN AMRO Bank N.V., Tokyo Branch, as Agent. "Secured Obligations" means all moneys, liabilities and obligations, whether actual or contingent, which are now or which may at any time and from time to time hereafter be due, owing, payable or incurred or be expressed to be due, owing, payable or incurred from or by the Pledgor to the Pledgee under the Facility Agreement. "Security Event" means (i) a Default or (ii) a breach by the Pledgor of its obligations hereunder. "Security Period" means the period commencing on the date of this Agreement and terminating on the Expiration Date. 2. 108 All other terms used herein in capitalized form which are defined in the Facility Agreement and not otherwise defined herein shall have the respective meanings set forth in the Facility Agreement. 1.2 Interpretation. Unless the context otherwise requires, words importing the singular number shall include the plural and vice versa; the headings are for convenience only and shall not affect the construction hereof; references herein to any agreement, license or other instrument shall be deemed to include references to such agreement, license or other instrument as amended, or otherwise modified from time to time, but only to the extent such amendments or other modifications are not prohibited by the terms of the Loan Documents; references herein to any enactment shall be deemed to include references to such enactment as re-enacted, amended or extended; references to Sections are references to Sections of this Agreement; and references to the Pledgor and the Pledgee shall, where relevant, be deemed to be references to or to include, as appropriate, their respective successors or assigns. SECTION 2. SECURITY 2.1 As collateral security for the prompt payment and punctual performance in full of the Secured Obligations when due (whether at stated maturity, by acceleration or otherwise), the Pledgor hereby irrevocably and unconditionally grants to the Pledgee a security 3. 109 interest in the form of a pledge (shichiken) upon all its present and future right, title and interest in the Collateral to the intent that such pledge shall constitute a first ranking charge on, over, and in respect of the Collateral in priority to any other Lien in favour of any other Person. 2.2 The security constituted by this Agreement shall not be released or discharged by payment or satisfaction of any part of the Secured Obligations but shall be a continuing security and shall extend to cover any sum or sums of money or other obligations which shall for the time being constitute the balance of the Secured Obligations until all of the Secured Obligations have been discharged in full; provided, however, that so long as no Default shall have occurred and be continuing, Collateral may be withdrawn only on 10 Banking Days' prior notice to the Agent and on (i) an Interest Payment Date or (ii) the Expiration Date. Withdrawals shall be an integral multiple of (yen)100,000,000 (one hundred million yen). 2.3 The security hereby constituted shall become enforceable immediately upon the occurrence and continuance of a Security Event. At any time after the security hereby constituted has become enforceable, the Pledgee may, at its discretion and without prejudice to any other rights and remedies it may have, and without being responsible for any loss or damage which may arise in connection therewith unless due to the wilful misconduct or gross negligence of the Pledgee, and without any consent of, or notice to, the Pledgor, apply all or 4. 110 any part of the Collateral or any deposit forming part of the Collateral in or towards satisfaction of any of the Secured Obligations which is then due and payable. SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS 3.1 The Pledgor hereby represents, warrants and covenants that it has not heretofore created or agreed to create any Lien over, or assigned or permitted any Lien to subsist over, and that throughout the Security Period it will not hereafter create or agree to create, assign or suffer to exist any Lien over, the Collateral. 3.2 The Pledgor agrees to deliver to the Pledgee the passbook (if any) and any and all other documentary evidence or records in respect of the Account and further agrees that from time to time upon the reasonable request of the Pledgee it will promptly and duly execute and deliver to the Pledgee any and all such further instruments and documents, as may reasonably be necessary in order to enable the Pledgee to obtain the full benefits of this Agreement and of the rights, benefits and powers herein granted. 3.3 Without prejudice to Clause 6.7 of the Facility Agreement, the Pledgor agrees that insofar as a Security Event has occurred and is continuing, it will not withdraw any 5. 111 amount out of the Account and the Pledgee will be permitted not to effect the Pledgor's instruction for such withdrawal. SECTION 4. APPOINTMENT OF ATTORNEY The Pledgor hereby irrevocably and by way of security for the performance of its obligations hereunder appoints the Pledgee to be its true and lawful attorney-in-fact, with full power of substitution, for the Pledgor and in its name or otherwise and on its behalf and as its act and deed to sign, seal, execute and deliver any document or deed and do all such assurances, acts and things which the Pledgee may reasonably deem to be necessary in order to give full effect to the purposes of this Agreement provided that the Pledgee shall not exercise the authority conferred on it under this Section unless a Security Event has occurred. No action taken or omitted to be taken by the Pledgee pursuant to this Section shall give rise to any defense, counterclaim or other right of set-off in favor of the Pledgor or affect in any manner whatsoever any of the Secured Obligations except in cases of willful misconduct or gross negligence on the part of the Pledgee. The Pledgor will take such reasonable acts as may be necessary to ratify or confirm any actions taken by the Pledgee as attorney-in-fact as provided herein. The Pledgee shall not have any obligation to exercise any of the powers hereby conferred upon it, or to make any demand or enquiry as to the nature or sufficiency of 6. 112 any payment secured by it or to take any other action whatsoever with respect to the Collateral. SECTION 5. MISCELLANEOUS 5.1 The security created by this Agreement shall be in addition to and without prejudice to any other security or guarantees from time to time held by the Pledgee in respect of the Secured Obligations and this Agreement shall remain in full force and effect until payment and discharge in full of the Secured Obligations, notwithstanding, and shall not be affected in anyway by, (a) the liquidation, bankruptcy, insolvency or reorganization of the Pledgor, or (b) the release of, or any amendment to, any security or guarantee now or hereafter held by the Pledgee or any other Person in respect of the Secured Obligations (including, except to the extent of the relevant release or amendment, the security hereby constituted), or (c) the enforcement or absence of enforcement of any security or guarantee (including the security hereby constituted), or (d) any time, indulgence, waiver or consent given to the Pledgor or any other Person whether by the Pledgee or any other Person, or (e) the illegality, invalidity or unenforceability or any defect in any provision of any documents relating to the Secured Obligations or this Pledge or any security or any guarantee (including the security hereby constituted) or any of the rights or obligations of any of the 7. 113 parties under or in connection with any such document or any security or any guarantee (including the security hereby constituted), whether on the grounds of not having been duly executed by the Pledgor or any other party thereto or for any other reason whatsoever, or (f) any other fact or contingency whatsoever. 5.2 No failure on the part of the Pledgee to exercise, and no delay in exercising, and no course of dealing with respect to, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise of the same or any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 5.3 The Pledgor agrees to indemnify the Pledgee against, and to reimburse the Pledgee on demand for, all reasonable out-of-pocket costs, expenses, losses and liabilities of the Pledgee in connection with the enforcement of this Agreement and the exercise by the Pledgee of any of the powers conferred upon it hereunder (other than in respect of any exercise which would constitute gross negligence or wilful misconduct). 5.4 If at any time any provision hereof becomes invalid, illegal or unenforceable in respect of the laws of any jurisdiction, the validity, legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby and such invalidity, 8. 114 illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. 5.5 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The Pledgor may not assign its rights or obligations hereunder without the written consent of the Pledgee. 5.6 This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, and both such counterparts together shall constitute one and the same instrument. 5.7 This Agreement shall take effect under and be governed by and construed in accordance with the laws of Japan. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives on the day and year first above written. LSI LOGIC JAPAN SEMICONDUCTOR, INC. 9. 115 By _____________________________________ Name: Title: [PLEDGEE] By _____________________________________ Name: Title: [NB: Date of this agreement to be officially established in the form of Kakutei hizuke] 10. 116 Exhibit 4 Form of Substitution Certificate To: [Name and address of Agent] Attention: -19- Substitution Certificate This Substitution Certificate relates to a Credit Facility Agreement (the "Agreement") dated 27 December, 1995 between LSI Logic Japan Semiconductor, Inc. as Borrower (1), ABN AMRO Bank N.V. as Arranger (2), the banks and financial institutions whose respective names and addresses are set out in schedule 1 thereto as Banks (3) and ABN AMRO Bank N.V., Tokyo Branch as Agent (4) and the Guaranty as defined in the Agreement. Terms defined in the Agreement shall have the same meaning in this Substitution Certificate. 1. 117 1 [Existing Bank] (the "Existing Bank") (a) confirms the accuracy of the summary of its participation in the Facility set out in the schedule hereto; and (b) requests [Substitute Bank] (the "Substitute") to accept by way of novation the portion of that participation specified in the schedule hereto by counter-signing and delivering this Substitution Certificate to the Agent at its address for the service of notices specified in the Agreement. 2 The Substitute hereby requests the Agent (on behalf of itself, the Borrower and the Banks) to accept this Substitution Certificate as being delivered to the Agent pursuant to and for the purposes of Clause 15.4 of the Agreement [and Clause [ ] of the Guaranty], so as to take effect in accordance with the respective terms thereof on [date of transfer] (the "Effective Date") or on such later date as may be determined in accordance with the terms thereof. 3 The Agent (for itself, the Borrower and the other Banks [and the Guarantor]) confirms the novation effected by this Substitution Certificate pursuant to and for the purposes of Clause 15.4 of the Agreement and Section 22 of the Guaranty so as to take effect in accordance with the terms thereof. 4 The Substitute confirms: 2. 118 (a) that it has received a copy of the Agreement and the Guaranty and all other documentation and information required by it in connection with the transactions contemplated by this Substitution Certificate; (b) that it has made and will continue to make its own assessment of the validity, enforceability and sufficiency of the Agreement the Guaranty and this Substitution Certificate and has not relied and will not rely on the Existing Bank, the Arranger or the Agent or any statements made by any of them in that respect; (c) that it has made and will continue to make its own credit assessment of the Borrower and has not relied and will not rely on the Existing Bank, the Arranger or the Agent or any statements made by either of them in that respect; and (d) accordingly, none of the Existing Bank, the Arranger nor the Agent shall have any liability or responsibility to the Substitute in respect of any of the foregoing matters. 3. 119 5 Execution of this Substitution Certificate by the Substitute constitutes its representation to the Existing Bank and all other parties to the Agreement that it has power to become party to the Agreement as a Bank on the terms herein and therein set out and has taken all necessary steps to authorise execution and delivery of this Substitution Certificate. 6 The Existing Bank makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Agreement the Guaranty or any document relating thereto and assumes no responsibility for the financial condition of the Borrower or any other party to the Agreement or the Guaranty or for the performance and observance by the Borrower or any other such party of any of its obligations under the Agreement or any document relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded. 7 The Substitute hereby undertakes to the Existing Bank, the Borrower and Agent that it will perform in accordance with their terms all those obligations which by the respective terms of the Agreement will be assumed by it after acceptance of this Substitution Certificate by the Agent. 8 This Substitution Certificate and the rights and obligations of the parties hereunder are governed by and shall be construed in accordance with the laws of Japan. 4. 120 Note: This Substitution Certificate is not a security, bond, note, debenture, investment or similar instrument. Executed by the authorised signatories of the parties on the date appearing below. 5. 121 The Schedule
Amount of Amount of Portion novated --------- --------- --------------- Advance Contribution Next (Yen) ------- ------------ ---- ---- (Yen) (Yen) Repayment Date ----- ----- -------------- Administrative Details of Substitute Lending office: Account for payments: Telephone: Telefax: Telex: Attention:
6. 122 [Existing Bank] [Substitute] By: By: Title: Title: Date: Date: The Agent (for itself and on behalf of the Borrower and the Banks [and the Guarantor]) By: Title: Date: 7. 123 Exhibit 5 Form of Margin Certificate To: [Name and address of Agent] Attention: [Date] (Yen)25,000,000,000 Floating Rate Guaranteed Credit Facility Agreement dated 27 December, 1995 We refer to the above Agreement (terms used in this letter having the meanings given to them in that Agreement) and notify you that as at the date of this letter; (i) the Ratio is [ ] 1. 124 (ii) the Debt Rating is [ ]. for and on behalf of LSI Logic Corporation ____________________ Name: Title: 2. 125 Exhibit 6 Form of Confirmation of Repayment Schedule To: [Name and Address of Agent] Attention: (Yen)25,000,000,000 Floating Rate Guaranteed Credit Facility Agreement dated 27 December, 1995 We refer to the above Agreement (terms used in this letter having the meanings given to them in that Agreement) and confirm to you that as of the Expiration Date: (a) the aggregate of all Advances made is (Yen)___________. (b) each Bank's contribution is as follows: [Name of Bank] [Amount of Contribution] (c) the repayment schedule with respect to the Loan is as follows: 3. 126 [Date of Repayment] [Amount of Repayment] (d) the repayment schedule with respect to each Bank's Contribution is as follows: [Name of Bank] : [Date of Repayment] [Amount of Repayment] 127 FORM OF LSI LOGIC CORPORATION GUARANTY ================================================================================ LSI LOGIC CORPORATION GUARANTY DATED AS OF DECEMBER __, 1995 ================================================================================ 128 TABLE OF CONTENTS -----------------
SECTION Page - ------- ---- SECTION 1 Definitions; Interpretation............................................................................. 1 (a) Terms Defined in Facility Agreement..................................................................... 1 (b) Certain Defined Terms................................................................................... 1 (c) Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Guaranty....................... 13 (d) Interpretation.......................................................................................... 13 SECTION 2 Guaranty........................................................................................................... 14 SECTION 3 Liability of Guarantor............................................................................................. 15 SECTION 4 Consents of Guarantor.............................................................................................. 17 SECTION 5 Guarantor's Waivers................................................................................................ 18 (a) Certain Waivers......................................................................................... 18 (b) Additional Waivers...................................................................................... 19 (c) Independent Obligations................................................................................. 19 (d) Financial Condition of Borrower......................................................................... 19 SECTION 6 Subrogation........................................................................................................ 19 SECTION 7 Subordination...................................................................................................... 20 (a) Subordination to Payment of Subject Obligations......................................................... 20 (b) No Payments............................................................................................. 20 (c) Subordination of Remedies............................................................................... 21 (d) Subordination upon Any Distribution of Assets of the Borrower........................................... 21 (e) Authorization to Agent.................................................................................. 22 SECTION 8 Continuing Guaranty; Reinstatement................................................................................. 22 (a) Continuing Guaranty..................................................................................... 22 (b) Reinstatement........................................................................................... 22 SECTION 9 Payments; Taxes.................................................................................................... 23 (a) Payments................................................................................................ 23 (b) Taxes................................................................................................... 23 SECTION 10 Representations and Warranties.................................................................................... 24 (a) Organization and Powers................................................................................. 24 (b) Authorization; No Conflict.............................................................................. 24 (c) Binding Obligation...................................................................................... 25 (d) Governmental Consents................................................................................... 25 (e) No Default.............................................................................................. 25 (f) Taxes................................................................................................... 25 (g) Regulated Entities...................................................................................... 25 (h) Title to Properties..................................................................................... 26 (i) Litigation.............................................................................................. 26 (j) Compliance with Consents and Licenses................................................................... 26 (k) Compliance with Environmental Laws...................................................................... 26
i 129 TABLE OF CONTENTS ----------------- (continued)
SECTION Page - ------- ---- (l) ERISA................................................................................................... 27 (m) Insurance............................................................................................... 27 (n) Financial Statements.................................................................................... 27 (o) Liabilities............................................................................................. 28 (p) Labor Disputes, Etc..................................................................................... 28 (q) Consideration........................................................................................... 28 (r) Independent Investigation............................................................................... 28 (s) Name of Borrower........................................................................................ 28 (t) Full Disclosure......................................................................................... 28 SECTION 11 Affirmative Covenants............................................................................................. 29 (a) Financial Statements and Other Reports.................................................................. 29 (b) Additional Information.................................................................................. 30 (c) Preservation of Corporate Existence, Etc................................................................ 31 (d) Payment of Taxes, Etc................................................................................... 32 (e) Licenses................................................................................................ 32 (f) Maintenance of Property................................................................................. 32 (g) Insurance............................................................................................... 32 (h) Payment of Obligations.................................................................................. 33 (i) Compliance with Laws.................................................................................... 33 (j) Compliance with ERISA................................................................................... 33 (k) Inspection of Property and Books and Records............................................................ 33 (l) Margin Certificate...................................................................................... 34 (m) Further Assurances and Additional Acts.................................................................. 34 SECTION 12 Negative Covenants................................................................................................ 34 (a) Liens; Negative Pledges................................................................................. 34 (b) Change in Nature of Business............................................................................ 34 (c) Sales of Assets......................................................................................... 35 (d) Loans and Investments................................................................................... 35 (e) Restrictions on Fundamental Changes and Acquisitions.................................................... 36 (f) Transactions with Related Parties....................................................................... 36 (g) Accounting Changes...................................................................................... 37 (h) Distributions........................................................................................... 37 SECTION 13 Financial Covenants............................................................................................... 38 (a) Senior Debt to Total Capital............................................................................ 38 (b) Total Leverage Ratio.................................................................................... 38 (c) Quick Ratio............................................................................................. 38 (d) Minimum Consolidated Tangible Net Worth................................................................. 38 (e) Debt Service Coverage Ratio............................................................................. 38 (f) Profitability........................................................................................... 38 (g) Subordinated Debt....................................................................................... 39 SECTION 14 Event of Default.................................................................................................. 39 (a) Representation or Warranty.............................................................................. 39 (b) Specific Defaults....................................................................................... 39 (c) Other Defaults.......................................................................................... 39 (d) Default Under Other Indebtedness........................................................................ 39
ii 130 TABLE OF CONTENTS ----------------- (continued)
SECTION Page - ------- ---- (e) Insolvency; Voluntary Proceedings....................................................................... 40 (f) Involuntary Proceedings................................................................................. 40 (g) Judgments............................................................................................... 40 (h) Process Issued.......................................................................................... 40 (i) Seizure................................................................................................. 41 (j) ERISA................................................................................................... 41 (k) Dissolution, Etc........................................................................................ 41 (l) Ownership of Borrower................................................................................... 41 (m) Change in Ownership or Control.......................................................................... 41 (n) Repudiation............................................................................................. 41 (o) Material Adverse Effect................................................................................. 42 SECTION 15 Notices........................................................................................................... 42 SECTION 16 No Waiver; Cumulative Remedies.................................................................................... 42 SECTION 17 Costs and Expenses; Indemnification; Other Charges................................................................ 43 (a) Costs and Expenses...................................................................................... 43 (b) Indemnification......................................................................................... 43 (c) Defense................................................................................................. 44 (d) Other Charges........................................................................................... 44 (e) Interest................................................................................................ 44 SECTION 18 Payment Currency.................................................................................................. 45 SECTION 19 Set-off........................................................................................................... 46 SECTION 20 Survival.......................................................................................................... 46 SECTION 21 Successors and Assigns............................................................................................ 46 SECTION 22 Assignments, Participations, Etc.................................................................................. 46 SECTION 23 Governing Law..................................................................................................... 47 SECTION 24 Waiver of Jury Trial.............................................................................................. 47 SECTION 25 Entire Agreement.................................................................................................. 48 SECTION 26 Amendments and Waivers............................................................................................ 48 SECTION 27 Severability...................................................................................................... 48 SECTION 28 Benefit of Guaranty............................................................................................... 48 SECTION 29 Time.............................................................................................................. 49
EXHIBITS Exhibit A Compliance Certificate iii 131 SCHEDULES Schedule 1 Certain Permitted Liens (Section 1, "Permitted Liens") Schedule 2 Litigation (Section 10(i)) Schedule 3 Certain Environmental Matters (Section 10(k)) iv 132 GUARANTY THIS GUARANTY (this "Guaranty"), dated as of December ___, 1995, is made by LSI LOGIC CORPORATION, a Delaware corporation (the "Guarantor"), in favor of the Banks from time to time party to the Facility Agreement referred to below and ABN AMRO Bank N.V., as agent for such Banks (in such capacity, the "Agent"). LSI Logic Japan Semiconductor, Inc., a limited liability company incorporated under the laws of Japan (the "Borrower"), certain financial institutions as lenders (the "Banks") and the Agent are parties to an Agreement dated as of December ___, 1995 (as amended, modified, renewed or extended from time to time, the "Facility Agreement"). It is a condition precedent to the borrowings under the Facility Agreement that the Guarantor guarantee the indebtedness and other obligations of the Borrower to the Agent and the Banks under or in connection with the Facility Agreement as set forth herein. The Guarantor, as the indirect holder of 100% of the issued and outstanding shares of common stock of the Borrower, will derive substantial direct and indirect benefits from the making of the Advances to the Borrower pursuant to the Facility Agreement (which benefits are hereby acknowledged by the Guarantor). NOW THEREFORE, to induce the Banks and the Agent to enter into the Facility Agreement and to induce the Banks to make the Advances made pursuant to the Facility Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantor hereby represents, warrants, covenants and agrees as follows: SECTION 9 Definitions; Interpretation. (a) Terms Defined in Facility Agreement. All capitalized terms used in this Guaranty (including in the recitals hereof) and not otherwise defined herein shall have the meanings assigned to them in the Facility Agreement. (b) Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting in (a) the acquisition, directly or indirectly, of all or substantially all of the assets of a Person or of any business or division of a Person, (b) the acquisition, directly or indirectly, of all or substantially all of the capital stock, obligations or other securities of or interest in a Person, or (c) a merger or consolidation or any other combination by the Guarantor or any Subsidiary with another Person. "Affiliate" means any Person which, directly or indirectly, controls, is controlled by or is under common control with another Person. For purposes of the foregoing, "control" with respect to any Person shall mean the possession, directly or indirectly, of the power (i) to vote 25% or more of the securities having ordinary voting power for the election of directors of such Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Bankruptcy Code" means Title 11 of the United States Code, as applicable to the relevant case. "Capital Lease" means, for any Person, any lease of property (whether real, personal or mixed) in respect of which such Person is liable as lessee and which, in accordance with GAAP, would, at the time a determination is made, be required to be recorded as a capital lease. "Capitalized Interest" means interest that is incurred or accrued in any period and added to the cost of the asset in connection with which such interest is incurred. "Compliance Certificate" means a certificate of a Responsible Officer of the Guarantor, in substantially the form of Exhibit A, with such changes thereto as the Agent or any Bank may from time to time reasonably request. "Consolidated CMLTD" means, as of any date of determination, the portion of long term Indebtedness coming due in the next succeeding four-quarter period. "Consolidated Current Liabilities" means, as of any date of determination, the sum of current liabilities of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP, plus (without 1 133 duplication) Guaranty Obligations with respect to that portion of the underlying obligations which come due within one year of such date of determination. "Consolidated EBIT" means, for any period, Consolidated Net Income plus Consolidated Interest Expense plus income tax expense as determined for the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Interest Expense" means, for any period, interest expense (including interest expense attributable to Capital Leases) of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income of the Guarantor and its Subsidiaries on a consolidated basis for such period taken as a single accounting period, as determined in accordance with GAAP. "Consolidated Quick Assets" means, as of any date of determination, the sum of all unencumbered and unrestricted (except those encumbered or restricted in favor of the Agent or the Banks) cash, cash equivalents and net accounts receivable classified as current assets according to GAAP, of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Rental Expense" means, for any period, rental expense of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Tangible Net Worth" means, as of any date of determination, Consolidated Total Assets minus Consolidated Total Liabilities, minus (i) all assets which would be classified in a separate account as intangible assets in accordance with GAAP, including goodwill, organizational expense, research and development expense, capitalized software, patent applications, patents, trademarks, trade names, brands, copyrights, trade secrets, customer lists, licenses, franchises and covenants not to compete, (ii) all unamortized debt discount and expense and (iii) all treasury stock; provided, however, that to the extent otherwise included in the amount set forth in the foregoing clause (i) of this definition, there shall be excluded from such amount the sum of (x) all engineering costs incurred in connection with the development of major production capabilities at new manufacturing facilities or refurbishment of an existing facility or with respect to introducing a new manufacturing process to existing or new manufacturing facilities and which are classified as a fixed asset and capitalized on the consolidated balance sheet of the Guarantor in accordance with GAAP and (y) amounts representing the capitalized portion of the acquisition and development costs of software necessary for the operation of the business of the Guarantor and its Subsidiaries, as shown on the consolidated balance sheet of the Guarantor. "Consolidated Total Assets" means, as of any date of determination, the total assets of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Total Liabilities" means, as of any date of determination, the total liabilities of the Guarantor and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Dollars" and the sign "$" each means lawful money of the United States. "Environmental Laws" means all laws, statutes, common law duties, rules, regulations, ordinances and codes, administrative orders, directives, requests, licenses, authorizations and permits of, and agreements with (including consent decrees), any Governmental Authorities, in each case relating to or imposing liability or standards of conduct concerning (a) the pollution, conservation or protection of the environment (both natural and built), (b) the development, occupation, exploitation or other use of land, buildings or other property or assets, (c) the creation, storage, handling and disposal of industrial waste and hazardous substances and (d) health and safety at work or elsewhere, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right-to-Know Act, the California Hazardous Waste Control Law, the California Solid Waste Management, Resource Recovery and Recycling Act, the California Water Code and the California Health and Safety Code. "Equity Capital" means Consolidated Total Assets minus Consolidated Total Liabilities. 2 134 "ERISA" means the Employee Retirement Income Security Act of 1974, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) which is under common control with the Guarantor within the meaning of Section 4001(a)(14) of ERISA and Sections 414(b), (c) and (m) of the Internal Revenue Code. "ERISA Event" means (i) a Reportable Event with respect to a Pension Plan; (ii) a withdrawal by the Guarantor from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (iii) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to terminate a Pension Plan subject to Title IV of ERISA; (iv) a failure by the Guarantor to make required contributions to a Pension Plan or other Plan subject to Section 412 of the Code; (v) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Guarantor; or (vii) an application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Pension Plan. "Event of Default" means any of the events or circumstances specified as such in Section 14. "Facility Agreement" has the meaning provided therefor in the preamble hereto. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means, with respect to any Person, any federal, state, local or other governmental department, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government having jurisdiction over such Person. "Guaranty Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease (other than an operating lease), dividend, or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (A) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (B) to advance or provide funds (x) for the payment or discharge of any such primary obligation, or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (C) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (D) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof; (ii) (A) with respect to letters of credit, acceptances, bank guaranties, surety bonds or similar instruments issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (B) as a partner or joint venturer in any partnership or joint venture; (iii) with respect to synthetic leases; or (iv) net obligations with respect to Rate Contracts, other than Rate Contracts entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Person. 3 135 "Hazardous Substances" means any hazardous or toxic substance, material or waste, defined, listed, classified or regulated as such in or under any Environmental Laws, including asbestos, petroleum or petroleum products (including gasoline, crude oil or any fraction thereof), polychlorinated biphenyls and ureaformaldehyde insulation. "Indebtedness" means, for any Person, without duplication: (i) all indebtedness or other obligations of such Person for borrowed money; (ii) all obligations of such Person for the deferred purchase price of property or services (including obligations under credit facilities which secure or finance such purchase price), other than trade payables incurred by such Person in the ordinary course of its business on ordinary terms; (iii) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (iv) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (v) all obligations under Capital Leases; (vi) all Guaranty Obligations other than Guaranty Obligations described in clauses (i)(C) and (i)(D) of the definition of "Guaranty Obligation" where the primary obligor is a Subsidiary; and (vii) all indebtedness of another Person secured by any Lien upon or in property owned by the Person for whom Indebtedness is being determined, whether or not such Person has assumed or become liable for the payment of such indebtedness of such other Person; provided, that if such indebtedness is not assumed and recourse is limited solely to such property, the Indebtedness incurred hereunder shall be valued at the lesser of the principal amount of the obligation so secured or the fair market value of the property subject to such Lien. "Insolvency Proceeding" means (i) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (ii) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Intercompany Debt" has the meaning given to it in Section 7(a). "Intercompany Debt Payments" has the meaning given to it in Section 7(b). "Internal Revenue Code" means the Internal Revenue Code of 1986, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "IRS" means the Internal Revenue Service, or any successor thereto. "Lien" means any mortgage, deed of trust, pledge, security interest, assignment, deposit arrangement, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any conditional sale or other title retention agreement, or any financing lease having substantially the same economic effect as any of the fore going or any agreement to give any security interest, but excluding any operating lease, regardless of whether precautionary filings are made in respect thereof under Section 9408 of the California Uniform Commercial Code). "Loan Document" means the Facility Agreement, any notes evidencing the Indebtedness thereunder, this Guaranty and all other certificates, documents, agreements and instruments delivered to the Agent and the Banks under or in connection with the Facility Agreement. "Material Adverse Effect" means (i) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Guarantor, the Borrower or the Guarantor and its Subsidiaries taken as a whole; (ii) a material impairment of the ability of the Guarantor or the Borrower 4 136 to perform its payment obligations under any Loan Document to which it is a party or under any loan document relating to any Indebtedness of the Guarantor or the Borrower, as the case may be, described in Section 14(d); or (iii) a material adverse effect upon the legality, validity, binding effect or enforceability of any Loan Document. "Multiemployer Plan" means a "multiemployer plan" as defined in Sections 3(37) and 4001(a)(3) of ERISA. "Other Taxes" means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Guaranty or any other Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA, which the Guarantor sponsors or maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. "Permitted Acquisition" has the meaning given to it in Section 12(e). "Permitted Investments" means any Dollar-denominated investments, maturing within 24 months from the date of acquisition, selected by the Guarantor in accordance with its Corporate Cash Investment Policy as adopted by the Guarantor on February 13, 1995; provided that any Investments not meeting the standards set forth in such Corporate Cash Investment Policy shall nevertheless be deemed to be "Permitted Investments" if they do not exceed at any time, in the aggregate, 10% of all Permitted Investments at such time. "Permitted Liens" means: (i) Liens which may at any time be granted in favor of the Agent on behalf of the Banks or the Banks to secure obligations under the Loan Documents; (ii) Liens in existence as of the date of this Guaranty listed on Schedule 1, and any substitutions or renewals thereof, provided that the principal amount of the obligations secured thereby is not increased; (iii) Liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty or which are being contested in good faith via appropriate proceedings, with appropriate reserves established therefor in accordance with GAAP; (iv) Liens in connection with workers' compensation, unemployment insurance or other social security obligations; (v) mechanics', workers', materialmen's, landlords', carriers' or other like Liens arising in the ordinary and normal course of business with respect to obligations which are not past due or which are being contested in good faith via appropriate proceedings, with appropriate reserves established therefor in accordance with GAAP; (vi) purchase money security interests (including by way of installment sales and title retention agreements) in personal or real property hereafter acquired when the security interest is granted contemporaneously with such acquisition (or within nine months thereafter), Liens created to secure the cost of construction or improvement of property and Liens created to secure Indebtedness incurred to finance such purchase price or cost (including Liens of the Guarantor or the Borrower in favor of the United States or any State, or any department, agency, instrumentality or political subdivision thereof, securing any real property or other assets in connection with the financing of industrial revenue bond facilities or of any equipment or other property designed primarily for the purpose of air or water pollution control); provided, that (A) any such Lien shall attach only to the property so purchased, constructed or improved, together with attachments and accessions thereto, and rents, proceeds, products, substitutions, replacements and profits thereof and attachments and accessories thereto, and (B) the amount of Indebtedness secured by any such Lien shall not exceed the purchase or construction price of such property plus transaction costs and financing charges relating to the acquisition or construction thereof; 5 137 (vii) Liens arising from attachments or similar proceedings, pending litigation, judgments or taxes or assessments in any such event whose validity or amount is being contested in good faith by appropriate proceedings and for which adequate reserves have been established and are maintained in accordance with GAAP; (viii) Liens arising in the ordinary course of business or by operation of law, not securing Indebtedness, but securing such obligations as (A) judgments or awards, which (x) are covered by applicable insurance or (y) have been outstanding less than 30 consecutive days, (B) interests of landlords or lessors under leases of real or personal property entered into in the ordinary course of business arising by contract or operation of law, (C) Liens in favor of customs and revenue authorities which secure payment of customs in connection with the importation of goods, (D) Liens which constitute rights of set-off of a customary nature or bankers' liens on amounts on deposit, whether arising by contract or by operation of law, in connection with arrangements entered into with depository institutions in the ordinary course of business, (E) such minor defects, irregularities, encumbrances, easements, rights of way, and clouds on title as normally exist with respect to similar properties which do not, individually or in the aggregate, materially impair the property affected thereby or the use thereof and (F) subleases, licenses, and sublicenses granted to third parties, the granting of which does not result in a Material Adverse Effect; (ix) Liens securing reimbursement obligations of the Borrower or the Guarantor under documentary letters of credit; provided, that such liens shall attach only to documents relating to such letters of credit, goods covered thereby and products and proceeds thereof; (x) Liens on insurance policies or the proceeds of insurance policies incurred solely to secure the financing of premiums owing with respect thereto; (xi) Liens existing on property (including the proceeds and accessions thereto) acquired by the Borrower or the Guarantor (including Liens on assets of any corporation at the time it becomes a Subsidiary), but excluding any Liens created in contemplation of any such acquisition; and (xii) Liens encumbering customary initial deposits and margin deposits, and other Liens that are either within the general parameters customary in the industry and incurred in the ordinary course of business, in each case securing Indebtedness under Rate Contracts. "Person" means an individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or any other entity of whatever nature or any Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Guarantor sponsors or maintains, or to which the Guarantor makes, is making, or is obligated to make contributions, and includes any Pension Plan. "Rate Contracts" means interest rate swaps, caps, floors and collars, currency swaps, or other similar financial products designed to provide protection against fluctuations in interest, currency or exchange rates. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations promulgated thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Responsible Officer" means, with respect to any Person, the chief executive officer, the president, the chief financial officer or the treasurer of such Person, or any other senior officer of such Person having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of such Person, or any other senior officer of such Person involved principally in the financial administration or controllership function of such Person and having substantially the same authority and responsibility. "Senior Debt" means all Indebtedness, other than Subordinated Debt, of the Guarantor and its Subsidiaries on a consolidated basis. "Solvent" means, with respect to any Person, that as of the date of determination, (i) the then fair saleable value of the property of such Person is (A) greater than the total amount of liabilities (including reasonably anticipated liabilities with respect to contingent obligations) of such Person and (B) greater than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured 6 138 considering all financing alternatives and potential asset sales reasonably available to such Person, and (ii) such Person has not incurred and does not intend to incur, or does not believe that it will incur, debts beyond its ability to pay such debts as they become due. "Subject Obligations" shall have the meaning assigned to such term in Section 2 hereof. "Subordinated Debt" means (i) the Guarantor's 5-1/2% Convertible Subordinated Notes Due 2001 (the "Convertible Subordinated Notes") and (ii) any other Indebtedness of the Guarantor or any Subsidiary under which principal payments will become due and payable no earlier than the first anniversary of the Final Maturity Date and which is subordinated on terms and conditions reasonably acceptable to the Majority Banks; provided, that any Subordinated Debt having subordination provisions no more favorable to the holder than those contained in the Convertible Subordinated Notes shall be deemed to be reasonably acceptable to the Majority Banks for the purposes hereof. "Subsidiary" means, with respect to the Guarantor, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of capital stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by the Guarantor or one or more of the other Subsidiaries of the Guarantor or a combination thereof. "Taxes" means any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Bank's net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office; and "Taxation" shall be construed accordingly. "Termination Event" means any of the following: (i) with respect to a Pension Plan, a reportable event described in Section 4043 of ERISA and the regulations issued thereunder (other than a reportable event not subject to the provisions for 30-day notice to the PBGC under such regulations); (ii) the withdrawal of the Guarantor or an ERISA Affiliate from a Pension Plan during a plan year in which the withdrawing employer was a "substantial employer" as defined in Section 4001(a)(2) or 4062(e) of ERISA; (iii) the taking of any actions (including the filing of a notice of intent to terminate) by the Guarantor, an ERISA Affiliate, the PBGC, a Plan Administrator, or any other Person to terminate a Pension Plan or the treatment of a Plan amendment as a termination of a Pension Plan under Section 4041 of ERISA; (iv) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; or (v) the complete or partial withdrawal of the Guarantor or an ERISA Affiliate from a Multiemployer Plan. "Total Capital" means the sum of Equity Capital, Senior Debt and Subordinated Debt. "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. (c) Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Guaranty. Except as otherwise expressly provided in this Guaranty, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements, determination relating to covenants, and other information required to be delivered or determined by the Guarantor pursuant to this Guaranty shall be prepared or determined in conformity with GAAP as in effect at the time of such preparation or determination; provided, that in the event that a change to GAAP taking effect after the 7 139 date hereof would otherwise affect the calculation of any covenant set forth in Section 13 hereof, such covenant shall be calculated in accordance with GAAP as in effect immediately prior to such change until an appropriate adjustment can be determined. (d) Interpretation. In this Guaranty, except to the extent the context otherwise requires: (i) Any reference to an Article, a Section, a Schedule or an Exhibit is a reference to an article or section of, or a schedule or an exhibit to, this Guaranty, respectively, and any reference to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Guaranty or any other Loan Document as a whole and not merely to the specific Article, Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of the Loan Documents. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any table of contents, captions and headings are for convenience of reference only and shall not affect the construction of this Guaranty. (viii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." (ix) The use of a word of any gender shall include each of the masculine, feminine and neuter genders. SECTION 2 Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees to the Agent and the Banks, and their respective successors, endorsees, transferees, assigns and Substitutes, the full and prompt payment when due (whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise) and performance of the indebtedness, liabilities and other obligations of the Borrower to the Agent and the Banks under or in connection with the Facility Agreement and the other Loan Documents, including all unpaid principal of the Advances, all interest accrued thereon, all fees due under the Facility Agreement and all other amounts payable by the Borrower to the Agent and the Banks thereunder or in connection therewith. The terms "indebtedness," "liabilities" and "obligations" are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities, now existing or hereafter arising, whether voluntary or involuntary and whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, together with interest thereon at the contract rate (whether before or after the commencement of any Insolvency Proceeding with respect to the Borrower), and whether recovery upon such indebtedness, liabilities and obligations may be or hereafter become unenforceable or shall be an allowed or disallowed claim under the Bankruptcy Code or other applicable law. The foregoing indebtedness, liabilities and other obligations of the Borrower, and all other indebtedness, liabilities and obligations to be paid or performed by the Guarantor in connection with this Guaranty (including any and all amounts due under Section 17), shall hereinafter be collectively referred to as the "Subject Obligations." SECTION 3 Liability of Guarantor. The liability of the Guarantor under this Guaranty shall be irrevocable, absolute, independent and unconditional, and shall not be affected by any circumstance which might constitute a discharge of a surety or guarantor other than the indefeasible payment and performance in full of all Subject Obligations. In furtherance of the foregoing and without limiting the generality thereof, the Guarantor agrees as follows: 8 140 (i) the Guarantor's liability hereunder shall be the immediate, direct, and primary obligation of the Guarantor and shall not be contingent upon the Agent's or any Bank's exercise or enforcement of any remedy it may have against the Borrower or any other Person, or against any security at any time securing the Subject Obligations; (ii) this Guaranty is a guaranty of payment when due and not merely of collectibility; (iii) the Guarantor's payment of a portion, but not all, of the Subject Obligations shall in no way limit, affect, modify or abridge the Guarantor's liability for any portion of the Subject Obligations remaining unsatisfied; and (iv) the Guarantor's liability with respect to the Subject Obligations shall remain in full force and effect without regard to, and shall not be impaired or affected by, nor shall the Guarantor be exonerated or discharged by, any of the following events: (A) any Insolvency Proceeding with respect to the Borrower, the Guarantor, any other guarantor or any other Person, or any liquidation, winding up or dissolution of the Borrower, the Guarantor, any other guarantor or any other Person; (B) any limitation, discharge, or cessation of the liability of the Borrower, the Guarantor, any other guarantor or any other Person for any Subject Obligations due to any statute, regulation or rule of law, or any invalidity or unenforceability in whole or in part of any of the Subject Obligations or the Loan Documents; (C) any merger, acquisition, consolidation or change in structure of the Borrower, the Guarantor or any other guarantor or Person, or any sale, lease, transfer or other disposition of any or all of the assets or shares of the Borrower, the Guarantor, any other guarantor or other Person; (D) any assignment or other transfer, in whole or in part, of the Agent's or any Bank's interests in and rights under this Guaranty or the other Loan Documents, including the Agent's or any Bank's right to receive payment of the Subject Obligations, or any assignment or other transfer, in whole or in part, of the Agent's or any Bank's interests in and to any collateral at any time securing the Subject Obligations; (E) any claim, defense, counterclaim or setoff, other than that of prior performance, that the Borrower, the Guarantor, any other guarantor or other Person may have or assert, including any defense arising from the unavailability of the Borrower's commercial register reflecting the Borrower's current name, any defense of incapacity or lack of corporate or other authority to execute any of the Loan Documents or any defense to or excuse of performance arising under or by virtue of any sovereign or regulatory act of any Governmental Authority, including any payment moratorium, suspension or forgiveness of debtor payments, bank holiday, imposition of exchange controls, or declaration of war or national emergency; (F) the Agent's or any Bank's amendment, modification, renewal, extension, cancellation or surrender of any Loan Document, any Subject Obligations, any collateral at any time securing the Subject Obligations, or the Agent's or any Bank's exchange, release, or waiver of any collateral at any time securing the Subject Obligations; (G) the Agent's or any Bank's exercise or nonexercise of any power, right or remedy with respect to any collateral at any time securing any of the Subject Obligations, including the Agent's or any Bank's compromise, release, settlement or waiver with or of the Borrower, the Guarantor, any other guarantor or any other Person; (H) the Agent's or any Bank's vote, claim, distribution, election, acceptance, action or inaction in any bankruptcy case related to the Subject Obligations; (I) any impairment or invalidity of any collateral at any time securing any of the Subject Obligations or any failure to perfect any of the liens of the Agent and the Banks thereon with respect to such collateral; and (J) any other guaranty, whether by the Guarantor or any other Person, of all or any part of the Subject Obligations or any other indebtedness, obligations or liabilities of the Borrower to the Agent or the Banks. 9 141 SECTION 12 Consents of Guarantor. The Guarantor hereby unconditionally consents and agrees that, without notice to or further assent from the Guarantor: (i) the principal amount of the Subject Obligations may be increased or decreased and additional indebtedness or obligations of the Borrower under the Loan Documents may be incurred, by one or more amendments, modifications, renewals or extensions of any Loan Document or otherwise; (ii) the time, manner, place or terms of any payment under any Loan Document may be extended or changed, including by an increase or decrease in the interest rate on any Subject Obligation or any fee or other amount payable under such Loan Document, by an amendment, modification or renewal of any Loan Document or otherwise; (iii) the time for the Borrower's (or any other Person's) performance of or compliance with any term, covenant or agreement on its part to be performed or observed under any Loan Document may be extended, or such performance or compliance waived, or failure in or departure from such performance or compliance consented to, all in such manner and upon such terms as the Agent and the Banks may deem proper; (iv) the Agent or the Banks may discharge or release, in whole or in part, any other guarantor or any other Person liable for the payment and performance of all or any part of the Subject Obligations, and may permit or consent to any such action or any result of such action, and shall not be obligated to demand or enforce payment upon any collateral at any time securing the Subject Obligations, nor shall the Agent or the Banks be liable to the Guarantor for any failure to collect or enforce payment or performance of the Subject Obligations from any Person or to realize on any collateral therefor; (v) the Agent and the Banks may take and hold security (legal or equitable) of any kind, at any time, as collateral for the Subject Obligations, and may, from time to time, in whole or in part, exchange, sell, surrender, release, subordinate, modify, waive, rescind, compromise or extend such security and may permit or consent to any such action or the result of any such action, and may apply such security and direct the order or manner of sale thereof; (vi) the Agent and the Banks may request and accept other guaranties of the Subject Obligations and any other indebtedness, obligations or liabilities of the Borrower to the Agent or the Banks and may, from time to time, in whole or in part, surrender, release, subordinate, modify, waive, rescind, compromise or extend any such guaranty and may permit or consent to any such action or the result of any such action; and (vii) the Agent and the Banks may exercise, or waive or otherwise refrain from exercising, any other right, remedy, power or privilege (including the right to accelerate the maturity of any Advance and any power of sale) granted by any Loan Document or other security document or agreement, or otherwise available to the Agent and the Banks, with respect to the Subject Obligations, any security for any or all of the Subject Obligations, even if the exercise of such right, remedy, power or privilege affects or eliminates any right of subrogation or any other right of the Guarantor against the Borrower; all as the Agent and the Banks may deem advisable, and all with out impairing, abridging, releasing or affecting this Guaranty. SECTION 5 Guarantor's Waivers. (a) Certain Waivers. The Guarantor waives and agrees not to assert: (i) any right to require the Agent or any Bank to marshal assets in favor of the Borrower, the Guarantor, any other guarantor or any other Person, to proceed against the Borrower, any other guarantor or any other Person, to proceed against or exhaust any security at any time held for the Subject Obligations, to give notice of the terms, time and place of any public or private sale of personal property security constituting collateral for the Subject Obligations or comply with any other provisions of Section 9504 of the California UCC (or any equivalent provision of any other applicable law) or to pursue any other right, remedy, power or privilege of the Agent or any Bank whatsoever; (ii) the defense of the statute of limitations in any action hereunder or for the collection or performance of the Subject Obligations; (iii) any defense arising by reason of any lack of corporate or other authority or any other defense of the Borrower, the Guarantor or any other Person; 10 142 (iv) any defense (other than payment) based upon the Agent's or any Bank's errors or omissions in the administration of the Subject Obligations; (v) any rights to set-offs and counterclaims; (vi) all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligations, has destroyed the Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; (vii) any rights or defenses by reason of the lack of any fair value hearing or determination with respect to any collateral securing the Subject Obligations, whether pursuant to California Code of Civil Procedure Sections 580a or 726 or otherwise; and (viii) without limiting the generality of the foregoing, to the fullest extent permitted by law, any defenses or benefits that may be derived from or afforded by applicable law limiting the liability of or exonerating guarantors or sureties, or which may conflict with the terms of this Guaranty, including any and all benefits that otherwise might be available to the Guarantor under California Civil Code Section 1432, 2809, 2810, 2815, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 3433 and California Code of Civil Procedure Section 580a, 580b, 580d and 726. (b) Additional Waivers. The Guarantor waives any and all notice of the acceptance of this Guaranty, and any and all notice of the creation, renewal, modification, extension or accrual of the Subject Obligations, or the reliance by the Agent and the Banks upon this Guaranty, or the exercise of any right, power or privilege hereunder. The Subject Obligations shall conclusively be deemed to have been created, contracted, incurred and permitted to exist in reliance upon this Guaranty. The Guarantor waives promptness, diligence, presentment, protest, demand for payment, notice of default, dishonor or nonpayment and all other notices to or upon the Borrower, the Guarantor or any other Person with respect to the Subject Obligations. (c) Independent Obligations. The obligations of the Guarantor hereunder are independent of and separate from the obligations of the Borrower and any other guarantor and upon the occurrence and during the continuance of any Event of Default (as defined in the Facility Agreement), a separate action or actions may be brought against the Guarantor, whether or not the Borrower or any such other guarantor is joined therein or a separate action or actions are brought against the Borrower or any such other guarantor. (d) Financial Condition of Borrower. The Guarantor shall not have any right to require the Agent or the Banks to obtain or disclose any information with respect to: (i) the financial condition or character of the Borrower or the ability of the Borrower to pay and perform the Subject Obligations; (ii) the Subject Obligations; (iii) any collateral at any time securing any or all of the Subject Obligations; (iv) the existence or nonexistence of any other guarantees of all or any part of the Subject Obligations; (v) any action or inaction on the part of the Agent or the Banks or any other Person; or (vi) any other matter, fact or occurrence whatsoever. SECTION 14 Subrogation. The Guarantor shall not have, and hereby waives, (i) any rights that it may acquire by way of subrogation under this Guaranty, by any payment hereunder or otherwise, (ii) any rights of contribution, indemnification, reimbursement or similar suretyship claims arising out of this Guaranty or (iii) any other right which it might otherwise have or acquire (in any way whatsoever) which could entitle it at any time to share or participate in any right, remedy or security of the Banks or the Agent as against the Borrower or other guarantors, whether in connection with this Guaranty, any of the other Loan Documents or otherwise. If any amount shall be paid to the Guarantor on account of the foregoing rights at any time, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited and applied to the Subject Obligations, whether matured or unmatured, in accordance with the terms of the Loan Documents. SECTION 15 Subordination. (a) Subordination to Payment of Subject Obligations. All payments on account of all indebtedness, liabilities and other obligations of the Borrower to the Guarantor, whether created under, arising out of or in connection with any documents or instruments evidencing any credit extensions to Borrower or otherwise, including all principal on any such credit extensions, all interest accrued thereon, all fees and all other amounts payable by the Borrower to the Guarantor in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined 11 143 or undetermined (the "Intercompany Debt") shall be subject, subordinate and junior in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment in full in cash or cash equivalents of the Subject Obligations. (b) No Payments. Following the occurrence of an Event of Default under the Facility Agreement, the Guarantor shall not accept or receive any payment or distribution by or on behalf of the Borrower, directly or indirectly, of assets of the Borrower of any kind or character, whether in cash, property or securities, including on account of the purchase, redemption or other acquisition of Intercompany Debt, as a result of any collection, sale or other disposition of collateral, or by setoff, exchange or in any other manner, for or on account of the Intercompany Debt ("Intercompany Debt Payments"). In the event that, notwithstanding the provisions of this Section 7, any Intercompany Debt Payments shall be received in contravention of this Section 7 by the Guarantor before all Subject Obligations are paid in full in cash or cash equivalents, such Intercompany Debt Payments shall be held in trust for the benefit of the Agent and the Banks and shall be paid over or delivered to the Agent for application to the payment in full in cash or cash equivalents of all Subject Obligations remaining unpaid to the extent necessary to give effect to this Section 7, after giving effect to any concurrent payments or distributions to the Agent and the Banks in respect of the Subject Obligations. (c) Subordination of Remedies. As long as any Subject Obligations shall remain outstanding and unpaid, the Guarantor shall not, without the prior written consent of the Agent: (i) accelerate, make demand or otherwise make due and payable prior to the original stated maturity thereof any Intercompany Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests under or in respect of the Intercompany Debt; (ii) exercise any rights under or with respect to (A) any guaranties of the Intercompany Debt, or (B) any collateral held by it, including causing or compelling the pledge or delivery of any collateral, any attachment of, levy upon, execution against, foreclosure upon or the taking of other action against or institution of other proceedings with respect to any collateral held by it, notifying any account debtors of the Borrower or asserting any claim or interest in any insurance with respect to any collateral, or attempt to do any of the foregoing; or (iii) commence, or cause to be commenced, or join with any creditor other than the Agent and the Banks in commencing, any Insolvency Proceeding against the Borrower. (d) Subordination upon Any Distribution of Assets of the Borrower. In the event of any payment or distribution of assets of the Borrower of any kind or character, whether in cash, property or securities, upon the dissolution, winding up or total or partial liquidation or reorganization, readjustment, arrangement or similar proceeding relating to the Borrower or its property, whether voluntary or involuntary, or in any Insolvency Proceeding with respect to the Borrower, or otherwise (i) all amounts owing on account of the Subject Obligations, including all interest accrued thereon at the contract rate both before and after the commencement of any such proceeding, whether or not an allowed claim in any such proceeding, shall first be paid in full in cash, or payment provided for in cash or in cash equivalents, before any Intercompany Debt Payment is made; and (ii) to the extent permitted by applicable law, any Intercompany Debt Payment to which the Guarantor would be entitled except for the provisions hereof, shall be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors or other liquidating agent making such payment or distribution directly to the Agent (on behalf of the Banks) for application to the payment of the Subject Obligations in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to the Agent or the Banks in respect of such Subject Obligations. (e) Authorization to Agent. If, while any Intercompany Debt is outstanding, any Insolvency Proceeding is commenced by or against the Borrower or its property: (i) the Agent, when so instructed by the Majority Banks, is hereby irrevocably authorized and empowered (in the name of the Banks or in the name of the Guarantor or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution in respect of the Intercompany Debt and give acquittance therefor and to file claims and proofs of claim and take such other action (including voting the Intercompany Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Agent and the Banks; and (ii) the Guarantor shall promptly take such action as the Agent (on instruction from the Majority Banks) may reasonably request (A) to collect the Intercompany Debt for the account of the Banks and to file appropriate claims or proofs of claim in respect of the Intercompany Debt, (B) to execute and deliver to the Agent, such powers of attorney, assignments and other instruments as it may request to enable it to enforce any and all claims with respect to the Intercompany Debt, and (C) to collect and receive any and all Intercompany Debt Payments. 12 144 SECTION 16 Continuing Guaranty; Reinstatement. (a) Continuing Guaranty. This Guaranty is a continuing guaranty and agreement of subordination and shall continue in effect and be binding upon the Guarantor until payment and performance in full of the Subject Obligations. (b) Reinstatement. This Guaranty shall continue to be effective or shall be reinstated and revived, as the case may be, if, for any reason, any payment of the Subject Obligations by or on behalf of the Borrower (or receipt of any proceeds of any collateral) shall be rescinded, invalidated, declared to be fraudulent or preferential, set aside, voided or otherwise required to be repaid to the Borrower, its estate, trustee, receiver or any other Person (including under the Bankruptcy Code or other state or federal law), or must otherwise be restored by the Agent or any Bank, whether as a result of any Insolvency Proceedings or otherwise. To the extent any payment is so rescinded or restored, the Subject Obligations shall be revived in full force and effect without reduction or discharge for such payment. All losses, damages, expenses (including fees and expenses of external legal counsel and the allocated cost of internal legal services and disbursements of internal counsel) that the Agent or the Banks may suffer or incur as a result of any voided or otherwise set aside payments shall be specifically covered by the indemnity in favor of the Banks and the Agent contained in Section 17 of this Guaranty. SECTION 17 Payments; Taxes. (a) Payments. The Guarantor hereby agrees, in furtherance of the foregoing provisions of this Guaranty and not in limitation of any other right which the Agent or any Bank or any other Person may have against the Guarantor by virtue hereof, upon the failure of the Borrower to pay any of the Subject Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code or any similar provision under Japanese law), the Guarantor shall forthwith pay, or cause to be paid, in cash, to the Agent an amount equal to the amount of the Subject Obligations then due as aforesaid (including interest which, but for the filing of a petition in bankruptcy with respect to the Borrower, would have accrued on such Subject Obligations, whether or not a claim is allowed against the Borrower for such interest in any such bankruptcy proceeding). The Guarantor shall make each payment hereunder, unconditionally in full without set-off, recoupment or counterclaim, on the day when due, in accordance with Section 18. All such payments shall be applied as directed by the Guarantor; provided, that following a default by the Guarantor in the performance of its obligations hereunder, such payments shall be promptly applied from time to time by the Agent (i) first, to the payment of any fees, costs, expenses and other amounts due the Agent hereunder, and (ii) second, to the payment of the other Subject Obligations in accordance with the provisions of the Facility Agreement. (b) Taxes. (i) Any and all payments by the Guarantor to each Bank or the Agent under this Guaranty shall be made free and clear of, and without deduction or withholding, for any Taxes. In addition, the Guarantor shall pay all Other Taxes. (ii) The Guarantor agrees to indemnify and hold harmless each Bank and the Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by the Bank or the Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (iii) Except where such deduction or withholding results from the failure of a Bank to comply with the terms of clause (v) below, if the Guarantor shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (A) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Bank or the Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (B) the Guarantor shall make such deductions and withholdings; 13 145 (C) the Guarantor shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (D) the Guarantor shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, all additional amounts which the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes or Other Taxes had not been imposed. (iv) Within 30 days after the date of any payment by the Guarantor of Taxes or Other Taxes, the Guarantor shall furnish the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agent. (v) Each Bank that is organized under the laws of a jurisdiction outside the United States hereby agrees that, if and to the extent it is legally able to do so, it shall deliver in a timely fashion to the Guarantor and the Agent, as applicable, such certificates, documents or other evidence that may be available to establish, if applicable, the nonapplicability to such Bank of, or such Bank's exemption from, United States federal withholding tax under the Internal Revenue Code in respect of any sum payable hereunder. SECTION 18 Representations and Warranties. The Guarantor represents and warrants to the Agent and each Bank that: (a) Organization and Powers. The Guarantor is a corporation duly organized, validly existing and in good standing under the law of the jurisdiction of its incorporation, is qualified to do business and is in good standing in each jurisdiction in which the failure so to qualify or be in good standing would have a Material Adverse Effect and has all requisite power and authority to own its assets and carry on its business and to execute, deliver and perform its obligations under the Guaranty. (b) Authorization; No Conflict. The execution, delivery and performance by the Guarantor of this Guaranty have been duly authorized by all necessary corporate action of the Guarantor, and do not and will not: (i) contravene the terms of the certificate of incorporation, or the terms of the bylaws, of the Guarantor or result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Guarantor is a party or by which it or its properties may be bound or affected; or (ii) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree or the like binding on or affecting the Guarantor. (c) Binding Obligation. This Guaranty is the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except to the extent the enforceability hereof would be subject to bankruptcy, insolvency, receivership or similar laws providing relief from creditors, or principles of equity generally. (d) Governmental Consents. No authorization, consent, approval, license, exemption of, or filing or registration with, any Governmental Authority, or approval or consent of any other Person, is required for the due execution, delivery or performance by the Guarantor of this Guaranty. (e) No Default. No Default or Event of Default (as defined in the Facility Agreement) exists or would result from the execution and delivery of the Facility Agreement or this Guaranty or from the performance by the Borrower of its obligations under the Facility Agreement or by the Guarantor of the Subject Obligations. As of the Closing Date, neither the Guarantor nor any Subsidiary is in default under or with respect to any contractual obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default (as defined in the Facility Agreement). The Subject Obligations are "Senior Debt" as defined in the Indenture, dated as of March 23, 1994, by and between the Guarantor and The First National Bank of Boston executed in connection with the Guarantor's 5 1/2% Convertible Subordinated Notes Due 2001. (f) Taxes. The Guarantor and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Guarantor or any Subsidiary that would, if made, have a Material Adverse Effect. (g) Regulated Entities. None of the Guarantor, any Person controlling the Guarantor, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Guarantor is not subject to regulation 14 146 under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. (h) Title to Properties. The Guarantor and each Subsidiary have good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the property of the Guarantor and its Subsidiaries is subject to no Liens, other than Permitted Liens. (i) Litigation. Except as set forth on Schedule 2, there are no actions, suits or proceedings pending or, to the best of the Guarantor's or the Borrower's knowledge, threatened against or affecting the Guarantor or any of its Subsidiaries or the properties of the Guarantor or any of its Subsidiaries before any Governmental Authority or arbitrator which would be reason ably likely to result in a Material Adverse Effect. (j) Compliance with Consents and Licenses. Every consent required by the Guarantor or any Subsidiary (including those required under or pursuant to any Environmental Law) in connection with the conduct of its business and the ownership, use, exploitation or occupation of its property and assets has been obtained and is in full force and effect and there has not been any default in the observance of the conditions and restrictions (if any) imposed in, or in connection with, any of the same, except where the failure to obtain any of the foregoing would not reasonably be expected to have a Material Adverse Effect. (k) Compliance with Environmental Laws. Except as set forth on Schedule 3, to the best of the Guarantor's or the Borrower's knowledge after due investigation, (i) the properties of the Guarantor and its Subsidiaries do not contain and have not previously contained (at, under, or about any such property) any Hazardous Substances or other contamination (A) in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, any Environmental Laws, in either case where such violation or liability could reasonably be expected to result in a Material Adverse Effect, (B) which could interfere with the continued operation of such property, or (C) which could materially impair the fair market value thereof; and (ii) there has been no transportation or disposal of Hazardous Substances from, nor any release or threatened release of Hazardous Substances at or from, any property of the Guarantor or any of its Subsidiaries in violation of or in any manner could give rise to liability under any Environmental Laws, where such violation or liability, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. (l) ERISA. Except as specifically disclosed to the Banks in writing prior to the Closing Date: (i) each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (ii) there are no pending, or to the best knowledge of the Guarantor, threatened, claims, actions or lawsuits, or action by any governmental authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect; (iii) there has been no prohibited transaction or other violation of the fiduciary responsibility rule with respect to any Plan which could reasonably result in a Material Adverse Effect; (iv) no ERISA Event has occurred or is reasonably expected to occur with respect to any Pension Plan; (v) no Pension Plan has any Unfunded Pension Liability; (vi) the Guarantor has not incurred, nor does it reasonably expect to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (vii) no trade or business (whether or not incorporated under common control with the Guarantor within the meaning of Section 414(b), (c), (m) or (o) of the Code) maintains or contributes to any Pension Plan or other Plan subject to Section 412 of the Code; and (viii) neither the Guarantor nor any entity under common control with the Guarantor in the preceding sentence has ever contributed to any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. (m) Insurance. The properties of the Guarantor and its Subsidiaries are insured against losses and damages of the kinds and in amounts which are deemed prudent by the Guarantor in its reasonable business judgment and within the general parameters customary among similarly situated businesses in the industry, and such insurance is maintained with financially sound and reputable insurance companies or pursuant to a plan or plans or self-insurance to such extent as is usual for companies of similar size engaged in the same or similar businesses and owning similar properties. (n) Financial Statements. The audited consolidated balance sheet of the Guarantor and its Subsidiaries as at December 31, 1994 and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal year then ended, and the unaudited consolidated balance sheet of the Guarantor and its Subsidiaries as at September 30, 1995 and the related consolidated statements of income, shareholders' equity and cash flows, for the quarter then ended and the nine-month period then ended, are complete and correct and fairly present the financial condition of the Guarantor and its Subsidiaries as at such dates and the results of operations of the Guarantor and its Subsidiaries for the periods covered by such statements, in each case in accordance with GAAP consistently applied, subject, in the case of the September 30, 1995 financial statements, to normal year-end adjustments and the absence of notes. Since December 31, 1994, there has been no Material Adverse Effect. 15 147 (o) Liabilities. Neither the Guarantor nor any of its Subsidiaries has any material liabilities, fixed or contingent, that are not reflected in the financial statements referred to in subsection (n), in the notes thereto or otherwise disclosed in writing to the Banks, other than liabilities arising in the ordinary course of business since September 30, 1995. (p) Labor Disputes, Etc. There are no strikes, lockouts or other labor disputes against the Guarantor or any Subsidiary, or, to the best of the Guarantor's or the Borrower's knowledge, threatened against or affecting the Guarantor or any Subsidiary which may result in a Material Adverse Effect. (q) Consideration. The Guarantor has received at least "reasonably equivalent value" (as such phrase is used in Section 548 of the Bankruptcy Code, in Section 3439.04 of the California Uniform Fraudulent Transfer Act and in comparable provisions of other applicable law) and at least sufficient consideration to support its obligations hereunder in respect of the Subject Obligations. (r) Independent Investigation. The Guarantor hereby acknowledges that it has undertaken its own independent investigation of the financial condition of the Borrower and all other matters pertaining to this Guaranty and further acknowledges that it is not relying in any manner upon any representation or statement of the Agent or any Bank with respect thereto. The Guarantor represents and warrants that it has received and reviewed copies of the Loan Documents and that it is in a position to obtain, and it hereby assumes full responsibility for Borrower obtaining, any additional information concerning the financial condition of the Borrower and any other matters pertinent hereto that the Guarantor may desire. The Guarantor is not relying upon or expecting the Agent or any Bank to furnish to the Guarantor any information now or hereafter in the Agent's or any such Bank's possession concerning the financial condition of the Borrower or any other matter. (s) Name of Borrower. The Borrower's true name is set forth in the preamble to this Guaranty, and the Borrower has made all applicable filings required to cause such name to be reflected on its commercial register. (t) Full Disclosure. None of the representations or warranties made by the Guarantor in this Guaranty or by the Borrower in the Facility Agreement as of the date such representations and warranties are made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Guarantor or the Borrower in connection with this Guaranty or the Facility Agreement, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading in any material respect as of the time when made or delivered. SECTION 11 Affirmative Covenants. So long as any Subject Obligations shall remain unpaid or any Bank shall have any Commitment, the Guarantor agrees as follows: (a) Financial Statements and Other Reports. The Guarantor will furnish to the Agent in sufficient copies for distribution to the Banks: (i) as soon as available and in any event within 55 days after the end of each of the first three fiscal quarters of each fiscal year of the Guarantor, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such quarter, and the related consolidated statements of income, shareholders' equity and cash flows of the Guarantor and its Subsidiaries for such quarter and the portion of the fiscal year through the end of such quarter, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the corresponding period in the preceding fiscal year; (ii) as soon as available and in any event within 100 days after the end of each fiscal year of the Guarantor, a consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such fiscal year, and the related consolidated statements of income, shareholders' equity and cash flows of the Guarantor and its Subsidiaries for such fiscal year, prepared in accordance with GAAP consistently applied, all in reasonable detail and setting forth in comparative form the figures for the previous fiscal year, and in the case of such consolidated financial statements, accompanied by a report thereon of Price Waterhouse LLP or another firm of independent certified public accountants of recognized national standing, which report shall be unqualified as to scope of audit or the status of the Guarantor and its Subsidiaries as a going concern; (iii) together with the financial statements required pursuant to clauses (i) and (ii), a Compliance Certificate of a Responsible Officer as of the end of the applicable accounting period, which shall contain a certification of a Responsible Officer of the Guarantor stating that such financial statements fairly present the financial condition of the Guarantor and its Subsidiaries as at such date and the results of operations of the Guarantor and its Subsidiaries for the period ended on such date and 16 148 have been prepared in accordance with GAAP consistently applied, subject to changes resulting from normal, year-end audit adjustments and except for the absence of notes; and (iv) promptly after the giving, sending or filing thereof, copies of all reports, if any, which the Guarantor or any of its Subsidiaries sends to the holders of its respective capital stock or other securities and of all reports or filings, if any, by the Guarantor or any of its Subsidiaries with the SEC or any national securities exchange. (b) Additional Information. The Guarantor will furnish to the Agent the following information, and will cause the Borrower to furnish to the Agent the following information insofar as it relates to the Borrower: (i) promptly after the Guarantor or the Borrower has knowledge or becomes aware thereof, notice of the occurrence or existence of any Default; (ii) prompt written notice of any action, event or occurrence that could reasonably be expected to result in a Material Adverse Effect due to environmental liability under Environmental Laws; (iii) prompt written notice of each action, suit and proceeding before any Governmental Authority or arbitrator pending, or to the best of the Guarantor's or the Borrower's knowledge, threatened against or affecting the Guarantor or any of its Subsidiaries which if adversely determined would involve an aggregate liability of $10,000,000 (or its equivalent in any other currency) or more in excess of amounts covered by third-party insurance, or (B) otherwise may have a Material Adverse Effect; (iv) promptly after the Guarantor has knowledge or becomes aware thereof, (A) notice of the occurrence of any Termination Event, together with a copy of any notice of such Termination Event to the PBGC, and (B) the details concerning any action taken or proposed to be taken by the IRS, PBGC, Department of Labor or other Person with respect thereto; (v) promptly upon the commencement or increase of contributions to, the adoption of, or an amendment to, a Plan by the Guarantor or an ERISA Affiliate, if such commencement or increase of contributions, adoption, or amendment could reasonably be expected to result in a net increase in unfunded liability to Guarantor or an ERISA Affiliate in excess of $10,000,000, a calculation of the net increase in unfunded liability; (vi) promptly after filing or receipt thereof by the Guarantor or any ERISA Affiliate, copies of the following: (A) any notice received from the PBGC of intent to terminate or have a trustee appointed to administer any Pension Plan; (B) any notice received from the sponsor of a Multiemployer Plan concerning the imposition, delinquent payment, or amount of withdrawal liability; (C) any demand by the PBGC under Subtitle D of Title IV of ERISA; and (D) any notice received from the IRS regarding the disqualification of a Plan intended to qualify under Section 401(a) of the Internal Revenue Code; (vii) within 30 days of the date thereof, or, if earlier, on the date of delivery of any financial statements pursuant to subsection 11(a), notice of any material change in accounting policies or financial reporting practices by the Guarantor or the Borrower; (viii) promptly after the occurrence thereof, notice of any labor controversy resulting in or threatening to result in any strike, work stoppage, boycott, shutdown or other material labor disruption against or involving the Guarantor or any of its Subsidiaries which could result in a Material Adverse Effect; (ix) prompt written notice of any change in the fiscal year of the Guarantor or of the Borrower; (x) prompt written notice of any other condition or event which has resulted, or that could reasonably be expected to result, in a Material Adverse Effect; and 17 149 (xi) such other information respecting the operations, properties, business or condition (financial or otherwise) of the Guarantor or its Subsidiaries as any Bank (through the Agent) may from time to time reasonably request. Each notice pursuant to this subsection (b) shall be accompanied by a written statement by a Responsible Officer of the Guarantor (or of the Borrower, with respect to occurrences affecting the Borrower) setting forth details of the occurrence referred to therein, and stating, to the extent then known or proposed, what action the Guarantor or the Borrower, as the case may be, may take with respect thereto. (c) Preservation of Corporate Existence, Etc. The Guarantor shall, and shall cause each Subsidiary to: (i) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation, except in the case of any Subsidiary (other than the Borrower) to the extent that the failure to obtain or maintain the foregoing would not reasonably be expected to have a Material Adverse Effect; (ii) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except to the extent that the failure to obtain or maintain the foregoing would not reasonably be expected to have a Material Adverse Effect; (iii) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill, except in the case of any Subsidiary (other than the Borrower) to the extent that the failure to obtain or maintain the foregoing would not reasonably be expected to have a Material Adverse Effect; and (iv) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. (d) Payment of Taxes, Etc. The Guarantor will, and will cause each of its Subsidiaries to, pay and discharge all taxes, fees, assessments and governmental charges or levies imposed upon it or upon its properties or assets prior to the date on which penalties attach thereto, and all lawful claims for labor, materials and supplies which, if unpaid, might become a Lien upon any properties or assets of the Guarantor or any Subsidiary, except to the extent such taxes, fees, assessments or governmental charges or levies, or such claims, are being contested in good faith by appropriate proceedings and are adequately reserved against in accordance with GAAP. (e) Licenses. The Guarantor will, and will cause each of its Subsidiaries to, obtain and maintain all licenses, authorizations, consents, filings, exemptions, registrations and other governmental approvals necessary in connection with the execution, delivery and performance of the Loan Documents, the consummation of the transactions therein contemplated or the operation and conduct of its business and ownership of its properties, except to the extent that the failure to obtain or maintain the foregoing would not reasonably be expected to have a Material Adverse Effect. (f) Maintenance of Property. The Guarantor shall maintain, and shall cause each Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted. (g) Insurance. The Guarantor shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against losses and damages of the kinds and in amounts which are deemed prudent by the Guarantor in its reasonable business judgment and within the general parameters customary among similarly situated businesses in the industry. (h) Payment of Obligations. The Guarantor shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: (i) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Guarantor or such Subsidiary; (ii) all lawful claims which, if unpaid, would by law become a Lien (other than a Permitted Lien) upon its property, except to the extent such claims are being contested in good faith, via appropriate proceedings, with adequate reserves established therefor in accordance with GAAP; and 18 150 (iii) all Indebtedness, including obligations of the Borrower under the Facility Agreement, as and when due and payable or within any grace periods applicable thereto, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. (i) Compliance with Laws. The Guarantor shall comply, and shall cause each Subsidiary to comply, in all material respects with the requirements of all Environmental Laws and all applicable laws, rules, regulations and orders of any Governmental Authority having jurisdiction over it or its business. (j) Compliance with ERISA. The Guarantor shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. (k) Inspection of Property and Books and Records. The Guarantor shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Guarantor and such Subsidiary. The Guarantor shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the expense of the Guarantor and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Guarantor; provided, however, that (i) unless an Event of Default under the Facility Agreement shall have occurred and be continuing, (A) the Guarantor shall be responsible under this paragraph (k) for the costs and expenses of the Agent only, (B) all inspections, visits, examinations and other actions permitted or authorized hereunder shall be coordinated only through the Guarantor, and (C) physical inspections of the Borrower's facilities in Japan shall be made on two weeks' prior notice and shall occur no more frequently than semiannually in the case of inspections by the Agent and no more frequently than annually otherwise, and (ii) when an Event of Default under the Facility Agreement exists the Agent or any Bank may make any visit, inspection or examination or take any other action authorized hereunder at the expense of the Guarantor at any time during normal business hours, without advance notice and without being subject to any of the other restrictions described in clause (i). (l) Margin Certificate. The Guarantor shall from time to time furnish to the Borrower for delivery by it pursuant to the Facility Agreement a Margin Certificate. (m) Further Assurances and Additional Acts. The Guarantor shall, and shall cause the Borrower to, execute, acknowledge, deliver, file, notarize and register at its own expense all such further agreements, instruments, certificates, documents and assurances and perform such acts as the Agent or the Majority Banks shall deem reasonably necessary or appropriate to effectuate the purposes of the Loan Documents, and promptly provide the Bank with evidence of the foregoing satisfactory in form and substance to the Agent and the Majority Banks. SECTION 12 Negative Covenants. So long as any Subject Obligations shall remain unpaid or any Bank shall have any Commitment, the Guarantor agrees that: (a) Liens; Negative Pledges. The Guarantor will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, revenues or assets, whether now owned or hereafter acquired, other than (i) Permitted Liens and (ii) other Liens that, in the aggregate at any time, secure obligations in an amount not in excess of 10% of Consolidated Total Assets. (b) Change in Nature of Business. The Guarantor will not, and will not permit any of its Subsidiaries to, engage in any material line of business other than the electronics business and other businesses incidental or reasonably related thereto. (c) Sales of Assets. The Guarantor will not, and will not permit any of its Subsidiaries to, convey, sell, lease, transfer, or otherwise dispose of, or part with control of (whether in one transaction or a series of transactions) any assets (including any shares of stock in any Subsidiary or other Person), except: (i) sales or other dispositions of inventory in the ordinary course of business; 19 151 (ii) sales or other dispositions of assets in the ordinary course of business which have become worn out or obsolete or which are promptly being replaced; (iii) sales of accounts receivable to financial institutions not affiliated with the Guarantor; provided that (A) the discount rate shall not at any time exceed 10%, (B) the amount of all accounts receivable permitted to be sold in any fiscal quarter shall not exceed 30% of the consolidated accounts receivable of the Guarantor and its Subsidiaries, determined as of the end of the next preceding fiscal quarter (or fiscal year, as the case may be), and (C) the sole consideration received for such sales shall be cash; and (iv) sales or other dispositions of assets outside the ordinary course of business which do not constitute Substantial Assets. For purposes of clause (iv), a sale, lease, transfer or other disposition of assets shall be deemed to be of "Substantial Assets" if such assets, when added to all other assets conveyed, sold, leased, transferred or otherwise disposed of in any period of four consecutive fiscal quarters (other than assets sold in the ordinary course of business or pursuant to clause (iii)), shall exceed 10% of Consolidated Total Assets as determined as of the end of the fiscal quarter of the Guarantor immediately preceding the date of determination. (d) Loans and Investments. The Guarantor will not, and will not permit any of its Subsidiaries to, make any investment in any Person, or otherwise extend any credit to or make any additional investments in any Person, other than in connection with: (i) extensions of credit in the nature of accounts receivable or notes receivable arising from the sales of goods or services in the ordinary course of business; (ii) Permitted Investments; (iii) additional purchases of or investments in the stock of Subsidiaries; (iv) advances or loans in the ordinary course of its business to its employees, officers and directors; or (v) investments otherwise permitted in this Guaranty. (e) Restrictions on Fundamental Changes and Acquisitions. The Guarantor will not, and will not permit the Borrower to, liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or enter into any Acquisition, provided that the Guarantor or the Borrower may enter into and consummate the following Acquisitions, subject to the provisos below (each a "Permitted Acquisition"): (i) a merger of the Guarantor with any other Person, if the Guarantor is the surviving corporation; or a merger of the Borrower and the Guarantor as long as no Material Adverse Effect shall result therefrom; and (ii) other Acquisitions in which the consideration paid consists of stock or cash or a combination of cash and stock; provided, that the aggregate consideration paid in cash in connection with any Permitted Acquisition made during any period of four consecutive fiscal quarters, when added to the cash consideration paid in connection with all other Permitted Acquisitions during such period, shall not exceed the lesser of (A) an amount equal to 25% of Consolidated Tangible Net Worth, determined as of the last day of the fiscal quarter (or fiscal year) of the Guarantor most recently ended or (B) an amount equal to 50% of the cash balance as shown on the consolidated balance sheet of the Guarantor and its Subsidiaries as of such day; and provided further, that in any event, (x) the Guarantor shall give to the Agent prior written notice of any proposed Acquisition and concurrently with such notice shall deliver to the Agent pro forma financial statements of the Guarantor and its Subsidiaries and a certificate of a Responsible Officer of the Guarantor setting forth pro forma calculations of the covenants set forth in Section 13, in each case after giving effect to the proposed Acquisition, (y) no Permitted Acquisition shall be made while there exists a Default or if a Default would occur as a result thereof and (z) the acquired or other Person in any Acquisition shall be in the electronics business or other business incidental or reasonably related thereto. 20 152 (f) Transactions with Related Parties. The Guarantor will not, and will not permit any of its Subsidiaries to, enter into any transaction, including the purchase, sale or exchange of property or the rendering of any services, with any Affiliate, any officer or director thereof or any Person which beneficially owns or holds 20% or more of the equity securities, or 20% or more of the equity interest, thereof (a "Related Party"), or enter into, assume or suffer to exist, or permit any Subsidiary to enter into, assume or suffer to exist, any employment or consulting contract with any Related Party, except (i) a transaction or contract which is in the ordinary course of the Guarantor's or such Subsidiary's business, including a transaction in the ordinary course of business between or among the Guarantor and one or more of its Subsidiaries, and (ii) any other transaction which is upon fair and reasonable terms not less favorable to the Guarantor or such Subsidiary than it would obtain in a comparable arm's length transaction with a Person not a Related Party. For purposes of this paragraph (f), the sale, transfer or disposition of more than 30% of its assets (in any transaction or a series of related transactions) by the Guarantor or any Subsidiary shall be deemed to be outside the ordinary course of business. (g) Accounting Changes. The Guarantor shall not, and shall not suffer or permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required or permitted by GAAP (or, in the case of any Subsidiary domiciled in a jurisdiction other than the United States, in accordance with generally accepted accounting principles and practices in such jurisdiction). (h) Distributions. The Guarantor will not declare or pay any dividends in respect of its capital stock, or purchase, redeem, retire or otherwise acquire for value any of its capital stock now or hereafter outstanding, return any capital to its shareholders as such, or make any distribution of assets to its shareholders as such, or permit any of its Subsidiaries to purchase, redeem, retire, or otherwise acquire for value any stock of the Guarantor, except that the Guarantor may: (i) declare and deliver dividends and distributions payable only in common stock of the Guarantor; (ii) purchase shares of its capital stock from time to time in connection with the issuance of shares under the Guarantor's employee stock option plans; provided, however, that the aggregate purchase price for all such shares in any fiscal year of the Guarantor shall not exceed $10,000,000; (iii) purchase, redeem, retire, or otherwise acquire shares of its capital stock with the proceeds received from a substantially concurrent issue of new shares of its capital stock; and (iv) in addition to the dividends, purchases, redemptions, retirements and other acquisitions permitted by the foregoing paragraphs (i) through (iii), declare and deliver dividends and distributions, and purchase, redeem, retire, or otherwise acquire shares of its capital stock, in an aggregate amount not exceeding $100,000,000 in any period of four consecutive quarters. SECTION 21 Financial Covenants. So long as of the Subject Obligations shall remain unpaid or any Bank shall have any Commitment, the Guarantor agrees that: (a) Senior Debt to Total Capital. The Guarantor will maintain a ratio of Senior Debt to Total Capital of not more than 0.35 to 1.0 as of the end of each of the Guarantor's fiscal quarters. (b) Total Leverage Ratio. The Guarantor will maintain a ratio of the sum (without duplication) of (i) Consolidated Total Liabilities and (ii) Guaranty Obligations (determined on a consolidated basis for the Guarantor and its Subsidiaries) to Consolidated Tangible Net Worth of not more than (x) 1.0 to 1.0 as of the end of each of the Guarantor's fiscal quarters in the Guarantor's 1995 and 1996 fiscal years and (y) 0.75 to 1.0 as of the end of each of the Guarantor's fiscal quarters thereafter; (c) Quick Ratio. The Guarantor will maintain a ratio of Consolidated Quick Assets to Consolidated Current Liabilities of not less than 1.35 to 1.0 as of the end of any fiscal quarter of the Guarantor; (d) Minimum Consolidated Tangible Net Worth. The Guarantor will maintain Consolidated Tangible Net Worth (exclusive of the cumulative translation adjustment account as reported in the consolidated balance sheet of the Guarantor and its Subsidiaries as of such date) as of the end of each of the Guarantor's fiscal quarters of not less than $997,000,000 plus 100% of the net proceeds received by the Guarantor or any Subsidiary from the sale or issuance of equity securities (including equity securities issued upon the conversion of Subordinated Debt) to any Person other than the Guarantor or any Subsidiary after September 30, 1995 plus 80% of positive Consolidated Net Income, if any, for each fiscal quarter elapsed after September 30, 1995; 21 153 (e) Debt Service Coverage Ratio. The Guarantor will maintain a ratio of (A) the sum of Consolidated EBIT plus Consolidated Rental Expense to (B) the sum of Consolidated CMLTD plus Consolidated Interest Expense plus Capitalized Interest plus Consolidated Rental Expense of not less than 2.0 to 1.0 for any period of four consecutive fiscal quarters of the Guarantor; (f) Profitability. During any period of four consecutive fiscal quarters, the Guarantor, on a consolidated basis, shall not incur (a) more than two quarterly losses or (b) losses in excess of $45,000,000 in the aggregate for any one or two quarters. The Guarantor, on a consolidated basis, shall be profitable for any period of four consecutive fiscal quarters; and (g) Subordinated Debt. Subordinated Debt of the Guarantor and its consolidated Subsidiaries shall not exceed (A) $500,000,000 at any time during the Guarantor's 1995 and 1996 fiscal years or (B) $750,000,000 at any time thereafter; and the Guarantor shall not, and shall not permit any of its Subsidiaries to, make any voluntary or optional payment or repayment on, redemption, exchange or acquisition for value of, or any sinking fund or similar payment with respect to, any Subordinated Debt if a Default shall then exist or would occur as a result thereof. SECTION 14 Event of Default. Any of the following shall constitute an "Event of Default": (a) Representation or Warranty. Any representation or warranty by the Guarantor or the Borrower made herein or in the Facility Agreement, or which is contained in any certificate, document or financial or other statement by the Guarantor or the Borrower or any Responsible Officer of the Guarantor or the Borrower, furnished at any time under this Guaranty, the Facility Agreement or any other Loan Document, is incorrect in any material respect, on or as of the date made; or (b) Specific Defaults. The Guarantor fails to perform or observe any term, covenant or agreement contained in any of Sections 11(b), 11(h)(iii) (in respect of the Borrower's obligations under the Facility Agreement), 12 or 13; or (c) Other Defaults. The Guarantor fails to perform or observe any other term or covenant contained in this Guaranty, and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer of the Guarantor knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to the Guarantor by the Agent or any Bank; or (d) Default Under Other Indebtedness. The Guarantor or any of its Subsidiaries shall fail (i) to make any payment of any principal of, or interest or premium on, any Indebtedness (other than in respect of the Advances) in an aggregate principal amount outstanding of at least $10,000,000 (or its equivalent in any other currency) when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness as of the date of such failure, or (ii) to perform or observe any term, covenant or condition on its part to be per formed or observed under any agreement or instrument relating to any such Indebtedness, when required to be performed or observed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness without any further action by the holder thereof; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a contractually required prepayment), prior to the stated maturity thereof; or any facility or commitment available to the Guarantor or any Subsidiary relating to Indebtedness in an aggregate amount at any one time of not less than $10,000,000 (or its equivalent in any other currency) is withdrawn, suspended or cancelled by reason of any default (however described) of the Guarantor or such Subsidiary; or (e) Insolvency; Voluntary Proceedings. The Guarantor or any Subsidiary (i) ceases or fails to be Solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any formal corporate action to effectuate or authorize any of the foregoing; or (f) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Guarantor or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Guarantor's or any Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Guarantor or any Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; 22 154 or (iii) the Guarantor or any Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (g) Judgments. (i) A final nonappealable judgment or order for the payment of money against the Guarantor or any of its Subsidiaries shall remain unpaid 90 days following the due date for such payment and that is reasonably expected to result in a Material Adverse Effect; or (ii) any non-monetary judgment or order shall be rendered against the Guarantor or any such Subsidiary which has or would reasonably be expected to have a Material Adverse Effect; or (h) Process Issued. A warrant of attachment, execution, distraint, or similar process against any substantial part of the assets of the Guarantor or any of its Subsidiaries is issued which remains undismissed or undischarged for a period of 30 days, if as a result thereof there is reasonably expected to occur a Material Adverse Effect; or (i) Seizure. All or a material part of the undertaking, assets, rights or revenues of the Guarantor or the Borrower are seized, nationalized, expropriated or compulsorily acquired by or under the authority of any Governmental Authority; or (j) ERISA. (i) an ERISA Event shall occur with respect to a Pension Plan which has resulted or could reasonably be expected to result in liability of the Guarantor under Title IV of ERISA to the Pension Plan or PBGC in an aggregate amount in excess of $10,000,000; (ii) the commencement or increase of contributions to, or the adoption of or the amendment of a Pension Plan by the Guarantor which has resulted or could reasonably be expected to result in an increase in Unfunded Pension Liability among all Pension Plans in an aggregate amount in excess of $10,000,000; or (iii) any of the representations and warranties contained in subsection 10(l) hereof shall cease to be true and correct which, individually or in combination, has resulted or could reasonably be expected to result in a Material Adverse Effect; or (k) Dissolution, Etc. The Guarantor or any of its Subsidiaries shall (i) liquidate, wind up or dissolve (or suffer any liquidation, wind-up or dissolution), except to the extent expressly permitted by subsection 12(g), (ii) suspend its operations other than in the ordinary course of business, or (iii) take any corporate action to authorize any of the actions or events set forth above in this subsection (k); or (l) Ownership of Borrower. The Borrower shall cease to be a wholly-owned indirect or direct Subsidiary of the Guarantor, except as permitted hereunder; or (m) Change in Ownership or Control. (i) Any Person, or two or more Persons acting in concert, shall acquire beneficial ownership, directly or indirectly, or shall enter into a contract or arrangement (A) for the acquisition of the securities of the Guarantor (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Guarantor entitled to vote in the election of directors, or (B) which upon consummation will result in its or their acquisition of, or control over, securities of the Guarantor (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Guarantor entitled to vote in the election or directors; or (ii) during any period of up to 12 consecutive months commencing after the Closing Date, individuals who at the beginning of such period were directors of the Guarantor shall cease for any reason to constitute a majority of the Board of Directors of the Guarantor, unless the Persons replacing such individuals were nominated by the Board of Directors of the Guarantor. (n) Repudiation. This Guaranty is for any reason revoked, invalidated or repudiated, or otherwise ceases to be in full force and effect, or the Guarantor or any other Person contests the validity or enforceability of this Guaranty or denies that it has any further liability hereunder. (o) Material Adverse Effect. A Material Adverse Effect shall have occurred. Upon the occurrence of an Event of Default, the Agent and the Banks shall have the rights and remedies set forth in Clause 11 of the Facility Agreement. SECTION 15 Notices. All notices, requests and other communications provided for hereunder shall be in writing and delivered by prepaid letter (airmail if the addressee is abroad), or by telex or telefax, (a) if to the Guarantor, to its address specified on the signature pages hereof or such other address as shall be designated by the Guarantor in a written notice to the other parties, (b) if to the Agent, to its address as set forth in or determined 23 155 pursuant to the Facility Agreement or such other address as shall be designated by the Agent in a written notice to the other parties, and (c) if to any Bank, to its address as set forth in or determined pursuant to the Facility Agreement or such other address as shall be designated by such Bank in a written notice to the Guarantor and the Agent. All such notices, requests and communications shall be effective (i) if delivered for overnight delivery, upon delivery, (ii) if mailed, two business days after it has been deposited into the mail (seven business days if delivered through international mail), (iii) if transmitted by facsimile, when a complete and legible copy is received by the addressee, or (iv) if sent by telex, at the time of dispatch with confirmed answerback of the addressee appearing at the beginning and end of the transmission (provided that if the date of receipt is not a business day in the country of the addressee or if the time of receipt of any telex or telefax is after the close of business in the country of the address it shall be deemed to have been received at the opening of business on the next business day). SECTION 16 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank of any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. SECTION 17 Costs and Expenses; Indemnification; Other Charges. (a) Costs and Expenses. The Guarantor shall: (i) as soon as reasonably practicable in accordance with the Guarantor's customary procedures for reviewing and processing such items, and in any event within 30 days following receipt of an invoice therefor, and to the extent not earlier paid pursuant to the Facility Agreement, pay or reimburse the Agent for all reasonable costs and expenses incurred by the Agent in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to, this Guaranty and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including fees and expenses of external legal counsel and the allocated cost of internal legal services and disbursements of internal counsel incurred by the Agent with respect thereto (subject, however, in the case of legal fees only, to an aggregate limit agreed between the Agent and the Guarantor in a letter dated November 30, 1995 for the development, preparation, delivery and execution of the Loan Documents); (ii) pay or reimburse each Bank and the Agent on demand for all reasonable costs and expenses incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies (including in connection with any "workout" or restructuring regarding the Subject Obligations) under this Guaranty, including fees and expenses of external legal counsel and the allocated cost of internal legal services and disbursements of internal counsel incurred by the Agent and any Bank; and (iii) as soon as reasonably practicable in accordance with the Guarantor's customary procedures for reviewing and processing such items, and in any event within 30 days following receipt of an invoice therefor, pay or reimburse the Agent on demand for all reasonable appraisal (including the allocated cost of internal appraisal services), audit, search and filing costs, fees and expenses, consulting, recording, costs and similar fees and expenses incurred or sustained by the Agent or any of its Affiliates in connection with the matters referred to in clauses (i) and (ii) of this subsection 17(a) or otherwise in connection with this Guaranty. (b) Indemnification. Whether or not the transactions contemplated by the Facility Agreement are consummated, the Guarantor shall indemnify and hold the Agent, the Arranger, each Bank and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including fees and expenses of external legal counsel and the allocated cost of internal legal services and disbursements of internal counsel) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Advances and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Guaranty or any document contemplated by or referred to herein, or the trans actions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate pro ceeding) related to or arising out of this Guaranty or the Advances or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Guarantor shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Subject Obligations. 24 156 (c) Defense. At the election of any Indemnified Person, the Guarantor shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's sole discretion, at the sole cost and expense of the Guarantor. (d) Other Charges. The Guarantor agrees to indemnify the Agent and each of the Banks against and hold each of them harmless from any and all present and future stamp, transfer, documentary and other such taxes, levies, fees, assessments and other charges made by any jurisdiction by reason of the execution, delivery, performance and enforcement of this Guaranty. (e) Interest. Any amounts payable in Dollars to the Agent or any Bank under this Section 17 or otherwise under this Guaranty if not paid when due shall bear interest from the due date until paid in full, at a fluctuating rate per annum equal to the Prime Commercial Lending Rate of ABN AMRO Bank N.V. ("ABN") as announced from time to time by ABN at its Chicago Office plus 2% (calculated on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed). Any other amounts payable to the Agent or any Bank under this Guaranty if not paid when due shall bear interest at the default rate set forth in the Facility Agreement (but in no event exceeding the maximum rate permitted by applicable law). SECTION 18 Payment Currency. (a) The Guarantor hereby guarantees that the Subject Obligations will be paid to the Agent and the Banks without set-off or counterclaim in the currency and at the places and times and in the manner provided for in the Facility Agreement. The obligation of the Guarantor hereunder to make payments in any currency (the "Payment Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Payment Currency or any other realization in such currency, whether as proceeds of set-off, security, guarantee, distributions, or otherwise, except to the extent to which such tender, recovery or realization shall result in the effective receipt by the Agent and the Banks of the full amount of the Payment Currency to be payable hereunder. Without limiting the foregoing, the Guarantor (i) acknowledges that this Guaranty is not an instrument which may be paid in Dollars pursuant to Section 3107 of the California Uniform Commercial Code, (ii) agrees that (A) upon the acceleration of the Subject Obligations after an Event of Default, the Agent, upon the instructions of the Majority Banks, may at any time and from time to time purchase for the ratable benefit of the Banks, one or more hedging contracts to fix the Dollar equivalent amount of the Subject Obligations in the Payment Currency and (B) as a separate and independent obligation hereunder, the Guarantor shall immediately pay to the Agent and the Banks all direct and indirect costs incurred by the Agent or the Banks in obtaining any such hedging contract, and (iii) agrees that (A) any judgment entered against the Guarantor and in favor of any Bank with respect to the Subject Obligations shall, if requested by such Bank, be entered in the Payment Currency pursuant to the Uniform Foreign-Money Claims Act as in effect in the State of California (California Code of Civil Procedure Section 676 et seq.) and (B) for the purpose of determining any "spot rate" as defined in California Code of Civil Procedure Section 676.1(11), the Reference Banks shall be used as the "bank or other dealer in foreign exchange" referenced in such section. The Guarantor shall indemnify the Agent and each Bank (as an alternative or additional cause of action) for the amount (if any) by which such effective receipt shall fall short of the full amount of the Payment Currency to be payable hereunder, and such obligation to indemnify shall not be affected by judgment being obtained for any other sums due under this Guaranty. (b) Upon a payment with respect to any of the Subject Obligations becoming due hereunder, unless and until such payment is received by the Agent and the Banks in the Payment Currency in accordance with subsection 18(a), the Guarantor shall (i) bear all exchange rate risks with respect thereto, and (ii) pay inter est on such Subject Obligations to the Guarantor and the Banks on the amounts due, on demand, at the rate of interest then payable by the Borrower. SECTION 19 Set-off. In addition to any rights and remedies of the Agent and the Banks provided by law, if an Event of Default (as defined in the Facility Agreement) exists or the Advances have been accelerated, the Agent and each Bank are authorized at any time and from time to time, without prior notice to the Guarantor, any such notice being waived by the Guarantor to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, the Agent or such Bank (as the case may be) to or for the credit or the account of the Guarantor against any and all Subject Obligations, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Guaranty which are then due and payable. The Agent and each Bank agree promptly to notify the Guarantor, and each Bank agrees promptly to notify the Agent, after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 25 157 SECTION 28 Survival. All covenants, agreements, representations and warranties made in this Guaranty shall survive the execution and delivery of this Guaranty, and shall continue in full force and effect so long as any of the Subject Obligations remains unsatisfied. Without limiting the generality of the foregoing, the obligations of the Guarantor under Section 17 shall survive the satisfaction of the Subject Obligations. SECTION 29 Successors and Assigns. The provisions of this Guaranty shall be binding upon the Guarantor and its successors and assigns and inure to the benefit of the Agent, each Bank and their respective successors and assigns, except that the Guarantor may not assign or transfer any of its rights or obligations under or in connection with this Guaranty without the prior written consent of the Agent and each Bank. SECTION 30 Assignments, Participations, Etc. Each Bank may, without notice to or consent by the Guarantor, sell, assign, transfer or grant participations in all or any portion of such Bank's rights and obligations hereunder in connection with any sale, assignment, transfer or grant of a participation by such Bank under Clause 15 of the Facility Agreement of its rights and obligations thereunder. The Guarantor agrees that in connection with any such sale, assignment, transfer or grant by any Bank, such Bank may deliver to the prospective participant or assignee financial statements and other relevant information relating to the Guarantor and its Subsidiaries as contemplated by Clause 15 of the Facility Agreement. SECTION 31 Governing Law. (a) THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY SHALL BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA IN AND FOR THE CITY AND COUNTY OF SAN FRANCISCO OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, OR, AT THE SOLE OPTION OF AGENT OR MAJORITY BANKS, IN ANY OTHER COURT IN WHICH AGENT OR MAJORITY BANKS SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS JURISDICTION OVER THE SUBJECT MATTER AND PARTIES IN CONTROVERSY AND BY EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR CONSENTS, AND THE BANKS AND THE AGENT BY THEIR ACCEPTANCE HEREOF EACH CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE JURISDICTION OF THOSE COURTS. THE GUARANTOR IRREVOCABLY WAIVES, AND THE BANKS AND THE AGENT BY THEIR ACCEPTANCE HEREOF EACH IRREVOCABLY WAIVES, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS GUARANTY OR ANY DOCUMENT RELATED HERETO. THE GUARANTOR WAIVES, AND THE BANKS AND THE AGENT BY THEIR ACCEPTANCE HEREOF EACH WAIVES, PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. SECTION 32 Waiver of Jury Trial. THE GUARANTOR HEREBY AGREES TO WAIVE, AND THE AGENT AND THE BANKS BY THEIR ACCEPTANCE HEREOF HEREBY AGREE TO WAIVE, THEIR RESPECTIVE RIGHTS TO A TRAIL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE GUARANTOR HEREBY AGREES, AND THE AGENT AND THE BANKS BY THEIR ACCEPTANCE HEREOF HEREBY AGREE, THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY WAY LIMITING THE FOREGOING, THE GUARANTOR FURTHER AGREES, AND THE AGENT AND THE BANKS BY THEIR ACCEPTANCE HEREOF FURTHER AGREE, THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM, OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS GUARANTY OR ANY PROVISION HEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. THIS SECTION 24 MAY NOT BE AMENDED EXCEPT PURSUANT TO SECTION 26 AND BY SPECIFIC REFERENCE TO THIS SECTION 24. 26 158 SECTION 33 Entire Agreement. This Guaranty embodies the entire agreement and understanding among the Guarantor, the Banks and the Agent with respect to the subject matter hereof, and supersedes all prior or contemporaneous agreements and under standings of such Persons, verbal or written, relating to the subject matter hereof. SECTION 34 Amendments and Waivers. This Guaranty may not be amended except by a writing signed by the Guarantor, the Agent and the Majority Banks, except that without the consent in writing of all of the Banks (a) the release or termination of this Guaranty may not be made, (b) the due date of any payment of principal, interest or other amount payable by the Guarantor hereunder may not be postponed and the amount thereof may not be reduced, and (c) the currency in which any amount is payable by the Guarantor may not be changed. No waiver of any rights of the Agent or the Banks under any provision of this Guaranty or consent to any departure by the Guarantor therefrom shall be effective unless in writing and signed by the Agent and the Majority Banks. Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 35 Severability. The illegality or unenforceability of any provision of this Guaranty or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Guaranty or any instrument or agreement required here under. SECTION 36 Benefit of Guaranty. This Guaranty is made and entered into for the sole protection and legal benefit of the Banks and the Agent and their successors and assigns, and no other Person shall be a direct or indirect beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Guaranty. Neither the Agent nor any Bank, by its acceptance of this Guaranty, shall have any obligation under this Guaranty to any Person other than the Guarantor, and such obliga tions shall be limited to those expressly stated herein. 27 159 SECTION 37 Time. Time is of the essence as to each term or provision of this Guaranty. IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered in San Francisco, California, by its proper and duly authorized officers, as of the date first above written. LSI LOGIC CORPORATION By _______________________________________________ Title:__________________________________________ Address: 1551 McCarthy Boulevard Milpitas, CA 95035 Facsimile:________________________________________ Attention:________________________________________ 28 EX-11.1 6 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 LSI LOGIC CORPORATION CALCULATION OF EARNINGS PER SHARE Year ended December 31, 1995, 1994 and 1993 (In thousands, except per share amounts)
1995 1994 1993 -------- -------- -------- Primary Earnings Per Share Net income $238,120 $108,743 $ 53,750 ======== ======== ======== Average common and common equivalent shares: Average common shares outstanding 123,960 106,336 95,638 Dilutive options 4,062 3,570 3,424 -------- -------- -------- 128,022 109,906 99,062 ======== ======== ======== Earnings per common and common equivalent share $ 1.86 $ 0.99 $ 0.54 ======== ======== ======== Fully Diluted Earnings Per Share Net income $238,120 $108,743 $ 53,750 Interest expense on convertible subordinated debt, net of tax effect 6,166 7,022 3,961 -------- -------- -------- Adjusted net income $244,286 $115,765 $ 57,711 ======== ======== ======== Average common and common equivalent shares on a fully diluted basis: Average common shares outstanding 123,960 111,930 95,530 Convertible subordinated debt 11,735 9,350 10,232 Dilutive options 4,073 4,148 3,864 -------- -------- -------- 139,768 125,428 109,626 -------- -------- -------- Fully diluted earnings per common and common equivalent share $ 1.75 $ 0.92 $ 0.53 ======== ======== ========
EX-13.1 7 A/R TO STOCKHOLDERS FOR YEAR ENDED 12/31/95 1 EXHIBIT 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Revenues for LSI Logic increased 41% to $1.3 billion in 1995 compared to $902 million in 1994. Income from operations was $319 million in 1995 compared to $158 million in 1994. Net income was $238 million in 1995 compared to $109 million in 1994. Fully diluted earnings per share increased to $1.75 per share in 1995 from $0.92 per share in 1994. The improvement in operating income during 1995 resulted primarily from increased product demand, greater factory utilization, improved plant efficiencies and a shift in product mix combined with management's continuing cost containment efforts. In addition, the Company increased its volume output capabilities during 1995 through continued expansion of its Japanese and U.S. manufacturing facilities. The Company continued to focus its efforts on key strategic products resulting in higher probability on increased revenues for each quarter throughout 1995. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information, it is recommended that this discussion and analysis be read in conjunction with the remainder of the Company's Annual Report on Form 10-K for the year ended December 31, 1995. The Company operates on a 52/53 week fiscal year which ends on the Sunday closest to December 31. Fiscal years 1995 and 1994 were 52 week years, whereas 1993 was a 53 week year. Statements in this discussion and analysis contain forward looking information and involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. Results of Operations Revenue. The Company operates in one industry segment in which it designs, develops, manufactures and markets application-specific integrated circuits (ASICs) and related products and services. Design and services revenues include engineering design services, licensing of LSI Logic's advanced design tools software, and technology transfer and support services. LSI Logic customers have used these services in the design of increasingly advanced integrated circuits characterized by increased functionality and performance. The proportion of revenues from ASIC design and related services compared to component product sales varies among customers depending upon their specific requirements. The following table describes revenues from component products and design and services as a percentage of total revenues:
1995 1994 1993 Component products 94% 89% 87%
2 Design and services 6% 11% 13% -- --- --- 100% 100% 100%
Total revenues grew to $1.3 billion in 1995 from $902 million in 1994. Total component revenues grew to $1.2 billion in 1995 from $803 million in 1994. The increase in total revenues and component revenues as a percentage of total revenues during 1995 was primarily attributable to increased customer demand for products utilizing the Company's advanced technologies and higher average selling prices. Increased manufacturing capacity at the Company's Japanese and U.S. manufacturing facilities enabled it to meet higher customer demand. Design and services revenue decreased to $67 million in 1995 from $99 million in 1994. The decrease is primarily attributable to a decline in nonrecurring engineering (NRE) revenue as the Company focused its resources on large volume production opportunities and more complex CoreWare designs, which has resulted in the Company undertaking fewer engineering projects for customers. Total revenues grew to $902 million in 1994 from $719 million in 1993. Total revenue growth and the increase in component product revenue as a percentage of total revenues in 1994 was primarily attributable to increased customer demand for the Company's products, including the Company's system-on-a-chip CoreWare products, the introduction of new products and increased manufacturing capacity as the Company's Japanese affiliate started volume production at its newest wafer manufacturing facility in 1994. Operating costs and expenses. Key elements of the consolidated statements of operations, expressed as a percentage of revenues, were as follows:
1995 1994 1993 Gross profit margin 47.5% 42.3% 39.0% Research and development expense 9.8% 11.0% 11.0% Selling, general and administrative expense 12.6% 13.9% 16.3% Income from operations 25.1% 17.5% 11.7%
Gross margin. The gross margin percentage continued to improve in 1995 and 1994 primarily as a result of greater factory utilization and improved plant efficiencies at the Company's Japanese wafer manufacturing facilities. Changes in the product mix and increasing usage of low-cost assembly and test subcontractors also contributed favorably to gross margin in both 1995 and 1994. The Company's operating environment combined with the resources required to operate in the semiconductor industry requires managing a variety of factors such as product mix, factory capacity and utilization, manufacturing yields, availability of certain raw materials, terms negotiated with third-party subcontractors and foreign currency fluctuations. Production capability is expected to continue to increase during the first quarter of 1996 due to an increase in manufacturing capacity resulting primarily from the installation of additional production equipment in the Company's Japanese wafer manufacturing facilities and improving manufacturing yields. However, lower factory utilization in the fourth quarter 3 of 1995 may be expected to have a negative impact on gross margin in the first quarter of 1996. If demand for the Company's products does not absorb this additional capacity at a sufficient rate, the Company's gross margin and operating results could be negatively impacted in future periods. Changes in the relative strength of the yen may have a greater impact on the Company's gross margin than other foreign exchange fluctuations due to the Company's large wafer fabrication operations in Japan. Although the average weighted yen exchange rate for 1995 increased approximately 8% from 1994, the effect on gross margin and net income was not material as the Company's yen denominated sales offset a substantial portion of its yen denominated costs during those periods, and the Company hedged a majority of its remaining yen exposures (see Note 4 of Notes to Consolidated Financial Statements). However, there can be no assurance that future changes in the relative strength of the yen or mix of foreign denominated revenues and costs will not have a material effect on gross margin or operating results. Research and development. Total research and development (R&D) expenses increased by $25 million in 1995; however, as a percentage of revenues they declined to approximately 10% from 11% in 1994. The increase in R&D expenses is primarily attributable to increased staffing levels as the Company continues to invest in the development of more advanced technology submicron products and the related manufacturing, packaging and design processes. The decline in R&D expenses as a percentage of revenues during 1995 was due to partial utilization of the Company's R&D facility to increase production of its 0.5-micron products as well as overall increases in total revenues. R&D expenses in 1994 compared to 1993 remained approximately the same as a percentage of revenues. The Company continues to be committed to technological leadership in the high-performance semiconductor market and anticipates maintaining its investment in R&D at a rate between 10-12% of revenues in future years. During 1996, this investment is expected to be primarily for development of new advanced products, development of advanced manufacturing processes and enhancements to the Company's design automation software capability. Selling, general and administrative. Selling, general and administrative (SG&A) expenses increased $34 million and $7 million in 1995 and 1994, respectively, primarily as a result of increased staffing levels in both years. SG&A expenses as a percentage of revenue decreased to 13% in 1995 compared to 14% in 1994 and 16% in 1993. The decline in SG&A expenses as a percentage of revenue in 1995 and 1994 primarily reflects the trend of more rapidly increasing revenues across these periods. The Company expects that SG&A expenses will continue to increase in absolute dollars, although such expenses may fluctuate as a percentage of revenue on a quarterly basis. Interest expense. Interest expense decreased $2 million in 1995 as compared to 1994. The 1995 decrease is primarily due to continued reduction of bank borrowings and declining interest rates related to yen denominated borrowings. The increase in interest expense of $9 million in 1994 as compared to 1993 was primarily due to the discontinuance of interest capitalization from the Japanese wafer fabrication facility, the Company's issuance of 5 and 4 1/2% Convertible Subordinated Notes of $144 million and an increase in interest rates. These increases were offset in part by the redemption of the 6 and 1/4% Convertible Subordinated Debentures during 1994 (see Note 7 of Notes to Consolidated Financial Statements). Interest and other income. Interest and other income increased $16 million in 1995 from 1994 due primarily to higher interest income as a result of higher cash and investment balances from two public stock offerings during 1995. The increase in interest and other income of $10 million in 1994 from 1993 is due principally to increased interest income as a result of higher average cash and investment balances compared to 1993 and higher average interest rates during 1994. Other income increased due to larger foreign currency gains, offset partially by increased goodwill amortization attributable to the repurchases of minority interest holdings throughout 1994. Provision for income taxes. In 1995 and 1994, the Company's effective tax rate was 28%. The tax rate was lower than the U.S. statutory rate primarily due to earnings of the Company's foreign subsidiaries being taxed at lower rates and the utilization of prior loss carryovers and other tax credits. The Company's effective tax rate in 1993 was 30%. Minority interest. The changes in minority interest between 1995, 1994 and 1993 were primarily attributable to the repurchase of minority held shares of LSI Logic Japan Semiconductor, Inc. (JSI), formerly known as Nihon Semiconductor, Inc., LSI Logic Corporation of Canada, Inc. and LSI Logic K.K. in 1995 and 1994 (see Notes 2 and 11 of Notes to Consolidated Financial Statements) and the composition of earnings and losses among certain of the Company's international affiliates for each of the respective years. Restructuring. In 1992, the Company's cost structure, combined with worldwide economic conditions and declines in the military, aerospace, European and personal computer markets, made it difficult to achieve profitability. The high cost of manufacturing in Europe and the continuing losses on chipset products were the primary contributors to the need to restructure. Rather than attempt to address the problems with a short-term view, the Company determined that a comprehensive, fundamental restructuring of its approach to product emphasis and getting its products to market would better serve the Company's long-term profitability goals. The Company's restructuring plan, implemented in the third quarter of 1992, contemplated revising its global manufacturing strategy, streamlining operations, discontinuing certain commodity products and focusing its product strategy on high-end technology solutions. Specifically, it involved the shutdown of the Braunschweig, Germany test and assembly facility, the planned phase-out of the Milpitas, California wafer fabrication facility, the consolidation of certain U.S. manufacturing operations, the downsizing of the chipset operation of its former subsidiary, Headland Technology Inc., and severance costs for approximately 500 employees worldwide. The $102 million restructuring charge included: the write-down and write-off of manufacturing facilities, equipment and improvements; the estimated operating costs attributable to the phase-out, closure and consolidation of these manufacturing facilities; the write-down of commodity chipset product inventories; the severance of manufacturing and other personnel; the 5 consolidation of certain U.S. and foreign sales offices, design centers and administrative organizations; and certain legal matters and other costs. The following table sets forth the Company's 1992 restructuring expense, remaining reserves at December 31, 1994 and 1995 (which are accounted for as components of fixed assets, inventories and current liabilities) and charges taken from the date the restructuring commenced through December 31, 1994 and during 1995:
1992 Restructuring Balance Balance (In thousands) Expense Utilized* Adjusted 12/31/94 Utilized* Adjusted 12/31/95 Write-down of manufacturing facility(a) $ 14,700 $(28,700) $ 14,000 $ -- $ -- $ -- $ -- Other fixed asset related charges(b) 35,500 (21,100) (3,300) 11,100 (500) (8,700) 1,900 Other provisions for phase-down and consolidation of manufacturing facilities(b) 13,500 (9,200) (800) 3,500 (700) -- 2,800 Payments to employees for severance(c) 8,000 (5,400) (1,100) 1,500 (300) (1,200) Write-down of inventories(a) 10,900 (8,800) (2,100) -- -- -- -- Relocation, lease terminations and other(b) 19,200 (3,300) (6,700) 9,200 (100) 9,900 19,000 Total $101,800 $(76,500) $ -- $ 25,300 $ (1,600) $-- $ 23,700
* NET OF CURRENCY TRANSLATION ADJUSTMENTS. (a) Amounts utilized represent non-cash charges. (b) Amounts utilized represent both cash and non-cash charges. Cumulative cash charges totaled $14 million. (c) Amounts utilized represent cash payments related to the severance of approximately 400 employees. By the end of 1994, the Company had completed the following actions in accordance with its original plan: (1) Phased-out the German test and assembly operations: Restructuring reserves were 6 utilized for employee terminations ($4 million), fixed asset dispositions ($7 million), inventory write-offs ($3 million) and other fixed asset related charges ($4 million). In addition, the German facility was written down ($29 million) for its full book value. Operating losses incurred during the phase-out period and ongoing maintenance costs ($6 million) associated with the facility were also applied against the reserves. (2) Discontinued the chipset business: Restructuring reserves were utilized for inventory write-downs ($3 million) and other costs including those associated with abandoned facility leases ($2 million). (3) Phased-down its Milpitas wafer manufacturing facility: Restructuring reserves were used for fixed asset dispositions ($6 million), inventory write-offs ($3 million) and other costs ($3 million). (4) Phased-down certain U.S. assembly and test operations: Restructuring reserves were used for fixed asset write-offs ($2 million). (5) Consolidated certain U.S. sales offices and design centers: Restructuring reserves were used for employee terminations ($1 million), lease terminations ($1 million) and fixed asset write-offs ($2 million). During 1995, $1.6 million was charged against the restructuring reserves. These charges primarily included the write-off and disposition of equipment associated with U.S. manufacturing operations and ongoing maintenance costs of its vacant German facility, offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark. In response to changing economic conditions, the Company modified its original restructuring plan in the second quarter of 1995 and upgraded its Milpitas, California facility to enable production of more advanced technology products. The Company also substantially completed the phase-down of its U.S. assembly and test operation. These actions resulted in excess reserves of approximately $12 million which were used to offset increases in the reserves for legal and other corporate matters, which include reserves for the jury verdict against the Company during the second quarter of 1995 in the Texas Instruments litigation (see Note 11 of Notes to Consolidated Financial Statements). Remaining reserves at December 31, 1995 include approximately $4.7 million for remaining costs related to the California manufacturing facilities and continued maintenance of the vacant Braunschweig facility and $19 million for legal and other corporate matters. Management believes that the total reserves established are adequate to cover uncertainties in connection with these matters. Factors that may affect future operating results. The Company believes that its future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of both the semiconductor industry and the markets addressed by the Company's products, the availability and extent of utilization of manufacturing capacity, fluctuations in manufacturing yields, price erosion, competitive factors, the timing of new product introductions, changes in product mix, product obsolescence and the ability to develop and implement new technologies. The Company's operating results could also be impacted by sudden fluctuations in customer requirements, currency exchange rate fluctuations and other economic conditions affecting customer 7 demand and the cost of operations in one or more of the global markets in which the Company does business. As a participant in the semiconductor industry, the Company operates in a technologically advanced, rapidly changing and highly competitive environment. The Company predominantly sells custom products to customers operating in a similar environment. Accordingly, changes in the conditions of any of the Company's customers may have a greater impact on the Company than if the Company offered standard products that could be sold to many purchasers. While the Company cannot predict what effect these various factors may have on its financial results, the aggregate effect of these and other factors could result in significant volatility in the Company's future performance. To the extent the Company's performance may not meet expectations published by external sources, public reaction could result in a sudden and significant adverse impact on the market price of the Company's securities, particularly on a short-term basis. The Company has international subsidiaries which operate and sell the Company's products in various global markets. The Company purchases a substantial portion of its raw materials and equipment from foreign suppliers, and incurs labor and other operating costs, particularly at its Japanese manufacturing facilities, in foreign currencies. As a result, the Company is exposed to international factors such as changes in foreign currency exchange rates or weak economic conditions of the respective countries in which the Company operates. The Company utilizes forward exchange and currency swap contracts to manage its exposure associated with currency fluctuations on intercompany transactions and certain foreign currency denominated commitments. At December 31, 1995, the Company had various forward exchange and currency swap contracts outstanding (see Note 4 of Notes to Consolidated Financial Statements). These contracts hedge intercompany loans and a portion of the Company's yen denominated commitments for the first and second quarters of 1996. The Company's corporate headquarters and manufacturing facilities are located near major earthquake faults. As a result, in the event of a major earthquake, the Company could suffer damages which could materially and adversely affect the operating results and financial condition of the Company. Financial Condition and Liquidity Cash, cash equivalents and short-term investments rose to $686 million at December 31, 1995 from $429 million at December 31, 1994. The increase of $257 million is primarily attributable to net proceeds from two stock offerings in February and July 1995 of approximately $158 million and $247 million, respectively, cash flows from operations of $294 million and proceeds from borrowings of $83 million, partially offset by capital additions of approximately $233 million, the acquisition of all minority owned stock in the Company's Japanese manufacturing subsidiary, JSI, for $126 million and its Canadian subsidiary for $32 million and $110 million in repayments of debt obligations. During 1995, the Company generated $294 million of cash and cash equivalents from its 8 operating activities, compared to $255 million during 1994. The increase in cash and cash equivalents provided from operations as compared to 1994 was primarily attributable to an increase in net income before depreciation and amortization and increases in accrued and other liabilities, offset in part by increases in accounts receivable, prepaid and other assets and inventories. Increased sales and manufacturing activities in response to rising customer demand contributed to increases in accounts receivable, inventories and accrued liabilities. The increase in prepaid and other current assets was primarily attributable to the inclusion of a receivable from land sold in 1995 and equipment held for sale to leasing companies. Cash and cash equivalents used in investing activities totalled $730 million during 1995. The primary investing activities included increased investments in debt and equity securities, purchases of property and equipment, acquisitions of stock in subsidiaries from minority interest holders (see Note 2 of Notes to Consolidated Financial Statements) and an investment in Chartered Semiconductor Manufacturing Pte. Ltd. (CSM). The Company believes that maintaining technological leadership in the highly competitive worldwide semiconductor industry requires substantial ongoing investment in advanced manufacturing capacity. Net capital additions during 1995 of $233 million were primarily for capacity expansion at the Japanese and U.S. wafer fabrication facilities, the upgrade of the U.S. research and development facilities and construction costs related to a new wafer fabrication facility in Oregon (see below), net of retirements and $152 million of equipment refinanced through operating leases by the Company's Japanese manufacturing subsidiary (see Note 11 of Notes to the Consolidated Financial Statements). In August 1995, the Company announced that it selected Gresham, Oregon as the site for a new eight-inch wafer manufacturing facility and began construction. The initial phase is expected to require capital spending of approximately $600 to $800 million over the next 24 months. Management expects capital additions, excluding operating lease activity, to approximate $300 to $350 million in 1996. In February 1995, the Company subscribed to purchase shares in CSM for approximately $20 million, of which payments of approximately $14 million were made during 1995 and approximately $6 million in January 1996. Transfer of the shares is restricted for five years or until the listing of CSM stock upon a recognized stock exchange, whichever occurs sooner. Cash and cash equivalents provided from financing activities totaled $397 million related to net proceeds received by the Company from two stock offerings in February and July 1995, partially offset by a net reduction in borrowings. In December 1995, the Company cancelled its $60 million revolving credit facility. Also, in December 1995 the Company's manufacturing subsidiary, JSI, entered into a 25 billion yen credit line arrangement. As of December 31, 1995, JSI had 3 billion yen ($29 million) outstanding under the facility and in January 1996, JSI drew down an additional 6 billion yen ($58 million) (see Note 7 of Notes to Consolidated Financial Statements). The Company will utilize a portion of these funds to repay certain JSI borrowings of approximately 4.7 billion yen ($44 million). In addition, JSI entered into a 15 billion yen operating lease arrangement during June 1995 which will be fully utilized as of January 1996 (see Note 11 of Notes to Consolidated Financial Statements). Each of the Company's significant foreign affiliates have lines of 9 credit available for local currency borrowings. These other foreign bank lines of credit were not material as of December 31, 1995. The Company believes that its level of financial resources is an important competitive factor in its industry. Accordingly, the Company may, from time to time, seek additional equity or debt financing. The Company believes that existing liquid resources and funds generated from operations combined with funds from such financing and its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. There can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financing will decrease existing stockholders' percentage equity ownership and may, depending on the price at which the equity is sold, result in dilution. Consolidated Statements of Operations
Year Ended December 31, (In thousands, except per share amounts) 1995 1994 1993 Revenues $ 1,267,657 $ 901,830 $ 718,812 Costs and expenses: Cost of revenues 665,673 520,150 438,523 Research and development 123,892 98,978 78,995 Selling, general and administrative 159,393 124,936 117,452 Total costs and expenses 948,958 744,064 634,970 Income from operations 318,699 157,766 83,842 Interest expense (16,349) (18,455) (9,621) Interest income and other 32,593 16,858 6,500 Income before income taxes and minority interest 334,943 156,169 80,721 Provision for income taxes 93,781 43,679 24,221 Income before minority interest 241,162 112,490 56,500 Minority interest in net income of subsidiaries 3,042 3,747 2,750 Net income $ 238,120 $ 108,743 $ 53,750 Net income per share: Primary $ 1.86 $ 0.99 $ 0.54 Fully diluted $ 1.75 $ 0.92 $ 0.53 Common shares and common share equivalents used in computing per share amounts: Primary 128,022 109,906 99,062 Fully diluted 139,768 125,428 109,626
See notes to consolidated financial statements Consolidated Balance Sheets December 31, 10
(In thousands, except per share amount) 1995 1994 Assets Cash and cash equivalents $ 172,780 $ 224,503 Short-term investments 512,765 204,008 Accounts receivable, less allowance for doubtful accounts of $3,486 and $4,044 230,980 152,244 Inventories 139,857 107,824 Prepaid expenses and other current assets 80,348 42,275 Total current assets 1,136,730 730,854 Property and equipment, net 638,282 495,549 Other assets 74,575 43,971 Total assets $1,849,587 $1,270,374 Liabilities and Stockholders' Equity Accounts payable $ 165,725 $ 165,612 Accrued salaries, wages and benefits 34,825 29,251 Accrued restructuring costs 22,700 19,800 Other accrued liabilities 42,315 30,192 Income taxes payable 73,649 38,916 Current portion of long-term obligations 56,569 24,167 Total current liabilities 395,783 307,938 Long-term obligations 222,388 288,496 Deferred income taxes 8,514 6,861 Minority interest in subsidiaries 6,656 122,173 Commitments and contingencies -- -- Stockholders' equity: Preferred shares; 2,000 shares authorized -- -- Common stock; $.01 par value; 250,000 shares authorized: 129,303 and 114,287 shares outstanding 1,293 1,143 Additional paid-in capital 853,538 401,268 Retained earnings 305,190 67,070 Cumulative translation adjustment 56,225 75,425 Total stockholders' equity 1,216,246 544,906 Total liabilities and stockholders' equity $1,849,587 $1,270,374
See notes to consolidated financial statements Consolidated Statements of Cash Flows
Year Ended December 31, (In thousands) 1995 1994 1993 operating activities: Net income $238,120 $108,743 $ 53,750 Adjustments: Depreciation and amortization 135,197 103,648 65,417 Minority interest in net income of subsidiaries 3,042 3,747 2,750
11 Changes in: Accounts receivable (81,343) (21,998) (14,121) Inventories (31,164) (34,051) (3,596) Prepaid expenses and other assets (45,226) (5,494) 741 Accounts payable 3,054 93,578 (52,136) Accrued and other liabilities 81,190 18,367 29,952 Accrued restructuring costs (8,376) (11,702) (9,167) Net cash provided by operating activities 294,494 254,838 73,590 investing activities: Purchase of debt and equity securities available-for-sale (613,703) (292,584) -- Maturities and sales of debt and equity securities available-for-sale 302,060 167,152 -- Purchase of restricted equity securities (13,966) -- -- Change in other short-term investments held-to-maturity -- -- (15,476) Purchases of property and equipment, net of retirements (232,723) (166,421) (87,899) Acquisition of stock from minority interest holders (171,843) (14,173) (970) Net cash used in investing activities (730,175) (306,026) (104,345) financing activities: Issuance of Convertible Subordinated Notes -- 143,750 -- Proceeds from borrowings 83,294 5,061 57,588 Repayment of debt obligations (110,126) (23,883) (26,866) Repurchase of Convertible Subordinated Debentures -- (1,112) (5,000) Issuance of common stock, net 423,520 17,203 28,797 Net cash provided by financing activities 396,688 141,019 54,519 Effect of exchange rate changes on cash and cash equivalents (12,730) 13,353 10,452 Increase (decrease) in cash and cash equivalents (51,723) 103,184 34,216 Cash and cash equivalents at beginning of period 224,503 121,319 87,103 Cash and cash equivalents at end of period $ 172,780 $ 224,503 $ 121,319 Schedule of noncash transactions: Conversion of subordinated debentures to common stock $ -- $ 97,104 $ -- Tax benefit of employee stock transactions $ 28,900 $ 13,674 $ --
See notes to consolidated financial statements Consolidated Statements of Stockholders' Equity 12
Common Stock Additional Retained Cumulative Paid-in Earnings Translation (In thousands) Shares Amount Capital (Deficit) Adjustment Total Balances at December 31, 1992 90,819 $ 908 $ 244,725 $ (95,423) $ 47,518 $ 197,728 Issuance to employees under stock option and purchase plans 8,636 87 28,710 28,797 Aggregate adjustment from translation of financial statements into U.S. dollars 12,159 12,159 Net income 53,750 53,750 Balances at December 31, 1993 99,455 995 273,435 (41,673) 59,677 292,434 Issuance to employees under stock option and purchase plans 5,118 51 17,152 17,203 Tax benefit of employee stock transactions 13,674 13,674 Issuance upon conversion of 6 and 1/4% debentures 9,714 97 97,007 97,104 Aggregate adjustment from translation of financial statements into U.S. dollars 15,748 15,748 Net income 108,743 108,743 Balances at December 31, 1994 114,287 1,143 401,268 67,070 75,425 544,906 Issuance of common stock under public offerings 12,075 121 404,745 404,866 Issuance to employees under stock option and purchase plans 2,941 29 18,625 18,654 Tax benefit of
13
Common Stock Additional Retained Cumulative Paid-in Earnings Translation (In thousands) Shares Amount Capital (Deficit) Adjustment Total employee stock transactions 28,900 28,900 Aggregate adjustment from translation of financial statements into U.S. dollars (19,200) (19,200) Net income 238,120 238,120 Balances at December 31, 1995 129,303 $1,293 $853,538 $305,190 $56,225 $1,216,246
See notes to consolidated financial statements Notes to Consolidated Financial Statements Note 1 - Nature of Business and Significant Accounting Policies Nature of Business - LSI Logic Corporation (the Company) designs, develops and manufactures high performance application-specific integrated circuits (ASICs) which it markets primarily to original equipment manufacturers in the electronic data processing, telecommunications and certain office automation industries worldwide. Basis of presentation - The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Assets and liabilities of certain foreign operations are translated to U.S. dollars at current rates of exchange, and revenues and expenses are translated using weighted average rates. Accounts denominated in foreign currencies have been remeasured into functional currencies before translation into U.S. dollars. Foreign currency transaction gains and losses are included as a component of interest income and other. Gains and losses from foreign currency translation are included as a separate component of stockholders' equity. Minority interest in subsidiaries represents the minority stockholders' proportionate share of the net assets and results of operations of the Company's majority-owned subsidiaries. Sales of common stock of the Company's subsidiaries and repurchases of such shares may result in changes in the Company's proportionate share of the subsidiaries' net assets. The Company reflects such changes as an element of additional paid-in-capital. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's fiscal year ends on the Sunday closest to December 31. For presentation 14 purposes, the consolidated financial statements and notes refer to December 31 as year end. Fiscal years 1995 and 1994 were 52 week years, whereas 1993 was a 53 week year. Cash equivalents and short-term investments - All highly liquid investments purchased with an original maturity of 90 days or less are considered to be cash equivalents. Marketable short-term investments are accounted for as available-for-sale. Cash equivalents are accounted for as held-to-maturity. Management determines the appropriate classification of debt and equity securities at the time of purchase and reassesses the classification at each reporting date. Investments in debt and equity securities classified as held-to-maturity are reported at amortized cost and securities available-for-sale are reported at fair value with unrealized gains and losses, net of related tax, if any, reported as a separate component of stockholders' equity. Unrealized gains and losses at December 31, 1995 and 1994 were not material. Realized gains and losses are based on the book value of specific securities sold and were immaterial during 1995, 1994 and 1993. Concentration of credit risk of financial instruments - Financial instruments which potentially subject the Company to credit risk consist of cash equivalents, short-term investments and accounts receivable. Cash equivalents and short-term investments are maintained with high quality institutions, the composition and maturities of which are regularly monitored by management. A majority of the Company's trade receivables are derived from sales to large multinational computer, telecommunication and electronics manufacturers, with the remainder distributed across other industries. Amounts due from the Company's largest customer in 1995 and two largest customers in 1994 accounted for 16% and 18% of trade receivables at December 31, 1995 and 1994, respectively. During 1995, the Company sold approximately $28 million (discounted at short-term yen borrowing rates, averaging 1.1%) of its Japanese sales affiliate's accounts receivable through financing programs with certain Japanese banks. Related losses were immaterial. Concentrations of credit risk with respect to all other trade receivables are considered to be limited due to the quantity of customers comprising the Company's customer base and their dispersion across industries and geographies. The Company performs ongoing credit evaluations of its customers' financial condition and requires collateral as considered necessary. Write-offs of uncollectible amounts have been immaterial. Fair value of financial instruments - The estimated fair value amounts have been determined by the Company, using available market information and valuation methodologies considered to be appropriate. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The estimated fair value of the Company's long-term debt was $500 million and $360 million at December 31, 1995 and 1994, respectively. The estimated fair value of all other financial instruments at December 31, 1995 and 1994 was not materially different from the values presented in the consolidated balance sheets. 15 Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis for raw materials and is computed on a currently adjusted standard basis (which approximates first-in, first-out) for work-in-process and finished goods. Property and equipment - Property and equipment is recorded at cost and includes interest on funds borrowed to finance construction. Depreciation and amortization are calculated based on the straight-line method. Depreciation of equipment and buildings, in general, is computed using the assets' estimated useful lives as presented below: Buildings and improvements 20 - 40 years Equipment 3 - 5 years Furniture and Fixtures 5 years Software 2 - 5 years Amortization of leasehold improvements is computed using the shorter of the remaining term of the Company's facility leases or the estimated useful lives of the improvements. Depreciation for income tax purposes is computed using accelerated methods. Preproduction engineering costs - Incremental costs incurred in connection with developing major production capabilities at new manufacturing plants, including facility carrying costs and costs to qualify production processes, are capitalized and amortized over the expected useful lives of the manufacturing processes utilized in the plants, generally four years. Amortization commences when the manufacturing plant is capable of volume production, which is generally characterized by meeting certain reliability, defect density and service cycle time criteria defined by management. Other assets - Goodwill of approximately $27 million and $8 million, net of accumulated amortization of $5 million and $3 million, is included in other assets at December 31, 1995 and 1994, respectively, and was generated from the purchase of common stock from minority stockholders (see Note 2). The acquisitions were accounted for as purchases, and the excess of the purchase price over the fair value of assets acquired was allocated to goodwill which is being amortized over seven years. Goodwill is evaluated for impairment based on estimated undiscounted cash flows of the acquired entity. In February 1995, the Company subscribed to purchase shares in Chartered Semiconductor Manufacturing Pte. Ltd. (CSM) for approximately $20 million, of which approximately $14 million was paid in 1995 and approximately $6 million was paid in January 1996. Transfer of the shares is restricted for five years or until the listing of CSM stock upon a recognized stock exchange, whichever occurs sooner. The Company has recorded the investment as a long-term asset at cost and believes that its fair value approximates its recorded value at December 31, 1995. Assets held for sale are included in other assets with an estimated realizable value of $16 million at December 31, 1994. In December 1995, the Company sold its Milpitas land valued at $16 million for $21 million. The gain on the sale of $5 million is included in other income. The Braunschweig, Germany test and assembly facility, closed in connection with the 1992 restructuring, was written-off in 1994 (see Note 6). 16 Income taxes - The Company accounts for income taxes under the liability method which requires an adjustment to the provision for income taxes for the effect on deferred income taxes of any enacted change in corporate income tax rates. Since 1993 the Internal Revenue Service (IRS) has been examining the Company's 1991 and 1992 federal income tax returns. The Company believes that the ultimate resolution of this examination will not have a material impact on the consolidated financial statements. No provision for income taxes is made for the undistributed earnings of the Company's foreign subsidiaries since it is the Company's intention to permanently reinvest such earnings in its foreign operations. Revenue recognition - Revenue from component products is recognized upon shipment to customers except that distributor revenues and related cost of sales are deferred until the merchandise is sold by the distributors. Revenue resulting from the licensing of the Company's design and manufacturing technology to other companies is recognized when the significant contractual obligations have been fulfilled. Royalty revenue is recognized upon the sale of products subject to royalties. The Company uses the percentage-of-completion method for recognizing revenues on fixed-fee design arrangements. One customer accounted for 12% of consolidated revenues in 1995. Two customers accounted for 14% and 11% of consolidated revenues in 1994. One customer accounted for 12% of consolidated revenues in 1993. Income per share - Primary income per common share and common share equivalent is computed using the weighted average number of common shares outstanding during the respective periods, including dilutive stock options. Fully diluted income per common share and common share equivalent is computed by adjusting net income and primary shares outstanding for the potential effect of the conversion of the weighted average subordinated debentures and notes outstanding during the year. Fully diluted earnings per share computations are based on the most advantageous conversion or exercise rights to the security holder that become effective within ten years following the period reported upon. Stock Dividend = On May 12, 1995, the Company's Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend for stockholders of record on May 23, 1995. The payment date was June 21, 1995. All prior period common stock and applicable share data appearing in the consolidated financial statements and notes thereto have been restated to reflect this stock dividend. Reclassifications - Certain reclassifications have been made to the 1994 consolidated financial statements to conform to the 1995 presentation. Such reclassifications had no effect on results of operations or the accumulated retained earnings. Note 2 - Purchases of Minority Interest During January 1995, the Company acquired all minority owned shares (a 45% interest) 17 of its Japanese manufacturing subsidiary, LSI Logic Japan Semiconductor, Inc. (JSI), formerly known as Nihon Semiconductor, Inc., from Kawasaki Steel Corporation (KSC) for a total of $175 million to be paid to KSC over eight years. The Company defeased this obligation through payment of $126 million to an unrelated party and pursuant thereto was legally released from the obligation by KSC. The acquisition was accounted for as a purchase. The excess of the total acquisition cost over the recorded value of assets acquired ($33 million) was allocated to property and equipment based on fair value and is being amortized over the estimated useful life of those assets of approximately nine years. During the third quarter of 1995 the Company's formerly publicly traded Canadian subsidiary, LSI Logic Corporation of Canada, Inc., became wholly owned by the Company. Certain former shareholders have exercised dissent and appraisal rights and have rejected the offer made by the Canadian subsidiary of payment of fair value for the shares such shareholders previously owned (see Note 11). The total of payments made to all other former shareholders to date is $43 million Canadian dollars (CD) or approximately U.S. $32 million of which U.S. $16 million was allocated to goodwill and is being amortized over seven years. An accrued liability has been recorded in connection with the amount yet to be paid in respect of the dissenters= shares and any excess thereof will be an increase to goodwill. During 1995, the Company acquired approximately 1.6 million common shares of its Japanese sales affiliate from its minority interest shareholders for approximately $10 million. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the assets acquired ($2 million) was allocated to goodwill and is being amortized over seven years. The Company owned approximately 91% of the Japanese affiliate at December 31, 1995. Note 3 - Cash and Investments Cash and cash equivalents and short-term investments included the following debt and equity securities at December 31:
(In thousands) 1995 1994 Cash and Cash Equivalents Overnight deposits $ 59,296 $ 29,569 Time deposits 25,030 49,751 Commercial paper 22,980 81,500 Other 9,237 27,366 Total held-to-maturity 116,543 188,186 Cash 56,237 36,317 Total cash and cash equivalents $172,780 $224,503 Short-term investments Corporate debt securities $335,612 $149,910 Auction rate preferred 82,615 -- U.S. government and agency securities 43,881 15,902 Bank notes 35,960 12,254 Commercial paper -- 18,984
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(In thousands) 1995 1994 Other 14,697 6,958 Total available-for-sale $512,765 $204,008
Cash and cash equivalents and short-term investments held at December 31, 1995 and 1994 approximate fair market value and generally are held less than one year. Interest income earned on cash, cash equivalents and short-term investments was $29 million, $15 million and $7 million during 1995, 1994 and 1993, respectively. Note 4 - Financial Instruments The Company has foreign subsidiaries which operate and sell the Company's products in various global markets. As a result, the Company is exposed to changes in interest rates and foreign currency exchange rates. The Company utilizes forward exchange contracts and currency and interest rate swap contracts to manage its exposure associated with firm intercompany and third-party transactions. The Company does not enter into speculative contracts to profit on exchange rate fluctuations. As of December 31, 1995, forward exchange and currency swap contracts, expiring January 1996 through September 1996, were held to hedge intercompany loans, firm obligations to the Company's Japanese manufacturing subsidiary and third-party borrowings. As of December 31, 1994, forward exchange and currency swap contracts were held to hedge various firm intercompany loans. The following table summarizes by major currency the forward exchange and currency swap contracts outstanding. The "buy" amounts represent U.S. dollar equivalent of commitments to purchase foreign currencies, and the "sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. Foreign currency amounts are translated at rates current at the reporting date.
December 31, (In thousands) 1995 1994 Buy/(Sell): Japanese yen $ 18,474 $(10,351) Pound sterling 5,614 9,447 German mark (5,990) (9,312) Canadian dollar -- 13,836 Singapore dollar 6,089 -- U.S. dollar (25,492) (3,200) $ (1,305) $ 420
These forward exchange and currency swap contracts are considered identifiable hedges and realized and unrealized gains and losses are deferred until settlement of the underlying commitments. The gains and losses are recorded as part of the underlying purchase or sale transaction, or as other gains or losses when a hedged transaction is no longer expected to occur. Deferred foreign exchange gains and losses were not material at December 31, 1995 and 1994. Foreign currency transaction gains and losses included in interest income and other were not material in 1995, 1994 or 1993. 19 Note 5 - Balance Sheet Detail
December 31, (In thousands) 1995 1994 Inventories: Raw materials $ 44,758 $ 20,493 Work-in-process 47,193 58,303 Finished goods 47,906 29,028 $ 139,857 $ 107,824 Property and equipment: Land $ 27,698 $ 23,043 Buildings and improvements 152,671 117,105 Equipment 807,596 681,857 Leasehold improvements 60,514 61,265 Preproduction engineering 27,832 27,417 Furniture and fixtures 28,150 22,091 Construction in progress 44,063 6,807 1,148,524 939,585 Accumulated depreciation and amortization (510,242) (444,036) $ 638,282 $ 495,549
Accumulated depreciation for preproduction engineering was $14 million and $8 million at December 31, 1995 and 1994, respectively. Capitalized interest included within property and equipment totaled $10 million at December 31, 1995 and 1994. Accumulated amortization of capitalized interest was $4 million and $2 million at December 31, 1995 and 1994, respectively. Note 6 - Restructuring In 1992, the Company's cost structure, combined with worldwide economic conditions and declines in the military, aerospace, European and personal computer markets, made it difficult to achieve profitability. The high cost of manufacturing in Europe and the continuing losses on chipset products were the primary contributors to the need to restructure. Rather than attempt to address the problems with a short-term view, the Company determined that a comprehensive, fundamental restructuring of its approach to product emphasis and getting its products to market would better serve the Company's long-term profitability goals. The Company's restructuring plan, implemented in the third quarter of 1992, contemplated revising its global manufacturing strategy, streamlining operations, discontinuing certain commodity products and focusing its product strategy on high-end technology solutions. Specifically, it involved the shutdown of the Braunschweig, Germany test and assembly facility, the planned phase-out of the Milpitas, California wafer fabrication facility, the consolidation of certain U.S. manufacturing operations, the downsizing of the chipset operation of its former subsidiary, Headland Technology Inc., and severance costs for approximately 500 employees worldwide. The $102 million restructuring charge included: the write-down and write-off of manufacturing facilities, equipment and improvements; the estimated operating costs attributable to the phase-out, closure and consolidation of these manufacturing facilities; the write-down of commodity chipset product inventories; the severance of manufacturing and other personnel; the 20 consolidation of certain U.S. and foreign sales offices, design centers and administrative organizations; and certain legal matters and other costs. The following table sets forth the Company's 1992 restructuring expense, remaining reserves at December 31, 1994 and 1995 (which are accounted for as components of fixed assets, inventories and current liabilities) and charges taken from the date the restructuring commenced through December 31, 1994 and during 1995:
1992 Restructuring Balance Balance (In thousands) Expense Utilized* Adjusted 12/31/94 Utilized* Adjusted 12/31/95 Write-down of manufacturing facility(a) $ 14,700 $(28,700) $ 14,000 $ -- $ -- $ -- $ -- Other fixed asset related charges(b) 35,500 (21,100) (3,300) 11,100 (500) (8,700) 1,900 Other provisions for phase-down and consolidation of manufacturing facilities(b) 13,500 (9,200) (800) 3,500 (700) -- 2,800 Payments to employees for severance(c) 8,000 (5,400) (1,100) 1,500 (300) (1,200) Write-down of inventories(a) 10,900 (8,800) (2,100) -- -- -- -- Relocation, lease terminations and other(b) 19,200 (3,300) (6,700) 9,200 (100) 9,900 19,000 Total $101,800 $(76,500) $ -- $ 25,300 $(1,600) $ -- $ 23,700
* NET OF CURRENCY TRANSLATION ADJUSTMENTS. (a) Amounts utilized represent non-cash charges. (b) Amounts utilized represent both cash and non-cash charges. Cumulative cash charges totaled $14 million. (c) Amounts utilized represent cash payments related to the severance of approximately 400 employees. By the end of 1994, the Company had completed the following actions in accordance with its original plan: (1) Phased-out the German test and assembly operations: Restructuring reserves were 21 utilized for employee terminations ($4 million), fixed asset dispositions ($7 million), inventory write-offs ($3 million) and other fixed asset related charges ($4 million). In addition, the German facility was written down ($29 million) for its full book value. Operating losses incurred during the phase-out period and ongoing maintenance costs ($6 million) associated with the facility were also applied against the reserves. (2) Discontinued the chipset business: Restructuring reserves were utilized for inventory write-downs ($3 million) and other costs including those associated with abandoned facility leases ($2 million). (3) Phased-down its Milpitas wafer manufacturing facility: Restructuring reserves were used for fixed asset dispositions ($6 million), inventory write-offs ($3 million) and other costs ($3 million). (4) Phased-down certain U.S. assembly and test operations: Restructuring reserves were used for fixed asset write-offs ($2 million). (5) Consolidated certain U.S. sales offices and design centers: Restructuring reserves were used for employee terminations ($1 million), lease terminations ($1 million) and fixed asset write-offs ($2 million). During 1995, $1.6 million was charged against the restructuring reserves. These charges primarily included the write-off and disposition of equipment associated with U.S. manufacturing operations and ongoing maintenance costs of its vacant German facility, offset in part by an increase in reserves due to translation adjustments as a result of the strengthening Deutschemark. In response to changing economic conditions, the Company modified its original restructuring plan in the second quarter of 1995 and upgraded its Milpitas, California facility to enable production of more advanced technology products. The Company also substantially completed the phase-down of its U.S. assembly and test operation. These actions resulted in excess reserves of approximately $12 million which were used to offset increases in the reserves for legal and other corporate matters, which include reserves for the jury verdict against the Company during the second quarter of 1995 in the Texas Instruments litigation (see Note 11 of Notes to Consolidated Financial Statements). Remaining reserves at December 31, 1995 include approximately $4.7 million for remaining costs related to the California manufacturing facilities and continued maintenance of the vacant Braunschweig facility and $19 million for legal and other corporate matters. Management believes that the total reserves established are adequate to cover uncertainties in connection with these matters. Note 7 - Debt
December 31, (In thousands) 1995 1994 Senior: Notes payable to banks $111,207 $142,299 Capital lease obligations 1,155 849 Subordinated: 5 and 1/2% Convertible Subordinated Notes, due 2001 143,750 143,750 256,112 286,898
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December 31, (In thousands) 1995 1994 Current portion of long-term debt, capital lease obligations and short-term borrowings (56,569) (24,167) Long-term debt and capital lease obligations $ 199,543 $ 262,731
During March 1994, the Company issued $144 million of 5 and 1/2% Convertible Subordinated Notes (Notes) due 2001. The Notes are subordinated to all existing and future senior debt, are convertible at any time after 60 days following issuance into shares of the Company's common stock at a conversion price of $12.25 per share, and are redeemable at the option of the Company, in whole or in part, at any time on or after March 18, 1997. Each holder of these Notes has the right to cause the Company to repurchase all of such holder's Notes at 100% of their principal amount plus accrued interest upon the occurrence of certain events and in certain circumstances. Interest is payable semiannually. In July 1994, the Company called for redemption of all its $98 million, 6 and 1/4% Convertible Subordinated Debentures (Debentures). In July and August of 1994, substantially all of the Debentures were converted into approximately 4.9 million shares of common stock at a price of $20 per share. During 1993, the Company repurchased and retired $5 million of such Debentures in the open market at a price that was approximately equal to the carrying value of the debt. In December 1995, the Company cancelled its $60 million revolving credit facility in the U.S. Also, in December 1995 the Company's manufacturing subsidiary, JSI, entered into a 25 billion yen credit line arrangement with adjustable interest rates. Borrowings under the credit line are for a term of five years with principle payments due semiannually beginning in July 1997. The Company must comply with certain financial covenants relating to profitability, tangible net worth, working capital, senior and total debt leverage and subordinated indebtedness. As of December 31, 1995 JSI had 3 billion yen ($29 million) outstanding under the facility and in January 1996 entered into a five year interest rate swap agreement to convert the adjustable interest rate per the credit arrangement to a fixed rate (2.65%). Also in January 1996, JSI drew down an additional 6 billion yen ($58 million) under this facility and entered into an additional five year interest rate swap agreement to convert the variable interest portion of the loan to a fixed rate (2.65%). JSI also had borrowings outstanding of approximately 8.4 billion yen ($82 million at December 31, 1995). The borrowings, which are secured by JSI's facility and production equipment, have fixed and variable interest rates averaging 4.25% at December 31, 1995, and are payable through 1999. Aggregate principal payments required on outstanding debt obligations are as follows: 1996-$56 million; 1997-$18 million; 1998-$18 million; 1999-$13 million; 2000-$7 million; 2001 and thereafter-$144 million. The Company paid $18 million, $20 million and $4 million in interest during 1995, 1994 and 1993, respectively. Note 8 - Common Stock The following summarizes all shares of common stock reserved for issuance as of 23 December 31, 1995:
(In thousands) Number of Shares Issuable upon: Conversion of subordinated long-term debt 11,735 Exercise of stock options, including options available for grant 14,422 Purchase under Employee Stock Purchase Plan 2,155 28,312
The Board of Directors approved an increase in the number of common shares authorized for issuance to 250,000,000 during February 1995 which was approved by the stockholders at the Company's annual meeting in May 1995. During February 1995, the Company completed an offering of 6,325,000 shares of common stock (3,162,500 shares prior to the stock dividend in May 1995), netting proceeds of approximately $158 million. During July 1995, the Company completed an offering of 5,750,000 shares of common stock, netting proceeds of approximately $247 million. Stock option plans-The Company's 1982 Incentive Stock Option Plan (1982 Option Plan) is administered by the Board of Directors. Terms of the 1982 Option Plan required that the exercise price of options be no less than the fair value at the date of grant and required that options be granted only to employees or consultants of the Company. Generally, options granted vest in annual increments of 25% per year commencing one year from the date of grant and have a term of ten years. During 1992, the 1982 Option Plan expired by its terms. Accordingly, no further options may be granted thereunder. Certain options previously granted under the 1982 Option Plan remained outstanding at December 31, 1995. During 1991, the stockholders approved the 1991 Equity Incentive Plan which enables the Company to sell or award to its officers, employees or consultants stock options, stock appreciation rights, stock purchase rights or stock bonuses. An aggregate 15,000,000 shares have been reserved for issuance under this plan through 1995. Incentive stock options may be granted with an exercise price with a value no less than the fair value of the stock on the date the option is granted. The term of each option is determined by the Board of Directors and is generally ten years. Options generally vest in annual increments of 25% per year commencing one year from the date of grant. Shares available for grant under the 1991 Equity Incentive Plan totaled 4,857,000 at December 31, 1995. Options to purchase 1,928,000 shares under the 1982 Option Plan and 1991 Equity Incentive Plan were exercisable at December 31, 1995. The following table summarizes option activity under the 1982 Option Plan and the 1991 Equity Incentive Plan:
Options Outstanding (In thousands, except per share amounts) Shares Price Per Share Amount Balance at December 31, 1992 13,324 $.11 - $6.58 $ 47,896 Options cancelled (586) .11 - 8.94 (2,375) Options granted 2,550 5.50 - 8.94 16,287
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Options Outstanding (In thousands, except per share amounts) Shares Price Per Share Amount Options exercised (6,470) 2.75 - 6.58 (23,007) Balance at December 31, 1993 8,818 2.75 - 8.94 38,801 Options cancelled (870) 2.75 - 15.13 (5,116) Options granted 2,080 8.94 - 21.75 29,720 Options exercised (2,864) 2.75 - 8.94 (10,983) Balance at December 31, 1994 7,164 2.75 - 21.75 52,422 Options cancelled (397) 2.75 - 58.13 (6,796) Options granted 4,314 25.31 - 58.13 145,071 Options exercised (2,206) 2.75 - 25.31 (9,484) Balance at December 31, 1995 8,875 2.75 - 58.13 $ 181,213
During 1986, the Company's directors and stockholders approved the 1986 Directors' Stock Option Plan (Directors' Plan) and reserved 300,000 shares of common stock for issuance thereunder. In May 1995, the stockholders approved the 1995 Director Option Plan, which replaced the 1986 Directors' Plan, and reserved 500,000 shares for issuance thereunder. Terms of the 1995 Director Option Plan provide for an initial option grant to new non-employee directors and subsequent automatic option grants each year thereafter. The option grants generally have a ten year term and vest in equal increments over four years. The exercise price of options granted is the fair market value at the date of grant. Shares available for grant under the 1995 Director Option Plan were 500,000 at December 31, 1995. Options to purchase 73,000 shares were exercisable under the Directors' Plan at December 31, 1995. The following table summarizes option activity under the Directors' Plan:
Options Outstanding (In thousands, except per share amounts) Shares Price Per Share Amount Balance at December 31, 1992 160 $3.56 - $5.63 $ 736 Options cancelled (34) 3.56 - 5.63 (178) Options granted 60 3.56 - 6.19 371 Options exercised (26) 3.56 - 5.56 (128) Balance at December 31, 1993 160 3.56 - 12.38 801 Options granted 40 10.75 430 Options exercised (10) 5.56 (56) Balance at December 31, 1994 190 3.56 - 10.75 1,175 Options granted 40 35.00 1,400 Options exercised (40) 3.56 - 10.75 (185) Balance at December 31, 1995 190 3.56 - 35.00 $ 2,390
Stock purchase plan-Since 1983, the Company has offered an Employee Stock Purchase Plan (Employee Plan) under which rights are granted to purchase shares of common stock at 85% of the lesser of the fair value of such shares at the beginning of a 24-month offering period or the end of each six-month segment within such offering period. Sales under the Employee Plan in 1995 and 1994 were 695,000 and 2,242,000 shares of common stock 25 at an average price of $12.95 and $3.05 per share, respectively. During 1995, an additional 1,500,000 shares were reserved for issuance under the Employee Plan. Shares available for purchase under the Employee Plan were 2,155,000 at December 31, 1995. Stock purchase rights-In November 1988, the Company implemented a plan to protect stockholders' rights in the event of a proposed takeover of the Company. Under the plan, each share of the Company's outstanding common stock carries one Preferred Share Purchase Right (Right). Each Right entitles the holder, under certain circumstances, to purchase one-thousandth of a share of Preferred Stock of the Company or its acquiror at a discounted price. The Rights are redeemable by the Company and expire in 1998. Note 9 - Income Taxes The provision for taxes consisted of the following:
(In thousands) 1995 1994 1993 Current: Federal $ 35,181 $ 39,079 $ 19,687 State 12,893 4,991 -- Foreign 43,836 14,639 10,925 Total 91,910 58,709 30,612 Deferred liability (benefit): Federal 6,663 (10,085) 89 State 1,460 -- -- Foreign (6,252) (4,945) (6,480) Total 1,871 (15,030) (6,391) Total 93,781 $ 43,679 $ 24,221
The foreign components of income before income taxes increased significantly during 1995 because of the Company's expansion of its foreign manufacturing operations (see Note 10). The domestic and foreign components of income before income taxes and minority interest were as follows:
(In thousands) 1995 1994 1993 Domestic $129,085 $135,943 $ 48,815 Foreign 205,858 20,226 31,906 Income before income taxes and minority interest $334,943 $156,169 $ 80,721
Undistributed earnings of the Company's foreign subsidiaries for which no U.S. income taxes have been provided aggregate to approximately $207 million at December 31, 1995. It is not practicable to estimate the amount of additional tax that might be payable on these undistributed foreign earnings; however, the Company believes that U.S. foreign tax credits would reduce any U.S. tax and offset any foreign tax liability. As of December 31, 1995, management believes that with the exception of certain foreign net operating loss carryforwards, for which a valuation allowance has been provided, realization of deferred tax assets is more likely than not due to carryback capacity. At 26 December 31, 1994, management believed that the realization of deferred tax assets was assured to the extent of taxable income for the carryback period and was not assured to the extent of expected volatility of future earnings in the semiconductor industry and stock option benefits. Significant components of the Company's deferred tax assets and liabilities as of December 31, are as follows:
(In thousands) 1995 1994 Deferred tax assets: Net operating loss carryforwards $ 5,136 $ 4,832 Tax credit carryovers -- 1,712 Nondeductible reserves and other 40,834 37,470 Total deferred tax assets 45,970 44,014 Valuation allowance (3,400) (19,364) Net deferred tax assets 42,570 24,650 Deferred tax liabilities-depreciation (26,652) (6,861) Total net deferred tax assets $ 15,918 $ 17,789
Differences between the Company's effective tax rate and the federal statutory rate were as follows:
(In thousands) 1995 1994 1993 Federal statutory rate $ 117,230 35% $ 54,661 35% $ 28,253 35% State taxes, net of federal benefit 12,190 4 9,370 6 4,036 5 Difference between U.S. and foreign tax rates (32,772) (10) 7,219 5 (242) (1) Nondeductible expenses 17,529 5 5,310 3 -- -- Foreign losses with no benefit -- -- 931 -- -- -- Research and development tax credit -- -- (1,743) (1) -- -- Change in valuation allowance (15,964) (5) (42,805) (27) (8,234) (10) Other (4,432) (1) 10,736 7 408 1 Effective tax rate $ 93,781 28% $ 43,679 28% $ 24,221 30%
The Company paid $31 million and $23 million for income taxes in 1995 and 1994, respectively, and received a net refund of $2 million in 1993. Note 10 - Segment Reporting and Foreign Operations The Company operates in one industry segment in which it designs, develops, manufactures and markets application-specific integrated circuits and related products and services. 27 Revenues from affiliates, which are eliminated in consolidation, consist of sales between geographic areas. Such sales are primarily recorded at amounts which are in excess of cost and consistent with rules and regulations of governing tax authorities. General corporate expenses include certain administrative expenses. Corporate assets include all cash, short-term investments and prepaid income taxes. During 1995, the Company significantly expanded its manufacturing operations in the Pacific Rim. Pacific Rim revenues are primarily derived from transactions with the Company and its other subsidiaries which are eliminated in consolidation. The Company's other operations outside the United States include manufacturing facilities, design centers and sales offices in Japan, Europe and Canada. The following is a summary of operations by entities located within the indicated geographic areas for 1995, 1994 and 1993. United States revenues include export sales.
(In thousands) 1995 1994 1993 Revenues: United States $ 1,005,351 $ 781,223 $ 589,455 Pacific Rim 720,372 9,028 -- Japan 532,421 270,445 163,684 Europe 204,385 141,773 143,928 Canada 60,589 35,107 44,006 Affiliates (1,255,461) (335,746) (222,261) Consolidated $ 1,267,657 $ 901,830 $ 718,812 Operating income (loss): United States $ 116,917 $ 138,713 $ 48,787 Pacific Rim 150,378 685 -- Japan 23,652 3,945 13,416 Europe 22,501 11,119 21,651 Canada 6,822 4,999 1,720 General corporate expenses (1,571) (1,695) (1,732) Consolidated $ 318,699 $ 157,766 $ 83,842 Identifiable assets: United States $ 418,776 $ 284,067 $ 227,041 Pacific Rim 90,253 7,567 -- Japan 523,847 479,449 367,135 Europe 59,208 35,704 40,687 Canada 44,811 9,128 11,786 General corporate assets 712,692 454,459 212,361 Consolidated $ 1,849,587 $ 1,270,374 $ 859,010
Note 11 - Commitments and Contingencies The Company leases the majority of its facilities and certain equipment under non-cancelable operating leases which expire in 1996 through 2005. The facilities lease agreements typically provide for base rental rates which are increased at various times 28 during the terms of the leases and renewal options at the fair market rental value. In June 1995, the Company, through its Japanese subsidiary, entered into a master lease agreement and a master purchase agreement with a group of leasing companies (Lessor) for up to 15 billion yen. Each Lease Supplement pursuant to the transaction will have a lease term of one year with four consecutive annual renewal options. The Company may at the end of any lease term return or purchase at a stated amount all the equipment. Upon return of the equipment, the Company must pay the Lessor a terminal adjustment amount. The Lessor also has entered into a remarketing agreement with a third party to remarket and sell any equipment returned pursuant to which the third party is obligated to reimburse the Company a guaranteed residual value. As of December 31, 1995, the Company had utilized 13.7 billion yen ($152 million) under these agreements to refinance equipment owned by its Japanese manufacturing subsidiary. There were no significant gains or losses from these transactions. Minimum rental payments under these operating leases, including option periods are $24 million for each of the years 1996 through 1999 and $16 million for 2000. The terminal adjustment which the Company would be required to pay upon cancellation of all leases and return of the equipment would be as follows: 1996-$98 million; 1997-$81 million; 1998-$62 million; 1999-$42 million; or 2000-$21 million. Future minimum payments under other lease agreements are as follows:1996-$29 million; 1997-$24 million; 1998-$20 million; 1999-$18 million; 2000-$14 million; 2001 and thereafter $31 million. Total rental expense, including month-to-month rentals was $44 million, $35 million and $30 million in 1995, 1994 and 1993, respectively. The Company is one of three defendants in a patent infringement suit brought by Texas Instruments (TI) in the Federal District Court in Dallas, Texas. In May 1995, this suit resulted in a jury verdict against the Company holding the patents valid and finding willful infringement. Damages against the Company were set by the jury at approximately $15 million. The Company filed certain post trial motions with the trial court, which included a motion to set aside the jury verdict and for an order that the Company had not infringed the patents. In addition, TI filed certain post trial motions, which included a motion that the jury award of damages be trebled. In July 1995, the district court judge ruled in the Company's favor, holding that the Company had not infringed the patents, and set aside the jury verdict, including the award of damages. TI has appealed the trial court's order to the United States Court of Appeals for the Federal Circuit. The Company has adequate reserves for the jury award. These reserves are being maintained by the Company pending the final outcome of this matter. Because both of the patents involved in the litigation have expired, they have no effect upon the manufacture or sale of the Company's present or future products. The Company continues to believe that the final outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. No assurance can be given, however, that this matter will be resolved without the payment of damages and other costs, including an amount greater than the Company's present reserves, with the potential for an adverse effect on the Company. During the third quarter of 1995, pursuant to a series of transactions, the Company 29 acquired all of the remaining shares (45%) of its Canadian subsidiary, LSI Logic Corporation of Canada, Inc., which it did not already own. Certain former shareholders, representing approximately 800,000 shares or 3% of the previously outstanding shares, have exercised dissent and appraisal rights. Pursuant to the relevant provisions of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, a proceeding to determine the fair value of these shares has begun and is still in an early phase. The offer of CD $4.00 (U.S. $3.00) per share that was made by the board of directors of the Canadian subsidiary for the dissenters' shares is the same per share price that was accepted by shareholders holding the other 42% of the shares not already owned by the Company immediately prior to the commencement of the above mentioned transactions. While no assurances can be given regarding the ultimate determination of the Canadian court, the Company believes that the final outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. Certain additional claims and litigation against the Company have also arisen in the normal course of business. The Company believes that it is unlikely that the outcome of these claims and lawsuits will have a materially adverse effect on the Company's consolidated financial position or results of operations. Report of Independent Accountants To the Stockholders and Board of Directors of LSI Logic Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of LSI Logic Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. San Jose, California January 17, 1996 Eleven Year Consolidated Summary For the years ended December 31, (In thousands, except per share amounts) 1995 1994 1993 30
Eleven Year Consolidated Summary For the years ended December 31, (In thousands, except per share amounts) 1995 1994 1993 Revenues $ 1,267,657 $ 901,830 $ 718,812 Costs and expenses: Cost of revenues 665,673 520,150 438,523 Research and development 123,892 98,978 78,995 Selling, general and administrative 159,393 124,936 117,452 Restructuring of operations and other non-recurring charges -- -- -- Total costs and expenses 948,958 744,064 634,970 Income (loss) from operations 318,699 157,766 83,842 Interest expense (16,349) (18,455) (9,621) Interest income and other 32,593 16,858 6,500 Income (loss) before income taxes, minority interest and extraordinary credit 334,943 156,169 80,721 Provision for income taxes 93,781 43,679 24,221 Income (loss) before minority interest and extraordinary credit 241,162 112,490 56,500 Minority interest in net income (loss) of subsidiaries 3,042 3,747 2,750 Income (loss) before extraordinary credit 238,120 108,743 53,750 Extraordinary credits resulting from gain on retirement of debt -- -- -- Net income (loss) $ 238,120 $ 108,743 $ 53,750 Primary income (loss) per share:* Income (loss) before extraordinary credit $ 1.86 $ 0.99 $ 0.54 Extraordinary credit -- -- -- Net income (loss) $ 1.86 $ 0.99 $ 0.54 Fully diluted income per share* $ 1.75 $ 0.92 $ 0.53 Year-end status: Total assets $ 1,849,587 $ 1,270,374 $ 859,010 Long-term debt $ 199,543 $ 262,730 $ 220,005 Stockholders' equity $ 1,216,246 $ 544,906 $ 292,434
1992 1991 1990 1989 1988 1987 1986 1985 $ 617,468 $ 697,838 $ 655,491 $ 546,870 $ 378,908 $ 262,131 $ 194,335 $ 140,012 408,318 457,692 443,759 381,544 226,625 168,403 129,150 88,508 78,825 80,802 60,196 52,457 36,964 28,919 21,558 14,386 129,254 136,811 117,318 99,885 80,145 55,726 40,200 26,759 101,785 5,626 44,000 43,000 9,046 -- -- -- 718,182 680,931 665,273 576,886 352,780 253,048 190,908 129,653 (100,714) 16,907 (9,782) (30,016) 26,128 9,083 3,427 10,359 (11,567) (19,371) (21,256) (17,341) (11,347) (9,903) (6,883) (8,141) 12,413 14,722 12,517 12,494 16,421 18,114 11,991 13,168
31
1992 1991 1990 1989 1988 1987 1986 1985 99,868) 12,258 (18,521) (34,863) 31,202 17,294 8,535 15,386 8,521 6,129 11,685 1,476 18,322 7,031 3,103 4,739 (108,389) 6,129 (30,206) (36,339) 12,880 10,263 5,432 10,647 1,819 (2,212) 1,065 (5,085) (5,623) (483) 564 533 (110,208) 8,341 (31,271) (31,254) 18,503 10,746 4,868 10,114 -- -- 955 -- 859 594 -- -- $(110,208) $ 8,341 $ (30,316) $ (31,254) $ 19,362 $ 11,340 $ 4,868 $ 10,114 $ (1.24) $ 0.10 $ (0.37) $ (0.38) $ 0.22 $ 0.13 $ 0.06 $ 0.13 -- -- 0.01 -- 0.01 0.01 -- -- $ (1.24) $ 0.10 $ (0.36) $ (0.38) $ 0.23 $ 0.14 $ 0.06 $ 0.13 $ 747,438 $ 748,456 $ 771,682 $ 755,109 $ 783,751 $ 699,398 $ 451,404 $ 372,456 $ 191,527 $ 166,107 $ 189,795 $ 204,443 $ 191,857 $ 187,909 $ 106,908 $ 81,887 $ 197,728 $ 293,075 $ 267,729 $ 286,660 $ 327,277 $ 309,243 $ 252,002 $ 231,527
*primary and fully diluted income (loss) per share have been retroactively adjusted for all periods presented to reflect a two-for-one stock split in the form of a stock dividend issued to stockholders of record on may 23, 1995. The Company's fiscal year ends on the Sunday closest to December 31. For presentation purposes, the Consolidated Financial Statements refer to December 31 as year end. Interim Financial Information (Unaudited)
First Second Third Fourth (In thousands, except per Quarter Quarter Quarter Quarter share amounts) Year ended December 31, 1995 Revenues $280,158 $307,066 $330,832 $349,601 Gross profit 126,759 144,761 160,031 170,433 Net income 45,260 55,745 65,542 71,573 Primary net income per share* $ .37 $ .44 $ .50 $ .54 Fully diluted net income per share* $ .35 $ .42 $ .47 $ .51 Year ended December 31, 1994 Revenues $193,812 $212,106 $240,218 $255,694 Gross profit 78,425 88,769 101,999 112,487 Net income 19,355 23,438 29,468 36,482 Primary net income per share* $ .19 $ .22 $ .26 $ .31 Fully diluted net income per share* $ .18 $ .20 $ .24 $ .29
*primary and fully diluted Net Income per share have been retroactively adjusted for all periods presented to reflect a two-for-one stock split In the form of a stock dividend issued 32 to stockholders of record on may 23, 1995. The Company's fiscal year ends on the Sunday closest to December 31. For presentation purposes, the Consolidated Financial Statements refer to December 31 as year end. Stock Information LSI Logic logo design and CoreWare are registered trademarks, and G10 and SeriaLink are trademarks of LSI Logic Corporation. Stock Price Range*
1995 1994 First Quarter $18.25 - $29.19 $7.75 - $11.50 Second Quarter 25.50 - 42.63 8.38 - 13.19 Third Quarter 39.13 - 62.50 11.44 - 17.88 Fourth Quarter 30.00 - 59.25 17.32 - 22.69 Year $18.25 - $62.50 $7.75 - $22.69
* Stock prices have been retroactively adjusted for all periods presented to reflect a two-for-one stock split in the form of a stock dividend issued to stockholders of record on May 23, 1995. Symbol: LSI Where traded: NYSE Actual shares outstanding at 12/31/95: 129,303,242 Average daily volume for 1995: 1,263,560 EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION LSI Logic Europe plc United Kingdom LSI Logic Corporation of Canada, Inc. Canada LSI Logic K.K. Japan LSI Logic Hong Kong Limited Hong Kong LSI Logic Netherlands B.V. Netherlands LSI Logic Japan Semiconductor, Inc.* Japan LSI Logic Corporation of Korea Korea LSI Logic Export Sales Corporation U.S. Virgin Islands LSI Logic Asia, Inc. Delaware LSI Logic International Services, Inc. California * Formerly known as Nihon Semiconductor, Inc. EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1995 DEC-31-1995 172,780 512,765 234,466 3,486 139,857 1,136,730 1,148,524 510,242 1,849,587 395,783 143,750 0 0 1,293 1,214,953 1,849,587 1,267,657 1,267,657 665,673 665,673 283,285 0 16,439 334,943 93,781 238,120 0 0 0 238,120 1.86 1.75
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