-----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, IaMqXFU4p7ivwsP2mdb1LcwoOZDyhLGfggUP+2DSs6vljLZU/b/yET9uQe/qsJAR ibXMpBqfVugJ/DLuUbQL8g== 0000891618-97-001361.txt : 19970327 0000891618-97-001361.hdr.sgml : 19970327 ACCESSION NUMBER: 0000891618-97-001361 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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: 97563168 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 THE YEAR ENDED DECEMBER 31, 1996 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, 1996 [ ] 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 14, 1997 as reported on the New York Stock Exchange, was approximately $4,819,807,000. 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 14, 1997, registrant had 129,390,793 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 1997 Annual Meeting of Stockholders, and (2) registrant's 1996 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 consumer, communications, and computer products markets. The Company offers products and services for a variety of applications, including digital video (DVD), digital broadcasting (set top box) and personal entertainment applications for the consumer market segment, networking and wireless communication for the communications market and desktop, and personal computer and office automation applications for the computer products market. 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 0.25-micron processes and smaller for the Company's advanced product offerings. The Company's 0.25-micron(1) G10(TM) process, for example, allows for up to 49,000,000 usable transistors on a single chip. In early 1997, the Company formally introduced its next generation G11(TM) process technology featuring a 0.18 micron gate length, providing up to 64,000,000 transistors and allowing greater density and increased functionality on a single chip. The Company's CoreWare methodology and deep 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, optimize its application and shorten product development cycles. 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" mean 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 and System-on-a-Chip Capability. The Company's CoreWare product library approach and its deep 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 consumer, communications and computer industries. The Company targets high growth end markets which are characterized by increasingly shortened product - --------------- (1) All references to gate length measurement reflect effective gate length unless otherwise indicated. 1 3 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 microprocessors and signal processing engines, Ethernet and ATM (Asynchronous Transfer Mode) in networking, PCI bus interfaces and high speed transmission in computers and MPEG2 (Motion Picture Experts Group) in the digital video and personal entertainment markets. - 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 performance will mirror the computer simulation of the chip and facilitate optimum 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. 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. - Provide 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 implement product specifications in a particular chip design through its own engineers, on a "turn-key" basis using the Company's engineers, or through a collaborative effort. The Company's extensive, worldwide network of design and engineering professionals facilitates effective interaction with customer management and engineering staff throughout the design process. - Maintain High-Quality and Cost-Effective Manufacturing. The Company believes that owning its wafer manufacturing facilities improves quality, cost-effectiveness, responsiveness to customers, implementation of leading-edge process technology and time-to-market advantages 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 813 employees (including its subsidiaries in Europe, Canada and the Far East), as well as through independent sales representatives and distributors. The Company operates 44 design centers throughout the world to assist customers in product design activities. The Company's extensive, worldwide network of design centers allows the Company to provide 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 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 2 4 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. In either case, 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, if so, 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 component products and systems expertise directed at particular markets. This system-level expertise and design methodology in conjunction with a wide range of component product offerings, including the Company's CoreWare libraries, offer customers the opportunity to achieve rapid time to market system-on-a-chip solutions. The Company's CoreWare Program offers a complete design approach for creating a system-on-a-chip efficiently, predictably and rapidly to address the performance, cost and time-to-market goals of the customer. CoreWare library elements are complex VLSI or large system-level pre-designed building blocks of integrated circuit logic functions which are either developed by the Company or acquired under technology transfer or licensing agreements. 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's CoreWare libraries are based upon industry standard functions, protocols and interfaces, and are positioned 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 Gigabit Serial Transceiver functions for the communications market, PCI bus interfaces and Fibre Channel protocol for the computer market and MPEG2 (Motion Picture Experts Group) decoders and digital signal processing for the digital video market. The Company's MiniRISC(TM) family of MIPS-based RISC (reduced instruction set computing) central processing unit (CPU) cores, including the TinyRISC(TM) 16/32-bit compressed code CPU, can be coupled with these other cores and with customer proprietary functionality to realize system-level applications on a single chip. In addition, the Company offers a family of application specific standard product (ASSP) high-speed digital signal and image processing devices that perform a wide variety of common digital signal processing operations. Generally, even new standard products developed by the Company are implementations of emerging industry standard functions that the Company may also target for inclusion in its CoreWare library. 3 5 The Company's expanding line of products includes a variety of single chip solutions, including a DVD decoder, a satellite receiver, an MPEG2 Audio/Video decoder, a JPEG single-chip co-processor, and the ATMizer(TM) II. The Company also offers a range of reference design modules such as the Scenario(TM) MPEG2/AC3 reference design module, and development platforms including the Integra(TM) SDP1000 platform for set top box applications. 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 piece of silicon. 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. 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 faster turnaround times resembling those available only for gate array-based designs. 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. 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." 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 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 4 6 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 reversion of Hong Kong to Chinese control, any political or economic disruptions in the countries where the Company's 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 two facilities in Tsukuba, Japan utilize advanced process technologies in conjunction with computer integrated manufacturing to produce mainly 0.38-micron and G10 0.25-micron products containing up to 49,000,000 transistors (or up to 5,000,000 logic gates) on a single chip and offer customers a high-volume, reliable source for manufacturing. Each of these facilities has a highly automated production line, providing greater productivity, product quality and production management flexibility. During 1996, the Company installed highly specialized chemical mechanical polishing (CMP) equipment in its Japanese manufacturing facilities. CMP increases manufacturing yields and allows for higher levels of chip customization. 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. 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 volume production is expected to commence during the first half of 1998, utilizing the Company's G10 0.25-micron and, later, G11 0.18-micron process technologies. The Company expects to spend approximately $500 to $600 million during 1997 and the first half of 1998 to bring this facility to operational status. 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 such high reliability packaging needs of both military and selected commercial applications. The proportion of ceramic packaging being done by independent assembly plants continues to increase and the Company subcontracts some ceramic packaging offshore. In 1996, the Company introduced its advanced Flip Chip packaging technology, which essentially replaces wires that connect the edge of the die to a package with solder bumps spread over the entire external surface of the die. This new technology enables the Company to reach exceptional performance and lead count levels in packages required for process technologies of 0.25-micron and below. The Company also introduced a mini-BGA (Ball Grid Array) package which offers a smaller package size without sacrificing electrical and thermal performance. 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. 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 1996, capital expenditures 5 7 (leases and purchases of plant and equipment) were approximately $375,000,000. The Company expects 1997 capital expenditures to be approximately $475,000,000, and significant capital expenditures are expected in subsequent years, as well. The Company believes that existing liquid resources and funds generated from operations combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. 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. However, 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. 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. A disruption of operations for these and other reasons could adversely affect the Company's operating results. 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. 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 semiconductor industry also has been characterized by periods of rapid expansion of production capacity. Even if customers' aggregate demand might not decline, the availability of additional capacity can adversely impact pricing levels, which can also depress revenue levels and afffect operating results. Also, during such periods, customers benefiting from shorter lead times may delay some purchases into future periods, as the Company believes occurred during 1996. 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. The Company continues to evaluate its worldwide manufacturing operations to effect additional cost-savings and technological improvements. Nevertheless, 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 may 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 many vendors of certain critical items, and shortages could occur in various essential materials due to interruption of supply or increased demand in the industry. 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 and adverse effect on its operating results. The Company's operations also depend upon a continuing 6 8 adequate supply of electricity, natural gas and water. To date, the Company has experienced no significant difficulty in obtaining the necessary raw materials. 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. The Company also has borrowings and operating lease obligations denominated in yen, which totaled approximately 31 billion yen (approximately $270,000,000) as of December 31, 1996. 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, digital broadcasting, personal entertainment, networking, desktop and personal computing, wireless communication and office automation applications. The Company's strategy is to leverage its systems-level ASIC strength to shift its marketing emphasis from the low level integration market to the type of account where the Company can bring greater systems-level 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 and field engineering organizations which consists of approximately 813 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 1996 Annual Report to Stockholders. 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 1996, Sony Corporation accounted for approximately 14% of the Company's revenues. In 1995, Sony Corporation accounted for approximately 12% of the Company's revenues. In 1994 Sun Microsystems, Inc. and Intel Corporation accounted for approximately 14% and 11%, respectively, 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. 7 9 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 Mitsubishi Corporation, Toshiba Corporation, NEC Corporation and SGS Thompson, Inc., and a number of United States semiconductor manufacturers, including Lucent Technologies, Inc. (formerly known as AT&T), IBM Corporation, and Texas Instruments, Inc., offer ASIC products and/or offer products which compete with the product lines of the Company. In addition, the Company faces competition from some companies whose strategy is to provide a portion of the products and services which the Company offers. For example, these competitors may offer semiconductor design services, may license design tools, and/or may provide support for obtaining products at an independent foundry. There can be 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 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 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 presently has a competitive advantage. Although there may be other companies that offer similar types of products and related services, the Company believes it currently offers different, and generally more complete, capabilities than those companies. As the market 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 approach 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 1996, 1995 and 1994, the Company expended $184,452,000, $123,892,000 and $98,978,000, respectively, on its research and development activities. The Company expects to continue to make significant investments in research and development activities and believes such 8 10 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 1996 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. See "Legal Proceedings." 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. 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. However, increasing public attention has 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, 1996, the Company and its subsidiaries had approximately 3,912 employees, including approximately 511 in field marketing and sales, approximately 528 in product marketing and support, approximately 904 in engineering and research and development activities, approximately 1,596 in manufacturing and approximately 373 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 9 11 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 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. A disruption of operations for these or other reasons could adversely affect the Company's operating results. 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, if so, 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. 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 1997 capital expenditures to be approximately $475,000,000, and expects significant capital expenditures in subsequent years, as well. The Company believes that existing liquid resources and funds generated from operations combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. 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. However, 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. 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. 10 12 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 Mitsubishi Corporation, Toshiba Corporation, NEC Corporation and SGS Thompson, Inc. and a number of United States semiconductor manufacturers, including Lucent Technologies, Inc. (formerly known as AT&T), IBM Corporation and Texas Instruments, Inc., offer ASIC products and/or other products which are competitive to the product lines of the Company. In addition, the Company faces competition from some companies whose strategy is to provide a portion of the products and services which the Company offers. For example, these competitors may offer semiconductor design services, may license design tools, and/or may provide support for obtaining products at an independent foundry. In addition, there can be no assurance that certain large customers, some of whom have licensed elements of the Company's process and product 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. The Company also has borrowings and operating lease obligations denominated in yen, which totaled approximately 31 billion yen (approximately $270 million) at December 31, 1996. 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 1996, approximately 53% of the Company's net revenues were derived 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 11 13 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, and 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. 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 semiconductor industry also has been characterized by periods of rapid expansion of production capacity. Even if customers' aggregate demand might not decline, the availability of additional capacity can adversely impact pricing levels, which can also depress revenue levels. Also, during such periods, customers benefiting from shorter lead times may delay some purchases into future periods. There can be no assurance that the Company will not experience such downturns in the future, which could have a material adverse effect on the Company's future operating results. 12 14 ITEM 2. PROPERTIES The following table sets forth certain information concerning the Company's principal facilities. PRINCIPAL LOCATIONS
NO. OF LEASED/ BUILDINGS LOCATION OWNED SQ. FT. TOTAL USE - --------- ------------------ ------------- ------- ----------------------------- 7 Milpitas, CA Leased 609,410 Corporate Offices, Administration, Engineering 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 Logistics 3 Gresham, OR Owned 532,400 Executive Office, Engineering, Manufacturing 1 Bracknell, Leased 18,000 Executive Offices, Design United Kingdom 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, Owned 26,000 Manufacturing Control, Hong Kong Assembly & Test
The Company maintains leased regional office space for its field sales, marketing and design center offices at the locations described below. In addition, the Company maintains design centers at various distributor locations.
UNITED STATES INTERNATIONAL -------------------------------- -------------------------------- Atlanta, GA Etobicoke, Ontario, Canada Austin, TX Kanata, Ontario, Canada Beaverton, OR Montreal, Quebec, Canada Bellevue, WA Ballerup, Denmark Bethesda, MD Paris, France Boca Raton, FL Munich, Germany Boulder, CO Stuttgart, Germany Bowling Green, KY Netanya, Israel Carlsbad, CA Ramat Hasharon, Israel Dallas, TX Milan, Italy Edison, NJ Osaka, Japan Houston, TX Tokyo, Japan Irvine, CA Seoul, Korea Milpitas, CA Singapore Minneapolis, MN Madrid, Spain Mountain View, CA Kista, Sweden Raleigh, NC Taipei, Taiwan San Diego, CA Bracknell, U.K. Schaumburg, IL Victor, NY Waltham, MA
Leased facilities described above are subject to operating leases which expire in 1997 through 2022. See Note 11 of Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. 13 15 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. 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 infringed certain of TI's patents. The ITC action was finally resolved on appeal in all aspects by the Federal Circuit in 1993. The patents upon which TI based the ITC action expired in 1994. In TI's United States District Court action, TI sought damages in an unspecified amount for alleged prior patent infringement. In May 1995, the trial resulted in a verdict against the Company for willful infringement and an award of damages in the amount of approximately $15 million. In July 1995, the District Court granted the Company's motions, holding that the Company had not infringed the patent and setting aside all assessed damages. In July 1996, the United States Court of Appeals for the Federal Circuit (CAFC) affirmed the District Court's post-trial rulings in favor of the Company. In September 1996, the CAFC denied TI's motion for reconsideration en banc. In December 1996, TI petitioned the U.S. Supreme Court for a writ of certiorari, seeking further review of the case. That petition was pending at the time of filing of this Form 10-K Report. The Company believes that the probability of a significant loss is remote and has accordingly reallocated its reserves for the damages originally assessed. See Notes 5, 6 and 11 of Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Stockholders. 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, with the potential for having an adverse effect on the Company. During the third quarter of 1995, the Company acquired all the remaining shares which it did not own (45%) of its Canadian subsidiary LSI Logic Corporation of Canada, Inc. Certain former shareholders, representing approximately 800,000 shares, or 3% of the previously outstanding shares, have exercised dissent and appraisal rights. An action is pending in the Court of Queen's Bench of Alberta, Judicial District of Calgary, for the adjudication of claims asserted by such former shareholders under the relevant provisions of the Canada Business Corporations Act. In addition, a separate action was filed by another former shareholder in the Court of Chancery of the State of Delaware in and for New Castle County, seeking an order that the acquisition of shares by the Company be enjoined, certification of a class and damages. Although that case originally was dismissed pursuant to a motion filed by the Company, on appeal to the Supreme Court of Delaware, the order of dismissal was reversed and the case was remanded to the Court of Chancery. While no assurances can be given regarding either the ultimate determination of the Canadian court or the outcome of the action filed in Delaware, the Company believes that the final outcome of the these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. 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. 14 16 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 1996 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference to pages 38 through 39 of the Company's 1996 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 9 through 15 of the Company's 1996 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to pages 16 through 36 of the Company's 1996 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report 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 6, 1997, 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 59 Chairman and Chief Executive Officer 1981 Moshe N. Gavrielov 42 Executive Vice President, LSI Logic Products 1988 Cyril F. Hannon 58 Executive Vice President, Worldwide Operations 1984 W. Richard Marz 53 Executive Vice President, Geographic Markets 1995 R. Douglas Norby 61 Executive Vice President and Chief Financial Officer 1996 Lewis C. Wallbridge 53 Vice President, Human Resources 1984
Except as set forth below, all of the officers have been associated with the Company in their present position for more than the past five years. Moshe N. Gavrielov has been employed with the Company since November 1988. In May 1996, Mr. Gavrielov was named Executive Vice President, LSI Logic Products. From February 1996 until May 1996, Mr. Gavrielov served as Senior VicePresident and General Manager of International Marketing and Sales. From November 1994 until February 1996, Mr. Gavrielov held the position of Senior Vice- 15 17 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. 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. Mr. Norby has served as Executive Vice President and Chief Financial Officer of the Company since November 1996. From September 1993 until November 1996, Mr. Norby served as Senior Vice President and Chief Financial Officer of Mentor Graphics Corporation. From July 1992 until September 1993, Mr. Norby served as President and Chief Executive Officer of Pharmetrix Corporation, a health care company located in Menlo Park, California. Mr Norby served as President and Chief Operating Officer of Lucasfilm, Ltd. from February 1985 until May 1992. Additionally, from 1989 until May 1992, Mr. Norby served as Chairman, President and Chief Executive Officer of LucasArts Entertainment Company, a subsidiary of Lucasfilm, Ltd. 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. 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 1996 Annual Report to Stockholders:
PAGE IN ANNUAL REPORT ------------- Consolidated Balance Sheets -- As of December 31, 1996 and 1995................. 16 Consolidated Statements of Operations -- For the Three Years Ended December 31, 17 1996.......................................................................... Consolidated Statement of Stockholders' Equity -- For the Three Years Ended 18 December 31, 1996............................................................. Consolidated Statements of Cash Flows--For the Three Years Ended December 31, 19 1996.......................................................................... Notes to Consolidated Financial Statements...................................... 20-36 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 1996 was a 52 week year that ended on December 29, 1996. 16 18 2. Financial Statement Schedules. All 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) 3.2 By-laws of Registrant.(2) 4.3 Preferred Shares Rights Plan dated November 16, 1988.(3) 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).(11) 10.1 Lease dated March 26, 1981 for 1601 McCarthy Boulevard between the Registrant and McCarthy Industrial Investors.(4) 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.(10) 10.2 Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement.(8) 10.3 Registrant's Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. (13) 10.6 Series B Preferred Shares Purchase Agreement for 1,395,864 shares of Series B Preferred Stock dated as of February 8, 1982.(4) 10.7 Modification Agreement dated as of February 8, 1982 between the Registrant and holders of its Series A Preferred Stock.(4) 10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the Registrant and Bankamerica Realty Investors.(5) 10.24 Registrant's 1986 Directors' Stock Option Plan and forms of Stock Option Agreements.(6) 10.29 Form of Indemnification Agreement entered and to be entered into between Registrant and its officers, directors and certain key employees.(7) 10.35 LSI Logic Corporation 1991 Equity Incentive Plan.(13) 10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the Registrant and the Prudential Insurance Company of America.(9) 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.(12) 10.38 1995 Director Option Plan.(13) 10.39 Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated as of December 27, 1995; Guaranty dated as of December 27, 1995(13); 10.39A First Amendment to Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated December 24, 1996; Amended and Restated Guaranty dated as of December 30, 1996.
17 19 10.40 LSI Logic Corporation International Employee Stock Purchase Plan.(14) 10.41 $300,000,000 Credit Agreement dated as of December 20, 1996 with ABN AMRO Bank, N.V. 11.1 Statement Re: Computation of Earnings Per Share. 13.1 Annual Report to Stockholders for the year ended December 31, 1996 (to be deemed filed only to the extent required by the instructions for Reports on Form 10-K). 21.1 List of Subsidiaries. 22.1 Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders (15). 23.1 Consent of Independent Accountants (see page 21). 24.1 Power of Attorney (included on page 20). 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 Form 8-A filed on November 21, 1988. (4) 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. (5) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1983. (6) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986. (7) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (8) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (9) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (10) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (11) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1994. (12) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended January 1, 1995. (13) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (14) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-12887) which became effective September 27, 1996. (15) Incorporated by reference to the Registrant's Definitive Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed March 25, 1997. (b) Reports on Form 8-K. None 18 20 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, TinyRISC, Scenario, Integra, G10 and G11 are trademarks of the Company. - All other brand names or trademarks appearing in the Form 10-K are the property of their respective owners. 19 21 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 25, 1997 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. 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 March 25, 1997 - --------------------------------------------- Executive Officer (Principal (Wilfred J. Corrigan) Executive Officer) /s/ R. DOUGLAS NORBY Executive Vice President and March 25, 1997 - --------------------------------------------- Chief Financial Officer (R. Douglas Norby) (Principal Financial Officer and Principal Accounting Officer); Director /s/ T.Z. CHU Director March 25, 1997 - --------------------------------------------- (T.Z. Chu) /s/ MALCOLM R. CURRIE Director March 25, 1997 - --------------------------------------------- (Malcolm R. Currie) /s/ JAMES H. KEYES Director March 25, 1997 - --------------------------------------------- (James H. Keyes)
20 22 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, No. 333-12887) of LSI Logic Corporation of our report dated January 16, 1997 (except for Note 12 for which the date is February 21, 1997) 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 24, 1997 21 23 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------- ------------ 3.1 Restated Certificate of Incorporation of Registrant(1)................. 3.2 By-laws of Registrant(2)............................................... 4.3 Preferred Shares Rights Plan dated November 16, 1988(3)................ 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)(11)...................................................... 10.1 Lease dated March 26, 1981 for 1601 McCarthy Boulevard between the Registrant and McCarthy Industrial Investors(4)........................ 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(10)............................................... 10.2 Registrant's 1982 Incentive Stock Option Plan, as amended, and forms of Stock Option Agreement(8).............................................. 10.3 Registrant's Employee Stock Purchase Plan, as amended, and form of Subscription Agreement(13)............................................. 10.6 Series B Preferred Shares Purchase Agreement for 1,395,864 shares of Series B Preferred Stock dated as of February 8, 1982(4)............... 10.7 Modification Agreement dated as of February 8, 1982 between the Registrant and holders of its Series A Preferred Stock(4).............. 10.8 Lease Agreement dated November 22, 1983 for 48580 Kato Road, Fremont, California between the Registrant and Bankamerica Realty Investors(5)........................................................... 10.24 Registrant's 1986 Directors' Stock Option Plan and forms of Stock Option Agreements(6)................................................... 10.29 Form of Indemnification Agreement entered and to be entered into between Registrant and its officers, directors and certain key employees(7)........................................................... 10.35 LSI Logic Corporation 1991 Equity Incentive Plan(13)................... 10.36 Lease Agreement dated February 28, 1991 for 765 Sycamore Drive, Milpitas, California between the Registrant and the Prudential Insurance Company of America(9)........................................ 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(12)................................ 10.38 1995 Director Option Plan(13).......................................... 10.39 Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated as of December 27, 1995; Guaranty dated as of December 27, 1995(13).......... 10.39A First Amendment to Y25,000,000,000 Floating Rate Guaranteed Credit Facility dated December 24, 1996; Amended and Restated Guaranty dated as of December 30, 1996................................................ 10.40 LSI Logic Corporation International Employee Stock Purchase Plan(14)... 10.41 $300,000,000 Credit Agreement dated as of December 20, 1996 with ABN AMRO Bank, N.V. ....................................................... 11.1 Statement Re: Computation of Earnings Per Share........................
24
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------- ------------ 13.1 Annual Report to Stockholders for the year ended December 31, 1996 (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 21)....................... 24.1 Power of Attorney (included on page 20)................................ 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 Form 8-A filed on November 21, 1988. (4) 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. (5) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1983. (6) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986. (7) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (8) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988. (9) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. (10) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (11) Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1994. (12) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended January 1, 1995. (13) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (14) Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-8 (No. 333-12887) which became effective September 27, 1996. EX-10.39A 2 FLOATING RATE GUARANTEED CREDIT FACILITY 1 EXHIBIT 10.39A FIRST AMENDMENT TO AGREEMENT THIS FIRST AMENDMENT TO AGREEMENT (this "Amendment"), dated December 24, 1996, is made among LSI Logic Japan Semiconductor, Inc., a company organized and existing under the laws of Japan (the "Borrower"), the financial institutions listed on the signature pages hereof under the heading "BANKS" (each a "Bank" and, collectively, the "Banks"), ABN AMRO Bank N.V., Tokyo Branch as agent for the Banks (in such capacity, the "Agent"), and The Industrial Bank of Japan, Limited, as co-agent (in such capacity, the "Co-Agent"). The Borrower, the Banks, the Agent and the Co-Agent are parties to an Agreement dated as of December 27, 1995 (the "Agreement") under which the Banks have made available to the Borrower a credit facility of up to Y.25,000,000,000 (twenty-five billion yen). The Borrower has requested that the Banks agree to certain amendments to the Agreement. The Banks have agreed to such request, subject to the terms and conditions hereof. Accordingly, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) Terms Defined in Agreement. All capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings assigned to them in the Agreement or, if not defined in the Agreement, in the Guaranty (as such term is amended as provided below). (b) Interpretation. The rules of interpretation set forth in Section 1.5 of the Agreement shall be applicable to this Amendment and are incorporated herein by this reference. SECTION 2 Amendments to the Agreement. (a) Amendments. The Agreement shall be amended as follows, effective as of the date of satisfaction of the conditions set forth in Section 3 (the "Effective Date"): (i) Clause 1.2 of the Agreement is hereby amended as follows: (A) The definition of "Guaranty" is amended and restated as follows: "Guaranty" means the Guaranty dated as of December 27, 1995, as amended by that certain 1. 2 Amended and Restated Guaranty dated as of December 30, 1996, made by the Guarantor. (B) The definition of "Margin" is amended and restated in its entirety as follows: "Margin" has the meaning given to it in Clause 5.3; (C) The definition of "Margin Determination Date" is amended and restated in its entirety as follows: "Margin Determination Date" means (i) the "Effective Date" as defined in the First Amendment to Agreement dated December 30, 1996, among the Borrower, the Banks, the Agent and the Co-Agent, (ii) the 55th day following the end of each of the first three fiscal quarters of the Guarantor or (iii) the 100th day following the end of each fiscal year of the Guarantor, as the case may be; (D) The definition of "Margin Period" is deleted. (E) The definition of "Ratio" is amended and restated in its entirety as follows: "Ratio" means the EBITDA/Total Debt Ratio; (ii) Clause 5.3 of the Agreement is hereby amended and restated in its entirety as follows: 5.3 Margin (a) The "Margin" shall be, in respect of any portion of any Contribution other than any Collateralized Amount, the amount set forth opposite the indicated Level below the heading "LIBOR/TIBOR Margin" in the pricing grid set forth on Annex I in accordance with the parameters set forth on Annex I. (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 as of each Margin Determination Date 2. 3 and shall submit Margin Certificates (duly completed and signed by a Responsible Officer of the Guarantor) on or before each Margin Determination Date. (iii) The Agreement is hereby also amended by attaching as Annex I thereto the pricing grid attached hereto as Exhibit A. (iv) The Agreement is hereby also amended by deleting the reference to the Debt Rating in Exhibit 1 to the Agreement. (v) The Agreement is hereby also amended by deleting the form of "Margin Certificate" attached as Exhibit 5 to the Agreement and substituting therefor as a new Exhibit 5 the form of Margin Certificate attached hereto as Exhibit B. (b) Amendment to Table of Contents. The Table of Contents of the Agreement shall be amended to the extent necessary to reflect the amendments to the Agreement made in subsection (a). (c) References Within Agreement. Each reference in the Agreement to "this Agreement" and the words "hereof," "herein," "hereunder," or words of like import, shall mean and be a reference to the Agreement as amended by this Amendment. SECTION 3 Conditions of Effectiveness. The effectiveness of Section 2 of this Amendment shall be subject to the satisfaction of each of the following conditions precedent: (a) Guaranty. The Agent shall have received the Amended and Restated Guaranty in the form of Exhibit C hereto, executed by the Guarantor (the "Amended and Restated Guaranty"). (b) Additional Closing Documents and Actions. The Agent shall have received the following, in form and substance satisfactory to it: (i) evidence that all (A) authorizations or approvals of any Governmental Authority, and (B) approvals or consents of any other Person, required in connection with the Amended and Restated Guaranty or the execution, delivery and performance of this Amendment shall have been obtained; (ii) a certificate of a Responsible Officer of the Borrower, stating that (A) the representations and warranties contained in Section 4 are true and correct on and as of the date of such certificate as though made on and as of the Effective Date, and (B) on and as of the Effective Date, after and giving effect to the amendment of the Agreement contemplated hereby, 3. 4 (1) no Default shall have occurred and be continuing, and (2) there has been no material adverse change in the financial condition of the Borrower from that set forth in the financial statements as of December 31, 1995; and (iii) a certificate of a Responsible Officer of the Guarantor, stating that (A) the representations and warranties contained in Section 10 of the Amended and Restated Guaranty are true and correct on and as of the Effective Date as though made on and as of such date, (B) no "Event of Default" (as defined in the Guaranty) exists or would result from the execution, delivery and performance of the Amended and Restated Guaranty, and (C) there has been no Material Adverse Effect as to the Guarantor and its Subsidiaries since December 31, 1995. (c) Corporate Documents. The Agent shall have received the following, in form and substance satisfactory to it: (i) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Effective Date, certifying (A) copies of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment and (B) the incumbency, authority and signatures of each officer of the Borrower authorized to execute and deliver this Amendment, together with the related Power of Attorney empowering each Person to execute and deliver this Amendment; and (ii) a certificate of the Secretary or Assistant Secretary of the Guarantor, dated the Effective Date, certifying (A) copies of the resolutions of the Board of Directors of the Guarantor authorizing the execution, delivery and performance of the Amended and Restated Guaranty and (B) the incumbency, authority and signatures of each officer of the Guarantor authorized to execute and deliver the Amended and Restated Guaranty. (d) Legal Opinion. The Agent shall have received the opinion of the General Counsel of the Guarantor, dated the Effective Date, in substantially the form of Exhibit D; and (e) Material Adverse Effect. On and as of the Effective Date, there shall have occurred no material adverse change in the financial condition of the Borrower from that set forth in its financial statements dated December 31, 1995, and no Material Adverse Effect (with respect to the Guarantor and its Subsidiaries) since December 31, 1995. (f) Representations and Warranties; No Default. On the Effective Date, after giving effect to the amendment of the Agreement contemplated hereby: 4. 5 (i) the representations and warranties contained in Section 4 shall be true and correct on and as of the Effective Date as though made on and as of such date; and (ii) no Default shall have occurred and be continuing. (g) Margin Certificate and Compliance Certificate. The Agent shall have received a completed Margin Certificate and a completed Compliance Certificate, dated the Effective Date, for the Guarantor's immediately preceding fiscal quarter. (h) Additional Documents. The Agent shall have received, in form and substance satisfactory to it, such additional approvals, opinions, documents and other information as the Agent or any Bank (through the Agent) may reasonably request. SECTION 4 Representations and Warranties. To induce the Banks to enter into this Amendment, the Borrower hereby confirms and restates, as of the date hereof, the representations and warranties made by it in Section 9 of the Agreement and in the other Loan Documents. For the purposes of this Section 4, (i) each reference in Section 9 of the Agreement to "this Agreement," and the words "hereof," "herein," "hereunder," or words of like import in such Section, shall mean and be a reference to the Agreement as amended by this Amendment, (ii) Section 9.1(f) of the Agreement shall be deemed instead to refer to the last day of the most recent fiscal quarter and fiscal year for which financial statements have then been delivered, (iii) any representations and warranties which relate solely to an earlier date shall not be deemed confirmed and restated as of the date hereof (provided that such representations and warranties shall be true, correct and complete as of such earlier date), and (iv) clause (i) shall take into account any amendments to the Schedules and other disclosures made in writing by the Borrower to the Agent and the Banks after the Closing Date and approved by the Agent and the Majority Banks. SECTION 5 Miscellaneous. (a) Notice. The Agent shall notify the Borrower, the Guarantor and the Banks of the occurrence of the Effective Date and promptly thereafter distribute to the Borrower and the Banks copies of all documents delivered under Section 3. (b) Agreement Otherwise Not Affected. Except as expressly amended pursuant hereto, the Agreement shall remain unchanged and in full force and effect and is hereby ratified and confirmed in all respects. The Banks' and the Agent's execution and delivery of, or acceptance of, this Amendment and any other documents and instruments in connection herewith (collectively, 5. 6 the "Amendment Documents") shall not be deemed to create a course of dealing or otherwise create any express or implied duty by any of them to provide any other or further amendments, consents or waivers in the future. Nothing in this Amendment or any other Amendment Document is intended to impair the priorities, liens or rights of any Bank with respect to any Collateral granted to such Bank under the Account Pledge executed by the Borrower in favor of such Bank substantially in the form of Exhibit 3 to the Agreement or other form satisfactory to such Bank. The Borrower hereby ratifies and confirms the priority and perfection of all security interests in the Collateral granted to any Bank prior to the date hereof. (c) No Reliance. The Borrower hereby acknowledges and confirms to the Agent and the Banks that the Borrower is executing this Amendment and the other Amendment Documents on the basis of its own investigation and for its own reasons without reliance upon any agreement, representation, understanding or communication by or on behalf of any other Person. (d) Costs and Expenses. The Borrower agrees to pay to the Agent on demand the reasonable out-of-pocket costs and expenses of the Agent, and the reasonable fees and disbursements of counsel to the Agent (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution and delivery of this Amendment and any other documents to be delivered in connection herewith. (e) Binding Effect. This Amendment shall be binding upon, inure to the benefit of and be enforceable by the Borrower, the Agent and each Bank and their respective successors and assigns. (f) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF JAPAN. (g) Complete Agreement; Amendments. This Amendment, together with the other Amendment Documents and the other Loan Documents, contains the entire and exclusive agreement of the parties hereto and thereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior commitments, drafts, communications, discussion and understandings, oral or written, with respect thereto. This Amendment may not be modified, amended or otherwise altered except in accordance with the terms of Clause 16.2 of the Agreement. (h) Jurisdiction. (i) 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 6. 7 may arise out of or in connection with the Amendment Documents and, for those purposes, irrevocably submits to the jurisdiction of that court. (ii) Each party irrevocably waives any objection which it might now or hereafter have to the court referred to in clause (i) above 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 the Amendment Documents and agrees not to claim that court is not a convenient or appropriate forum. (iii) The submission to the jurisdiction of the court referred to in clause (i) above 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. (iv) Each party consents generally in respect of any legal action or proceedings arising out of or in connection with the Amendment Documents 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. (i) English language. This Amendment 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 Amendment 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. (j) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. 7. 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment, as of the date first above written. THE BORROWER LSI LOGIC JAPAN SEMICONDUCTOR, INC. By____________________________________ Title: THE AGENT ABN AMRO BANK N.V., Tokyo Branch By____________________________________ Title: THE BANKS ABN AMRO BANK N.V., Tokyo Branch, as Bank By____________________________________ Name: Title: 8. 9 THE INDUSTRIAL BANK OF JAPAN, LIMITED, as Co-Agent and a Bank By____________________________________ Name: Title: THE SANWA BANK, LIMITED By____________________________________ Name: Title: THE BANK OF NOVA SCOTIA, Tokyo Branch By____________________________________ Name: Title: BANQUE NATIONALE DE PARIS, Tokyo Branch By____________________________________ Name: Title: BARCLAYS BANK PLC, Tokyo Branch By____________________________________ Name: Title: 9. 10 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By____________________________________ Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By____________________________________ Name: Title: THE SUMITOMO BANK, LTD. By____________________________________ Name: Title: THE MITSUBISHI TRUST & BANKING CORPORATION By____________________________________ Name: Title: 10. 11 THE DAI-ICHI KANGYO BANK, LIMITED By____________________________________ Name: Title: 11. 12 Exhibit A to First Amendment to Agreement ANNEX I PRICING GRID --------------------------------------------------------------------------- Level EBITDA/Total Debt (Basis points per annum) Ratio ------------------------ LIBOR/TIBOR Margin ------- ------------------------ ------------------------ Level 1 Greater than or equal to 65 to 1.0 to 1.0 ------- ------------------------ ------------------------ Level 2 Less than 1.0 to 1.0 75 ---------------------------------------------------------------------------
The EBITDA/Total Debt Ratio used to compute the Margin for the Contributions shall be the EBITDA/Total Debt Ratio set forth in the Margin Certificate most recently delivered by the Guarantor to the Agent pursuant to Section 11(l) of the Guaranty; changes in the Margin resulting from a change in the EBITDA/Total Debt Ratio shall become effective one Business Day after delivery by the Guarantor to the Agent of a new Margin Certificate pursuant to Section 11(l). If the Guarantor shall fail to deliver a Margin Certificate on or prior to a Margin Determination Date as required pursuant to Section 11(l) (without giving effect to any grace period), the Margin from the first day after such Margin Determination Date through the day the Guarantor delivers to the Agent a Margin Certificate shall conclusively equal the highest Margin set forth above. 1. 13 Exhibit B to First Amendment to Agreement Exhibit 5 FORM OF MARGIN CERTIFICATE TO: ABN AMRO Bank N.V., Tokyo Branch, as Agent (address) Re: LSI Logic Japan Semiconductor, Inc. Gentlemen: This Margin Certificate is made and delivered pursuant to the Agreement dated December 27, 1995, as amended December 30, 1996 (as further amended, modified, renewed or extended from time to time, the "Agreement") among LSI Logic Japan Semiconductor, Inc. (the "Borrower"), certain financial institutions named therein as Banks, ABN AMRO Bank N.V., Tokyo Branch, as Agent, and The Industrial Bank of Japan, as Co-Agent and reference is made thereto for full particulars of the matters described therein. All capitalized terms used in this Margin Certificate and not otherwise defined herein shall have the meanings assigned to them in the Agreement, or, if not defined in the Agreement, in the Guaranty. This Margin Certificate relates to the accounting period ending __________, 199__. We hereby notify you that the Ratio is ____________ as of the end of the [fiscal quarter] [fiscal year] ending __________, 199__. We refer you to our Compliance Certificate dated __________, 199__ delivered pursuant to the Guaranty for further information regarding the determination of the Ratio. IN WITNESS WHEREOF, the undersigned officer has signed this Margin Certificate on behalf of the Guarantor this ____ day of ______________, 199__. ______________________________________ Name: Title: 1. 14 Exhibit C to First Amendment to Agreement FORM OF AMENDED AND RESTATED GUARANTY ================================================================================ LSI LOGIC CORPORATION AMENDED AND RESTATED GUARANTY DATED AS OF DECEMBER 30, 1996 ================================================================================ 15 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 2 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (d) Financial Condition of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 6 Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 7 Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (a) Subordination to Payment of Subject Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 20 (b) No Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (c) Subordination of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (d) Subordination upon any Distribution of Assets of the Borrower . . . . . . . . . . . . . . . . . . 22 (e) Authorization to Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 8 Continuing Guaranty; Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (a) Continuing Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (b) Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 9 Payments; Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (a) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (b) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 10 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (a) Organization and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (c) Binding Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (d) Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (e) No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (f) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (g) Regulated Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (h) Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (i) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (j) Compliance with Consents and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
i 16 TABLE OF CONTENTS (continued)
SECTION Page - ------- ---- (k) Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (l) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (m) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (n) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (o) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (p) Labor Disputes, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (q) Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (r) Independent Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (s) Name of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (t) Significant Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (u) Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 11 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) Financial Statements and Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (b) Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (c) Preservation of Corporate Existence, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (d) Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (e) Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (f) Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (g) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (h) Payment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (i) Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (j) Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (k) Inspection of Property and Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (l) Margin Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (m) Further Assurances and Additional Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 12 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (a) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (b) Change in Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (c) Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (d) Loans and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (e) Restrictions on Fundamental Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (f) Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (g) Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (h) Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 13 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (a) Senior Debt to Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (b) Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (c) Minimum Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (d) Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (e) Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ii 17 TABLE OF CONTENTS (continued)
SECTION Page - ------- ---- SECTION 14 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (a) Representation or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (b) Specific Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (c) Other Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (d) Default Under Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (e) Insolvency; Voluntary Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (f) Involuntary Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (g) Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (h) Process Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (i) Seizure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (j) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (k) Dissolution, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (l) Ownership of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (m) Change in Ownership or Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (n) Repudiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (o) Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 15 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 16 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 17 Costs and Expenses; Indemnification; Other Charges . . . . . . . . . . . . . . . . . . . . . . . . 43 (a) Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (b) Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (c) Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (d) Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (e) Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 18 Payment Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 19 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 20 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 21 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 22 Assignments, Participations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 23 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 24 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 25 Effective Date; Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 26 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 27 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
iii 18 TABLE OF CONTENTS (continued)
SECTION Page - ------- ---- SECTION 28 Benefit of Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 29 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 30 Guarantor Acknowledgment and Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 EXHIBITS Exhibit A Compliance Certificate SCHEDULES Schedule 1 Certain Permitted Liens (Section 1, "Permitted Liens") Schedule 2 Litigation (Section 10(i)) Schedule 3 Certain Environmental Matters (Section 10(k)) Schedule 4 Significant Subsidiaries
iv 19 AMENDED AND RESTATED GUARANTY THIS AMENDED AND RESTATED GUARANTY (this "Guaranty"), dated as of December 30, 1996, 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"). WHEREAS, 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 December 27, 1995 (as amended, modified, renewed or extended from time to time, the "Facility Agreement"); WHEREAS, the Guarantor has previously delivered a certain Guaranty (the "Prior Guaranty") dated as of December 27, 1995 in favor of the Banks from time to time party to the Facility Agreement and the Agent guaranteeing 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 therein; WHEREAS, the Borrower and the Guarantor have requested that the Banks and the Agent agree to amend and restate the Prior Guaranty in order to, among other things, amend the financial covenants contained therein; and WHEREAS, the Banks and the Agent are willing to amend and restate the Prior Guaranty as provided in this Guaranty. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the Guarantor hereby represents, warrants, covenants and agrees as follows: SECTION 1 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, 1 20 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 duplication) Guaranty Obligations with respect to that portion of the underlying obligations which come due within one year of such date of determination. "Consolidated EBITDA" means, for any period, Consolidated Net Income plus Consolidated Interest Expense plus income tax expense plus depreciation expense, amortization expense and other non-cash expenses or charges relating to Permitted Acquisitions which were deducted in determining Consolidated Net Income, of the Guarantor and 2 21 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. 3 22 "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 Debt" means, as of any date of determination, all Indebtedness 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. "Convertible Subordinated Notes" has the meaning provided therefor in the definition of Subordinated Debt. "Dollars" and the sign "$" each means lawful money of the United States. "EBITDA/Total Debt Ratio" means, as of the last day of any fiscal quarter of Guarantor, the ratio of (i) Consolidated EBITDA for such fiscal quarter then ended to (ii) Consolidated Total Debt as of such date. "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. "ERISA" means the Employee Retirement Income Security Act of 1974, including (unless the context 4 23 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. "First Amendment" has the meaning provided therefor in Section 30. "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 5 24 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. "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: 6 25 (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. "Indemnified Person" has the meaning given to such term in Section 17(b). "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. 7 26 "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 foregoing 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 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. 8 27 "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" means any Acquisition of a Person by the Guarantor or any Subsidiary for which (i) the sole consideration paid by the Guarantor or any Subsidiary, as the case may be, consists of common stock, or (ii) the total cash consideration paid by the Guarantor or any Subsidiary, as the case may be, does not exceed, in the aggregate with all other Acquisitions, $500,000,000 during the period from December 20, 1996 through the Final Maturity Date. "Permitted Investments" means any investments selected by the Guarantor in accordance with its Corporate Cash Investment Policy as adopted by the Guarantor on February 13, 1995 (as the same may be amended from time to time with the approval of the Agent); 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 (A) any substitute or renewal Lien is limited to the property encumbered by the existing Lien, and (B) 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; 9 28 (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; (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 10 29 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 within the general parameters customary in the industry and incurred in the ordinary course of business in connection with Rate Contracts or portfolio investments maintained with financial intermediaries. "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. "Prior Guaranty" has the meaning provided therefor in the Recitals hereof. "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. 11 30 "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. "Significant Subsidiary" means, at any time, any Subsidiary having at such time total assets, as of the last day of the preceding fiscal quarter, having a net book value in excess of $10,000,000 (exclusive of intercompany assets and liabilities), based upon the Guarantor's most recent annual or quarterly financial statements delivered to the Agent under Section 11(a). "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 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 12 31 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. "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, determinations 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 13 32 after the date hereof would otherwise affect the calculation of any covenant set forth in Section 13, 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. (x) References to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Guarantor. 14 33 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: (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, 15 34 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 16 35 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. SECTION 4 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; 17 36 (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 without 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 18 37 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; (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 Sections 1432, 2809, 2810, 2815, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 3433 and California Code of Civil Procedure Sections 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, 19 38 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 6 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 7 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 20 39 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 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 21 40 (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. 22 41 SECTION 8 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 9 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 23 42 (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; (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 24 43 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 10 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. 25 44 (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" for purposes of, and 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 Convertible Subordinated Notes. (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 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 Significant Subsidiary has 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 Liens permitted under Section 12(a). (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 reasonably likely to result in a Material Adverse Effect. 26 45 (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 27 46 Guarantor nor any entity under common control with the Guarantor in the preceding sentence has ever contributed to any Multiemployer Plan. (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, 1995 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, 1996 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, 1996 financial statements, to normal year-end adjustments and the absence of notes. Since December 31, 1995, there has been no Material Adverse Effect. (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, 1996. (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. 28 47 (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) Significant Subsidiaries. The name and ownership of each Significant Subsidiary of the Guarantor on the date of this Guaranty is as set forth in Schedule 4. All of the outstanding capital stock of, or other interest in, each such Significant Subsidiary has been validly issued, and is fully paid and nonassessable. (u) 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 29 48 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 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; 30 49 (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 ERISA Event, together with a copy of any notice of such ERISA 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 45 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 change in accounting policies or financial reporting practices by the Guarantor or the Borrower or any Significant Subsidiary that is expected to affect 31 50 (or has affected) materially under U.S. GAAP the consolidated financial condition of the Guarantor and its Subsidiaries; (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 Person or Subsidiary not identified on Schedule 4 that becomes a Significant Subsidiary after the date of this Guaranty; (xi) 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 (xii) such other information respecting the operations, properties, business or condition (financial or otherwise) of the Guarantor or its Significant 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 connection with transactions permitted by Section 12, and 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; 32 51 (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 (other than a Permitted 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. Except as otherwise permitted under Section 12(c) or (e), 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 Indebtedness. The Guarantor shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all obligations of the Borrower 33 52 under the Facility Agreement and all other Indebtedness, 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 subsection (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). 34 53 (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. 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, determined as of the end of the next preceding fiscal quarter (or fiscal year, as the case may be). (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; (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 35 54 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; (iv) sales or other dispositions of assets outside the ordinary course of business which do not constitute Substantial Assets; and (v) sales or other dispositions of Permitted Investments. 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, enter into any Acquisition or otherwise extend any credit to, guarantee the obligations of or make any additional investments in or acquire any interest 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, and guarantees of the obligations of, Subsidiaries; (iv) Permitted Acquisitions; (v) employee loans and guarantees in accordance with the Borrower's usual and customary practices with respect thereto; or (vi) additional investments not exceeding, in the aggregate with all such investments and all Acquisitions, $500,000,000 during the period from December 20, 1996 through the Final Maturity Date; provided that in the case of an Acquisition or an investment referred to in clause (vi) above, (A) no such Acquisition or investment shall be made while there exists a Default or if a Default or Material Adverse Effect would occur as a result thereof, and (B) the acquired or other Person in which any such Acquisition or investment is made shall be in the electronics 36 55 business or other business incidental or reasonably related thereto. (e) Restrictions on Fundamental Changes. The Guarantor will not, and will not permit any of its Subsidiaries to, merge with or consolidate into, or acquire all or substantially all of the assets of, any Person, or sell, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets, except that: (i) any of the Guarantor's Subsidiaries may merge with, consolidate into or transfer all or substantially all of its assets to another of the Guarantor's Subsidiaries or to the Guarantor and in connection therewith such Subsidiary may be liquidated or dissolved, provided that (A) if the transaction involves the Guarantor, the Guarantor shall be the surviving Person, and (B) if any transaction shall be between a non-wholly owned Subsidiary and a wholly owned Subsidiary, the wholly owned Subsidiary shall be the continuing or surviving Person, and provided further that no Material Adverse Effect or Default shall result therefrom; (ii) the Guarantor or any of its Subsidiaries may sell or dispose of assets in accordance with the provisions of subsection (c); (iii) the Guarantor or any of its Subsidiaries may make any investment permitted by subsection (d); and (iv) the Guarantor may merge with or consolidate into any other Person pursuant to an Acquisition permitted by subsection (d), provided that (A) the Guarantor is the surviving Person, (B) no such merger or consolidation shall be made while there exists a Default or if a Default or Material Adverse Effect would occur as a result thereof, and (C) the Guarantor shall have complied with the notice and other requirements of subsection (d) with respect to any Acquisition. (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 37 56 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; (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 13 Financial Covenants. So long as any 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; 38 57 (b) 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; (c) 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 (i) $997,000,000 plus (ii) 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 (iii) 80% of positive Consolidated Net Income, if any, for each fiscal quarter elapsed after September 30, 1995, minus (iv) 80% of total goodwill generated by the Guarantor's Permitted Acquisitions from September 30, 1996, if any, and minus (v) 100% of restructuring and acquisition charges related to the Guarantor's Permitted Acquisitions from September 30, 1996 (provided that any such restructuring or acquisition charges are expensed in the same fiscal quarter during which the applicable Permitted Acquisition is completed); (d) Debt Service Coverage Ratio. The Guarantor will maintain a ratio of (i) the sum of Consolidated EBITDA plus Consolidated Rental Expense to (ii) 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, calculated as of the end of such period; and (e) Subordinated Debt. The Guarantor will not permit Subordinated Debt of the Guarantor and its consolidated Subsidiaries to exceed (i) $500,000,000 at any time during the Guarantor's 1996 fiscal year or (ii) $750,000,000 at any time thereafter; and the Guarantor will not, and will 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 Events 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 39 58 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) (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 performed 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 40 59 (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; 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 41 60 (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(e), (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 herein and 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 pursuant to the Facility Agreement or such other 42 61 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. The rights and remedies hereunder are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Agent or any Bank. 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 43 62 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 transactions 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 proceeding) 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. 44 63 (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 45 64 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 interest 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. SECTION 20 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 46 65 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 21 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 22 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 23 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 47 66 SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. SECTION 24 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. SECTION 25 Effective Date; Entire Agreement. This Guaranty shall be effective on and as of the "Effective Date" defined in the First Amendment. 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 understandings of such Persons, verbal or written, relating to the subject matter hereof, and amends and restates in its entirety the Prior Guaranty. SECTION 26 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. 48 67 SECTION 27 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 hereunder. SECTION 28 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 other than an Indemnified 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 obligations shall be limited to those expressly stated herein. SECTION 29 Time. Time is of the essence as to each term or provision of this Guaranty. SECTION 30 Guarantor Acknowledgment and Consent. The Guarantor hereby (a) acknowledges and consents to the execution, delivery and performance by the Borrower of that certain First Amendment to Facility Agreement (the "First Amendment") dated as of December 24, 1996 which amends the Facility Agreement as set forth in such First Amendment, a copy of which has been previously delivered to and reviewed by the Guarantor; (b) reaffirms and agrees that this Guaranty and all other documents and agreements executed and delivered by the Guarantor previously (other than the Prior Guaranty) or concurrently herewith to the Agent and the Banks in connection with the Facility Agreement are in full force and effect, without defense, offset or counterclaim; and (c) reaffirms and agrees that all of the provisions of this Guaranty are applicable to, and enforceable by the Agent and all Banks party to the Facility Agreement against, the Guarantor. 49 68 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: (408) 954-3634 Attention: Mark R. Kent 50 69 EXHIBIT A to the Amended and Restated Guaranty FORM OF COMPLIANCE CERTIFICATE TO: ABN AMRO Bank N.V., Tokyo Branch, as Agent (address) Re: LSI Logic Corporation Ladies and Gentlemen: This Compliance Certificate is made and delivered pursuant to the Amended and Restated Guaranty dated as of December 30, 1996 (as amended, modified, renewed or extended from time to time, the "Guaranty") made by LSI Logic Corporation, a Delaware corporation (the "Guarantor"), in favor of the Banks referred to therein and ABN AMRO Bank N.V., Tokyo Branch, as Agent, and reference is made thereto for full particulars of the matters described therein. All capitalized terms used in this Compliance Certificate and not otherwise defined herein shall have the meanings assigned to them in the Guaranty. This Compliance Certificate relates to the accounting period ending __________, 199__. I am the _______________________ of the Guarantor. I have reviewed the terms of the Guaranty and I have made, or caused to be made under my supervision, a detailed review of the transactions and conditions of the Guarantor and its Subsidiaries during such accounting period. I hereby certify that the information set forth on Schedule 1 hereto (and on any additional schedules hereto setting forth further supporting detail) is true, accurate and complete as of the end of such accounting period. I hereby further certify that (i) as of the date hereof, no Event of Default has occurred and is continuing, and (ii) on and as of the date hereof, there has occurred no Material Adverse Effect since December 31, 1995, except, in each case, as may be set forth in a separate attachment hereto describing in detail the nature of each condition or event constituting an exception to the foregoing statements, the period during which it has existed and the action which the Guarantor is taking or proposes to take with respect to each such condition or event. IN WITNESS WHEREOF, the undersigned officer has signed this Compliance Certificate this ____ day of ______________, 199__. ______________________________________ Name: Title: A-1. 70 Exhibit D to First Amendment to Agreement FORM OF LEGAL OPINION December __, 1996 To each of the Banks party to the Amendment Agreement referred to below, and to ABN AMRO Bank N.V., Tokyo Branch, as Agent Ladies and Gentlemen: I am General Counsel of LSI Logic Corporation, a Delaware corporation (the "Guarantor"), and I am giving my opinion in connection with the execution and delivery of the First Amendment to Agreement, dated December 24, 1996 (the "Amendment Agreement"), amending the Agreement dated December 27, 1995 (the "Agreement") among LSI Logic Japan Semiconductor, Inc. (the "Borrower"), certain financial institutions named therein as Banks (the "Banks"), ABN AMRO Bank N.V., Tokyo Branch, as Agent (the "Agent"), and The Industrial Bank of Japan, Limited, as Co-Agent, and the related Amended and Restated Guaranty, dated as of December 30, 1996 (the "Guaranty") of LSI Logic Corporation, Inc. (the "Guarantor") in favor of the Agent and the Banks. This opinion is provided to the Agent and the Banks as required pursuant to Section 3(d) of the Amendment Agreement. Capitalized terms not otherwise defined herein have the respective meanings set forth in the Amendment Agreement and the Guaranty. In connection with this opinion letter, I have examined an executed copies of the Guaranty; certificates of public officials from the States of California and Delaware; the certificate of incorporation and by-laws of the Guarantor, as amended to date; records of proceedings of the Board of Directors of the Guarantor by which resolutions were adopted relating to matters covered by this opinion; and such certificates of officers of the Guarantor as to certain factual matters as I have deemed necessary or appropriate. In addition, I have made such other investigations as I have deemed necessary to enable me to express the opinions hereinafter set forth. In the course of this examination I have assumed the genuineness of all signatures of persons signing the Loan Documents on behalf of parties thereto other than the Guarantor, the authenticity of all documents submitted to me as originals and the conformity to authentic original documents of all documents submitted to me as certified, conformed or photostatic copies. 1. 71 Based upon the foregoing, and further subject to the assumptions, qualifications and exceptions set forth below, I hereby advise you that in my opinion: (1) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with the corporate power and authority to own and operate (or lease, as the case may be) its properties and to carry on its business as it is now conducted. The Guarantor is qualified as a foreign corporation and in good standing in the State of California. (2) The Guarantor has the corporate power and authority to enter into and perform the Guaranty, and has taken all necessary corporate action to authorize the execution, delivery and performance of the Guaranty. (3) 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, or enforcement against, the Guarantor of the Guaranty. (4) The Guaranty have been duly executed and delivered by the Guarantor and constitutes the legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms. (5) The execution, delivery and performance by the Guarantor of the Guaranty will not (i) violate or be in conflict with any provision of the certificate of incorporation, or by-laws of the Guarantor, (ii) violate or be in conflict with any law or regulation having applicability to the Guarantor, (iii) violate or contravene any judgment, decree, injunction, writ or order of any court, or any arbitrator or other Governmental Authority, having jurisdiction over the Guarantor or the Guarantor's properties or by which the Guarantor may be bound, or (iv) violate or conflict with, or constitute a default under or result in the termination of, or accelerate the performance required by, any indenture, any loan or credit agreement, or any other agreement for borrowed money or any other material agreement, lease or instrument to which the Guarantor is a party or by which it or the Guarantor's properties may be bound or affected except as contemplated under the Guaranty. (6) Except as otherwise disclosed on Schedule 2 to the Guaranty, no litigation or other proceedings are pending or threatened against the Guarantor or its properties before any court, arbitrator or governmental agency or authority with respect to the Guaranty or which, if determined adversely to the Guarantor, would be likely to have a Material Adverse Effect. The opinion set forth in paragraph 4 above is subject to the qualification that the enforceability of the Guaranty may 2. 72 be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and by general equity principles. I express no opinion herein concerning any law other than the law of the State of California, the General Corporation Law of the State of Delaware and the federal law of the United States. This letter has been furnished to you at the request of the Guarantor pursuant to Section 3(d) of the Amendment Agreement for your use in connection with the Amendment Agreement and the Guaranty, and may not be relied upon by you or any other person for any other purpose without my consent; provided the Agent and each Bank may deliver a copy to its legal counsel in connection with the Amendment Agreement and the Guaranty, to any prospective assignee or participant of any Bank and to any successor Agent, and such legal counsel, any such assignee or participant and any successor Agent shall be entitled to rely hereon. Very truly yours, 3. EX-10.41 3 $300,000,000 CREDIT AGREEMENT 1 EXHIBIT 10.41 LSI LOGIC CORPORATION _________________________________ U.S.$300,000,000 CREDIT AGREEMENT Dated as of December 20, 1996 _________________________________ ABN AMRO BANK N.V. Agent and ABN AMRO NORTH AMERICA, INC. Arranger 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02 Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (a) Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (b) "Fiscal Year" and "Fiscal Quarter" . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 1.03 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE II THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.01 The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.02 Borrowing Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (a) Notice to the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (b) Notice to the Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.03 Non-Receipt of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.04 Lending Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.05 Evidence of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.06 Minimum Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.07 Required Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE III INTEREST AND FEES; CONVERSION OR CONTINUATION . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.01 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (a) Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (b) Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (c) Interest Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 (d) Notice to the Borrower and the Banks . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3.02 Default Rate of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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Page ---- SECTION 3.03 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (a) Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (b) Agency and Arrangement Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (c) Fees Nonrefundable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.04 Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.05 Conversion or Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (a) Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (b) Automatic Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (c) Notice to the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 (d) Notice to the Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.06 Replacement of Reference Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.07 Highest Lawful Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE IV REDUCTION OF COMMITMENTS; REPAYMENT; PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.01 Reduction or Termination of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (a) Optional Reduction or Termination . . . . . . . . . . . . . . . . . . . . . . . . . 24 (b) Mandatory Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (c) Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (d) Adjustment of Commitment Fee; No Reinstatement . . . . . . . . . . . . . . . . . . . 25 SECTION 4.02 Repayment of the Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.03 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (a) Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Notice; Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE V YIELD PROTECTION AND ILLEGALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 5.01 Inability to Determine Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 5.02 Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 5.03 Regulatory Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (a) Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (b) Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (c) Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.04 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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Page ---- SECTION 5.05 Funding Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 5.06 Obligation to Mitigate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 5.07 Substitution of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE VI PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 6.01 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 6.02 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (a) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (b) Authorization to Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (c) Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (d) Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 6.03 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (a) No Reduction of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (b) Deduction or Withholding; Tax Receipts . . . . . . . . . . . . . . . . . . . . . . . 30 (c) Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (d) Forms 1001 and 4224 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (e) Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 (f) Exceptions to Payment of Additional Amounts . . . . . . . . . . . . . . . . . . . . 31 SECTION 6.04 Non-Receipt of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 6.05 Sharing of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VII CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 7.01 Conditions Precedent to the Initial Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (a) Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 (b) Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (c) Additional Closing Documents and Actions . . . . . . . . . . . . . . . . . . . . . . 33 (d) Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (e) Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (f) Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 7.02 Conditions Precedent to All Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (a) Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (b) Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (c) Representations and Warranties; No Default . . . . . . . . . . . . . . . . . . . . . 34 (d) Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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Page ---- ARTICLE VIII REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 8.01 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (a) Organization and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (b) Authorization; No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (c) Binding Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (d) Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (e) No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (f) Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (g) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (h) Compliance with Consents and Licenses . . . . . . . . . . . . . . . . . . . . . . . 36 (i) Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . 36 (j) Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (k) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (l) Significant Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (m) Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (n) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (o) Patents and Other Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (p) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (q) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (r) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (s) Labor Disputes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (t) Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (u) Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE IX COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 9.01 Reporting Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (a) Financial Statements and Other Reports . . . . . . . . . . . . . . . . . . . . . . . 39 (b) Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 9.02 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (a) Senior Debt to Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (b) Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (c) Minimum Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . 42 (d) Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (e) Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 9.03 Additional Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (a) Preservation of Corporate Existence, Etc . . . . . . . . . . . . . . . . . . . . . . 42 (b) Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (c) Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (d) Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 (e) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (f) Payment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
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Page ---- (g) Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (h) Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (i) Inspection of Property and Books and Records . . . . . . . . . . . . . . . . . . . . 44 (j) Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (k) Further Assurances and Additional Acts . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 9.04 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (a) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (b) Change in Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (c) Restrictions on Fundamental Changes . . . . . . . . . . . . . . . . . . . . . . . . 45 (d) Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (e) Loans and Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (f) Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (g) Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . 48 (h) Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE X EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 10.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (a) Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (b) Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (c) Failure by Borrower to Perform Certain Covenants . . . . . . . . . . . . . . . . . . 49 (d) Failure by Borrower to Perform Other Covenants . . . . . . . . . . . . . . . . . . . 49 (e) Insolvency; Voluntary Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 49 (f) Involuntary Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (g) Default Under Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (h) Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (i) Process Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (j) Seizure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (k) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (l) Dissolution, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (m) Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 (n) Change in Ownership or Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 10.02 Effect of Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE XI THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 11.01 Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 11.02 Limitation on Liability of Agent; Notices; Closing . . . . . . . . . . . . . . . . . . . . . . . 53 (a) Limitation on Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 53 (b) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 (c) Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
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Page ---- SECTION 11.03 Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 11.04 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 SECTION 11.05 Non-Reliance on Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 11.06 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 11.07 Delegation of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 11.08 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 11.09 Arranger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 12.01 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (a) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 (b) Facsimile and Telephonic Notice . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 12.03 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 12.04 Costs and Expenses; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (a) Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (b) Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (c) Defense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 (d) Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 12.05 Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 12.06 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 12.07 Obligations Several . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 12.08 Benefits of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 12.09 Binding Effect; Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (a) Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (b) Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 12.10 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 12.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 12.12 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 12.13 Limitation on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
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Page ---- SECTION 12.14 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 12.15 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 12.16 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ANNEXES Annex 1 Pricing Grid SCHEDULES Schedule 1 Commitments and Pro Rata Shares Schedule 2 Lending Offices; Addresses for Notices Schedule 3 Existing Liens Schedule 4 Significant Subsidiaries Schedule 5 Litigation Schedule 6 Environmental Compliance EXHIBITS Exhibit A Form of Note Exhibit B Form of Notice of Borrowing Exhibit C Form of Compliance Certificate Exhibit D Form of Opinion of General Counsel of the Borrower Exhibit E Form of Assignment and Acceptance
vii. 9 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement"), dated as of December 20, 1996, is made among LSI LOGIC CORPORATION, a Delaware corporation (the "Borrower"), the financial institutions listed on the signature pages of this Agreement under the heading "BANKS" (each a "Bank" and, collectively, the "Banks") and ABN AMRO BANK N.V. as agent for the Banks hereunder (in such capacity, the "Agent"). The Borrower has requested the Banks to make revolving loans to the Borrower in an aggregate principal amount of up to $300,000,000 at any time outstanding. The Banks are severally willing to make such loans to the Borrower upon the terms and subject to the conditions set forth in this Agreement. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "ABN AMRO" means ABN AMRO Bank N.V. "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 Borrower 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. "Agent" has the meaning set forth in the introduction to this Agreement. "Agent's Account" means the account of the Agent set forth in Schedule 2 or such other account as the Agent from time 1. 10 to time shall designate in a written notice to the Borrower and the Banks. "Applicable Fee Amount" means with respect to the commitment fee payable hereunder, the amount set forth opposite the indicated Level below the heading "Commitment Fee" in the pricing grid set forth on Annex I in accordance with the parameters for calculation and adjustment of such amount also set forth on Annex I. "Applicable Margin" means (i) with respect to Base Rate Loans, 0% per annum; and (ii) with respect to Eurodollar Rate Loans, the amount set forth opposite the indicated Level below the heading "Eurodollar Rate Loan Spread" in the pricing grid set forth on Annex I in accordance with the parameters for calculation and adjustment of such amount also set forth on Annex I. "Arranger" means ABN AMRO North America, Inc. "Assignment and Acceptance" has the meaning set forth in Section 11.02(a). "Bank" and "Banks" each has the meaning set forth in the recital of parties to this Agreement. "Bankruptcy Code" Title 11 of the United States Code entitled "Bankruptcy." "Base Rate" means for any day the higher of: (i) the Prime Commercial Lending Rate of ABN AMRO, as announced from time to time at its Chicago office, or (ii) the Federal Funds Rate, plus 1/2 of 1% per annum. Each change in the interest rate on the Loans or other Obligations bearing interest at the Base Rate based on a change in the Base Rate shall be effective as of the effective date of such change in the Base Rate. "Base Rate Loan" means a Loan bearing interest at a rate determined by reference to the Base Rate. "Borrower" has the meaning set forth in the recital of parties to this Agreement. "Borrower's Account" means the account of the Borrower set forth in Schedule 2 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. "Borrowing" means a borrowing consisting of simultaneous Loans made at any one time by the Borrower from the Banks pursuant to Article II. 2. 11 "Business Day" means a day (i) other than Saturday or Sunday, and (ii) on which commercial banks are open for business in San Francisco, California and New York, New York. "Capital Lease" means, for any Person, any lease of property (whether real, personal or mixed) which, in accordance with GAAP, would, at the time a determination is made, be required to be recorded as a capital lease in respect of which such Person is liable as lessee. "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. "Closing Date" means the date on which all conditions precedent set forth in Section 7.01 are satisfied or waived by all Banks. "Commitment" means, when used with reference to any Bank at the time any determination thereof is to be made, the amount set forth opposite the name of such Bank on Schedule 1, as such amount may be reduced from time to time pursuant to Section 4.01, or, where the context so requires, the obligation of such Bank to make Loans up to such amount on the terms and conditions set forth in this Agreement. "Compliance Certificate" means a certificate of a Responsible Officer of the Borrower, in substantially the form of Exhibit C, 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 Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP, plus (without duplication) Guaranty Obligations with respect to that portion of the underlying obligations which come due within one year of such date of determination. "Consolidated EBITDA" means, for any period, Consolidated Net Income plus Consolidated Interest Expense plus income tax expense plus depreciation expense, amortization expense and other non-cash expenses or charges relating to Permitted Acquisitions which were deducted in determining Consolidated Net Income, of the Borrower 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 3. 12 Capital Leases) of the Borrower 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 Borrower 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 Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Rental Expense" means, for any period, rental expense of the Borrower 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 (A) 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 Borrower in accordance with GAAP and (B) amounts representing the capitalized portion of the acquisition and development costs of software necessary for the operation of the business of the Borrower and its Subsidiaries, as shown on the consolidated balance sheet of the Borrower. "Consolidated Total Assets" means, as of any date of determination, the total assets of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Consolidated Total Debt" means, as of any date of determination, all Indebtedness of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. 4. 13 "Consolidated Total Liabilities" means, as of any date of determination, the total liabilities of the Borrower and its Subsidiaries on a consolidated basis, as determined in accordance with GAAP. "Default" means an Event of Default or an event or condition which with notice or lapse of time or both would constitute an Event of Default. "Dollars" and the sign "$" each means lawful money of the United States. "EBITDA/Total Debt Ratio" means, as of the last day of any Fiscal Quarter, the ratio of (i) Consolidated EBITDA for such Fiscal Quarter then ended to (ii) Consolidated Total Debt as of such date. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States and licensed by the United States or any state thereof; and (iii) a Person that is primarily engaged in the business of commercial banking and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all 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 public health, safety and environmental protection matters, 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. "ERISA" means the Employee Retirement Income Security Act of 1974, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. 5. 14 "ERISA Affiliate" means any trade or business (whether or not incorporated) which is under common control with the Borrower 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 Borrower 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 Borrower 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 Borrower; 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. "Eurodollar Business Day" means a Business Day on which dealings in Dollar deposits are carried on in the London interbank market. "Eurodollar Rate" means for each Interest Period for each Eurodollar Rate Loan the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) determined by the Agent pursuant to the following formula: Interbank Rate Eurodollar Rate = ------------------------------------ 100% - Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "Eurodollar Rate Loan" means a Loan bearing interest at a rate determined by reference to the Eurodollar Rate. "Eurodollar Reference Banks" means ABN AMRO and Morgan Guaranty Trust Company of New York, subject to the provisions of Section 3.06. "Eurodollar Reserve Percentage" means the maximum reserve requirement percentage (including any ordinary, supplemental, marginal and emergency reserves), if any, as 6. 15 determined by the Agent, then applicable under Regulation D in respect of Eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in the Federal Reserve System with deposits exceeding $1,000,000,000. "Event of Default" has the meaning set forth in Section 10.01. "FDIC" means the Federal Deposit Insurance Corporation, or any successor thereto. "Fee Letter" means that certain letter agreement dated October 31, 1996 among the Borrower, the Agent and the Arranger relating to the payment of certain arrangement and agency fees. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%), as determined by the Agent, equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for any day of determination (or if such day of determination is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "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 7. 16 (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. "Hazardous Substances" means any toxic or hazardous substances, materials, wastes, contaminants or pollutants, including asbestos, PCBs, petroleum products and byproducts, and any substances defined or listed as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances" (or similarly identified), regulated under or forming the basis for liability under any applicable Environmental Law. "IRS" means the Internal Revenue Service, or any successor thereto. "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 8. 17 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 (a) 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 (b) 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. "Interbank Rate" means the rate per annum determined by the Agent, on the basis of quotations furnished to it by the Eurodollar Reference Banks, to be the average (rounded upward, if necessary, to the nearest 1/16 of 1%) of the rates at which deposits in Dollars are offered to each of the Eurodollar Reference Banks by prime banks in the London interbank market, at approximately 11:00 a.m. (London time), two Eurodollar Business Days before the first day of such Interest Period, in an amount substantially equal to the proposed Eurodollar Rate Loan to be made, continued or converted by such Eurodollar Reference Bank and for a period of time comparable to such Interest Period. If 9. 18 any Eurodollar Reference Bank shall fail to furnish a quotation of its applicable rate to the Agent, the Interbank Rate for such Interest Period shall be determined on the basis of the quotations furnished to the Agent by the other Eurodollar Reference Bank or Reference Banks. "Interest Payment Date" means a date specified for the payment of interest pursuant to Section 3.01(c). "Interest Period" means, with respect to any Eurodollar Rate Loan, the period determined in accordance with Section 3.01(b) applicable thereto. "Internal Revenue Code" means the Internal Revenue Code of 1986, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Lending Office" has the meaning set forth in Section 2.04. "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 foregoing 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 Documents" means this Agreement, the Notes, the Fee Letter and all other certificates, documents, agreements and instruments delivered to the Agent and the Banks under or in connection with this Agreement. "Loans" has the meaning set forth in Section 2.01. "Majority Banks" means at any time Banks holding at least 66-2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks having at least 66-2/3% of the aggregate Commitments. "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 Borrower or the Borrower and its Subsidiaries taken as a whole; (ii) a material impairment of the ability of the Borrower 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 Borrower described in Section 10.01(g); or (iii) a material adverse effect upon the legality, validity, binding effect or enforceability of any Loan Document. 10. 19 "Minimum Amount" has the meaning set forth in Section 2.06. "Multiemployer Plan" means a "multiemployer plan" as defined in Sections 3(37) and 4001(a)(3) of ERISA. "Note" has the meaning set forth in Section 2.05. "Notice" means a Notice of Borrowing, a Notice of Conversion or Continuation or a Notice of Prepayment, as the case may be. "Notice of Borrowing" has the meaning set forth in Section 2.02(a). "Notice of Conversion or Continuation" has the meaning set forth in Section 3.05(c). "Notice of Prepayment" has the meaning set forth in Section 4.03(b). "Obligations" means the indebtedness, liabilities and other obligations of the Borrower to the Agent or any Bank under or in connection with the Loan Documents, including all Loans, all interest accrued thereon, all fees due under this Agreement and all other amounts payable by the Borrower to the Agent or any Bank thereunder or in connection therewith, whether now or hereafter existing or arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. "OECD" means the Organization for Economic Cooperation and Development. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means any employee pension benefit plan covered by Title IV of ERISA (other than a Multiemployer Plan) that is maintained for employees of the Borrower or any ERISA Affiliate or with regard to which the Borrower or an ERISA Affiliate is a contributing sponsor within the meaning of Sections 4001(a)(13) or 4069 of ERISA. "Permitted Acquisition" means any Acquisition of a Person by the Borrower or any Subsidiary for which (i) the sole consideration paid by the Borrower or any Subsidiary, as the case may be, consists of capital stock, or (ii) the total cash consideration paid by the Borrower or any Subsidiary, as the case may be, does not exceed, in the aggregate with all other Acquisitions and all investments under Section 9.04(e)(vi), $500,000,000 during the period from the Closing Date through the Revolving Expiry Date. 11. 20 "Permitted Investments" means any investments selected by the Borrower in accordance with its Corporate Cash Investment Policy as adopted by the Borrower on February 13, 1995 (as the same may be amended from time to time with the approval of the Agent); 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 Agreement listed on Schedule 3, and any substitutions or renewals thereof, provided that (A) any substitute or renewal Lien is limited to the property encumbered by the existing Lien, and (B) 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 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 12. 21 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; (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 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 (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 within the general 13. 22 parameters customary in the industry and incurred in the ordinary course of business in connection with Rate Contracts or portfolio investments maintained with financial intermediaries. "Person" means an individual, corporation, partnership, limited liability company, 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 Borrower sponsors or maintains, or to which the Borrower makes, is making, or is obligated to make contributions, and includes any Pension Plan. "Premises" means any and all real property, including all buildings and improvements now or hereafter located thereon and all appurtenances thereto, now or hereafter owned, leased, occupied or used by the Borrower and its Subsidiaries. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitments divided by the combined Commitments of all Banks (or, if all Commitments have been terminated, the aggregate principal amount of such Bank's Loans divided by the aggregate principal amount of the Loans then held by all Banks). The initial Pro Rata Share of each Bank is set forth opposite such Bank's name in Schedule 1 under the heading "Pro Rata Share." "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. "Regulation D" means Regulation D of the FRB. "Regulatory Change" has the meaning set forth in Section 5.03. "Related Person" has the meaning set forth in Section 11.06. "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. "Required Notice Date" has the meaning set forth in Section 2.07. "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 14. 23 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 any 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. "Revolving Expiry Date" means the third anniversary of the Closing Date. "SEC" means the Securities and Exchange Commission, or any successor thereto. "Senior Debt" means all Indebtedness, other than Subordinated Debt, of the Borrower and its Subsidiaries on a consolidated basis. "Significant Subsidiary" means, at any time, any Subsidiary having at such time total assets, as of the last day of the preceding Fiscal Quarter, having a net book value in excess of $10,000,000 (exclusive of intercompany assets and liabilities), based upon the Borrower's most recent annual or quarterly financial statements delivered to the Agent under Section 9.01(a). "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 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. "Subordinated Debt" means (i) the Subordinated Notes and (ii) any other Indebtedness of the Borrower or any Subsidiary under which principal payments will become due and payable no earlier than the first anniversary of the Revolving Expiry 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 Subordinated Notes shall be deemed to be reasonably acceptable to the Majority Banks for the purposes hereof. "Subordinated Notes" means the Borrower's 5-1/2% Convertible Subordinated Notes Due 2001 and the indenture relating thereto. 15. 24 "Subsidiary" means any corporation, association, partnership, joint venture or other business entity of which more than 50% of the voting stock or other equity interest is owned directly or indirectly by any Person or one or more of the other Subsidiaries of such Person or a combination thereof. "Swap Termination Value" means, in respect of any one or more Rate Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Rate Contracts, (i) for any date on or after the date such Rate Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (ii) for any date prior to the date referenced in clause (a) the amount(s) determined as the mark-to-market value(s) for such Rate Contracts, as determined based upon one or more mid- market or other readily available quotations provided by any recognized dealer in such Rate Contracts (which may include any Bank). "Taxes" has the meaning set forth in Section 6.03. "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. SECTION 1.02 Accounting Principles. (a) Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements, determinations relating to covenants, and other information required to be delivered or determined by the Borrower pursuant to this Agreement 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 date hereof would otherwise affect the calculation of any covenant set forth in Section 9.02, such covenant shall be calculated in accordance with GAAP as in effect immediately prior to such change until an appropriate adjustment can be determined. (b) "Fiscal Year" and "Fiscal Quarter". References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Borrower. 16. 25 SECTION 1.03 Interpretation. In the Loan Documents, 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 thereof, or a schedule or an exhibit thereto, respectively, and 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 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. (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 Agreement or any other Loan Document. (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. (x) This Agreement and the other Loan Documents are the result of negotiations among the Agent, the Borrower and the other parties, have been reviewed by counsel to the Agent, the Borrower and such other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 17. 26 ARTICLE II THE LOANS SECTION 2.01 The Loans. Each Bank severally agrees, on the terms and conditions hereinafter set forth, to make revolving loans (each a "Loan" and, collectively, the "Loans") to the Borrower from time to time on any Business Day during the period from the Closing Date until the Revolving Expiry Date, in an aggregate principal amount up to but not exceeding at any time outstanding such Bank's Commitment. Within the limits of each Bank's Commitment, during such period the Borrower may borrow, repay the Loans in whole or in part, and reborrow, all in accordance with the terms and conditions hereof. SECTION 2.02 Borrowing Procedure. (a) Notice to the Agent. Each Borrowing shall be made upon written or telephonic notice (in the latter case to be confirmed promptly in writing) from the Borrower to the Agent, which notice shall be received by the Agent not later than 10:00 A.M. (California time) on the Required Notice Date. Each such notice shall be in substantially the form of Exhibit B (a "Notice of Borrowing"), shall be irrevocable and binding on the Borrower except as provided in Sections 5.01 and 5.04, and shall specify: (A) the proposed date of the Borrowing, which shall be a Business Day; (B) whether the Borrowing consists of Base Rate Loans or Eurodollar Rate Loans; (C) the aggregate amount of the Borrowing, which shall be in a Minimum Amount; (D) if the Borrowing consists of any Eurodollar Rate Loans, the duration of the initial Interest Period with respect thereto; (E) that no Default exists hereunder; and (F) payment instructions with respect to the funds to be made available to the Borrower as a result of such Borrowing. (b) Notice to the Banks. The Agent shall give each Bank prompt notice by telephone (confirmed promptly in writing) or by facsimile of each Borrowing, specifying the information contained in the Borrower's Notice and such Bank's Pro Rata Share of the Borrowing. On the date of each Borrowing, each Bank shall make available such Bank's Pro Rata Share of such Borrowing, in same day or immediately available funds, to the Agent for the Agent's Account, not later than 12:00 Noon (California time. Upon fulfillment of the applicable conditions set forth in Article VII and after receipt by the Agent of any such funds, and unless other payment instructions are provided by the Borrower, the Agent shall make such funds available to the Borrower by crediting the Borrower's Account with same day or immediately available funds on such Borrowing date. SECTION 2.03 Non-Receipt of Funds. Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank shall not make available to the Agent such Bank's Pro Rata Share of such Borrowing, the Agent may assume that such Bank has made such portion available to the 18. 27 Agent on the date of such Borrowing in accordance with Section 2.02(b) and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Bank shall not have so made such Pro Rata Share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan as part of such Borrowing for purposes of this Agreement. SECTION 2.04 Lending Offices. The Loans made by each Bank may be made from and maintained at such offices of such Bank (each a "Lending Office") as such Bank may from time to time designate (whether or not such office is specified on Schedule 2. A Bank shall not 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. With respect to Eurodollar Rate Loans made from and maintained at any Bank's non- U.S. offices, the obligation of the Borrower to repay such Eurodollar Rate Loans shall nevertheless be to such Bank and shall, for all purposes of this Agreement (including for purposes of the definition of the term "Majority Banks") be deemed made or maintained by it, for the account of any such office. SECTION 2.05 Evidence of Indebtedness. The Loans made by each Bank shall be evidenced by one or more loan accounts maintained by such Bank in accordance with its usual practices. The loan accounts maintained by the Agent and each such Bank shall be rebuttable presumptive evidence of the amount of the Loans made by such Bank to the Borrower and the interest and payments thereon; provided, however, that in case of a discrepancy between the entries in the Agent's books and any Bank's books, such Bank's books shall constitute rebuttable presumptive evidence of the accuracy of the information so recorded. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Loans. At the request of any Bank, the Borrower shall execute and deliver for the account of such Bank a promissory note in substantially the form of Exhibit A, dated the Closing Date, setting forth such Bank's Commitment as the maximum principal amount thereof, as additional evidence of the Indebtedness of the Borrower to such Bank resulting from the Loans made by such Bank (each a "Note" and, collectively, the "Notes"). SECTION 2.06 Minimum Amounts. Any Borrowing, conversion, continuation, Commitment reduction or prepayment of Loans hereunder shall be in an aggregate amount determined as 19. 28 follows (each such specified amount a "Minimum Amount"): (i) any Borrowing or partial prepayment of Base Rate Loans shall be in the amount of $10,000,000 or a greater amount which is an integral multiple of $5,000,000; (ii) any Borrowing, continuation or partial prepayment of, or conversion into, Eurodollar Rate Loans shall be in the amount of $15,000,000 or a greater amount which is an integral multiple of $5,000,000; and (iii) any partial Commitment reduction under Section 4.01(a) shall be in the amount of $15,000,000 or a greater amount which is an integral multiple of $5,000,000. SECTION 2.07 Required Notice. Any Notice hereunder shall be given not later than the date determined as follows (each such specified date a "Required Notice Date"): (i) any Notice with respect to a Borrowing of, or conversion into, Base Rate Loans shall be given at least one Business Day prior to the date of the proposed borrowing or conversion; (ii) any Notice with respect to any Borrowing or continuation of, or conversion into, Eurodollar Rate Loans shall be given at least four Eurodollar Business Days prior to the date of the proposed Borrowing, conversion or continuation; and (iii) any Notice with respect to any prepayment under Section 4.03(a) or Commitment reduction under Section 4.01(a) shall, except as otherwise provided in Section 4.03(b), be given at least five Business Days prior to the proposed prepayment date. ARTICLE III INTEREST AND FEES; CONVERSION OR CONTINUATION SECTION 3.01 Interest. (a) Interest Rate. The Borrower shall pay interest on the unpaid principal amount of each Loan from the date of such Loan until the maturity thereof, at the following rates: (i) during such periods as such Loan is a Base Rate Loan, at a rate per annum equal at all times to the Base Rate plus the Applicable Margin; and (ii) during such periods as such Loan is a Eurodollar Rate Loan, at a rate per annum equal at all times during each Interest Period for such Eurodollar Rate Loan to the Eurodollar Rate for such Interest Period plus the Applicable Margin. (b) Interest Periods. The initial and each subsequent Interest Period for the Eurodollar Rate Loans shall be a period of one, two, three or six months, or such other period as requested by the Borrower and acceptable to the Banks. The determination of Interest Periods shall be subject to the following provisions: (A) in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; 20. 29 (B) if any Interest Period would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (C) no Interest Period shall extend beyond the Revolving Expiry Date; (D) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the ending calendar month of such Interest Period) shall end on the last Business Day of the ending calendar month of such Interest Period; and (E) there shall be no more than three Interest Periods in effect at any one time. (c) Interest Payment Dates. Subject to Section 3.02, interest on the Loans shall be payable in arrears at the following times: (i) interest on each Base Rate Loan shall be payable quarterly on the last Business Day in each calendar quarter, on the date of any prepayment or conversion of any such Base Rate Loan, and at maturity; and (ii) interest on each Eurodollar Rate Loan shall be payable on the last day of each Interest Period for such Eurodollar Rate Loan, provided that (A) in the case of any such Interest Period which is greater than three months, interest on such Eurodollar Rate Loan shall be payable on each date that is three months, or an integral multiple thereof, after the beginning of such Interest Period, and on the last day of such Interest Period, and (B) if any prepayment, conversion, or continuation is effected other than on the last day of such Interest Period, accrued interest on such Eurodollar Rate Loan shall be due on such prepayment, conversion or continuation date as to the principal amount of such Eurodollar Rate Loan prepaid, converted or continued. (d) Notice to the Borrower and the Banks. Each determination by the Agent hereunder of a rate of interest and of any change therein, including any changes in (i) the Applicable Margin, (ii) the Base Rate during any periods in which Base Rate Loans shall be outstanding, and (iii) the Eurodollar Reserve Percentage (if any) during any periods in which Eurodollar Rate Loans shall be outstanding, in the absence of manifest error shall be conclusive and binding on the parties hereto and shall be promptly notified by the Agent to the Borrower and the Banks. Such notice shall set forth in reasonable detail the basis for any such determination or change. The failure of the Agent to give any such notice specified in this subsection shall not 21. 30 affect the Borrower's obligation to pay any interest or fees hereunder. SECTION 3.02 Default Rate of Interest. In the event that any amount of principal of or interest on any Loan, or any other amount payable hereunder or under the Loan Documents, is not paid in full when due (whether at stated maturity, by acceleration or otherwise), the Borrower shall pay interest on such unpaid principal, interest or other amount, from the date such amount becomes due until the date such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Base Rate plus 2% per annum. Additionally, and without limiting the foregoing, during the existence of any Event of Default and upon the request of the Majority Banks, the Borrower shall pay interest on the unpaid principal amount of all Loans, at a rate per annum which is determined by adding 2% per annum to the Applicable Margin then in effect for such Loans; provided, however, that, on and after the expiration of any Interest Period applicable to any Eurodollar Rate Loan outstanding on the date of occurrence of such Event of Default, the Borrower shall pay interest on the principal amount of such Loan, during the continuation of such Event of Default, at a rate per annum equal at all times to the Base Rate plus 2% per annum. SECTION 3.03 Fees. (a) Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Commitment as in effect from time to time from Closing Date until the Revolving Expiry Date at a rate per annum equal to the Applicable Fee Amount, payable quarterly in arrears on the last Business Day of each calendar quarter, commencing on the first such date after the Closing Date, and on the earlier of the date such Commitment is terminated hereunder or the Revolving Expiry Date. (b) Agency and Arrangement Fees. The Borrower agrees to pay to the Agent and to the Arranger for their own accounts such agency and arrangement fees in the amounts and at the times specified in the Fee Letter. (c) Fees Nonrefundable. All fees payable under this Section 3.03 shall be nonrefundable. SECTION 3.04 Computations. All computations of interest based upon the Base Rate (when it is determined by reference to ABN AMRO's Prime Commercial Lending Rate) shall be made on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days occurring in the period for which such interest is payable. All other computations of any interest and of any commitment fee shall be made on the basis of a year of 360 days for the actual number of days occurring in the period for which such interest or commitment fee is payable, which results in more interest being paid than if computed on the 22. 31 basis of a 365-day year. Notwithstanding the foregoing, if any Loan is repaid on the same day on which it is made, such day shall be included in computing interest on such Loan. SECTION 3.05 Conversion or Continuation. (a) Election. The Borrower may elect (i) to convert all or any part of (A) outstanding Base Rate Loans into Eurodollar Rate Loans, or (B) outstanding Eurodollar Rate Loans into Base Rate Loans; or (ii) to continue all or any part of a Loan with one type of interest rate as such; provided, however, that so long as the aggregate amount of Eurodollar Rate Loans in respect of any Borrowing shall have been reduced, by payment, prepayment, or conversion of part thereof to be less than $15,000,000, such Eurodollar Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Borrower to continue such Loans as, and convert such Loans into, Eurodollar Rate Loans, as the case may be, shall terminate. The continued or converted Base Rate and Eurodollar Rate Loans shall be allocated to the Banks ratably in accordance with their Pro Rata Shares. Any conversion or continuation of Eurodollar Rate Loans shall be made on the last day of the current Interest Period for such Eurodollar Rate Loans. No outstanding Loan may be converted into or continued as a Eurodollar Rate Loan if any Default has occurred and is continuing. (b) Automatic Conversion. On the last day of any Interest Period for any Eurodollar Rate Loans, such Eurodollar Rate Loans shall, if not repaid, automatically convert into Base Rate Loans unless the Borrower shall have made a timely election to continue such Eurodollar Rate Loans as such for an additional Interest Period or to convert such Eurodollar Rate Loans, in each case as provided in subsection (a). (c) Notice to the Agent. The conversion or continuation of any Loans contemplated by subsection (a) shall be made upon written or telephonic notice (in the latter case to be confirmed promptly in writing) from the Borrower to the Agent, which notice shall be received by the Agent not later than 10:00 A.M. (California time) on the Required Notice Date. Each such notice (a "Notice of Conversion or Continuation") shall, except as provided in Sections 5.01 and 5.04, be irrevocable and binding on the Borrower, shall refer to this Agreement and shall specify: (i) the proposed date of the conversion or continuation, which shall be a Business Day; (ii) the outstanding Loans (or parts thereof) to be converted into or continued as Base Rate or Eurodollar Rate Loans; (iii) the aggregate amount of the Loans which are the subject of such continuation or conversion, which shall be in a Minimum Amount; (iv) if the conversion or continuation consists of any Eurodollar Rate Loans, the duration of the Interest Period with respect thereto; and (v) that no Default exists hereunder. 23. 32 (d) Notice to the Banks. The Agent shall give each Bank prompt notice by telephone (confirmed promptly in writing) or by facsimile of (i) the proposed conversion or continuation of any Loans, specifying the information contained in the Borrower's Notice of Conversion or Continuation and such Bank's Pro Rata Share thereof or (ii), if timely notice was not received from the Borrower, the details of any automatic conversion under subsection (b). SECTION 3.06 Replacement of Reference Banks. If the Loan of any Eurodollar Reference Bank is prepaid in full or its Commitment shall terminate (otherwise than on termination of all the Commitments), or if a Eurodollar Reference Bank transfers its Loans in full to an unaffiliated institution or otherwise shall cease to be a Bank hereunder, the Agent shall, in consultation with the Borrower and with the approval of the Majority Banks, appoint another similarly situated Bank to replace such Bank as a Eurodollar Reference Bank. SECTION 3.07 Highest Lawful Rate. Anything herein to the contrary notwithstanding, if during any period for which interest is computed hereunder, the applicable interest rate, together with all fees, charges and other payments which are treated as interest under applicable law, as provided for herein or in any other Loan Document, would exceed the maximum rate of interest which may be charged, contracted for, reserved, received or collected by any Bank in connection with this Agreement under applicable law (the "Maximum Rate"), the Borrower shall not be obligated to pay, and such Bank shall not be entitled to charge, collect, receive, reserve or take, interest in excess of the Maximum Rate, and during any such period the interest payable hereunder shall be limited to the Maximum Rate. ARTICLE IV REDUCTION OF COMMITMENTS; REPAYMENT; PREPAYMENT SECTION 4.01 Reduction or Termination of the Commitments. (a) Optional Reduction or Termination. The Borrower may, upon prior notice to the Agent as provided herein, terminate in whole or reduce ratably in part, as of the date specified by the Borrower in such notice, any then unused portion of the respective Commitments, provided that each partial reduction shall be in a Minimum Amount. (b) Mandatory Termination. The Commitments shall terminate in full on the Revolving Expiry Date. (c) Notice. The Agent shall give each Bank prompt notice of any termination or reduction of the Commitments under this Section 4.01. 24. 33 (d) Adjustment of Commitment Fee; No Reinstatement. From the effective date of any reduction or termination prior to the Revolving Expiry Date, the commitment fee payable under Section 3.03(a) shall be computed on the basis of the Commitments as so reduced or terminated. Once reduced or terminated, the Commitments may not be increased or otherwise reinstated. SECTION 4.02 Repayment of the Loans. The Borrower shall repay to the Banks in full on the Revolving Expiry Date the aggregate principal amount of the Loans outstanding on such date. SECTION 4.03 Prepayments. (a) Optional Prepayments. The Borrower may, upon prior notice to the Agent not later than the Required Notice Date, prepay the outstanding amount of the Loans in whole or ratably in part, without premium or penalty. Partial prepayments shall be in Minimum Amounts. (b) Notice; Application. The notice given of any prepayment (a "Notice of Prepayment") shall specify the date and amount of the prepayment and whether the prepayment is of Base Rate or Eurodollar Rate Loans or a combination thereof, and if of a combination thereof the amount of the prepayment allocable to each. Upon receipt of the Notice of Prepayment the Agent shall promptly notify each Bank thereof. If the Notice of Prepayment is given, the Borrower shall make such prepayment and the prepayment amount specified in such Notice shall be due and payable on the date specified therein, with accrued interest to such date on the amount prepaid. ARTICLE V YIELD PROTECTION AND ILLEGALITY SECTION 5.01 Inability to Determine Rates. If the Agent shall determine that adequate and reasonable means do not exist to ascertain the Eurodollar Rate, or the Majority Banks shall determine that the Eurodollar Rate does not accurately reflect the cost to the Banks of making or maintaining Eurodollar Rate Loans, then the Agent shall give telephonic notice (promptly confirmed in writing) to the Borrower and each Bank of such determination. Such notice shall specify the basis for such determination and shall, in the absence of manifest error, be conclusive and binding for all purposes. Thereafter, the obligation of the Banks to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the Agent (upon the instructions of the Majority Banks) revokes such notice. Upon receipt of such notice, the Borrower may revoke any Notice then submitted by it. If the Borrower does not revoke such Notice, the Banks shall make, convert or continue Loans, as proposed by the Borrower, in the amount specified in the Notice submitted by the Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans. 25. 34 SECTION 5.02 Funding Losses. In addition to such amounts as are required to be paid by the Borrower pursuant to Section 5.03, the Borrower shall compensate each Bank, promptly within 30 days following receipt of such Bank's written request made to the Borrower (with a copy to the Agent), for all losses, costs and expenses (including any loss or expense incurred by such Bank in obtaining, liquidating or re-employing deposits or other funds to fund or maintain its Eurodollar Rate Loans), if any, which such Bank sustains: (i) if the Borrower repays, converts or prepays any Eurodollar Rate Loan on a date other than the last day of an Interest Period for such Eurodollar Rate Loan (whether as a result of an optional prepayment, mandatory prepayment, a payment as a result of acceleration or otherwise); (ii) if the Borrower fails to borrow a Eurodollar Rate Loan after giving its Notice (other than as a result of the operation of Section 5.01 or 5.04); (iii) if the Borrower fails to convert into or continue a Eurodollar Rate Loan after giving its Notice (other than as a result of the operation of Section 5.01 or 5.04); or (iv) if the Borrower fails to prepay a Eurodollar Rate Loan after giving its Notice. Any such request for compensation shall set forth the basis for requesting such compensation and shall, in the absence of manifest error, be conclusive and binding for all purposes. SECTION 5.03 Regulatory Changes. (a) Increased Costs. If after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (a "Regulatory Change"), or compliance by any Bank (or its Lending Office) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including any such requirement imposed by the FRB, but excluding with respect to any Eurodollar Rate Loan any such requirement included in the calculation of the Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank's Lending Office or shall impose on any Bank (or its Lending Office) or on the United States market for certificates of deposit or the interbank eurodollar market any other condition affecting its Eurodollar Rate Loans or its obligation to make Eurodollar Rate Loans, and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making or maintaining any Eurodollar Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement with respect thereto, by an amount deemed by such Bank to be material, then from time to time, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amounts as shall compensate such Bank for such increased cost or reduction. 26. 35 (b) Capital Requirements. If any Bank shall have determined that any Regulatory Change regarding capital adequacy, or compliance by such Bank (or any corporation controlling such Bank) with any request, guideline or directive regarding capital adequacy (whether or not having the force of law) of any Governmental Authority, has or shall have the effect of reducing the rate of return on such Bank's or such corporation's capital as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation would have achieved but for such adoption, change or compliance (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy), by an amount deemed by such Bank to be material, then from time to time, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amounts as shall compensate such Bank for such reduction. (c) Requests. Any such request for compensation by a Bank under this Section 5.03 shall set forth the basis of calculation thereof and shall, in the absence of manifest error, be conclusive and binding for all purposes. In determining the amount of such compensation, such Bank may use any reasonable averaging and attribution methods. SECTION 5.04 Illegality. If any Bank shall determine that it has become unlawful, as a result of any Regulatory Change, for such Bank to make, convert into or maintain Eurodollar Rate Loans as contemplated by this Agreement, such Bank shall promptly give notice of such determination to the Borrower (through the Agent), and (i) the obligation of such Bank to make or convert into Eurodollar Rate Loans, as the case may be, shall be suspended until such Bank gives notice that the circumstances causing such suspension no longer exist; and (ii) each of such Bank's outstanding Eurodollar Rate Loans, as the case may be, shall, if requested by such Bank, be converted into a Base Rate Loan not later than upon expiration of the Interest Period related to such Eurodollar Rate Loan, or, if earlier, on such date as may be required by the applicable Regulatory Change, as shall be specified in such request. Any such determination shall, in the absence of manifest error, be conclusive and binding for all purposes. SECTION 5.05 Funding Assumptions. Solely for purposes of calculating amounts payable by the Borrower to the Banks under this Article V, each Eurodollar Rate Loan made by a Bank (and any related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Interbank Rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded. 27. 36 SECTION 5.06 Obligation to Mitigate. Each Bank agrees that as promptly as practicable after it becomes aware of the occurrence of an event that would entitle it to give notice pursuant to Section 5.03(a) or 5.04, and in any event if so requested by the Borrower, each Bank shall use reasonable efforts to make, fund or maintain its affected Eurodollar Rate Loans through another Lending Office if as a result thereof the increased costs would be avoided or materially reduced or the illegality would thereby cease to exist and if, in the reasonable opinion of such Bank, the making, funding or maintaining of such Eurodollar Rate Loans through such other Lending Office would not in any material respect be disadvantageous to such Bank or contrary to such Bank's normal banking practices. SECTION 5.07 Substitution of Banks. Upon the receipt by the Borrower from any Bank (an "Affected Bank") of a request for compensation under Sections 5.03, a notice under Section 5.05 or a request for payment under Section 6.03, the Borrower may (i) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitments; or (ii) designate an Eligible Assignee satisfactory to the Borrower to acquire and assume all or part of such Affected Bank's Loans and Commitment (a "Replacement Bank"). Any such designation of a Replacement Bank under clause (ii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld). In connection with any such assumption (A) the Replacement Bank shall pay to the Affected Bank in immediately available funds on the date of the assignment the principal amount of the Loans made by the Affected Bank hereunder which are being acquired by the Replacement Bank, and (B) the Borrower shall pay to the affected Bank in immediately available funds on the date of the assignment the interest accrued to the date of the assignment on the Loans which are being acquired by the Replacement Bank and all other amounts then accrued for the Affected Bank's account or owed to it hereunder with respect to such Loans, including any amounts owing under Section 5.02. ARTICLE VI PAYMENTS SECTION 6.01 Pro Rata Treatment. Except as otherwise provided in this Agreement, each Borrowing hereunder, each Commitment reduction, each payment (including each prepayment) by the Borrower on account of the principal of and interest on the Loans and on account of any commitment fee, and each conversion or continuation of Loans, shall be made ratably in accordance with the respective Pro Rata Shares of the Banks. SECTION 6.02 Payments. (a) Payments. The Borrower shall make each payment under the Loan Documents, unconditionally in full without set-off, counterclaim or other defense, not later than 10:00 A.M. (California time) on the day when due to the Agent in Dollars and 28. 37 in same day or immediately available funds, to the Agent's Account. The Agent shall promptly thereafter distribute like funds relating to the payment of principal or interest, commitment fee or any other amounts payable to the Banks, ratably (except as a result of the operation of Article V) to the Banks in accordance with their Pro Rata Shares. (b) Authorization to Agent. To effectuate any payment of principal and interest by the Borrower hereunder, the Agent shall, and the Borrower hereby authorizes the Agent to, charge any deposit account of the Borrower with the Agent for the amount of such payment on the due date thereof. If the collected credit balance of such account on such date shall be insufficient to cover the full payment due, the Borrower shall immediately upon demand remit to the Agent the full amount of such deficiency. The Agent may (but shall not be obligated to), and the Borrower hereby authorizes the Agent to, charge any such account of the Borrower for the amount of any other payment which is not made by the time specified in subsection (a). The Agent shall promptly notify the Borrower after charging any such account. (c) Application. (i) Unless the Agent shall receive a timely election by the Borrower with respect to the application of any principal payments, each payment of principal by the Borrower shall be applied (A) first, to the Base Rate Loans then outstanding, and (B) second, to the Eurodollar Rate Loans then outstanding (in such manner as the Agent shall determine in its sole discretion). (ii) Each payment by or on behalf of the Borrower hereunder shall, unless a specific determination is made by the Agent and the Majority Banks with respect thereto, be applied in the following order: (A) first, to any fees, costs, expenses and other amounts due the Agent; (B) second, to any fees, costs, expenses and other amounts (other than principal and interest) due the Banks; (C) third, to accrued and unpaid interest due the Banks; and (D) fourth, to principal due the Banks. (d) Extension. Whenever any payment hereunder shall be stated to be due, or whenever any Interest Payment Date or any other date specified hereunder would otherwise occur, on a day other than a Business Day, then, except as otherwise provided herein, such payment shall be made, and such Interest Payment Date or other date shall occur, on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest or commitment fee hereunder. SECTION 6.03 Taxes. (a) No Reduction of Payments. The Borrower shall pay all amounts of principal, interest, fees and other amounts due under the Loan Documents free and clear of, and without reduction for or on account of, any present and future taxes, levies, imposts, duties, fees, assessments, charges, deductions or 29. 38 withholdings and all liabilities with respect thereto excluding, in the case of each Bank and the Agent, income and franchise taxes imposed on it by the jurisdiction under the laws of which such Bank or the Agent is organized or in which its principal executive offices may be located or any political subdivision or taxing authority thereof or therein, and by the jurisdiction of such Bank's Lending Office and any political subdivision or taxing authority thereof or therein (all such nonexcluded taxes, levies, imposts, duties, fees, assessments, charges, deductions, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be required by law to be deducted or withheld from any payment, the Borrower shall increase the amount paid so that the respective Bank or the Agent receives when due (and is entitled to retain), after deduction or withholding for or on account of such Taxes (including deductions or withholdings applicable to additional sums payable under this Section 6.03), the full amount of the payment provided for in the Loan Documents. (b) Deduction or Withholding; Tax Receipts. If the Borrower makes any payment hereunder in respect of which it is required by law to make any deduction or withholding, it shall pay the full amount to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and promptly thereafter shall furnish to the Agent (for itself or for redelivery to the Bank to or for the account of which such payment was made) an original or certified copy of a receipt evidencing payment thereof, together with such other information and documents as the Agent or any Bank (through the Agent) may reasonably request. (c) Indemnity. If any Bank or the Agent is required by law to make any payment on account of Taxes, or any liability in respect of any Tax is imposed, levied or assessed against any Bank or the Agent, the Borrower shall indemnify the Agent and the Banks, within 30 days following demand and except as provided in subsection (f) below, for and against such payment or liability, together with any incremental taxes, interest or penalties, and all costs and expenses, payable or incurred in connection therewith, including Taxes imposed on amounts payable under this Section 6.03, whether or not such payment or liability was correctly or legally asserted. A certificate of the Agent or any Bank as to the amount of any such payment shall, in the absence of manifest error, be conclusive and binding for all purposes. (d) Forms 1001 and 4224. Each Bank that is incorporated under the laws of any jurisdiction outside the United States agrees to deliver to the Agent and the Borrower on or prior to the Closing Date, and in a timely fashion thereafter, Form 1001, Form 4224 or such other documents and forms of the United States Internal Revenue Service, duly executed and completed by such Bank, as are required under United States law to establish such Bank's status for United States withholding tax purposes. 30. 39 (e) Mitigation. Each Bank agrees that as promptly as practicable after it becomes aware of the occurrence of an event that would cause the Borrower to make any payment in respect of Taxes to such Bank or a payment in indemnification with respect to any Taxes, and in any event if so requested by the Borrower following such occurrence, each Bank shall use reasonable efforts to make, fund or maintain its affected Loan (or relevant part thereof) through another Lending Office if as a result thereof the additional amounts so payable by the Borrower would be avoided or materially reduced and if, in the reasonable opinion of such Bank, the making, funding or maintaining of such Loan (or relevant part thereof) through such other Lending Office would not in any material respect be disadvantageous to such Bank or contrary to such Bank's normal banking practices. (f) Exceptions to Payment of Additional Amounts. The Borrower will not be required to pay any additional amounts in respect of Taxes consisting of U.S. Federal income tax pursuant to this Section 6.03 to any Bank for the account of any Lending Office of such Bank: (i) if the obligation to pay such additional amounts would not have arisen but for a failure by such Bank to comply with its obligations under subsection (d) in respect of such Lending Office; (ii) if such Bank shall have delivered to the Agent a Form 4224 in respect of such Lending Office pursuant to subsection (d), and such Bank shall not at any time be entitled to exemption from deduction or withholding of U.S. Federal income tax in respect of payments by Borrower for the account of such Lending Office for any reason other than a change in U.S. law or regulations or any applicable tax treaty or in the official interpretation of such law, treaty or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224; or (iii) if the Bank shall have delivered to the Agent a Form 1001 in respect of such Lending Office pursuant to subsection (d), and such Bank shall not at any time be entitled to exemption from deduction or withholding of U.S. Federal income tax in respect of payments by Borrower hereunder for the account of such Lending Office for any reason other than a change in U.S. law or regulations or any applicable tax treaty or in the official interpretation of any such law, treaty or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001. SECTION 6.04 Non-Receipt of Funds. Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to any of the Banks hereunder that the Borrower shall not make such payment in full, the Agent may 31. 40 assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 6.05 Sharing of Payments. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Loans made by it (other than pursuant to a provision hereof providing for non-pro rata treatment) in excess of its Pro Rata Share of payments on account of the Loans obtained by all the Banks, such Bank shall forthwith advise the Agent of the receipt of such payment, and within five Business Days of such receipt purchase from the other Banks (through the Agent), without recourse, such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them in accordance with the respective Pro Rata Shares of the Banks; provided, however, that if all or any portion of such excess payment is thereafter recovered by or on behalf of the Borrower from such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 6.05 may exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. No documentation other than notices and the like referred to in this Section 6.05 shall be required to implement the terms of this Section 6.05. The Agent shall keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section 6.05 and shall in each case notify the Banks following any such purchases. ARTICLE VII CONDITIONS PRECEDENT SECTION 7.01 Conditions Precedent to the Initial Loans. The obligation of each Bank to make its initial Loan shall be subject to the satisfaction of each of the following conditions precedent on or before the Closing Date: (a) Fees and Expenses. The Borrower shall have paid (i) all fees then due in accordance with Section 3.03 and (ii) all invoiced costs and expenses then due in accordance with Section 12.04(a). 32. 41 (b) Loan Documents. The Agent shall have received a copy of this Agreement duly executed by the parties hereto, and any Notes for the Banks requesting such Notes duly executed by the Borrower. (c) Additional Closing Documents and Actions. The Agent shall have received the following, in form and substance satisfactory to it and each of the Banks: (i) evidence that all (A) authorizations or approvals of any Governmental Authority and (B) approvals or consents of any other Person, required in connection with the execution, delivery and performance of the Loan Documents shall have been obtained; and (ii) a certificate of a Responsible Officer of the Borrower, dated the Closing Date, stating that (A) the representations and warranties contained in Section 8.01 and in the other Loan Documents are true and correct on and as of the date of such certificate as though made on and as of such date and (B) on and as of the Closing Date, no Default shall have occurred and be continuing or shall result from the initial Borrowing. (d) Corporate Documents. The Agent shall have received the following, in form and substance satisfactory to it: (i) certified copies of the certificate of incorporation of the Borrower, together with certificates as to good standing and tax status, from the Secretary of State or other Governmental Authority, as applicable, of the Borrower's state of incorporation and certificates from the Secretary of State or other Governmental Authority, as applicable, of California as to the Borrower's status as a foreign corporation and tax status, each dated as of a recent date prior to the Closing Date; and (ii) a certificate of the Secretary or Assistant Secretary of the Borrower, dated the Closing Date, certifying (A) copies of the bylaws of the Borrower and the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of the Loan Documents and (B) the incumbency, authority and signatures of each officer of the Borrower authorized to execute and deliver the Loan Documents and act with respect thereto, upon which certificate the Agent and the Banks may conclusively rely until the Agent shall have received a further certificate of the Secretary or an Assistant Secretary of the Borrower cancelling or amending such prior certificate. (e) Legal Opinions. The Agent shall have received (i) an opinion of the General Counsel of the Borrower, dated the Closing Date, in substantially the form of Exhibit D; and (ii) an opinion of Brobeck, Phleger & Harrison LLP in form and substance satisfactory to the Agent. 33. 42 (f) Compliance Certificate. The Agent shall have received a completed Compliance Certificate, dated the Closing Date, for the immediately preceding Fiscal Quarter. SECTION 7.02 Conditions Precedent to All Loans. The obligation of each Bank to make a Loan on the occasion of each Borrowing (including the initial Borrowing) shall be subject to the satisfaction of each of the following conditions precedent: (a) Notice. The Borrower shall have given the Notice of Borrowing as provided in Section 2.02(a). (b) Material Adverse Effect. On and as of the date of such Borrowing, there shall have occurred no Material Adverse Effect since December 31, 1995. (c) Representations and Warranties; No Default. On the date of such Borrowing, both before and after giving effect thereto and to the application of proceeds therefrom: (i) the representations and warranties contained in Section 8.01 and in the other Loan Documents shall be true, correct and complete on and as of the date of such Borrowing as though made on and as of such date; and (ii) no Default shall have occurred and be continuing or shall result from such Borrowing. For purposes of this Section 7.02(c), clause (i) shall be deemed instead to refer to the last day of the most recent quarter and year for which financial statements have then been delivered in respect of the representation and warranty made in Section 8.01(q) and shall not be deemed to refer to any other representations and warranties which relate solely to an earlier date (provided that such other representations and warranties shall be true, correct and complete as of such earlier date); and clause (i) shall take into account any amendments to the Schedules and other disclosures made in writing by the Borrower to the Agent and the Banks after the Closing Date and approved by the Agent and the Majority Banks. The giving of any Notice of Borrowing and the acceptance by the Borrower of the proceeds of each Borrowing following the Closing Date shall each be deemed a certification to the Agent and the Banks that on and as of the date of such Borrowing such statements are true. (d) Additional Documents. The Agent shall have received, in form and substance satisfactory to it, such additional approvals, opinions, documents and other information as the Agent or any Bank (through the Agent) may reasonably request. ARTICLE VIII REPRESENTATIONS AND WARRANTIES SECTION 8.01 Representations and Warranties. The Borrower represents and warrants to each Bank and the Agent that: (a) Organization and Powers. Each of the Borrower and its Significant Subsidiaries is a corporation or partnership duly 34. 43 organized or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, 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 result in a Material Adverse Effect and has all requisite power and authority to own its assets and carry on its business and, with respect to the Borrower, to execute, deliver and perform its obligations under the Loan Documents. (b) Authorization; No Conflict. The execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized by all necessary corporate action of the Borrower and do not and will not (i) contravene the terms of the certificate or articles, as the case may be, of incorporation and the bylaws of the Borrower 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 Borrower 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 Borrower. (c) Binding Obligation. The Loan Documents constitute, or when delivered under this Agreement will constitute, legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except to the extent the enforceability thereof 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 Borrower of any of the Loan Documents. (e) No Defaults. Neither the Borrower nor any of its Subsidiaries is in default under any material contract, lease, agreement, judgment, decree or order to which it is a party or by which it or its properties may be bound which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect. The Obligations of the Borrower are "Senior Debt" for purposes of the Subordinated Notes. (f) Title to Properties. The Borrower and each Significant Subsidiary has 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. 35. 44 The property of the Borrower and its Subsidiaries is subject to no Liens, other than Liens permitted under Section 9.04(a). (g) Litigation. Except as set forth in Schedule 5, there are no actions, suits or proceedings pending or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Subsidiaries or the properties of the Borrower or any of its Subsidiaries before any Governmental Authority or arbitrator which if determined adversely to the Borrower or any such Subsidiary would be reasonably likely to result in a Material Adverse Effect. (h) Compliance with Consents and Licenses. Every consent required by the Borrower 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. (i) Compliance with Environmental Laws. Except as set forth in Schedule 6, to the best of the Borrower's knowledge after due investigation, (i) the properties of the Borrower 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 Borrower 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. (j) Governmental Regulation. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act, any state public utilities code or any other federal or state statute or regulation limiting its ability to incur Indebtedness. (k) 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 36. 45 provisions of ERISA, the Code and other federal or state law; (ii) there are no pending, or to the best knowledge of the Borrower, 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 Borrower 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 Borrower 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 Borrower nor any entity under common control with the Borrower in the preceding sentence has ever contributed to any Multiemployer Plan. (l) Significant Subsidiaries. The name and ownership of each Significant Subsidiary of the Borrower on the date of this Agreement is as set forth in Schedule 4. All of the outstanding capital stock of, or other interest in, each such Significant Subsidiary has been validly issued, and is fully paid and nonassessable. (m) Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying "margin stock" (within the meaning of Regulations G or U of the FRB). No part of the proceeds of the Loans will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock, except in compliance with said Regulations G and U. (n) Taxes. The Borrower 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 Borrower or any Subsidiary that would, if made, have a Material Adverse Effect. (o) Patents and Other Rights. Each of the Borrower and its Significant Subsidiaries possesses all permits, franchises, licenses, patents, trademarks, trade names, service marks, copyrights and all rights with respect thereto, free from burdensome restrictions, that are necessary for the ownership, 37. 46 maintenance and operation of its business, except where the failure to obtain any of the foregoing would not reasonably be expected to have a Material Adverse Effect. (p) Insurance. The properties of the Borrower and its Subsidiaries are insured against losses and damages of the kinds and in amounts which are deemed prudent by the Borrower 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. (q) Financial Statements. (i) The audited consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1995, 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 Borrower and its Subsidiaries as at September 30, 1996, 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 Borrower and its Subsidiaries as at such dates and the results of operations of the Borrower 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, 1996 financial statements, to normal year-end adjustments and the absence of notes. (ii) Since December 31, 1995, there has been no Material Adverse Effect. (r) Liabilities. Neither the Borrower nor any of its Subsidiaries has any material liabilities, fixed or contingent, that are not reflected in the financial statements referred to in subsection (q), 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, 1996. (s) Labor Disputes, Etc. There are no strikes, lockouts or other labor disputes against the Borrower or any of its Subsidiaries, or, to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Subsidiaries, which may result in a Material Adverse Effect. (t) Solvency. The Borrower and its Subsidiaries on a consolidated basis are Solvent. (u) Disclosure. None of the representations or warranties made by the Borrower in the Loan Documents as of the date of such representations and warranties, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Borrower or any of its Subsidiaries to the Agent and the Banks in connection with 38. 47 the Loan Documents, 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. ARTICLE IX COVENANTS SECTION 9.01 Reporting Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Commitment, the Borrower agrees that: (a) Financial Statements and Other Reports. The Borrower 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, a consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Quarter, and the related consolidated statements of income, shareholders' equity and cash flows of the Borrower 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, a consolidated balance sheet of the Borrower 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 Borrower 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 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 Borrower 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 Borrower stating that such financial statements fairly present the financial condition of the Borrower and its Subsidiaries as at such date and the results of operations of the Borrower and its Subsidiaries for the period ended on such date and 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 39. 48 (iv) promptly after the giving, sending or filing thereof, copies of all reports, if any, which the Borrower 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 Borrower or any of its Subsidiaries with the SEC or any national securities exchange. (b) Additional Information. The Borrower will furnish to the Agent: (i) promptly after 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 all actions, suits and proceedings before any Governmental Authority or arbitrator pending, or to the best of the Borrower's knowledge, threatened against or affecting the Borrower or any of its Subsidiaries which (A) if adversely determined would involve an aggregate liability of $10,000,000 or more in excess of amounts covered by third-party insurance, or (B) otherwise may have a Material Adverse Effect; (iv) promptly after the Borrower has knowledge or becomes aware thereof, (A) notice of the occurrence of any ERISA Event, together with a copy of any notice of such ERISA 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 Borrower 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 Borrower 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 Borrower 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; 40. 49 (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 45 days of the date thereof, or, if earlier, on the date of delivery of any financial statements pursuant to subsection (a), notice of any change in accounting policies or financial reporting practices by the Borrower or any of its Significant Subsidiaries that is expected to affect (or has affected) materially under U.S. GAAP the consolidated financial condition of the Borrower and its Subsidiaries; (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 Borrower or any of its Subsidiaries which could result in a Material Adverse Effect; (ix) upon the request from time to time of the Agent or any Bank (through the Agent), the Swap Termination Values, together with a description of the method by which such values were determined, relating to any then-outstanding Rate Contracts to which the Borrower or any of its Subsidiaries is party; (x) prompt written notice of any change in the Borrower's Fiscal Year; (xi) prompt written notice of any Person or Subsidiary not identified on Schedule 4 that becomes a Significant Subsidiary after the date of this Agreement; (xii) 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 (xiii) such other information respecting the operations, properties, business or condition (financial or otherwise) of the Borrower or its Significant 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 Borrower setting forth details of the occurrence referred to therein, and stating what action the Borrower proposes to take with respect thereto. SECTION 9.02 Financial Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Commitment, the Borrower agrees that: 41. 50 (a) Senior Debt to Total Capital. The Borrower 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 Fiscal Quarter. (b) Quick Ratio. The Borrower 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 each Fiscal Quarter. (c) Minimum Consolidated Tangible Net Worth. The Borrower will maintain Consolidated Tangible Net Worth (exclusive of the cumulative translation adjustment account as reported in the consolidated balance sheet of the Borrower and its Subsidiaries as of such date) as of the end of each Fiscal Quarter of not less than (i) $997,000,000 plus (ii) 100% of the net proceeds received by the Borrower 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 Borrower or any Subsidiary after September 30, 1995, plus (iii) 80% of positive Consolidated Net Income, if any, for each Fiscal Quarter elapsed after September 30, 1995, minus (iv) 80% of total goodwill generated by the Borrower's Permitted Acquisitions from September 30, 1996, if any, and minus (v) 100% of restructuring and acquisition charges related to the Borrower's Permitted Acquisitions from September 30, 1996 (provided that any such restructuring or acquisition charges are expensed in the same fiscal quarter during which the applicable Permitted Acquisition is completed). (d) Debt Service Coverage Ratio. The Borrower will maintain a ratio of (i) the sum of Consolidated EBITDA plus Consolidated Rental Expense to (ii) 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, calculated as of the end of such period. (e) Subordinated Debt. The Borrower will not permit Subordinated Debt of the Borrower and its consolidated Subsidiaries to exceed (i) $500,000,000 at any time during the 1996 Fiscal Year or (ii) $750,000,000 at any time thereafter; and the Borrower will not, and will 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 9.03 Additional Affirmative Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Commitment, the Borrower agrees that: (a) Preservation of Corporate Existence, Etc. The Borrower shall, and shall cause each Subsidiary to: 42. 51 (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 (A) in connection with transactions permitted by Section 9.04 and (B) in the case of any Subsidiary 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 to the extent that the failure to obtain or maintain the foregoing would not reasonably be expected to have a Material Adverse Effect; and (a) 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. (b) Payment of Taxes, Etc. The Borrower 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 Borrower 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. (c) Licenses. The Borrower 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. (d) Maintenance of Property. Except as otherwise permitted under Section 9.04(c) or Section 9.04(d), the Borrower shall, 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. 43. 52 (e) Insurance. The Borrower 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 Borrower in its reasonable business judgment and within the general parameters customary among similarly situated businesses in the industry. (f) Payment of Indebtedness. The Borrower shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all Indebtedness 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. (g) Compliance with Laws. The Borrower 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. (h) Compliance with ERISA. The Borrower shall, and shall cause each of its ERISA Affiliates to: (i) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (ii) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (iii) make all required contributions to any Plan subject to Section 412 of the Code. (i) Inspection of Property and Books and Records. The Borrower 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 Borrower and such Subsidiary. The Borrower 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 Borrower and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Borrower; provided, however, that (i) unless an Event of Default shall have occurred and be continuing, (A) the Borrower shall be responsible under this subsection (i) 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 Borrower, and (C) physical inspections of the Borrower's or any Subsidiary's facilities in 44. 53 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 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 Borrower at any time during normal business hours, without advance notice and without being subject to any of the other restrictions described in clause (i). (j) Use of Proceeds. The Borrower will use the proceeds of the Loans solely for general corporate purposes, including for working capital, capital expenditures, Permitted Investments and Permitted Acquisitions. If the Borrower uses the proceeds of the Loans to purchase or carry "margin stock" (within the meaning of Regulations G or U of the FRB) or extend credit to others for the purpose of purchasing or carrying margin stock, the Borrower will do so only in compliance with said Regulations G and U and only if not more than 20% of the value of the assets of the Borrower and its Subsidiaries on a consolidated basis consists of margin stock. (k) Further Assurances and Additional Acts. The Borrower will 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 necessary or appropriate to effectuate the purposes of the Loan Documents, and promptly provide the Agent with evidence of the foregoing satisfactory in form and substance to the Agent or the Majority Banks. SECTION 9.04 Negative Covenants. So long as any of the Obligations shall remain unpaid or any Bank shall have any Commitment, the Borrower agrees that: (a) Liens. The Borrower 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 determined as of the end of the next preceding Fiscal Quarter (or Fiscal Year, as the case may be). (b) Change in Nature of Business. The Borrower 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) Restrictions on Fundamental Changes. The Borrower will not, and will not permit any of its Subsidiaries to, merge with or consolidate into, or acquire all or substantially all of 45. 54 the assets of, any Person, or sell, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets, except that: (i) any of the Borrower's Subsidiaries may merge with, consolidate into or transfer all or substantially all of its assets to another of the Borrower's Subsidiaries or to the Borrower and in connection therewith such Subsidiary may be liquidated or dissolved, provided that (A) if the transaction involves the Borrower, the Borrower shall be the surviving Person, and (B) if any transaction shall be between a non-wholly owned Subsidiary and a wholly owned Subsidiary, the wholly owned Subsidiary shall be the continuing or surviving Person, and provided further that no Material Adverse Effect or Default shall result therefrom; (ii) the Borrower or any of its Subsidiaries may sell or dispose of assets in accordance with the provisions of subsection (d); (iii) the Borrower or any of its Subsidiaries may make any investment permitted by subsection (e); and (iv) the Borrower may merge with or consolidate into any other Person pursuant to an Acquisition permitted by subsection (e), provided that (A) the Borrower is the surviving Person, (B) no such merger or consolidation shall be made while there exists a Default or if a Default or Material Adverse Effect would occur as a result thereof, and (C) the Borrower shall have complied with the notice and other requirements of subsection (e) with respect to any Acquisition. (d) Sales of Assets. The Borrower 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; (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 Borrower; 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 Borrower and its Subsidiaries, determined as of the end of the next preceding Fiscal Quarter (or Fiscal Year, as 46. 55 the case may be), and (C) the sole consideration received for such sales shall be cash; (iv) sales or other dispositions of assets outside the ordinary course of business which do not constitute Substantial Assets; and (v) sales or other dispositions of Permitted Investments. 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 Borrower immediately preceding the date of determination. (e) Loans and Investments. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Acquisition or otherwise extend any credit to, guarantee the obligations of or make any additional investments in or acquire any interest 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, or guarantees of the obligations of, Subsidiaries; (iv) Permitted Acquisitions; (v) employee loans and guarantees in accordance with the Borrower's usual and customary practices with respect thereto; or (vi) additional investments not exceeding, in the aggregate with all such investments and all Acquisitions, $500,000,000 during the period from the Closing Date through the Revolving Expiry Date; provided that in the case of an Acquisition or an investment referred to in clause (vi) above, (A) no such Acquisition or investment shall be made while there exists a Default or if a Default or Material Adverse Effect would occur as a result thereof, and (B) the acquired or other Person in which any such Acquisition or investment is made shall be in the electronics business or other business incidental or reasonably related thereto. 47. 56 (f) Distributions. The Borrower 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 Borrower, except that the Borrower may: (i) declare and deliver dividends and distributions payable only in common stock of the Borrower; (ii) purchase shares of its capital stock from time to time in connection with the issuance of shares under the Borrower's employee stock option plans; (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 Fiscal Quarters. (g) Transactions with Related Parties. The Borrower 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 Borrower's or such Subsidiary's business, including a transaction in the ordinary course of business between or among the Borrower and one or more of its Subsidiaries, and (ii) any other transaction which is upon fair and reasonable terms not less favorable to the Borrower 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 subsection (g), the sale, transfer or disposition of more than 30% of its assets (in any transaction or a series of related transactions) by the Borrower or any Subsidiary shall be deemed to be outside the ordinary course of business. (h) Accounting Changes. The Borrower will not, and will not suffer or permit any of its Subsidiaries to, make any 48. 57 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). ARTICLE X EVENTS OF DEFAULT SECTION 10.01 Events of Default. Any of the following events which shall occur shall constitute an "Event of Default": (a) Payments. The Borrower shall fail to pay (i) when due any amount of principal of any Loan or Note, or (ii) within five Business Days after the same becomes due, any interest, fee or other amount payable hereunder or under any of the Loan Documents. (b) Representations and Warranties. Any representation or warranty by the Borrower made herein or which is contained in any certificate, document or financial or other statement by the Borrower or any Responsible Officer of the Borrower, furnished at any time under or in connection with this Agreement or any other Loan Document, is incorrect in any material respect, on or as of the date made. (c) Failure by Borrower to Perform Certain Covenants. The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 9.02 or Section 9.04. (d) Failure by Borrower to Perform Other Covenants. The Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any other Loan Document on its part to be performed or observed and any such failure shall remain unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer of the Borrower knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to the Borrower by the Agent or any Bank. (e) Insolvency; Voluntary Proceedings. The Borrower 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. (f) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Borrower or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a sub- 49. 58 stantial part of the Borrower'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 Borrower 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; or (iii) the Borrower 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. (g) Default Under Other Indebtedness. The Borrower 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 Loans) 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 performed 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 Borrower 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 Borrower or such Subsidiary. (h) Judgments. (i) A final nonappealable judgment or order for the payment of money against the Borrower 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 Borrower or any such Subsidiary which has or would reasonably be expected to have a Material Adverse Effect. (i) Process Issued. A warrant of attachment, execution, distraint, or similar process against any substantial part of the assets of the Borrower or any of its Subsidiaries is issued which remains undismissed or undischarged for a period of 50. 59 30 days, if as a result thereof there is reasonably expected to occur a Material Adverse Effect. (j) Seizure. All or a material part of the undertaking, assets, rights or revenues of the Borrower or any of its Subsidiaries are seized, nationalized, expropriated or compulsorily acquired by or under the authority of any Governmental Authority. (k) 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 Borrower 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 Borrower 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 Section 8.01(j) 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. (l) Dissolution, Etc. The Borrower 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 Section 9.04, (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 (i). (m) Material Adverse Effect. A Material Adverse Effect shall occur. (n) 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 Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower 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 Borrower (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of the Borrower 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 Borrower shall cease for any reason to constitute a majority of the Board of Directors of the Borrower, unless the Persons replacing such individuals were nominated by the Board of Directors of the Borrower. 51. 60 SECTION 10.02 Effect of Event of Default. If any Event of Default shall occur and be continuing, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, (i) by notice to the Borrower, (A) declare the Commitments of the Banks to be terminated, whereupon the same shall forthwith terminate, and (B) declare the entire unpaid principal amount of the Loans and the Notes, all interest accrued and unpaid thereon and all other Obligations to be forthwith due and payable, whereupon the Loans and the Notes, all such accrued interest and all such other Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, provided that if an event described in Section 10.01(e) or (f) shall occur, the result which would otherwise occur only upon giving of notice by the Agent to the Borrower as specified in this clause (i) shall occur automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, proceed to enforce all other rights and remedies available to the Agent and the Banks under the Loan Documents and applicable law. ARTICLE XI THE AGENT SECTION 11.01 Authorization and Action. Each Bank hereby appoints ABN AMRO as Agent and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and perform such duties under this Agreement and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. The duties and obligations of the Agent are strictly limited to those expressly provided for herein, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Agent. As to any matters not expressly provided for by the Loan Documents (including enforcement or collection of the Loan Documents), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks; provided, however, that except for action expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act under any Loan Document unless it shall be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by reason of taking or continuing to take any such action, and that the Agent shall not in any event be required to take any action which exposes the Agent to liability or which is contrary to any Loan Document or applicable law. Nothing in any Loan Document shall, or shall be construed to, constitute the Agent a trustee or fiduciary for any Bank. In performing its functions and duties hereunder, the Agent shall act solely as the agent of the Banks and does not assume and 52. 61 shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrower. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement and the other Loan Documents with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 11.02 Limitation on Liability of Agent; Notices; Closing. (a) Limitation on Liability of Agent. Neither the Agent nor any Affiliate thereof nor any of their respective directors, officers, employees or agents shall be liable for any action taken or omitted to be taken by it or them under or in connection with any Loan Document, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent (i) may treat a Bank as the holder of its Loans for all purposes hereof unless and until such Bank and its assignee shall have delivered to the Agent and the Borrower an Assignment and Acceptance Agreement substantially in the form of Exhibit E (an "Assignment and Acceptance"), and the Agent receives written notice of the assignment in substantially the form of Schedule 1 to the Assignment and Acceptance and the other condition to assignment set forth in Section 12.09 shall have been satisfied, (ii) may consult with legal counsel (including counsel to the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts, and (iii) shall incur no liability to any Bank under or in respect of any Loan Document by acting upon any notice, consent, certificate, telegram, facsimile, telex or teletype message, statement or other instrument or writing believed by it to be genuine and signed or sent by the proper party or parties or by acting upon any representation or warranty made or deemed to be made hereunder or under any other Loan Document. Further, the Agent (A) makes no warranty or representation to any Bank and shall not be responsible to any Bank for the accuracy or completeness of any information, exhibit or report furnished under any Loan Document, for any statements, warranties or representations (whether written or oral) made or deemed made in or in connection with any Loan Documents, (B) shall have no duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Loan Document on the part of the Borrower or any other Person or to inspect the property, books or records of the Borrower or any other Person, and (C) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, suf- 53. 62 ficiency, value or collectibility of this Agreement or any other Loan Document. (b) Notices. Promptly upon receipt thereof, the Agent shall forward to each Bank originals or copies, as specified in this Agreement or any other Loan Document, of all agreements, instruments, opinions, financial statements, notices and other documents delivered by the Borrower or any other Person to the Agent pursuant to any Loan Document for distribution to the Banks. Except for any of the foregoing expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. (c) Closing. For purposes of determining compliance with the conditions specified in Section 7.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent (or made available) by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Bank, unless an officer of the Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Bank prior to the Closing Date specifying its objection thereto and either such objection shall not have been withdrawn by notice to the Agent to that effect on or prior to the Closing Date or, if any Borrowing on the Closing Date has been requested, the Bank shall not have made available to the Agent on or prior to the Closing Date the Bank's Pro Rata Share of any Borrowing. SECTION 11.03 Agent and Affiliates. With respect to its Commitment, the Loans made by it, the Notes issued to it and all other Obligations owing to it as a Bank, the Agent shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with the Borrower and any Affiliate thereof, all as if the Agent were not the Agent hereunder and without any duty to account therefor to the Banks. SECTION 11.04 Notice of Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default hereunder (other than nonpayment of principal of or interest on the Loans or of any fees or any of its costs and expenses) unless the Agent has actual knowledge thereof or has received notice in writing from a Bank or the Borrower referring 54. 63 to this Agreement, describing such event or condition and expressly stating that such notice is a "notice of default." Should the Agent receive such notice of the occurrence of a Default, the Agent shall promptly give notice thereof to the Banks. The Agent thereupon shall take such action with respect to such Default as shall be reasonably directed by the Majority Banks; provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Banks. SECTION 11.05 Non-Reliance on Agent. Each Bank has itself been, and will continue to be, based on such documents and information as it has deemed appropriate, solely responsible for making its own independent appraisal of and investigations into the financial condition, creditworthiness, condition, affairs, status and nature of the Borrower or any of its Subsidiaries. Accordingly, each Bank confirms to the Agent that it has not relied, and will not hereafter rely, on the Agent (i) to check or inquire on such Bank's behalf into the adequacy, accuracy or completeness of any information provided by the Borrower or any other Person under or in connection with the Loan Documents or the transactions herein contemplated (whether or not such information has been or is hereafter distributed to such Bank by the Agent), or (ii) to assess or keep under review on such Bank's behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Borrower or any Subsidiary. SECTION 11.06 Indemnification. The Banks agree to indemnify the Agent, and any Affiliate, and any directors, officers, employees, agents, counsel and other advisors (collectively, the "Related Persons") of the Agent (to the extent not reimbursed by the Borrower), ratably in accordance with the respective Pro Rata Shares of the Banks, against and hold each of them harmless from any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel to the Agent (including allocated costs of internal counsel), which may be imposed on, incurred by, or asserted against the Agent, or any Related Person to be indemnified, in any way relating to or arising out of the Loan Documents, the use or intended use of the proceeds of the Loans or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent, its Affiliates or other Related Person to be indemnified in connection with any of the foregoing; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent, its Affiliates or any other Related Person to be indemnified. Without limitation of the foregoing, each Bank agrees to reimburse the Agent and its 55. 64 Affiliates promptly upon demand for such Bank's Pro Rata Share of any costs and expenses or other charges incurred by the Agent or its Affiliates and payable by the Borrower pursuant to Section 12.04(a) or any other Loan Document to the extent that the Agent or any Affiliate is not reimbursed for such expenses or charges by the Borrower. SECTION 11.07 Delegation of Duties. The Agent may, in its discretion, employ from time to time one or more agents or attorneys-in-fact (including any of the Agent's Affiliates) to perform any of the Agent's duties under the Loan Documents. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 11.08 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving written notice thereof to the Banks and the Borrower and may be removed at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent, and the Banks shall use their best efforts so to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which in each case shall be a commercial bank having a combined capital and surplus of at least $100,000,000 and (i) organized under the laws of the United States or of any state thereof, or any Affiliate of such bank, or (ii) organized under the laws of any other country which is a member of the OECD, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States and licensed under the laws of the United States or of any state thereof. Upon the effectiveness of the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, duties and obligations of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. SECTION 11.09 Arranger. Except to the extent expressly provided herein, the Arranger (in its capacity as such) shall not have any right, power, obligation, liability, responsibility or duty under this Agreement. Without limiting the foregoing, the Arranger shall not have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on the Arranger in 56. 65 deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE XII MISCELLANEOUS SECTION 12.01 Amendments and Waivers. Except as otherwise provided herein or in any other Loan Document, (i) no amendment to any provision of this Agreement or any of the other Loan Documents shall in any event be effective unless the same shall be in writing and signed by the Borrower (or other party thereto), the Agent and the Majority Banks (or the Agent with the written consent of the Majority Banks); and (ii) no waiver of any provision of this Agreement or any other Loan Document, or consent to any departure by the Borrower or other party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent and the Majority Banks (or the Agent with the consent of 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; provided, however, that, notwithstanding the foregoing provisions of this Section 12.01, any term or provision of any such other Loan Document may be amended without the agreement or consent of, or prior notice to, the Borrower or other party thereto, to the extent such Loan Document provides for notices without the agreement or consent of the Borrower or such other party, and any term or provision of Article XI (other than the provisions of Section 11.08 pertaining to Borrower consent) may be amended without the agreement or consent of, or prior notice to, the Borrower; and provided further, however, that, unless in writing and signed by all of the Banks (or by the Agent with the written consent of all the Banks), no amendment, waiver or consent shall do any of the following: (A) increase the amount, or extend the stated expiration or termination date, of the Commitments of the Banks or change the aggregate amount by which or to which the Commitments are required to be reduced as provided in Section 4.01(b); (B) reduce the principal of, or interest on, the Loans or any fee or other amount payable to the Banks hereunder; (C) postpone any date fixed for any payment in respect of principal of, or interest on, the Loans or any fee or other amount payable to the Banks hereunder (including the date of any mandatory prepayment hereunder); (D) change the definition of "Majority Banks" or any definition or provision of this Agreement requiring the approval of Majority Banks or some other specified amount of Banks; (E) consent to the assignment or transfer by the Borrower of any of its rights and obligations under the Loan Documents; 57. 66 (F) waive any of the conditions specified in Article VII; (G) amend, modify or waive the provisions of Section 6.01, 6.05 or 12.07; or (H) amend, modify or waive the provisions of this Section 12.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Banks required hereinabove to take such action, affect the rights, obligations or duties of the Agent under any Loan Document. SECTION 12.02 Notices. (a) Notices. All notices and other communications provided for hereunder and under the other Loan Documents shall, unless otherwise stated herein, be in writing (including by facsimile transmission) and mailed, sent or delivered to the respective parties hereto at or to their respective addresses or facsimile numbers set forth in Schedule 2 or at or to such other address or facsimile number as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be effective (i) if delivered by hand, when delivered; (ii) if sent by mail, upon receipt; and (iii) if sent by facsimile transmission when received. (b) Facsimile and Telephonic Notice. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Borrower to give any notice hereunder and the Agent and the Banks shall not have any liability to the Borrower or other Person on account of any action taken or not taken by the Agent and the Banks in reliance upon any telephonic or facsimile notice hereunder. The obligation of the Borrower to repay the Loans and the other Obligations shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. SECTION 12.03 No Waiver; Cumulative Remedies. No failure on the part of the Agent or any Bank to exercise, and no delay in exercising, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Agent or any Bank. 58. 67 SECTION 12.04 Costs and Expenses; Indemnification. (a) Costs and Expenses. The Borrower agrees to pay within 30 days following demand, whether or not the transactions contemplated hereby shall be consummated: (i) the reasonable out-of-pocket costs and expenses of the Agent and any of its Affiliates, and the reasonable fees and disbursements of counsel to the Agent (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution, delivery and administration of the Loan Documents, and any amendments, modifications or waivers of the terms thereof; and (ii) all costs and expenses of the Agent, its Affiliates and the Banks, and fees and disbursements of counsel (including allocated costs of internal counsel), in connection with (A) any Default, (B) the enforcement or attempted enforcement of, and preservation of any rights or interests under, the Loan Documents, and (C) any out-of-court workout or other refinancing or restructuring or any bankruptcy case, including any losses, costs and expenses sustained by the Agent and any Bank as a result of any failure by the Borrower to perform or observe its obligations contained in the Loan Documents. (b) Indemnification. Whether or not the transactions contemplated by this Agreement are consummated, the Borrower hereby agrees, within 30 days following demand, to indemnify and hold the Agent, the Arranger, each Bank and any Related Persons of the Agent, the Arranger and each Bank (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 Loans 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 Agreement or any Loan Document or any other document contemplated by or referred to herein or therein, or the transactions contemplated hereby or thereby, 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 proceeding) related to or arising out of this Agreement or the Loans 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 Borrower 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 59. 68 Indemnified Person. The agreements in this Section shall survive the payment of the Obligations. (c) Defense. At the election of any Indemnified Person, the Borrower 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 Borrower. (d) Other Charges. Except as otherwise provided in Section 6.03(f), the Borrower agrees, within 30 days following demand, 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 the Loan Documents. SECTION 12.05 Right of Set-Off. Upon the occurrence and during the continuance of any Event of Default, or if any Loans have been accelerated, each Bank hereby is authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower now or hereafter existing under this Agreement and the other Loan Documents, irrespective of whether or not such Bank shall have made any demand under this Agreement or any such other Loan Document and although such Obligations may be unmatured. Each Bank agrees promptly to notify the Borrower (through the Agent) after any such set-off and application made by such Bank; provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 12.05 are in addition to other rights and remedies (including other rights of set-off) which such Bank may have. SECTION 12.06 Survival. All covenants, agreements, representations and warranties made in any Loan Documents shall, except to the extent otherwise provided therein, survive the execution and delivery of this Agreement, the making of the Loans and the execution and delivery of the Notes, and shall continue in full force and effect so long as the Banks have any Commitments, any Loans remain outstanding or any other Obligations remain unpaid or any obligation to perform any other act under any Loan Document remains unsatisfied. Without limiting the generality of the foregoing, the obligations of the Borrower under Sections 5.02, 5.03, 6.03 and 12.04, and of the Banks under Sections 6.03 and 11.06, and all similar obligations under the other Loan Documents (including all obligations to pay costs and expenses and all indemnity obligations), shall survive 60. 69 the repayment of the Loans and the termination of the Commitments. SECTION 12.07 Obligations Several. The obligations of the Banks under the Loan Documents are several. The failure of any Bank or the Agent to carry out its obligations thereunder shall not relieve any other Bank or the Agent of any obligation thereunder, nor shall any Bank or the Agent be responsible for the obligations of, or any action taken or omitted by, any other Person hereunder or thereunder. Nothing contained in any Loan Document shall be deemed to cause any Bank or the Agent to be considered a partner of or joint venturer with any other Bank or Banks, the Agent or the Borrower. SECTION 12.08 Benefits of Agreement. The Loan Documents are entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other Person other than Affiliates of the Agent and the Related Persons referred to in Sections 11.06, 12.04 and 12.14 shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, any Loan Document. SECTION 12.09 Binding Effect; Assignment. (a) Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon, inure to the benefit of and be enforceable by the Borrower, the Agent and each Bank and their respective successors and assigns. (b) Assignment. The Borrower shall not have the right to assign its rights and obligations hereunder or under the other Loan Documents or any interest herein or therein without the prior written consent of the Banks. Each Bank may sell, assign, transfer or grant participations in all or any portion of such Bank's rights and obligations hereunder and under the other Loan Documents to any Bank or Eligible Assignee on the basis set forth below in this subsection (b). (i) Any Bank may, with the written consent of the Borrower and the Agent (which in each case shall not be unreasonably withheld), at any time assign and delegate to one or more Eligible Assignees all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder; provided, however, that (i) no written consent of the Borrower shall be required during the existence of a Default; (ii) no written consent of the Borrower or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is another Bank or an Affiliate of such Bank; and (iii) except in connection with an assignment of all of a Bank's rights and obligations with respect to its Commitment and Loans, any such assignment to an 61. 70 Eligible Assignee that is not a Bank hereunder shall be equal to or greater than $10,000,000. (ii) In the event of any such assignment, unless and until (A) an Assignment and Acceptance and notice of assignment shall have been delivered pursuant to clause (i) of Section 11.02(a), (B) the Agent shall have received payment of an administrative transfer charge in the amount of $3,500 from the assigning Bank (unless the assignee shall otherwise agree to pay such charge), and (C) the Agent and the Borrower shall have received all tax forms and documents required under Section 6.03(d), such assignee shall not be entitled to exercise the rights of a Bank under this Agreement and the other Loan Documents with respect to such assignment and the Agent shall not be obligated to make payment of any amount to which such assignee may become entitled thereunder other than to the assigning Bank. Subject to satisfaction of the foregoing conditions in connection with any assignment, upon the effectiveness of such assignment the assignee shall be deemed a "Bank" for all purposes of this Agreement and the other Loan Documents with respect to the rights and obligations assigned to it, and the assigning Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents; provided, however, that the assigning Bank shall not relinquish its rights under Article V or under Sections 6.03 and 12.04 to the extent such rights relate to the time prior to the effective date of the Assignment and Acceptance. (iii) In connection with any partial assignment, upon the request of the assigning Bank or the assignee, (A) the Borrower shall execute and deliver substitute Notes to the assigning Bank or the assignee, dated the effective date of such assignment, setting forth the respective Commitments of such assigning Bank and assignee as the maximum principal amount thereof and containing other appropriate insertions, and the assigning Bank shall thereupon return the Notes previously held by it; and (B) Schedules 1 and 2 shall be deemed amended to reflect the adjustment of the Commitments and Pro Rata Shares of the Banks resulting therefrom and the Lending Office, if any, and address for notices of the assignee. (iv) In the event of any grant of a participation, the granting Bank shall remain a "Bank" for purposes of this Agreement, the Borrower, the other Banks and the Agent shall continue to deal solely and directly with such Bank in connection with this Agreement and the other Loan Documents, and no Bank shall transfer or grant any participating interest under which the participant shall have rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent as described in the first proviso to Section 12.01. In the case of any such 62. 71 participation, the participant shall not have any of the rights of a Bank under this Agreement or the other Loan Documents, except that the participant shall (A) be deemed to have a right of setoff under Section 12.05 in respect of its participation to the same extent as if it were a "Bank" hereunder, provided that such participant shall also be considered a "Bank" for purposes of Section 6.05; and (B) such participant shall also be entitled to the benefits of Sections 5.02, 5.03, 6.03 and 12.04, provided that any amounts payable under Sections 5.03 or 6.03 to any participant shall not exceed the amounts which would have been payable by the Borrower thereunder to the Bank granting such participation. (v) The Borrower agrees that in connection with any such grant or assignment, such Bank may deliver to the prospective participant or assignee financial statements and other relevant information relating to the Borrower and its Subsidiaries. (vi) Each Bank shall obtain from any such prospective participant or assignee a confidentiality agreement in which such participant or assignee agrees to an obligation of confidentiality substantially similar to the terms of Section 12.10. (vii) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. SECTION 12.10 Confidentiality. Each Bank and the Agent shall hold all non-public information relating to the Borrower and its Subsidiaries obtained by it under this Agreement in accordance with its customary procedures for handling confidential information of this nature, except for: (i) disclosure to its Affiliates or to its counsel or to any agent or advisor acting on its behalf in connection with the negotiation, execution or performance of the Loan Documents; (ii) disclosure as reasonably required in connection with a transfer to a prospective assignee or participant of all or part of its Loans or any participation therein, as provided in Section 12.09(b); (iii) disclosure as may be required or requested by any Governmental Authority or representative thereof or pursuant to legal process; (iv) disclosure to any Person and in any proceeding necessary in such Bank's or the Agent's judgment to protect its interests in connection with any claim or dispute involving such Bank or the Agent; and (v) any other disclosure with the prior written consent of the Borrower. Prior to any disclosure by any Bank or the Agent of such non-public information permitted under clause (iii) (other than in connection with an examination of the financial condition of such Bank, 63. 72 the Agent or any of their Affiliates by any Governmental Authority), it shall, if permitted by applicable laws or judicial order, notify the Borrower of such pending disclosure. In no event shall any Bank or the Agent be obligated or required to return any materials furnished by the Borrower or its Subsidiaries. Notwithstanding the foregoing, such obligation of confidentiality shall not apply if the information or substantially similar information (A) is rightfully received by any Bank or the Agent from a Person other than the Borrower or any of its Affiliates without such Bank or the Agent being under an obligation to such Person not to disclose such information, or (B) is or becomes part of the public domain. SECTION 12.11 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. SECTION 12.12 Waiver of Jury Trial. THE BORROWER, THE BANKS AND THE AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS 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 BORROWER, THE BANKS AND THE AGENT 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 PARTIES 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 AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. A COPY OF THIS SECTION 12.12 MAY BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND CONSENT TO TRIAL BY COURT. SECTION 12.13 Limitation on Liability. No claim shall be made by the Borrower or its Affiliates against the Agent, the Banks or any of their Related Persons for any special, indirect, exemplary, consequential or punitive damages in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by the Loan Documents or any act or omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. SECTION 12.14 Entire Agreement. The Loan Documents reflect the entire agreement among the Borrower, the Banks and 64. 73 the Agent with respect to the matters set forth herein and therein and supersede any prior agreements, commitments, drafts, communications, discussions and understandings, oral or written, with respect thereto. SECTION 12.15 Severability. Whenever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of any of the Loan Documents shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of such Loan Document, or the validity or effectiveness of such provision in any other jurisdiction. SECTION 12.16 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. [SIGNATURE PAGES FOLLOW] 65. 74 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. THE BORROWER LSI LOGIC CORPORATION By _____________________________ Title: THE AGENT ABN AMRO BANK N.V., as Agent By: ABN AMRO NORTH AMERICA, INC. its agent By _____________________________ Title: By _____________________________ Title: THE BANKS ABN AMRO BANK N.V., as a Bank By: ABN AMRO NORTH AMERICA, INC. its agent By _____________________________ Title: By _____________________________ Title: [SIGNATURES CONTINUED NEXT PAGE] 66. 75 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By _____________________________ Title: BARCLAYS BANK PLC By _____________________________ Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By _____________________________ Title: THE BANK OF NOVA SCOTIA By _____________________________ Title: BANQUE NATIONALE DE PARIS By _____________________________ Title: By _____________________________ Title: THE DAI-ICHI KANGYO BANK, LIMITED By _____________________________ Title: [SIGNATURES CONTINUED NEXT PAGE] 67. 76 FLEET NATIONAL BANK By _____________________________ Title: KEY BANK OF WASHINGTON By _____________________________ Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By _____________________________ Title: MELLON BANK By _____________________________ Title: THE MITSUBISHI TRUST & BANKING CORPORATION By _____________________________ Title: Yasushi Satomi Chief Manager THE NIPPON CREDIT BANK, LTD. By _____________________________ Title: SANWA BANK CALIFORNIA By _____________________________ Title: [SIGNATURES CONTINUED NEXT PAGE] 68. 77 THE SUMITOMO BANK, LTD. SAN FRANCISCO BRANCH By _____________________________ Title: UNION BANK OF CALIFORNIA, N.A. By _____________________________ Title: 69. 78 ANNEX I PRICING GRID
(Basis points per annum) ---------------------------------------- EBITDA/Total Debt Eurodollar Rate Level Ratio Commitment Fee Loan Spread -------------------------------------------------------------------------------------- Level 1 Greater than or equal 22.5 65 to 1.0 to 1.0 Level 2 Less than 1.0 to 1.0 25.0 75
The EBITDA/Total Debt Ratio used to compute the Applicable Fee Amount for commitment fee and the Applicable Margin for Loans shall be the EBITDA/Total Debt Ratio set forth in the Compliance Certificate most recently delivered by the Borrower to the Agent pursuant to Section 9.01(a) of the Credit Agreement; changes in the Applicable Fee Amount and the Applicable Margin resulting from a change in the EBITDA/ Total Debt Ratio shall become effective one Business Day after delivery by the Borrower to the Agent of a new Compliance Certificate pursuant to Section 9.01(a). If the Borrower shall fail to deliver a Compliance Certificate within the number of days after the end of any Fiscal Quarter or Fiscal Year as required pursuant to Section 9.01(a) (without giving effect to any grace period), the Applicable Fee Amount and the Applicable Margin from the first day after the date on which such Compliance Certificate was required to be delivered to the Agent through the day the Borrower delivers to the Agent a Compliance Certificate shall conclusively equal the highest Applicable Fee Amount and Applicable Margin set forth above. 1. 79 SCHEDULE 1 to the Credit Agreement COMMITMENTS AND PRO RATA SHARES
Bank Commitment Pro Rata Share ---- ---------- -------------- ABN AMRO Bank N.V. $25,000,000 8.333333333% Morgan Guaranty Trust Company $25,000,000 8.333333333% of New York Barclays Bank PLC $22,500,000 7.500000000% The Industrial Bank of $22,500,000 7.500000000% Japan, Limited The Bank of Nova Scotia $20,000,000 6.666666667% Banque Nationale de Paris $20,000,000 6.666666667% The Dai-Ichi Kangyo $15,000,000 5.000000000% Bank, Ltd. Fleet National Bank $20,000,000 6.666666667% Key Bank of Washington $20,000,000 6.666666667% The Long-Term Credit $15,000,000 5.000000000% Bank of Japan, Ltd. Mellon Bank $20,000,000 6.666666667% The Mitsubishi Trust & $15,000,000 5.000000000% Banking Corporation The Nippon Credit Bank, Ltd. $15,000,000 5.000000000% Sanwa Bank California $15,000,000 5.000000000% The Sumitomo Bank, Ltd. $15,000,000 5.000000000% Union Bank of California, N.A. $15,000,000 5.000000000% ----------- ------------ TOTAL $300,000,000 100%
1. 80 SCHEDULE 2 to the Credit Agreement ADDRESSES FOR NOTICES; LENDING OFFICES BORROWER LSI Logic Corporation 1551 McCarthy Boulevard Milpitas, CA 95035 Attention: Mark R. Kent, Treasurer Mail Stop D106 Telephone: (408) 433-7189 Facsimile: (408) 433-6896 BORROWER'S ACCOUNT Bank of America ABA No. 121-000-358 Account No.: 12335-01388 Reference: LSI Logic Corporation Tax ID: 94-2712976 AGENT ABN AMRO Bank N.V., as Agent Notices of Borrowing, Notices of Conversion or Continuation and Payments: ABN AMRO Bank N.V. 335 Madison Avenue, 14th Floor Syndications Dept. New York, NY 10017 Attention: Linda Boardman Vice President Telephone: (212) 370-8509 Facsimile: (212) 682-0364 All other notices: ABN AMRO Bank N.V. 335 Madison Avenue, 14th Floor Syndications Dept. New York, NY 10017 Attention: Linda Boardman Vice President Telephone: (212) 370-8509 Facsimile: (212) 682-0364 1. 81 AGENT'S ACCOUNT: ABN AMRO Bank, New York ABA No. 026009580 Credit: ABN AMRO Bank, San Francisco Account No.: 651001054541 Reference: LSI Logic Attention: Gloria Lee BANKS ABN AMRO Bank N.V., as a Bank Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): ABN AMRO Bank N.V. 101 California Street, Suite 4550 San Francisco, CA 94111-5812 Attention: Gloria C. Lee Operations Officer Telephone: (415) 984-3720 Facsimile: (415) 362-3524 All other notices: ABN AMRO Bank N.V. San Francisco International Branch 101 California Street, Suite 4550 San Francisco, CA 94111-5812 Attention: Thomas Wagner Vice President and Director Telephone: (415) 984-3700 Facsimile: (415) 362-3524 Morgan Guaranty Trust Company of New York Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): JP Morgan Services, Inc. 500 Stanton Christiana Road Newark, DE 19713-2107 Attention: Patrick Rylee-Ribas Telephone: (302) 634-1963 Facsimile: (302) 634-1872/1091 2. 82 All other notices: Morgan Guaranty Trust Company of New York 60 Wall Street New york, NY 10260-0060 Attention: Jeffrey Hwang Telephone: (212) 648-6503 Facsimile: (212) 648-5014 Barclays Bank PLC Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Barclays Bank PLC 222 Broadway New York, NY 10038 Attention: Anand Chan-Sui Telephone: (212) 412-3702 Facsimile: (212) 412-5306 All other notices: Barclays Bank PLC 388 Market Street, 17th Floor San Francisco, CA 94111 Attention: James C. Tan Associate Director Telephone: (415) 765-4718 Facsimile: (415) 765-4760 The Industrial Bank of Japan, Limited Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Industrial Bank of Japan, Limited San Francisco Agency 555 California Street, Suite 3110 San Francisco, CA 94104 Attention: Jeanette O'Donnell Officer Telephone: (415) 693-1831 Facsimile: (415) 982-1917 3. 83 All other notices: The Industrial Bank of Japan, Limited San Francisco Agency 555 California Street, Suite 3110 San Francisco, CA 94104 Attention: Jeanette O'Donnell Officer Telephone: (415) 693-1831 Facsimile: (415) 982-1917 The Bank of Nova Scotia Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Bank of Nova Scotia 580 California Street, 21st Floor San Francisco, CA 94104 Attention: Chris Johnson Telephone: (415) 986-1100 Facsimile: (415) 397-0791 The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attention: Eudia Smith Telephone: (404) 877-1500 Facsimile: (404) 888-8998 All other notices: The Bank of Nova Scotia 580 California Street, 21st Floor San Francisco, CA 94104 Attention: Chris Johnson Telephone: (415) 986-1100 Facsimile: (415) 397-0791 The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, GA 30308 Attention: Eudia Smith Telephone: (404) 877-1500 Facsimile: (404) 888-8998 4. 84 Banque Nationale de Paris Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Banque Nationale de Paris, San Francisco Branch 180 Montgomery Street San Francisco, CA 94104 Attention: Donald A. Hart Vice President and Treasurer Telephone: (415) 956-2511 Facsimile: (415) 989-9041 All other notices: Banque Nationale de Paris 180 Montgomery Street, 3rd Floor San Francisco, CA 94104 Attention: Rafael Lumanlan Vice President Telephone: (415) 956-0707 Facsimile: (415) 296-8954 The Dai-Ichi Kangyo Bank, Limited Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Dai-Ichi Kangyo Bank, Limited San Francisco Agency 101 California Street, Suite 4000 San Francisco, CA 94111 Attention: Karen Leung Loan Administration Officer Telephone: (415) 393-1813 Facsimile: (415) 788-7868 All other notices: The Dai-Ichi Kangyo Bank, Limited San Francisco Agency 101 California Street, Suite 4000 San Francisco, CA 94111 Attention: Mark Dirsa Senior Relationship Manager Telephone: (415) 393-1813 Facsimile: (415) 788-7868 5. 85 Fleet National Bank Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Fleet National Bank MA/OF/0305 One Federal Street Boston, MA 02211 Attention: Pauline Kowalczyk Loan Administration Telephone: (617) 346-0622 Facsimile: (617) 346-0590 All other notices: Fleet National Bank MA/OF/0305 One Federal Street Boston, MA 02211 Attention: Frank Benesh Vice President Telephone: (617) 346-0617 Facsimile: (617) 346-0568 Key Bank of Washington Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Key Bank of Washington 1002 15th St. S.W. Auburn, WA 98001 Attention: Specialty Team Telephone: (800) 297-5518 Facsimile: (800) 297-5495 All other notices: Key Bank of Washington 700 Fifth Avenue 48th Floor Seattle, WA 98104 Attention: Kevin McBride Telephone: (206) 684-6079 Facsimile: (206) 684-6035 6. 86 The Long-Term Credit Bank of Japan, Ltd. Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Long-Term Credit Bank of Japan, Ltd. 350 S. Grand Avenue, Suite 3000 Los Angeles, CA 90071 Attention: Cindy Ly Telephone: (213) 689-6247 Facsimile: (213) 622-6908 All other notices: The Long-Term Credit Bank of Japan, Ltd. 350 S. Grand Avenue, Suite 3000 Los Angeles, CA 90071 Attention: Cindy Ly Telephone: (213) 689-6247 Facsimile: (213) 622-6908 Mellon Bank Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Mellon Bank Loan Administration Three Mellon Bank Center, Room 2304 Pittsburgh, PA 15259 Attention: Damon Carr Telephone: (412) 234-1872 Facsimile: (412) 236-2027/2028 All other notices: Mellon Bank 435 Tasso Street, Suite 100 Palo Alto, CA 94301 Attention: Sean C. Gannon Telephone: (415) 326-3005 Facsimile: (415) 326-2382 7. 87 The Mitsubishi Trust and Banking Corporation Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Mitsubishi Trust and Banking Corporation, Los Angeles Agency 801 S. Figueroa Street, 5th Floor Los Angeles, CA 90017 Attention: Yvonne Yoon Michael Lundgren Telephone: (213) 896-4737 Facsimile: (213) 629-2571 All other notices: The Mitsubishi Trust and Banking Corporation Los Angeles Agency 801 S. Figueroa Street, 5th Floor Los Angeles, CA 90017 Attention: Yvonne Yoon Michael Lundgren Telephone: (213) 896-4737 Facsimile: (213) 629-2571 The Nippon Credit Bank, Ltd. Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Nippon Credit Bank, Ltd. - Los Angeles Agency 550 South Hope Street, Suite 2500 Los Angeles, CA 90071 Attention: Teresa Pasamba Associate Telephone: (213) 243-5723 Facsimile: (213) 243-5579 All other notices: The Nippon Credit Bank, Ltd. - Los Angeles Agency 550 South Hope Street, Suite 2500 Los Angeles, CA 90071 Attention: Helen Y. Rhee Vice President - U.S. Corporate Finance Telephone: (213) 243-5723 Facsimile: (213) 892-0111 8. 88 Sanwa Bank California Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Sanwa Bank California 220 Almaden Boulevard San Jose, CA 95113 Attention: Jill Mathur Vice President Telephone: (408) 297-6500 Facsimile: (408) 292-4092 All other notices: Sanwa Bank California 220 Almaden Boulevard San Jose, CA 95113 Attention: Jill Mathur Vice President Telephone: (408) 297-6500 Facsimile: (408) 292-4092 The Sumitomo Bank, Limited Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): The Sumitomo Bank, Limited San Francisco Branch 555 California Street, Suite 3350 San Francisco, CA 94104 Attention: Pauline Tsang Corporate Banking Officer Telephone: (415) 616-3003 Facsimile: (415) 397-1475 All other notices: The Sumitomo Bank, Limited San Francisco Branch 555 California Street, Suite 3350 San Francisco, CA 94104 Attention: Herman White/Pauline Tsang Vice President/Corporate Banking Officer Telephone: (415) 616-3009/3003 Facsimile: (415) 398-3580 9. 89 Union Bank of California, N.A. Lending Office(s) (Notices of Borrowing, Notices of Conversion or Continuation, and Payments): Union Bank of California, N.A. 1980 Saturn Street Monterey Park, CA 91754 Attention: Maria Flores Telephone: (213) 720-2679 Facsimile: (213) 724-6198 All other notices: Union Bank of California, N.A. 350 California Street (H-1130) San Francisco, CA 94104 Attention: Wade Schlueter Telephone: (415) 705-7022 Facsimile: (415) 705-7046 10. 90 EXHIBIT A to the Credit Agreement FORM OF REVOLVING NOTE PROMISSORY NOTE San Francisco, California $______________ ____________, 199__ FOR VALUE RECEIVED, the undersigned, LSI LOGIC CORPORATION, a Delaware corporation (the "Borrower"), HEREBY UNCONDITIONALLY PROMISES TO PAY to the order of [Bank] (the "Bank") on the Revolving Expiry Date the principal sum of __________________ DOLLARS ($__________) or, if less, the aggregate outstanding principal amount of the Loans made by the Bank to the Borrower pursuant to the Credit Agreement referred to below. The Borrower further promises to pay interest on the Loans outstanding hereunder from time to time at the interest rates, and payable on the dates, set forth in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America and in same day or immediately available funds to ABN AMRO Bank N.V. as Agent under the Credit Agreement (the "Agent"), to the Agent's Account. The Bank shall record the date and amount of each Loan made, each conversion to a different interest rate, each relevant Interest Period, the amount of principal and interest due and payable from time to time hereunder, each payment thereof and the resulting unpaid principal balance hereof, in the Bank's internal records, and any such recordation shall be rebuttable presumptive evidence of the accuracy of the information so recorded; provided, however, that the Bank's failure so to record shall not limit or otherwise affect the obligations of the Borrower hereunder and under the Credit Agreement to repay the principal of and interest on the Loans. This promissory note is one of the Notes referred to in, and is subject to and entitled to the benefits of, the Credit Agreement dated as of December 20, 1996 (as amended, modified, renewed or extended from time to time, the "Credit Agreement") among the Borrower, certain financial institutions named therein as Banks (including the Bank) and the Agent. Capitalized terms used herein shall have the respective meanings assigned to them in the Credit Agreement. A-1. 91 The Credit Agreement provides, among other things, for acceleration (which in certain cases shall be automatic) of the maturity hereof upon the occurrence of certain stated events, in each case without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. This promissory note is subject to prepayment in whole or in part as provided in the Credit Agreement. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. LSI LOGIC CORPORATION By ___________________________ Name: Title: A-2. 92 EXHIBIT B to the Credit Agreement FORM OF NOTICE OF BORROWING Date: ____________, 199__ To: ABN AMRO Bank N.V., as Agent 335 Madison Avenue, 14th Floor Syndications Dept. New York, NY 10017 Re: LSI Logic Corporation Ladies and Gentlemen: The undersigned, LSI Logic Corporation, a Delaware corporation (the "Borrower"), refers to the Credit Agreement dated as of December 20, 1996 (as amended, modified, renewed or extended from time to time, the "Credit Agreement"), among the Borrower, the several financial institutions party to the Credit Agreement (the "Banks") and ABN AMRO Bank N.V., as Agent for the Banks, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.02 of the Credit Agreement, of the Borrowing specified herein: (a) The Business Day of the proposed Borrowing is __________, 199_. (b) The aggregate amount of the proposed Borrowing is $___________. (c) The Borrowing is to be comprised of [Base Rate] [Eurodollar Rate] Loans. (d) The duration of the Interest Period for the Eurodollar Rate Loans included in the Borrowing shall be [_________] months. (e) The payment instructions with respect to the funds to be made available to the Borrower are as follows: ______________. The Borrower hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Borrowing, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Borrower contained in Section 8.01 of the Credit Agreement and in the B-1. 93 other Loan Documents are true and correct as though made on and as of each such date (except to the extent such representations and warranties relate solely to an earlier date, in which case they are true and correct as of such date, except that Section 8.01 of the Credit Agreement shall be deemed instead to refer to the last day of the most recent fiscal year and quarter for which financial statements have then been delivered and except as set forth in amendments to Schedules and other disclosures made in writing to the Agent and the Banks and approved by them); and (b) no Default exists or would result from such proposed Borrowing. LSI LOGIC CORPORATION By: _________________________ Name: Title: B-2. 94 EXHIBIT C to the Credit Agreement FORM OF COMPLIANCE CERTIFICATE ABN AMRO Bank N.V., as Agent 335 Madison Avenue, 14th Floor Syndications Dept. New York, NY 10017 Re: LSI Logic Corporation Ladies and Gentlemen: This Compliance Certificate is made and delivered pursuant to the Credit Agreement dated as of December 20, 1996 (as amended, modified, renewed or extended from time to time, the "Credit Agreement") among LSI Logic Corporation, a Delaware corporation (the "Borrower"), certain financial institutions named therein as Banks and ABN AMRO Bank N.V., as Agent, and reference is made thereto for full particulars of the matters described therein. All capitalized terms used in this Compliance Certificate and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. This Compliance Certificate relates to the accounting period ending __________, 199__. I am the _______________________ of the Borrower. I have reviewed the terms of the Credit Agreement and I have made, or caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during such accounting period. I hereby certify that the information set forth on Schedule 1 hereto (and on any additional schedules hereto setting forth further supporting detail) is true, accurate and complete as of the end of such accounting period. I hereby further certify that (i) as of the date hereof, no Default has occurred and is continuing, and (ii) on and as of the date hereof, there has occurred no Material Adverse Effect since December 31, 1995, except, in each case, as may be set forth in a separate attachment hereto describing in detail the nature of each condition or event constituting an exception to the foregoing statements, the period during which it has existed and the action which the Borrower is taking or proposes to take with respect to each such condition or event. IN WITNESS WHEREOF, the undersigned officer has signed this Compliance Certificate this ____ day of ______________, 199__. ___________________________________ Name: Title: C-1. 95 EXHIBIT D to the Credit Agreement FORM OF LEGAL OPINION OF GENERAL COUNSEL OF BORROWER December __, 1996 To each of the Banks party to the Credit Agreement referred to below, and to ABN AMRO Bank N.V., as Agent Ladies and Gentlemen: I am General Counsel of LSI Logic Corporation, a Delaware corporation (the "Borrower"), and I am giving my opinion in connection with the execution and delivery of the Credit Agreement, dated as of December 20, 1996 (the "Credit Agreement"), among the Borrower, the several financial institutions party to the Credit Agreement (the "Banks") and ABN AMRO Bank N.V., as Agent for the Banks. This opinion is provided to the Agent and the Banks as required pursuant to Section 7.01(e) of the Credit Agreement. Capitalized terms not otherwise defined herein have the respective meanings set forth in the Credit Agreement. In connection with this opinion letter, I have examined executed copies of the Credit Agreement and any Notes for the Banks requesting such Notes; certificates of public officials from the States of California and Delaware; the certificate of incorporation and by-laws of the Borrower, as amended to date; records of proceedings of the Board of Directors of the Borrower by which resolutions were adopted relating to matters covered by this opinion; and such certificates of officers of the Borrower as to certain factual matters as I have deemed necessary or appropriate. In addition, I have made such other investigations as I have deemed necessary to enable me to express the opinions hereinafter set forth. In the course of this examination I have assumed the genuineness of all signatures of persons signing the Loan Documents on behalf of parties thereto other than the Borrower, the authenticity of all documents submitted to me as originals and the conformity to authentic original documents of all documents submitted to me as certified, conformed or photostatic copies. Based upon the foregoing, and further subject to the assumptions, qualifications and exceptions set forth below, I hereby advise you that in my opinion: (f) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State D-1. 96 of Delaware with the corporate power and authority to own and operate (or lease, as the case may be) its properties and to carry on its business as it is now conducted. The Borrower is qualified as a foreign corporation and in good standing in the State of California. (g) The Borrower has the corporate power and authority to enter into and perform the Loan Documents, and has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents. (h) 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, or enforcement against, the Borrower of the Loan Documents. (i) The Loan Documents have been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. (j) The execution, delivery and performance by the Borrower of the Loan Documents will not (i) violate or be in conflict with any provision of the certificate of incorporation, or by-laws of the Borrower, (ii) violate or be in conflict with any law or regulation having applicability to the Borrower, (iii) violate or contravene any judgment, decree, injunction, writ or order of any court, or any arbitrator or other Governmental Authority, having jurisdiction over the Borrower or the Borrower's properties or by which the Borrower may be bound, or (iv) violate or conflict with, or constitute a default under or result in the termination of, or accelerate the performance required by, any indenture, any loan or credit agreement, or any other agreement for borrowed money or any other material agreement, lease or instrument to which the Borrower is a party or by which it or the Borrower's properties may be bound or affected except as contemplated under the Loan Documents. (k) Except as otherwise disclosed on Schedule 5 to the Credit Agreement, no litigation or other proceedings are pending or threatened against the Borrower or its properties before any court, arbitrator or governmental agency or authority with respect to the Loan Documents or which, if determined adversely to the Borrower, would be likely to have a Material Adverse Effect. (l) The extension of credit under the Credit Agreement does not violate the provisions of Regulations G or U of the Board of Governors of the Federal Reserve System. (m) The Borrower is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. D-2. 97 The opinion set forth in paragraph 4 above is subject to the qualification that the enforceability of the Loan Documents may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and by general equity principles. I express no opinion herein concerning any law other than the law of the State of California, the General Corporation Law of the State of Delaware and the federal law of the United States. This letter has been furnished to you at the request of the Borrower pursuant to Section 7.01(e) of the Credit Agreement for your use in connection with the Credit Agreement, and may not be relied upon by you or any other person for any other purpose without my consent; provided the Agent and each Bank may deliver a copy to its legal counsel in connection with the Credit Agreement, to any prospective assignee or participant of any Bank and to any successor Agent, and such legal counsel, any such assignee or participant and any successor Agent shall be entitled to rely hereon. Very truly yours, D-3. 98 EXHIBIT E to the Credit Agreement FORM OF ASSIGNMENT AND ACCEPTANCE THIS ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Agreement") dated as of _____________________________, 199__, is made between __________________________________________ (the "Assignor") and ____________________________(the "Assignee"). PRELIMINARY STATEMENTS 1. The Assignor is party to that certain Credit Agreement dated as of December 20, 1996 (as amended, restated, modified, supplemented or renewed from time to time, the "Credit Agreement"), among LSI Logic Corporation (the "Borrower"), certain financial institutions as lenders (including the Assignor, the "Banks") and ABN AMRO Bank, N.V., as agent for the Banks (in such capacity, the "Agent"). All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. 2. As provided under the Credit Agreement, the Assignor has committed to making Loans to the Borrower in an aggregate amount not to exceed $_____________ (the "Commitment"); 3. [The Assignor has made Loans in the aggregate principal amount of $__________ to the Borrower consisting of $___________ principal amount of Loans.] [No Loans are outstanding under the Credit Agreement.] 4. The Assignor wishes to assign to the Assignee [part of the] [all] rights and obligations of the Assignor under the Credit Agreement in respect of its Commitment, [together with a corresponding portion of each of its outstanding Loans], in an amount equal to ___% of the Assignor's Commitment and Loans, on the terms and subject to the conditions set forth herein, and the Assignee wishes to accept assignment of such rights and to assume such obligations from the Assignor on such terms and subject to such conditions. Accordingly, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Assignment and Acceptance. (a) Subject to the terms and conditions of this Agreement, (i) the Assignor hereby sells, transfers and assigns to the Assignee, and (ii) the Assignee hereby purchases, assumes and undertakes from the Assignor, without recourse and without representation or warranty (except as provided in this Agreement) ___% (the "Assignee's Percentage Share") of (A) the Commitment [and the Loans] of the Assignor and (B) all related rights, E-1. 99 benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Credit Agreement and the Loan Documents. (b) With effect on and after the Effective Date (as defined in Section 5 hereof), the Assignee shall be a party to the Credit Agreement and succeed to all of the rights and be obligated to perform all of the obligations of a Bank under the Credit Agreement, including the requirements concerning confidentiality, if any, and the payment of indemnification, with a Commitment in the amount set forth in subsection (c) below. The Assignee agrees that it shall perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. It is the intent of the parties hereto that the Commitment of the Assignor shall, as of the Effective Date, be reduced by an amount equal to the portion thereof assigned to the Assignee hereunder, and the Assignor shall relinquish its rights and be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee; provided, however, that the Assignor shall not relinquish its rights under Article V or under Sections 6.03 and 12.04 of the Credit Agreement to the extent such rights relate to the time prior to the Effective Date. (c) After giving effect to the assignment and assumption set forth herein, on the Effective Date: (i) the Assignee's Commitment shall be $__________; and (ii) the Assignee's aggregate outstanding Loans shall be $_______________. (d) After giving effect to the assignment and assumption set forth herein, on the Effective Date: (i) the Assignor's Commitment shall be $__________; and (ii) the Assignor's aggregate outstanding Loans shall be $_______________. 2. Payments. (a) As consideration for the sale, assignment and transfer contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date in immediately available funds an amount equal to $__________, representing the Assignee's Percentage Share of the principal amount of all Loans previously made by the Assignor to the Borrower under the Credit Agreement and outstanding on the Effective Date. (b) The [Assignor] [Assignee] further agrees to pay to the Agent a processing fee in the amount specified in Section 12.09 of the Credit Agreement. 3. Reallocation of Payments. Any interest, fees and other payments accrued to the Effective Date with respect to the Commitment [and Loans] of the Assignor shall be for the account of the Assignor. Any interest, fees and other payments accrued on and after the Effective Date with respect to the portion of E-2. 100 such Commitment [and Loans] assigned to the Assignee shall be for the account of the Assignee. Each of the Assignor and the Assignee agrees that it will hold in trust for the other party any interest, fees and other amounts which it may receive to which the other party is entitled pursuant to the preceding sentence and pay to the other party any such amounts which it may receive promptly upon receipt. 4. Independent Credit Decision. The Assignee (a) acknowledges that it has received a copy of the Credit Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements referred to in Section 9.01 of the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Agreement; and (b) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Credit Agreement and the other Loan Documents. 5. Effective Date; Notices. (a) As between the Assignor and the Assignee, the effective date for this Agreement shall be ______________ (the "Effective Date"); provided that the following conditions precedent have been satisfied on or before the Effective Date: (i) this Agreement shall have been executed and delivered by the Assignor and the Assignee; (ii) any consent of the Borrower and the Agent required under Section 12.09 of the Credit Agreement for the effectiveness of the assignment hereunder by the Assignor to the Assignee shall have been duly obtained and shall be in full force and effect as of the Effective Date; (iii) the Assignee shall have paid to the Assignor all amounts due to the Assignor under this Agreement; (iv) the processing fee referred to in Section 2(b) hereof and in Section 12.09 of the Credit Agreement shall have been paid to the Agent; and (v) the Assignor and Assignee shall have complied with the other requirements of Section 12.09 of the Credit Agreement (to the extent applicable). (b) Promptly following the execution of this Agreement, the Assignor shall deliver to the Borrower and the Agent for acknowledgment by the Agent, a Notice of Assignment substantially in the form attached hereto as Schedule 1. E-3. 101 6. Agent. The Assignee hereby appoints and authorizes the Assignor to take such action as agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to the Agent by the Banks pursuant to the terms of the Credit Agreement and such other Loan Documents. [The Assignee shall assume no duties or obligations held by the Assignor in its capacity as Agent under the Credit Agreement and the other Loan Documents. [INCLUDE ONLY IF ASSIGNOR IS AGENT]] 7. Withholding Tax. The Assignee (a) represents and warrants to the Assignor, the Agent and the Borrower that under applicable law and treaties no tax will be required to be withheld by the Assignor with respect to any payments to be made to the Assignee hereunder, and (b) agrees to furnish (if it is organized under the laws of any jurisdiction other than the United States or any State thereof) to the Agent and the Borrower prior to the time that the Agent or Borrower is required to make any payment of interest or fees under the Credit Agreement, duplicate executed originals of Form 1001, Form 4224 or such other documents and forms of the United States Internal Revenue Service, duly executed and completed by the Assignee, as are required under United States law to establish the Assignee's status for United States withholding tax purposes. 8. Representations and Warranties. (a) The Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any Lien or other adverse claim; (ii) it is duly organized and existing and it has the full power and authority to take, and has taken, all action necessary to execute and deliver this Agreement and any other documents required or permitted to be executed or delivered by it in connection with this Agreement and to fulfill its obligations hereunder; (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than those referred to in Section 5(a)(ii) hereof and any already given or obtained) for its due execution, delivery and performance of this Agreement, and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iv) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against the Assignor in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles. (b) The Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the E-4. 102 Credit Agreement or any other Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other Loan Document. The Assignor makes no representation or warranty in connection with, and assumes no responsibility with respect to, the solvency, financial condition or statements of the Borrower or any other Person, or the performance or observance by the Borrower or any other Person, of any of its respective obligations under the Credit Agreement or any other Loan Document. (c) The Assignee represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this Agreement and any other documents required or permitted to be executed or delivered by it in connection with this Agreement, and to fulfill its obligations hereunder; (ii) no notices to, or consents, authorizations or approvals of, any Person are required (other than those referred to in Section 5(a)(ii) hereof and any already given or obtained) for its due execution, delivery and performance of this Agreement; and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; (iii) this Agreement has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable against the Assignee in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles; and (iv) it is an Eligible Assignee. 9. Further Assurances. The Assignor and the Assignee each hereby agrees to execute and deliver such other instruments, and take such other action, as either party may reasonably request in connection with the transactions contemplated by this Agreement, including the delivery of any notices or other documents or instruments to the Borrower or the Agent, which may be required in connection with the assignment and assumption contemplated hereby. 10. Miscellaneous. (a) Any amendment or waiver of any provision of this Agreement shall be in writing and signed by the parties hereto. (b) No failure on the part of the Assignor or Assignee to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under this Agreement are cumulative and E-5. 103 not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the parties. (c) All payments made hereunder shall be made without any set-off or counterclaim. (d) The Assignor and the Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Agreement. (e) This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. (f) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF CALIFORNIA. [Other provisions to be added as may be negotiated between the Assignor and the Assignee, provided that such provisions are not inconsistent with the Credit Agreement.] IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Agreement to be executed and delivered by their duly authorized officers or agents as of the date first above written. THE ASSIGNOR [_________________________] By ________________________ Title: THE ASSIGNEE [_________________________] By ________________________ Title: E-6. 104 SCHEDULE 1 to the Assignment and Acceptance Agreement NOTICE OF ASSIGNMENT AND ACCEPTANCE Date: ___________________ To: ABN AMRO Bank N.V., as Agent _____________________________ _____________________________ _____________________________ LSI LOGIC CORPORATION _____________________________ _____________________________ _____________________________ Re: LSI Logic Corporation ___________________________________________ Ladies and Gentlemen: We refer to the Credit Agreement dated as of December 20, 1996 (as amended, restated, modified, supplemented or renewed from time to time, the "Credit Agreement") among LSI Logic Corporation (the "Borrower"), certain financial institutions named as Banks therein and ABN AMRO Bank N.V., as Agent for the Banks (in such capacity, the "Agent"). Terms defined in the Credit Agreement are used herein as therein defined. 1. We hereby give you notice of[, and request the consent of [the Borrower and] the Agent to,] the assignment by ________________________ (the "Assignor") to ____________________ (the "Assignee") of ____% of the right, title and interest of the Assignor in and to the Credit Agreement (including, without limitation, ____% of the right, title and interest of the Assignor in and to the Commitment of the Assignor [and all outstanding Loans made by the Assignor]) pursuant to that certain Assignment and Acceptance Agreement, dated as of ___________ (the "Assignment and Acceptance") between Assignor and Assignee, a copy of which Assignment and Acceptance is attached hereto. Before giving effect to such assignment the Assignor's Commitment is $___________. [The Assignor has made Loans in the aggregate principal amount of $__________ to the Borrower.] [No Loans are outstanding under the Credit Agreement.] 2. The Assignee agrees that, upon receiving the consent of the Borrower and the Agent to such assignment (if applicable) and from and after the Effective Date (as such term is defined in Section 5 of the Assignment and Acceptance), the Assignee shall be bound by the terms of the Credit Agreement, E-7. 105 with respect to the interest in the Credit Agreement assigned to it as specified above, as fully and to the same extent as if the Assignee were the Bank originally holding such interest in the Credit Agreement. 3. The following administrative details apply to the Assignee: (a) Lending Office(s): Assignee name: _________________________________ Address: _________________________________ _________________________________ _________________________________ _________________________________ Attention: _________________________________ Telephone: _(____)__________________________ Facsimile: _(____)__________________________ Assignee name: _________________________________ Address: _________________________________ _________________________________ _________________________________ _________________________________ Attention: _________________________________ Telephone: _(____)__________________________ Facsimile: _(____)__________________________ (b) Address for Notices Assignee name: _________________________________ Address: _________________________________ _________________________________ _________________________________ _________________________________ Attention: _________________________________ Telephone: _(____)__________________________ Facsimile: _(____)__________________________ (c) Payment Instructions: Account No.: _________________________________ ABA No.: _________________________________ At: _________________________________ _________________________________ _________________________________ _________________________________ Reference: _________________________________ Attention: _________________________________ E-8. 106 4. You are entitled to rely upon the representations, warranties and covenants of each of the Assignor and Assignee contained in the Assignment and Acceptance. 5. This Notice of Assignment and Acceptance may be executed by the Assignor and the Assignee in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same notice and agreement. IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officers or agents as of the date first above written. Very truly yours, Adjusted Commitment: [ASSIGNOR] $_________________________ By_______________________________ Title: Adjusted Pro Rata Share: _______% Commitment: [ASSIGNEE] $_________________________ By_______________________________ Title: Pro Rata Share: _______% [CONSENTED TO this ___ day of [LSI LOGIC CORPORATION] By ____________________________________ Title: ________________________________ ACKNOWLEDGED [AND CONSENTED TO] this ____ day of ________: E-9. 107 ABN AMRO BANK N.V., as Agent By _____________________________________ Title: __________________________________ E-10. EX-11.1 4 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 LSI LOGIC CORPORATION CALCULATION OF EARNINGS PER SHARE Years ended December 31, 1996, 1995 and 1994 (In thousands, except per shares amounts)
1996 1995 1994 -------- -------- -------- Primary Earnings Per Share Net Income $147,184 $238,120 $108,743 ======== ======== ======== Average common and common equivalent shares: Average common shares outstanding 128,899 123,960 106,336 Dilutive options 2,347 4,062 3,570 -------- -------- -------- 131,246 128,022 109,906 ======== ======== ======== Earnings per common and common equivalent share $1.12 $1.86 $0.99 ======== ======== ======== Fully Diluted Earnings Per Share Net Income $147,184 $238,120 $108,743 Interest expense on convertible subordinated debt, net of tax effect 6,166 6,166 7,022 -------- -------- -------- Adjusted net income $153,350 $244,286 $115,765 ======== ======== ======== Average common and common equivalent shares on a fully diluted basis: Average common shares outstanding 128,899 123,960 111,930 Convertible subordinated debt 11,735 11,735 9,350 Dilutive options 2,374 4,073 4,148 -------- -------- -------- 143,008 139,768 125,428 ======== ======== ======== Fully diluted earnings per common and common equivalent share $1.07 $1.75 $0.92 ======== ======== ========
EX-13.1 5 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 TECHNOLOGY HIGHLIGHTS LSI LOGIC CORPORATION, THE SYSTEM ON A CHIP COMPANY(TM), IS A LEADING DESIGNER AND MANUFACTURER OF CUSTOM HIGH-PERFORMANCE SEMICONDUCTORS. LSI'S ADVANCED PROCESS TECHNOLOGY, ASIC EXPERTISE AND COREWARE(R) DESIGN PROGRAM ENABLE CUSTOMERS TO BUILD COMPLETE SYSTEMS ON A SINGLE CHIP. AS A PERCENTAGE OF 1996 REVENUES, CONSUMER PRODUCTS REPRESENTED 32%, COMMUNICATIONS 28%, COMPUTER 34%, AND OTHER 6%. 1996 3/96 8/96 10/96 11/96 - ---- ---- ---- ----- ----- ABOUT THE COVER INTEGRA(TM) ATMizer(TM) II DVD DECODING GIGABLAZE ARCHITECTURE ENGINE G10(TM) FLIP CHIP BGA PACKAGE A flexible ATM A cost-effective SERIALINK CORE Reduces all the segmentation single chip de- The industry's The cover design includes main functions and reassembly coding engine first 1.25 billion a representation of LSI required to cre- engine which for a variety of bit-per-second Logic's Ball Grid Array ate a satellite TV solves traffic DVD applications CMOS serial package, which uses balls set-top decoder management including stand- transceiver opens of solder to connect the box to three issues. It is alone players, data transmission package to the customer's chips. This highly ideal for DVD on a PC, bottlenecks by circuit board. Housed integrated solu- Network Interface and satellite keeping pace with inside the package is a tion enables Cards (NIC), set-top boxes. today's fastest silicon chip with small movie-quality Ethernet switches. microprocessors. solder bumps covering the video and CD- frame relay GSM Ideal for perform- surface of the chip. The quality audio switches, high- PROCESSOR ing high-speed chip is flipped over to for hundreds end servers, A single-chip data transfer for connect the solder bumps of channels. bridges, routers GSM baseband computer cluster- to the package. This Shown above and protocol processor which ing, RAID arrays, unique design increases is the L64008 converters. will allow custo- and networking the speed at which chip transport chip. mers to develop switches and signals can be transmitted GSM mobile routers. and increases the maximum phones with en- number of chip signals to hanced features over 1000. and significantly extended standby and talk times at dramatically reduced manu- facturing costs.
FINANCIAL HIGHLIGHTS REVENUES NET INCOME STOCKHOLDERS' EQUITY ($ millions) ($ millions) ($ millions) - ------------ ------------ -------------------- 94 ........ $ 902 94 ........ $109 94 ........ $ 545 95 ........ $1,268 95 ........ $238 95 ........ $ 1,216 96 ........ $1,239 96 ........ $147 96 ........ $ 1,316 2 TO OUR SHAREHOLDERS The global semiconductor industry experienced a moderate downturn in 1996, even as many electronics companies that consume chips continued to grow. The slowdown stemmed from excess semiconductor manufacturing capacity coupled with a prolonged reduction in chip inventories by customers. In other words, industry conditions were supply driven, not demand induced. Against this backdrop, LSI Logic turned in a respectable financial performance in 1996, following three consecutive years of record results. Revenues in the worldwide semiconductor industry declined by about 10% in 1996. LSI's 1996 revenues dipped 2% to $1.24 billion from a record $1.27 billion in 1995. The Company's fast-growing Communications and Consumer Products Groups each accounted for about 30% of total revenues compared with 22% each in 1995, and the Computer Products Group represented 34% of revenues in 1996 compared with 49% in 1995. The Company's gross profit margins held above 40% in each quarter of 1996, and net income as a percentage of annual revenues was 12% - a respectable return in a no-growth environment. Net income of $147 million or $107 a share declined 38% from record net income of $238 million or $1.75 a share in 1995. Cash reserves totaled $717 million, an increase of 5% from $686 million in 1995. Inventories declined sequentially in each quarter of the year, ending 1996 at $90 million, down 35% from $140 million at the end of 1995. The seeds of the 1996 business environment were planted a few years ago when a shortage of semiconductors prompted customers to stockpile chip inventories. When semiconductor companies responded by adding factory capacity, many customers abruptly halted their chip buying spree, beginning in the second half of 1995 and continuing through most of 1996, in order to reduce their abnormally high chip inventories. We were not unaffected. LSI possesses the most advanced high-volume manufacturing capacity for application-specific integrated circuits (ASICs), but we had too much of it in 1996. As a result, we closed an aging manufacturing facility in California and delayed by six months the launch of a highvolume factory under construction in Gresham, Oregon. That facility is now scheduled to begin production of eight-inch wafers at the beginning of 1998. PUTTING THE YEAR IN PERSPECTIVE It is important to place the events of 1996 in their proper perspective for both the industry and LSI Logic. Most observers believe 1996 was merely a pause in the industry's long-term growth pattern. Industry revenues about doubled between 1992-1996, and are expected to roughly double again over the next five years, according to several market research firms. That anticipated growth is expected to be fueled by consumers in the industrialized world and in highly populated emerging markets with a hearty appetite for a range of products, including wireless phones, 3 HIGH-VOLUME LSI LOGIC TARGETS HIGH-VOLUME CONSUMER APPLICATIONS WITH DIGITAL TECHNOLOGY AND SYSTEM-ON-A-CHIP SOLUTIONS. LSI, A LEADING SUPPLIER OF CHIPS FOR SATELLITE TELEVISION SET-TOP BOXES AND VIDEO GAMES, UNVEILED IN 1996 A SINGLE-CHIP DECODER FOR THE EMERGING DVD MARKET AND RECEIVED MULTIPLE DESIGN WINS FOR DIGITAL STILL CAMERAS. COST-EFFECTIVE 4 CONSUMER/32% satellite television set-top boxes, video games, digital cameras, networking products, personal computers, Internet products, and DVD products. Likewise, LSI Logic has about doubled in size from 1992. The Company's portfolio of advanced technologies and products provides us with the opportunity to outpace the industry growth rate over time. SETTING THE STAGE FOR GROWTH To achieve meaningful revenue growth in the future requires substantial investment today in emerging technologies and new products. Although 1996 was a challenging year, we did not hesitate to invest in our future. We increased spending on research and development activities by $60 million to a record $184 million in 1996 compared with 1995 levels. Total R&D spending in 1996 was 15% of revenues compared with 10% in 1995. As a highly focused ASIC company, our spending in 1996 was targeted towards technologies and methodologies required to design and manufacture chips for next-generation electronics products in our targeted vertical markets: consumer, communications and computers. We had notable successes in each market area in 1996: Exploiting a new wave of digital consumer products, LSI's Consumer Products Group introduced a number of new products, including the Integra(TM) three-chip set solution for satellite set-top boxes, and won several key customer designs. Adding to its leadership position in set-top boxes, LSI also received multiple design wins in 1996 with customers making digital still cameras, a potentially high-volume market expected to hit the consumer mainstream beginning in 1997. Additionally, the group announced an advanced, single-chip decoder for the emerging DVD market. The Communications Products Group announced its entry into the digital wireless segment with plans for a single-chip cellular phone for the GSM (Global System for Mobile) market. To fuel its future product plans in this market, LSI established two wireless communications R&D labs, one in Israel and the other in California. Also, in recognition of its heavy penetration of the networking industry, LSI was named in 1996 as one of the top five semiconductor suppliers to the worldwide networking industry. Already a well-established leader in the telecommunications market, the group shipped the second generation of its widely adopted ATMizer(TM) architecture for switching equipment and announced plans to enter the cable modem market with its Cablestream(TM) QAM receiver chip. Long known as a key supplier to the engineering workstation segment, LSI's Computer Products Group delivered the Scenario" product platform to enable high-quality MPEG-2 images on personal computers. In addition, the group announced products to handle gigabit-per-second transmission of data in high-end disk drives and won several key designs 5 INTEGRATION LSI LOGIC PROVIDES COMMUNICATIONS CUSTOMERS WITH A BLEND OF HIGH-PERFORMANCE, HIGH-INTEGRATION AND LOW-POWER SOLUTIONS FOR THE NETWORKING, DGITAL CELLULAR AND TRANSMISSION MARKETS. DURING 1996, LSI ANNOUNCED A SINGLE-CHIP GSM ARCHITECTURE FOR CELLULAR PHONES AND THE INDUSTRY'S FIRST CMOS-BASED GIGABIT ETHERNET SOLUTION FOR NETWORKING SWITCHES AND ROUTERS. STANDARDS 6 COMMUNICATIONS/28% from customers in the storage market segment. The storage business segment represents a significant opportunity for LSI Logic. THE SYSTEM ON A CHIP COMPANY(TM) LSI Logic is the undisputed leader in the industry's fast-growing ASIC market. In 1996, for the fourth consecutive year, market research firm Dataquest ranked LSI Logic as the world's largest merchant ASIC company producing metal-oxide semiconductors (MOS). LSI has leveraged its ASIC expertise and trendsetting CoreWare(R) design methodology to also lead a new semiconductor segment called "System on a Chip," which roughly translates into the ability to integrate the multiple functions of an electronic system, including the required software, onto a single system-level chip. Ultimately, all systems are gravitating towards becoming single-chip systems. To be a major factor in this market requires that LSI be a pacesetter in a number of key areas, including process and packaging technology, circuit design and software tools, and intellectual property knowhow. We also must deliver these advanced product solutions to customers via a highly trained field engineering workforce. In short, our continued success requires that we execute in parallel on the technology, manufacturing, engineering, sales and marketing fronts. During 1996, we made substantial headway in all these areas. PROCESS TECHNOLOGY During 1996, LSI Logic began volume production of its tenth generation G10(TM), 0.25-micron process technology, capable of integrating up to five million gates or 49 million transistors on a single chip. We also focused our research efforts on the next-generation G11(TM), 0.18-micron process technology. The G11 technology was formally introduced to customers in early 1997. Process technology is the foundation of the ASIC business because the smaller transistor dimensions associated with newer processes allow more and more of the functions of an electronic system to be integrated onto a single high-performance, cost-effective chip. INTEGRATING CORES FOR TARGETED MARKETS The Company added several industry standard cores in 1996 to its expanding CoreWare library of electronic functions, including those aimed at the GSM wireless market, Internet and Intranet applications, satellite set-top boxes, networking, high-end storage devices, DVD products, and personal computers. The Company also introduced its TinyRISC(TM) MIPS embedded microprocessor core, which is expected to be used in a wide range of applications. Designed by a global team of LSI engineers in Denmark and the United States, the cost-effective TinyRISC core derives its name from its extraordinarily small size (1.7 square millimeters of silicon). Another core called GigaBlaze(TM) is expected to attain widespread use in high-speed gigabit Ethernet networking applications and FibreChannel storage applications in the high-end disk drive and computer 7 TIME-TO-MARKET LSI LOGIC DELIVERS ULTRA-FAST PERFORMANCE TO THE COMPUTER INDUSTRY BY DEVELOPING LEADING-EDGE PRODUCTS FOR CUSTOMERS IN THE WORKSTATION, SERVER, STORAGE AND PC MARKETS. ANNOUNCEMENTS IN 1996 INCLUDED FIBRECHANNEL TECHNOLOGY AND THE INDUSTRY'S FIRST CMOS-BASED GIGABIT-PER-SECOND SOLUTION FOR HIGH-SPEED STORAGE APPLICATIONS, CHIP-TO-CHIP INTERCONNECT AND SYSTEM-TO-SYSTEM MULTIPROCESSING. HIGH-PERFORMANCE 8 COMPUTERS/34% markets. By way of illustrating its high performance and ability to unclog data transmission bottlenecks, the GigaBlaze core can transfer 1.25 billion bits of data per second, the equivalent of seventy-five 350-page novels per second. HIGH-VOLUME MANUFACTURING During 1996, the Company installed highly specialized chemical mechanical polishing (CMP) equipment in its Japanese factories. CMP increases manufacturing yields and allows for unprecedented levels of chip customization. Being among the first in the industry to deploy this equipment has offered what we believe is a competitive advantage. With chip densities quadrupling every three or four years, the packages that house ASICs become an increasingly important factor. In 1996, the Company introduced its state-of-the-art Flip Chip package, which essentially replaces the wires that connect a chip to a package with solder bumps connected to pads on the chip's external surface. This unique package increases the speed at which chip signals can be transmitted, and it simplifies the manufacturing process. SERVING CUSTOMERS Everyone at LSI Logic serves customers, but we made organizational changes in 1996 to emphasize the point. We created Worldwide Customer Marketing and Customer Engineering groups to harness the power of our own resources around the world for the benefit of our increasingly global customer base. One of those global resources is comprised of more than 1,200 engineers - or about one third of our total workforce to work directly with customers. This is both a competitive advantage for us and a barrier to entry for other companies. LOOKING FORWARD I started this letter by saying that a lengthy chip inventory correction by customers put a damper on our 1996 financial results. By the end of 1996, though, there were encouraging signs that the inventory correction had run its course, or very nearly so. While it is difficult to forecast short-term trends, it is decidedly easier to look longer-term. Given the anti-inflationary nature of the electronics business and the rapid development of new products, it is hard to imagine a scenario in which demand for chip-laden electronics products will slacken for extended periods of time. Electronics has now become an essential thread in the global economic fabric, and I am confident that LSI Logic will play an important role in this vital industry for many years to come. Thank you for your continued support. /s/ Wilfred J. Corrigan Wilfred J. Corrigan Chairman and Chief Executive Officer 9 1996 Financial Data Contents 9 Management's discussion and analysis of financial condition and results of operations 16 Consolidated financial statements 20 Notes to consolidated financial statements 37 Report of independent accountants 38 Eleven year consolidated summary 40 Interim financial information 41 Corporate information 42 Corporate directory 43 Stock information NET INCOME PER REVENUES NET INCOME SHARE FULLY DILUTED 1994 $ 902 1994 $109 1994 $0.92 1995 $1,268 1995 $238 1995 $1.75 1996 $1,239 1996 $147 1996 $1.07 SG&A EXPENSES OPERATING GROSS PROFIT MARGIN R&D FUNDING PROFIT MARGIN 1994 42.3% 1994 13.9% 1994 17.5% 11.0% 1995 47.5% 1995 12.6% 1995 25.1% 9.8% 1996 43.9% 1996 14.9% 1996 15.5% 13.5% REVENUES PER STOCKHOLDERS' EMPLOYEE TOTAL ASSETS EQUITY 1994 $257 1994 $1,270 1994 $ 545 1995 $333 1995 $1,850 1995 $1,216 1996 $311 1996 $1,953 1996 $1.316 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Revenues for LSI Logic decreased 2% to $1.24 billion in 1996 from $1.27 billion in 1995. Income from operations was $192 million in 1996 compared to $319 million in 1995. Net income was $147 million in 1996 compared to $238 million in 1995. Fully diluted earnings per share decreased to $1.07 per share in 1996 from $1.75 per share in 1995. The reduction in operating income during 1996 resulted primarily from lower factory utilization combined with increased investment in our product portfolio, process and package technology. In the latter part of 1995, the Company put in place manufacturing capacity necessary to meet the strong demand experienced at that time. As demand softened during 1996, that capacity resulted in lower factory utilization which reduced gross margin. However, the Company is well-positioned to take advantage of an upturn in the market. 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 31,1996. The Company operates on a 52/53 week fiscal year which ends on the Sunday 8 closest to December 31. Fiscal years 1996, 1995 and 1994 were 52 week years. Statements in this discussion and analysis contain forward looking information and involve known and unknown risks and uncertainties (see additional discussion contained in "Risk Factors," set forth in Part 1 of the Company's report on Form 10-K) which may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. RESULTS OF OPERATIONS REVENUES 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's 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: 1996 1995 1994 ---------------------------- Component products 94% 94% 89% Design and services 6% 6% 11% ---------------------------- 100% 100% 100% ============================ 11 Total revenues declined to $1.24 billion in 1996 from $1.27 billion in 1995. The decrease in revenues for 1996 was primarily attributable to a slowdown in new orders for the Company's component products utilized in computer applications and was partially offset by increased demand for its products utilized in consumer and communication applications. The Company's average selling prices for component products did not fluctuate significantly during 1996 compared to 1995. Design and services revenues during 1996 were consistent with 1995. During 1996, one customer represented 14% of the Company's consolidated revenues. Total revenues grew to $1.27 billion in 1995 from $902 million in 1994. Total component revenues grew to $1.19 billion in 1995 from $803 million in 1994. The increase in total revenues and component 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 was 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 resulted in the Company undertaking fewer engineering projects for customers in 1995. One customer represented 12% of the Company's consolidated revenues during 1995. 12 OPERATING COSTS AND EXPENSES Key elements of the consolidated statements of operations, expressed as a percentage of revenues, were as follows: - ------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Gross margin 44% 47% 42% Research and development expense 15% 10% 11% Selling, general and administrative expense 13% 13% 14% Income from operations 16% 25% 17% --- --- --- GROSS MARGIN The gross margin percentage for 1996 declined to 44% of revenues, compared with 47% in 1995. The decline was primarily attributable to lower factory utilization during 1996 which was compounded by the Company's increase in its production capability throughout 1995, primarily from the expansion of its Japanese wafer manufacturing facility. The impact of lower factory utilization on gross margin was offset in part by improvements in manufacturing yields and favorable pricing negotiations with assembly and test subcontractors. Additionally, the gross margin was favorably impacted in the fourth quarter of 1996 by the effects of the Company's decision to close its Milpitas, California, manufacturing facility during 1996. The gross margin percentage improved in 1995 to 47% of revenues from 42% in 1994 primarily as a result of greater factory utilization and improved plant efficiencies at the Company's Japanese wafer manufacturing facility. Changes in the product mix and increasing usage of low-cost assembly and test subcontractors also contributed favorably to gross margin in 1995. 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 13 third-party subcontractors and foreign currency fluctuations. Each of these factors can cause substantial fluctuations in operating results. 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 yen weakened (the average yen exchange rate for 1996 decreased 16% from 1995), 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. The Company hedged a portion of its remaining yen exposure (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 $60 million or 49% to $184 million in 1996 compared to $124 million in 1995. As a percentage of revenues, R&D expenses increased to 15% in 1996 from 10% in 1995. The increase is primarily attributed to increased staffing levels as the Company continues to invest in the development of more advanced products and the related manufacturing, packaging and design processes. The increase in R&D expense also reflects a decrease in the utilization of the Company's R&D facility for the production of products sold to customers. R&D expenses increased $25 million in 1995 compared to 1994; however, as a percentage of revenues they declined to approximately 10% from 11% in 1994. The increase in R&D expenses during 1995 was primarily attributable to increased staffing levels. 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. 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 of approximately 15o17% of revenues in 1997. This investment is expected to be primarily for development of new advanced products, development of advanced manufacturing processes and enhancement of the Company's design automation software capability. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses increased $7 million and $34 million in 1996 and 1995, respectively. The increase during 1996 is primarily attributable to information technology costs related to upgrading the Company's business systems and infrastructure. The increase during 1995 was primarily a result of increased staffing levels. SG&A expenses as a percentage of revenue remained relatively consistent at 13% in 1996 and 1995 and decreased during 1995 from 14% in 1994. The decline in SG&A expenses as a percentage of revenue in 1995 primarily reflects the trend of more rapidly increasing revenues during 1995. The Company expects that SG&A expenses will continue to increase in absolute dollars, although such expenses may fluctuate as a percentage of revenues in future periods. INTEREST EXPENSE Interest expense decreased to $14 million in 1996 compared to $16 million and $18 million in 1995 and 1994, respectively. The decrease is primarily due to the capitalization of interest relating to the construction of manufacturing facilities during 1996 and a decrease in interest rates related to yen denominated borrowings, offset in part by an increase in borrowings during these periods. 14 INTEREST AND OTHER INCOME Interest and other income decreased $6 million in 1996 compared with 1995. The decrease is primarily attributable to foreign currency exchange losses totaling _$7 million during 1996, the majority of which related to U.S. dollars held by the Company's European sales affiliate. 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. PROVISION FOR INCOME TAXES In 1996, 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 taxed at lower rates and the utilization of prior loss carryovers and other tax credits. MINORITY INTEREST The changes in minority interest between 1996, 1995 and 1994 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., LSI Logic K.K. and LSI Logic Europe, Ltd. (formerly known as LSI Logic Europe, plc) in 1996, 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 The Company implemented a restructuring plan in the third quarter of 1992 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 shut-down 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 consolidation of certain U.S. and foreign sales offices, design centers and administrative organizations; and certain legal matters and other costs. By the end of 1995, the Company had completed the phase-out of the German test and assembly operation and written off the facility, discontinued the chipset business, completed a partial phase-down of its Milpitas wafer manufacturing facility and certain U.S. assembly and test operations and completed consolidation of certain U.S. sales offices and design centers. These actions included termination of approximately 400 employees. 15 The following table sets forth the Company's 1992 restructuring expense, remaining reserves at December 31, 1995 and 1996 (which are accounted for as components of fixed assets and current liabilities) and charges taken from the date the restructuring commenced through December 31, 1995 and during 1996:
1992 RESTRUCTURING BALANCE BALANCE (In thousands) EXPENSE UTILIZED* ADJUSTED 12/31/95 UTILIZED* ADJUSTED 12/31/96 ------------------------------------------------------------------------------------------ Write-down of manufacturing facility (a) $ 14,700 $(28,700) $ 14,000 $ -- $ -- $ -- $ -- Other fixed asset related charges (b) 35,500 (21,600) (12,000) 1,900 (17,100) 15,200 -- Other provisions for phase- down and consolidation of manufacturing facilities (b) 13,500 (9,900) (800) 2,800 (3,600) 800 -- Payments to employees for severance (c) 8,000 (5,700) (2,300) -- (1,500) 1,500 -- Write-down of inventories (a) 10,900 (8,800) (2,100) -- -- -- -- Relocation, lease terminations and other (b) 19,200 (3,400) (3,200) 19,000 (1,500) (17,500) -- ----------------------------------------------------------------------------------------- Total $101,800 $(78,100) $ -- $23,700 $(23,700) $ -- $ -- =========================================================================================
- ---------- * Net of cumulative currency translation adjustments. (a) Amounts utilized represent non-cash charges. (b) Amounts utilized represent both cash and non-cash charges. Cumulative cash charges totaled $17 million. (c) Amounts utilized represent cash payments related to the severance of approximately 550 employees. During 1996, $23.7 million was charged against the restructuring reserves. These charges were primarily for the shut-down of the Milpitas wafer fabrication facility, which had been delayed due to the facility's manufacturing capacity having been required for longer than anticipated at the time the restructuring charge was taken. These charges included a $15 million charge resulting from the write-down of the Milpitas wafer fabrication equipment (see Note 5 of Notes to Consolidated Financial Statements), severance payments to approximately 150 employees ($1.5 million) and lease and other charges in connection with the Milpitas wafer manufacturing equipment ($5.3 million). Other restructuring charges were attributable to ongoing maintenance costs of the Company's vacant German facility ($1.8 million) and a decrease in reserves due to translation adjustments as a result of the weakening Deutsche mark ($0.1 million). As a result of a favorable appellate court decision in September 1996 in connection with the Texas Instruments litigation (see Note 11 of Notes to Consolidated Financial Statements), $15 million of restructuring reserves became available for the write-down of the Milpitas wafer manufacturing equipment (see Note 5 of Notes to Consolidated Financial Statements). 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 semi- 16 conductor industry and the markets addressed by the Company's products, the availability and extent of utilization of manufacturing capacity, price erosion, competitive factors, the timing of new product introductions, changes in product mix, fluctuations in manufacturing yields, product obsolescence and the ability to develop and implement new technologies. The Company's operating results could also be impacted by fluctuations in customer requirements, currency exchange rate fluctuations and other economic conditions affecting customer 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 significantly 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, currency swap and purchased option contracts to manage its exposure associated with currency fluctuations on intercompany transactions and certain foreign currency denominated commitments. At December 31, 1996, the Company had currency swap and purchased option contracts outstanding (see Note 4 of Notes to Consolidated Financial Statements). These contracts hedge intercompany loans, a portion of the Company's yen denominated commitments and net asset and liability positions denominated in non-functional currencies at certain of the Company's affiliates for the first quarter of 1997. There can be no assurance that the Company's efforts to hedge these risks will be successful or that these factors will not have an adverse effect on the Company's future operating results. 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 $717 million at December 31, 1996 from $686 million at December 31, 1995. The increase of $31 million is primarily attributable to cash flows from operations of $352 million, proceeds from borrowings of $143 million and proceeds received from employee stock transactions of $20 million, partially offset by capital additions of approximately $362 million, $54 million in repayments of debt obligations and $47 million used to repurchase the Company's stock. The Company terminated its stock repurchase program in February 1997. 17 During 1996, the Company generated $352 million of cash and cash equivalents from its operating activities, compared to $294 million during 1995. The increase in cash and cash equivalents provided from operations as compared to 1995 was primarily attributable to decreases in inventories and accounts receivable, partially offset by decreases in net income before depreciation and amortization and accounts payable. Decreased sales and manufacturing activities in response to reduced customer demand contributed to decreases in accounts payable, accounts receivable and inventories. Cash and cash equivalents used in investing activities totaled $433 million during 1996. The primary investing activities included purchases of property and equipment and increased investments in debt and equity securities. 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 1996 of $362 million were primarily for construction costs related to the Company's new wafer fabrication facility in Oregon (see below) and advanced processing equipment at JSI, net of retirements and $12 million of equipment refinanced through operating leases by the Company's Japanese manufacturing subsidiary (see Note 11 of Notes to Consolidated Financial Statements). In August 1995, the Company began construction on its new 8-inch wafer manufacturing facility in Gresham, Oregon. The Company expects to spend approximately $500 to $600 million during 1997 and the first half of 1998 to bring this facility to operational status. When fully ramped, the Gresham facility will have capacity to run approximately 4,000 8-inch wafers per week. Cash and cash equivalents provided from financing activities totaled $62 million. The increase during 1996 is attributable to the net increase in borrowings of $89 million and proceeds received from employee stock transactions of $20 million, partially offset by $47 million used to repurchase shares of the Company's stock (see Note 8 of Notes to Consolidated Financial Statements). In December 1996, the Company entered into a $300 million revolving line of credit with several banks (see Note 7 of Notes to Consolidated Financial Statements). As of December 31, 1996, there were no borrowings outstanding under this credit agreement. Additionally, the Company's manufacturing subsidiary, JSI, has a 25 billion yen credit line arrangement with adjustable interest rates. As of December 31, 1996, JSI had 18.25 billion yen ($159 million) outstanding under the facility (see Note 7 of Notes to Consolidated Financial Statements). Each of the Company's significant foreign affiliates has lines of credit available for local currency borrowings. These other foreign bank lines of credit were not material as of December 31, 1996. On February 21, 1997, the Company called for redemption of all of its $144 million, 51/2% Convertible Subordinated Notes (Notes). The Notes are redeemable by the Company at the principal amount plus a 2% premium. Each Note is convertible by the holder to common stock at a conversion price of $12.25 per share. If all Notes are converted to common stock, approximately 12 million additional shares of common stock will be issued. The Company believes that existing liquid resources and funds generated from operations combined with its ability to borrow funds will be adequate to meet its operating and capital requirements and obligations through the foreseeable future. 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. However, 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. 18 CONSOLIDATED BALANCE SHEETS
-------------------------- DECEMBER 31st - ---------------------------------------------------------------------------------- 1996 1995 -------------------------- (In ASSETS thousands, except Cash and cash equivalents $ 147,059 $ 172,780 per share amount) Short-term investments 570,223 512,765 Accounts receivable, less allowance for doubtful accounts of $3,116 and $3,486 184,977 230,980 Inventories 90,410 139,857 Prepaid expenses and other current assets 58,385 80,348 ---------- ---------- Total current assets 1,051,054 1,136,730 ---------- ---------- Property and equipment, net 811,659 638,282 Other assets 90,001 74,575 ---------- ---------- Total assets $1,952,714 $1,849,587 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 104,109 $ 165,725 Accrued salaries, wages and benefits 26,000 34,825 Accrued restructuring costs -- 22,700 Other accrued liabilities 67,921 42,315 Income taxes payable 77,696 73,649 Current portion of long-term obligations 69,612 56,569 ---------- ---------- Total current liabilities 345,338 395,783 ---------- ---------- Long-term obligations 281,136 222,388 ---------- ---------- Deferred income taxes 4,907 8,514 ---------- ---------- Minority interest in subsidiaries 5,114 6,656 ---------- ---------- Commitments and contingencies -- -- ---------- ---------- Stockholders' equity: Preferred shares; 2,000 shares authorized -- -- Common stock; $.01 par value; 250,000 shares authorized; 129,006 and 129,303 shares outstanding 1,290 1,293 Additional paid-in capital 837,151 853,538 Retained earnings 452,374 305,190 Cumulative translation adjustment 25,404 56,225 ---------- ---------- Total stockholders' equity 1,316,219 1,216,246 ---------- ---------- Total liabilities and stockholders' equity $1,952,714 $1,849,587 ========== ==========
See Notes to Consolidated Financial Statements. 19 CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31st - -------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------------------- (in Revenues $1,238,694 $1,267,657 $901,830 thousands, ---------------------------------------- except per share amounts) Costs and expenses: Cost of revenues 695,002 665,673 520,150 Research and development 184,452 123,892 98,978 Selling, general and administrative 166,823 159,393 124,936 --------------------------------------- Total costs and expenses 1,046,277 948,958 744,064 --------------------------------------- Income from operations 192,417 318,699 157,766 Interest expense (13,610) (16,349) (18,455) Interest income and other 26,308 32,593 16,858 --------------------------------------- Income before income taxes and minority interest 205,115 334,943 156,169 Provision for income taxes 57,432 93,781 43,679 --------------------------------------- Income before minority interest 147,683 241,162 112,490 Minority interest in net income of subsidiaries 499 3,042 3,747 ---------------------------------------- Net income $ 147,184 $ 238,120 $108,743 ======================================== Net income per share: Primary $ 1.12 $ 1.86 $ 0.99 ======================================== Fully dilutive $ 1.07 $ 1.75 $ 0.92 ======================================== Common shares and common share equivalents used in computing per share amounts: Primary 131,246 128,022 109,906 ======================================== Fully dilutive 143,008 139,768 125,428 ========================================
See Notes to Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Retained Cumulative ---------------- Paid-In Earnings Translation Shares Amount Capital (Deficit) Adjustment Total (In thousands) ------- ------ ---------- -------- ---------- ---------- Balances at January 1, 1994 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 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 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 Purchase of common stock under stock repurchase program (2,077) (21) (46,817) -- -- 46,838) Issuance to employees under stock option and purchase plans 1,780 18 19,680 -- -- 19,698 Tax benefit of employee stock transactions -- -- 10,750 -- -- 10,750 Aggregate adjustment from translation of financial statements into U.S. dollars -- -- -- -- (30,821) (30,821) Net Income -- -- -- 147,184 -- 147,184 ------- ------ -------- -------- -------- ---------- Balances at December 31, 1996 129,006 $1,290 $837,151 $452,374 $ 25,404 $1,316,219 ======= ====== ======== ======== ======== ==========
See Notes to Consolidated Financial Statements. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31ST ---------------------------------------- 1996 1995 1994 ---------------------------------------- (In thousands) Operating activities: Net income $ 147,184 $ 238,120 $ 108,743 Adjustments: Depreciation and amortization 147,465 135,197 103,648 Minority interest in net income of subsidiaries 499 3,042 3,747 Changes in: Accounts receivable 42,268 (81,343) (21,998) Inventories 46,675 (31,164) (34,051) Prepaid expenses and other Assets 8,494 (45,226) (5,494) Accounts payable (55,255) 3,054 93,578 Accrued and other liabilities 18,472 81,190 18,367 Accrued restructuring costs (3,873) (8,376) (11,702) --------------------------------------- Net cash provided by operating activities 351,929 294,494 254,838 --------------------------------------- Investing activities: Purchase of debt and equity securities available-for-sale (1,117,885) (613,703) (292,584) Maturities and sales of debt and equity securities available-for-sale 1,055,183 302,060 167,152 Purchase of restricted equity securities (6,252) (13,966) --- Purchases of property and equipment, net of retirements (361,776) (232,723) (166,421) Acquisition of stock from minority interest holders (2,757) (171,843) (14,173) --------------------------------------- Net cash used in investing activities (433,487) (730,175) (306,026) --------------------------------------- Financing activities: Issuance of Convertible Subordinated Notes -- -- 143,750 Proceeds from borrowings 142,832 83,294 5,061 Repayment of debt obligations (54,185) (110,126) (23,883) Repurchase of Convertible Subordinated Debentures -- -- (1,112) Purchase of common stock under repurchase program (46,838) -- -- Issuance of common stock, net 19,698 423,520 17,203 --------------------------------------- Net cash provided by financing activities 61,507 396,688 141,019 --------------------------------------- Effect of exchange rate changes on cash and cash equivalents (5,670) (12,730) 13,353 --------------------------------------- Increase (decrease) in cash and cash equivalents (25,721) (51,723) 103,184 Cash and cash equivalents at beginning of period 172,780 224,503 121,319 --------------------------------------- Cash and cash equivalents at end of period $ 147,059 $ 172,780 $ 224,503 ======================================= Schedule of non-cash transactions: Conversion of subordinated debentures to common stock $ -- $ -- $ 97,104 ======================================= Tax benefit of employee stock transactions $ 10,750 $ 28,900 $ 13,674 =======================================
See Notes to Consolidated Financial Statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 1: 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, consumer electronics, 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 purposes, the consolidated financial statements and notes refer to December 31 as year end. Fiscal years 1996, 1995 and 1994 were 52 week years. 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 and are classified as held-to-maturity. Marketable short-term investments are accounted for as available-for-sale. 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, 1996 and 1995 were not material. Realized gains and losses are based on the book value of specific securities at the time of sale. Such gains and losses included in net income were immaterial during 1996, 1995 and 1994. 23 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, communication and consumer electronics manufacturers, with the remainder distributed across other industries. Amounts due from the Company's largest customer accounted for 16% of trade receivables at December 31, 1996 and 1995. During 1996 and 1995, the Company sold approximately $41 million and $28 million (discounted at short-term yen borrowing rates, averaging 0.5% and 1.1%), respectively, of its Japanese sales affiliate's accounts receivable through financing programs with certain Japanese banks. Related transaction costs were not material. 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 not been material. FAIR VALUE DISCLOSURES 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 $511 million and $500 million at December 31, 1996 and 1995, respectively. The estimated fair value of all other financial instruments at December 31, 1996 and 1995 was not materially different from the values presented in the consolidated balance sheets. 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 2-5 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. 24 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. SOFTWARE The Company capitalizes substantially all external costs related to the purchase and implementation of software projects used for business operations and engineering design activities. Capitalized software costs primarily include purchased software and consulting fees. Capitalized software projects are amortized over the estimated useful life of the project, typically a two to five year period. The Company had $34 million and $28 million of capitalized software costs, net of amortization, included in other assets at December 31, 1996 and 1995. Software amortization totaling $16 million, $9 million and $5 million was included in the Company's results of operations during 1996, 1995 and 1994, respectively. OTHER ASSETS Goodwill of approximately $29 million and $27 million, and related accumulated amortization of $9 million and $5 million, are included in other assets at December 31, 1996 and 1995, 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 cash flows of the acquired entity. At December 31, 1996 and 1995, the Company had $20 million and $14 million, respectively, invested in restricted shares of Chartered Semiconductor Manufacturing Pte. Ltd. (CSM). 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 carrying value at December 31, 1996 and 1995. REVENUE RECOGNITION Revenue from component products is recognized upon shipment. Revenue from the licensing of the Company's design and manufacturing technology 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 14% and 12% of consolidated revenues in 1996 and 1995, respectively. Two customers accounted for 14% and 11% of consolidated revenues in 1994. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the grant date. Accordingly, no compensation cost has been recognized in the Company's statements of operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." See Note 8. 25 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 notes outstanding during the year. Fully dilutive earnings per share computations are based on the most advantageous conversion or exercise rights to the security holder that become effective within 10 years following the period reported upon. NOTE 2: PURCHASES OF MINORITY INTEREST During 1996 and 1995, the Company acquired 117,000 and 1.6 million common shares of its Japanese sales affiliate from its minority interest shareholders for approximately $0.7 million and $10 million, respectively. During December 1996, the Company acquired the remaining minority shares outstanding of its European sales affiliate, LSI Logic Europe, Ltd. (formerly LSI Logic Europe, plc) for $2 million. These acquisitions were accounted for as purchases and the excess of the purchase price over the fair value of the assets acquired ($2 million during each of 1996 and 1995) was allocated to goodwill and is being amortized over seven years. As of December 31, 1996, the Company owned approximately 92% of the Japanese affiliate and 100% of the European affiliate. During January 1995, the Company acquired all minority owned shares (a 45% interest) 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 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 made 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. 26 NOTE 3: CASH AND INVESTMENTS Cash and cash equivalents and short-term investments included the following debt and equity securities:
-------------------------- DECEMBER 31st - ------------------------------------------------------------------------------- (In thousands) 1996 1995 -------------------------- CASH AND CASH EQUIVALENTS Commercial paper $ 61,123 $ 22,980 Overnight deposits 40,513 59,296 Time deposits 13,483 25,030 Other 10,941 9,237 -------------------------- Total held-to-maturity 126,060 116,543 Cash 20,999 56,237 -------------------------- Total cash and cash equivalents $147,059 $172,780 ========================== SHORT-TERM INVESTMENTS Corporate debt securities $273,912 $335,612 U.S. government and agency securities 91,716 43,881 Auction rate preferred 82,170 82,615 Bank notes 51,689 35,960 Time deposits 36,182 - Commercial paper 34,554 - Other - 14,697 -------------------------- Total available-for-sale $570,223 $512,765 ==========================
Cash and cash equivalents and short-term investments held at December 31, 1996 and 1995 approximate fair market value. The Company generally holds available-for-sale investments for one year or less. As of December 31, 1996, contractual maturities of available-for-sale securities were $515 million and $55 million maturing within one year and between one to two years, 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 various hedge instruments, primarily forward exchange, currency swap, interest rate swap and purchased option contracts. The purpose of these instruments is to manage exposure associated with firm intercompany and third-party transactions and net asset and liability positions denominated in non-functional currencies. The Company does not enter into speculative contracts to profit on exchange rate fluctuations. As of December 31, 1996, currency swap contracts, expiring January 1997, were held to hedge firm obligations to the Company's Japanese manufacturing subsidiary. 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. 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 27 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 31st - ------------------------------------------------------------ (In thousands) 1996 1995 -------------------- BUY/(SELL) Japanese yen $ 7,337 $ 18,474 Pound sterling -- 5,614 German mark -- (5,990) Singapore dollar -- 6,089 U.S. dollar (7,398) (25,492) -------------------- $ (61) $ (1,305) ====================
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. They 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. At December 31, 1996, the Company had a purchased currency option expiring in March 1997 with a nominal value of $20 million to hedge a net dollar balance sheet exposure at its European affiliate. Deferred foreign exchange gains and losses were not material at December 31, 1996 and 1995. Foreign currency transaction losses for 1996 included in interest income and other were $7 million; foreign currency transaction gains and losses were not material in 1995 or 1994. NOTE 5: BALANCE SHEET DETAIL
------------------------- December 31st - ------------------------------------------------------------------------- (In thousands) 1996 1995 ------------------------- INVENTORIES Raw materials $ 19,540 $ 44,758 Work-in-process 53,785 47,193 Finished goods 17,085 47,906 ------------------------- $ 90,410 $ 139,857 ========================= PROPERTY AND EQUIPMENT Land $ 42,861 $ 27,698 Buildings and improvements 166,862 152,671 Equipment 856,469 807,596 Leasehold improvements 54,573 60,514 Preproduction engineering 27,222 27,832 Furniture and fixtures 32,512 28,150 Construction in progress 168,878 44,063 ------------------------- 1,349,377 1,148,524 Accumulated depreciation and amortization (537,718) (510,242) ------------------------- $ 811,659 $ 638,282 =========================
28 Accumulated amortization for preproduction engineering was $20 million and $14 million at December 31, 1996 and 1995, respectively. Capitalized interest included within property and equipment totaled $12 million and $10 million at December 31, 1996 and 1995, respectively. Accumulated amortization of capitalized interest was $5 million and $4 million at December 31, 1996 and 1995, respectively. During 1996, the Company completed the shut-down of its Milpitas wafer manufacturing facility and determined that the majority of the equipment for that facility was no longer needed for current or future capacity requirements. Accordingly, the equipment was made available for sale and was written down by $15 million to its estimated net realizable value. The Company utilized $15 million of its restructuring reserves, which became available as a result of a favorable court decision (see Notes 6 and 11), and, therefore, the write-down did not necessitate a charge to the income statement. At December 31, 1996, assets held for sale totaling $15.6 million are included in other current and noncurrent assets and include manufacturing equipment and two buildings. In December 1995, the Company sold land in Milpitas which had a carrying value of $16 million for $21 million. The gain on the sale of $5 million is included in other income. NOTE 6: RESTRUCTURING THE COMPANY The Company implemented a restructuring plan in the third quarter of 1992 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 shut-down 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 consolidation of certain U.S. and foreign sales offices, design centers and administrative organizations; and certain legal matters and other costs. By the end of 1995, the Company had completed the phase-out of the German test and assembly operation and written off the facility, discontinued the chipset business, completed a partial phase-down of its Milpitas wafer manufacturing facility and certain U.S. assembly and test operations, and completed consolidation of certain U.S. sales offices and design centers. These actions included termination of approximately 400 employees. 29 The following table sets forth the Company's 1992 restructuring expense, remaining reserves at December 31, 1995 and 1996 (which are accounted for as components of fixed assets and current liabilities) and charges taken from the date the restructuring commenced through December 31, 1995 and during 1996:
- ---------------------------------------------------------------------------------------------------------------------- 1992 Restructuring Balance Balance (in thousands) Expense Utilized Adjusted 12/31/95 Utilized Adjusted 12/31/96 - -------------- ------------- -------- -------- -------- -------- -------- -------- Write-down of manufacturing facility (a) $ 14,700 $(28,700) $14,000 $ -- $ -- $ -- $ -- Other fixed asset related charges (b) 35,500 (21,600) (12,000) 1,900 (17,100) 15,200 -- Other provisions for phase- down and consolidation of manufacturing facilities (b) 13,500 (9,900) (800) 2,800 (3,600) 800 -- Payments to employees for severance (c) 8,000 (5,700) (2,300) -- (1,500) 1,500 -- Write-down of inventories (a) 10,900 (8,800) (2,100) -- -- -- -- Relocation, lease terminations and other (b) 19,200 (3,400) 3,200 19,000 (1,500) (17,500) -- -------- -------- ------- ------- -------- -------- ------- Total $101,800 $(78,100) $ -- $23,700 $(23,700) $ -- $ -- ======== ======== ======= ======= ======== ======== =======
* Net of cumulative currency translation adjustments. (a) Amounts utilized represent non-cash charges. (b) Amounts utilized represent both cash and non-cash charges. Cumulative cash charges totaled $17 million. (c) Amounts utilized represent cash payments related to the severance of approximately 550 employees. During 1996, $23.7 million was charged against the restructuring reserves. These charges were primarily for the shut-down of the Milpitas wafer fabrication facility, which had been delayed due to the facility's manufacturing capacity having been required for longer than anticipated at the time the restructuring charge was taken. These charges included a $15 million charge resulting from the write-down of the Milpitas wafer fabrication equipment (see Note 5), severance payments to approximately 150 employees ($1.5 million) and lease and other charges in connection with the Milpitas wafer manufacturing equipment ($5.3 million). Other restructuring charges were attributable to ongoing maintenance costs of the Company's vacant German facility ($1.8 million) and a decrease in reserves due to translation adjustments as a result of the weakening Deutsche mark ($0.1 million). As a result of a favorable appellate court decision in September 1996 in connection with the Texas Instruments litigation (see Note 11), $15 million of restructuring reserves became available for the write-down of the Milpitas wafer manufacturing equipment (see Note 5). 30 NOTE 7: DEBT
December 31st - ----------------------------------------------------------------------------------------------- (In thousands) 1996 1995 ---------------------------- SENIOR Notes payable to banks $ 183,531 $111,207 Capital lease obligations 605 1,155 SUBORDINATED 5-1/2% Convertible Subordinated Notes, due 2001 143,750 143,750 ---------------------------- 327,886 256,112 Current portion of long-term debt, capital lease obligations and short-term borrowings (69,612) (56,569) ---------------------------- Long-term debt and capital lease obligations $ 258,274 $199,543 ============================
As of December 31, 1996 and 1995, the Company had $144 million of 5-1/2% Convertible Subordinated Notes (Notes) outstanding. The Notes are due in 2001 and are subordinated to all existing and future senior debt. The Notes 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 (see Note 12). 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 December 1996, the Company entered into a credit arrangement with several banks for a $300 million revolving line of credit expiring in December 1999. The agreement allows for borrowings at an adjustable rate. Interest payments are due quarterly. The agreement calls for financial covenants relating to senior debt ratio, quick ratio, debt service ratio, subordinated debt and tangible net worth. At December 31, 1996, the Company did not have any borrowings outstanding under this credit agreement. The Company's Japanese manufacturing subsidiary, JSI, has a 25 billion yen credit line arrangement with adjustable interest rates. Borrowings under the credit line are for a term of five years with principal 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. At December 31, 1996, the Company was in compliance with these covenants. As of December 31, 1996, JSI had 18.25 billion yen ($159 million) outstanding under the facility. Additionally, the Company has entered into several five year interest rate swap agreements to convert the adjustable interest rate per the credit arrangement to fixed rates (ranging from 2.65% to 3.24%). JSI also had borrowings outstanding of approximately 2.75 billion yen ($24 million) at December 31, 1996. JSI has notified the lenders of its intent to repay the 2.75 billion yen during 1997 and, therefore, these borrowings are classified as short term at December 31, 1996. Aggregate principal payments required on outstanding debt obligations are as follows: 1997 - $70 million; 1998 - $39 million; 1999 - $38 million; 2000 - $37 million; 2001 - $0; 2002 and thereafter - $144 million. The Company paid $17 million, $18 million and $20 million in interest during 1996, 1995 and 1994, respectively. 31 NOTE 8: COMMON STOCK The following summarizes all shares of common stock reserved for issuance as of December 31, 1996: - -------------------------------------------------------------------------------- (In thousands) NUMBER OF SHARES ---------------- ISSUABLE UPON Conversion of subordinated long-term debt 11,735 Exercise of stock options, including options available for grant 13,308 Purchase under Employee Stock Purchase Plan 1,489 ------ 26,532 ====== In February 1996, the Company's Board of Directors approved an action which authorizes management to acquire up to four million shares of its own stock in the open market at current market prices. During the first nine months of 1996, the Company repurchased and retired approximately two million shares of its common stock from the open market for approximately $47 million. The transactions were recorded as reductions to common stock and additional paid-in capital. The Company terminated its stock repurchase program in February 1997. During February 1995, the Company completed an offering of 6,325,000 shares of common stock, netting proceeds of approximately $158 million. 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. 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, 1996. The 1991 Equity Incentive Plan enables the Company to sell or award to its officers, employees or consultants stock options, stock appreciation rights, stock purchase rights or stock bonuses. Stock options may be granted under the 1991 Equity Incentive Plan with an exercise price no less than the fair value of the stock on the date of grant. 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. A total of 15 million shares have been reserved for issuance under this plan. 32 In May 1995, the stockholders approved the 1995 Director Option Plan (Director Plan), which replaced the 1986 Directors' Stock Option Plan, and reserved 500,000 shares for issuance thereunder. Terms of the Director Plan provide for an initial option grant to new 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 of the stock on the date of grant. At December 31, 1996, shares available for grant under all stock option plans were 2,496,000. The following table summarizes the Company's stock option activity and related weighted average exercise price within each category for each of the years ended December 31, 1996, 1995 and 1994 (share information in thousands):
- ------------------------------------------------------------------------------------------------------ 1996 1995 1994 -------------------------------------------------------------- SHARES PRICE SHARES PRICE SHARES PRICE -------------------------------------------------------------- Options outstanding at January 1 9,065 $ 20.26 7,354 $ 7.28 5,978 $ 4.41 Options cancelled (4,402) (34.46) (397) (13.59) (870) (5.91) Options granted 7,263 27.71 4,354 33.64 2,120 14.22 Options exercised (1,114) (7.73) (2,246) (4.90) (2,874) (3.84) -------------------------------------------------------------- Options outstanding at December 31 10,812 $ 20.77 9,065 $ 20.26 7,354 $ 7.28 ============================================================== Options exercisable at December 31 2,840 $ 11.29 2,001 $ 12.51 2,436 $ 4.01 ==============================================================
On August 16, 1996 the Company canceled options to purchase 2,853,000 shares of common stock with exercise prices ranging from $32.125 to $58.125, previously granted to employees, excluding certain executive officers, and reissued all such options at an exercise price of $22.375, the fair market value of the stock on August 16, 1996. The reissued options have a ten year term and vest in equal increments over four years from the date of reissuance. Significant option groups outstanding at December 31, 1996, and related weighted average exercise price and contractual life information are as follows (share information in thousands):
- ------------------------------------------------------------------------------ OPTIONS WITH EXERCISE PRICES OUTSTANDING EXERCISABLE REMAINING ---------------------------------------------- RANGING FROM: SHARES PRICE SHARES PRICE LIFE (YEARS) - ------------------------------------------------------------------------------ $2.75 to $10.00 2,235 $ 5.14 1,762 $ 4.69 5.5 $10.01 to $20.00 738 12.49 315 12.59 7.5 $20.01 to $30.00 5,679 23.51 719 24.45 9.0 $30.01 to $40.00 2,032 30.95 12 35.00 10.0 Greater than $40.00 128 57.89 32 57.89 9.0 ----------------------------------------------
All options were granted at an exercise price equal to the market value of the Company's common stock at the date of grant. The weighted average estimated grant date fair value, as defined by SFAS 123, for options granted during 1996 and 1995 was $16.86 and $17.66 per option, respectively. Additionally, the incremental estimated fair value, as defined by SFAS 123, for options canceled and reissued during August 1996 was $5.32 per option. The estimated grant date fair value disclosed by the Company is calculated using the Black-Scholes model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value. 33 - -------------------------------------------------------------------------------- The following weighted average assumptions are included in the estimated grant date fair value calculations for the Company's stock option awards: - -------------------------------------------------------------------------------- 1996 1995 -------------- Expected life (years) 5.25 5.25 Risk-free interest rate 6.10% 6.60% Volatility 55% 51% Dividend yield 0% 0% -------------- 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 market 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 1996, 1995 and 1994 were 666,000, 695,000 and 2,242,000 shares of common stock at an average price of $17.33, $12.95 and $3.05 per share, respectively. Shares available for future purchase under the Employee Plan were 1,489,000 at December 31, 1996. Compensation cost (included in pro forma net income and net income per share amounts) for the grant date fair value, as defined by SFAS 123, of the purchase rights granted under the Employee Plan was calculated using the Black-Scholes model. The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the Company's Employee Plan: - -------------------------------------------------------------------------------- 1996 1995 -------------- Expected life (years) 1.25 1.25 Risk-free interest rate 5.70% 6.20% Volatility 54% 32% Dividend yield 0% 0% -------------- The weighted average estimated grant date fair value, as defined by SFAS 123, of rights to purchase stock under the Employee Plan granted in 1996 and 1995 were $10.84 and $12.59 per share, respectively. 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. 34 PRO FORMA NET INCOME AND NET INCOME PER SHARE Had the Company recorded compensation costs based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under its stock option plans and stock purchase plan, the Company's net income and earnings per share would have been reduced to the pro forma amounts below for the years ended December 31, 1996 and 1995:
- ----------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------- Pro forma net income (in thousands) $ 128,069 $ 233,031 Pro forma net income per share Primary $ 0.99 $ 1.83 Fully diluted $ 0.94 $ 1.71 -----------------------
The pro forma effect on net income and net income per share for 1996 and 1995 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. NOTE 9: INCOME TAXES The provision for taxes consisted of the following:
- ------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 --------------------------------------- CURRENT Federal $ 29,111 $ 35,181 $ 39,079 State 6,969 12,893 4,991 Foreign 19,398 43,836 14,639 --------------------------------------- Total 55,478 91,910 58,709 --------------------------------------- DEFERRED LIABILITY (BENEFIT) Federal (2,437) 6,663 (10,085) State (6,635) 1,460 - Foreign 11,026 (6,252) (4,945) --------------------------------------- Total 1,954 1,871 (15,030) --------------------------------------- Total $ 57,432 $ 93,781 $ 43,679 =======================================
The domestic and foreign components of income before income taxes and minority interest were as follows:
- -------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 ---------------------------------------- Domestic $ 82,882 $ 129,085 $ 135,943 Foreign 122,233 205,858 20,226 ---------------------------------------- Income before income taxes and minority interest $ 205,115 $ 334,943 $ 156,169 ========================================
Undistributed earnings of the Company's foreign subsidiaries for which no U.S. income taxes have been provided aggregate to approximately $271 million at December 31, 1996. Undistributed earnings of the Company's foreign subsidiaries, which reflect full provision for foreign income taxes, are indefinitely reinvested in foreign operations or will be remitted substantially free of additional tax. Accordingly, no material provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of this liability. As of December 31, 1996, management believes that realization of deferred tax assets is more likely than not due to carryback capacity. As of December 31, 1995, management believed that with 35 the exception of certain foreign net operating loss carryforwards, for which a valuation allowance had been provided, realization of deferred tax assets was assured to the extent of taxable income for the carryback period. Significant components of the Company's deferred tax assets and liabilities were as follows:
December 31st ---------------- (In thousands) 1996 1995 ------ ------- DEFERRED TAX ASSETS Net operating loss carryforwards $ 2,473 $ 5,136 Tax credit carryovers 2,380 --- Nondeductible reserves and other 55,359 40,834 ------- ------- Total deferred tax assets 60,212 45,970 Valuation allowance --- (3,400) ------- ------- Net deferred tax assets 60,212 42,570 Deferred tax liabilities -- depreciation and amortization (46,246) (26,652) ------- ------- Total net deferred tax assets $13,966 $15,918 ======= =======
Differences between the Company's effective tax rate and the federal statutory rate were as follows:
(In thousands) 1996 1995 1994 -------- ---- -------- ---- -------- ---- Federal statutory rate $ 71,790 35 % $117,230 35 % $ 54,661 35 % State taxes, net of federal benefit 6,517 3 % 12,190 4 % 9,370 6 % Difference between U.S. and foreign tax rates (12,358) (6) (32,772) (10)% 7,219 5 % Nondeductible expenses 4,693 2 % 17,529 5 % 5,310 3 % Foreign losses with no benefit --- -- --- -- 931 -- Foreign tax credits (11,260) (5)% --- -- --- -- Research and development tax credit (4,243) (2)% --- -- 1,743) (1)% Change in valuation allowance (3,400) (2)% (15,964) (5)% (42,805) (27)% Other 5,693 3 % (4,432) (1)% 10,736 7 % -------- ---- -------- ---- -------- ---- Effective tax rate $ 57,432 28 % $ 93,781 28 % $ 43,679 28 % ======== == ======== == ======== ==
The Company paid $53 million, $31 million and $23 million for income taxes in 1996, 1995 and 1994, respectively. The IRS is currently auditing the Company's federal income tax returns for fiscal years 1991 and 1992. The Company has received a notice of proposed tax deficiency for such years and expects to file a tax protest letter with the IRS in response to the notice. Management believes the ultimate outcome of the IRS audit will not have a material adverse impact on the Company's financial position or results of operations. 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. 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 cash, short-term investments held for the U.S. affiliate and prepaid income taxes. 36 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 1996, 1995 and 1994. United States revenues include export sales.
- -------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 -------------------------------------------- REVENUES United States $ 1,201,674 $ 1,005,351 $ 781,223 Pacific Rim 996,429 720,372 9,028 Japan 537,504 532,421 270,445 Europe 225,071 204,385 141,773 Canada 54,345 60,589 35,107 Revenues from affiliates (1,776,329) (1,255,461) (335,746) ------------------------------------------ Consolidated $ 1,238,694 $ 1,267,657 $ 901,830 ========================================== REVENUES FROM AFFILIATES United States $ (539,845) $ (313,507) $ (163,134) Pacific Rim (946,787) (659,180) (437) Japan (273,188) (282,774) (170,764) Europe (12,661) -- -- Canada (3,848) -- (1,411) ------------------------------------------ Consolidated $(1,776,329) $(1,255,461) $ (335,746) ========================================== OPERATING INCOME (LOSS) United States $ 65,612 $ 116,917 $ 138,713 Pacific Rim 84,773 150,378 685 Japan 29,762 23,652 3,945 Europe 9,365 22,501 11,119 Canada 7,373 6,822 4,999 General corporate expenses (4,468) (1,571) (1,695) ------------------------------------------ Consolidated $ 192,417 $ 318,699 $ 157,766 ========================================== IDENTIFIABLE ASSETS United States $ 521,326 $ 418,776 $ 284,067 Pacific Rim 234,994 90,253 7,567 Japan 529,383 523,847 479,449 Europe 52,484 59,208 35,704 Canada 15,434 44,811 9,128 General corporate 599,093 712,692 454,459 ------------------------------------------ Consolidated $ 1,952,714 $ 1,849,587 $1,270,374 ==========================================
37 NOTE 11: COMMITMENTS AND CONTINGENCIES The Company leases the majority of its facilities and certain equipment under non-cancelable operating leases which expire in 1997 through 2022. The facilities lease agreements typically provide for base rental rates which are increased at various times during the terms of the leases and for 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. The lease line was fully utilized as of December 31, 1996. There were no significant gains or losses from these leasing transactions. Minimum rental payments under these operating leases, including option periods, are $24 million for each of the years 1997 through 1999, $16 million for 2000 and $.2 million for 2001. 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: 1997 - $81 million; 1998 - $62 million; 1999 - - $43 million; 2000 - $23 million; or 2001 - $2 million. Future minimum payments under other lease agreements are as follows: 1997 - $33 million; 1998 - $27 million; 1999 - $24 million; 2000 - $18 million; 2001 - $15 million; 2002 and thereafter - $62 million. Total rental expense, including month-to-month rentals, was $62 million, $44 million and $35 million in 1996, 1995 and 1994, 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 appealed the trial court's order to the United States Court of Appeals for the Federal Circuit (CAFC). In July 1996, the CAFC issued its decision affirming the U.S. District Court's holding in favor of the Company. In August 1996, TI filed a petition for reconsideration of the CAFC's decision and requested that the matter be heard en banc by the CAFC. In September 1996, TI's petition was denied. In December 1996, TI petitioned the U.S. Supreme Court for a writ of certiorari, thereby seeking further appeal of the case. The Company believes that the probability of a significant loss is remote and, therefore, reallocated $15 million of its reserves during September 1996 (see Notes 5 and 6). No assurance can be given, however, that this matter will be resolved without the payment of damages and other costs. 38 During the third quarter of 1995, pursuant to a series of transactions, the Company acquired all 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 the shares was initiated. No hearing date has yet been assigned. 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. NOTE 12: SUBSEQUENT EVENT On February 21, 1997, the Company called for redemption of all of its $144 million, 5 1/2% Convertible Subordinated Notes (Notes). The Notes are redeemable by the Company at the principal amount plus a 2% premium. Each Note is convertible by the holder to common stock at a conversion price of $12.25 per share. If all Notes are converted to common stock, approximately 12 million additional shares of common stock will be issued. 39 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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. PRICE WATERHOUSE LLP San Jose, California January 16, 1997 except for Note 12, for which the date is February 21, 1997 40 ELEVEN YEAR CONSOLIDATED SUMMARY
------------------------------------------ Year ended December 31st - ------------------------------------------------------------------------------------------ (in thousands, except per share amounts) 1996 1995 1994 ------------------------------------------ Revenues $1,238,694 $1,267,657 $ 901,830 Costs and expenses: Cost of revenues 695,002 665,673 520,150 Research and development 184,452 123,892 98,978 Selling, general and administrative 166,823 159,393 124,936 Restructuring of operations and other non-recurring charges -- -- -- ------------------------------------------ Total costs and expenses 1,046,277 948,958 744,064 ------------------------------------------ Income (loss) from operations 192,417 318,699 157,766 Interest expense (13,610) (16,349) (18,455) Interest income and other 26,308 32,593 16,858 ------------------------------------------ Income (loss) before income taxes, minority interest and extraordinary credit 205,115 334,943 156,169 Provision for income taxes 57,432 93,781 43,679 ------------------------------------------ Income (loss) before minority interest and extraordinary credit 147,683 241,162 112,490 Minority interest in net income (loss) of subsidiaries 499 3,042 3,747 ------------------------------------------ Income (loss) before extraordinary credit 147,184 238,120 108,743 Extraordinary credits resulting from gain on retirement of debt -- -- -- ------------------------------------------ Net income (loss) $ 147,184 $ 238,120 $ 108,743 Primary income (loss) per share: Income (loss) before extraordinary credit $ 1.12 $ 1.86 $ 0.99 Extraordinary credit -- -- -- ------------------------------------------ Net income (loss) $ 1.12 $ 1.86 $ 0.99 ========================================== Fully diluted income per share $ 1.07 $ 1.75 $ 0.92 ========================================== Year-end status: Total assets $1,952,714 $1,849,587 $1,270,374 Long-term debt $ 258,274 $ 199,543 $ 262,730 Stockholders' equity $1,316,219 $1,216,246 $ 544,906 ------------------------------------------
The Company's fiscal year ends on the Sunday closest to December 31. For presentation purposes, the Consolidated inancial Statements refer to December 31 as year end. 41
1993 1992 1991 1990 1989 1988 1987 1986 - -------- --------- -------- -------- -------- -------- -------- -------- $718,812 $ 617,468 $697,838 $655,491 $546,870 $378,908 $262,131 $194,335 - -------- --------- -------- -------- -------- -------- -------- -------- 438,523 408,318 457,692 443,759 381,544 226,625 168,403 129,150 78,995 78,825 80,802 60,196 52,457 36,964 28,919 21,558 117,452 129,254 136,811 117,318 99,885 80,145 55,726 40,200 --- 101,785 5,626 44,000 43,000 9,046 --- --- - -------- --------- -------- -------- -------- -------- -------- -------- 634,970 718,182 680,931 665,273 576,886 352,780 253,048 190,908 - -------- --------- -------- -------- -------- -------- -------- -------- 83,842 (100,714) 16,907 (9,782) (30,016) 26,128 9,083 3,427 (9,621) (11,567) (19,371) (21,256 (17,341) (11,347) (9,903) (6,883) 6,500 12,413 14,722 12,517 12,494 16,421 18,114 11,991 - -------- --------- -------- -------- -------- -------- -------- -------- 80,721 (99,868) 12,258 (18,521) (34,863) 31,202 17,294 8,535 24,221 8,521 6,129 11,685 1,476 18,322 7,031 3,103 - -------- --------- -------- -------- -------- -------- -------- -------- 56,500 (108,389) 6,129 (30,206) (36,339) 12,880 10,263 5,432 2,750 1,819 (2,212) 1,065) (5,085) (5,623) (483) 564 - -------- --------- -------- -------- -------- -------- -------- -------- 53,750 (110,208) 8,341 (31,271) (31,254) 18,503 10,746 4,868 --- --- --- 955 --- 859 594 --- - -------- --------- -------- -------- -------- -------- -------- -------- $ 53,750 $(110,208) $ 8,341 $(30,316) $(31,254) $ 19,362 $ 11,340 $ 4,868 ======== ========= ======== ======== ======== ======== ======== ======== $ 0.54 $ (1.24) $ 0.10 $ (0.37) $ (0.38) $ 0.22 $ 0.13 $ 0.06 --- --- --- 0.01 --- 0.01 0.01 --- - -------- --------- -------- -------- -------- -------- -------- -------- $ 0.54 $ (1.24) $ 0.10 $ (0.36) $ (0.38) $ 0.23 $ 0.14 $ 0.06 ======== ========= ======== ======== ======== ======== ======== ======== $ 0.53 ======== $859,010 $ 747,438 $748,456 $771,682 $755,109 $783,751 $699,398 $451,404 $220,005 $ 191,527 $166,107 $189,795 $204,443 $191,857 $187,909 $106,908 $292,434 $ 197,728 $293,075 $267,729 $286,660 $327,277 $309,243 $252,002 - -------- --------- -------- -------- -------- -------- -------- --------
42 INTERIM FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------------------- QUARTER - ---------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH -------------------------------------------------------- (In YEAR ENDED DECEMBER 31, 1996 thousands, Revenues $311,352 $325,359 $300,195 $301,788 except Gross profit 134,503 148,905 125,121 135,163 per share Net income 42,284 46,496 27,743 30,661 amounts) Primary net income per share $ .32 $ .35 $ .21 $ .23 Fully diluted net income per share $ .31 $ .34 $ .21 $ .23 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
The Company's yscal year ends on the Sunday closest to December 31. For presentation purposes, the Consolidated Financial Statements refer to December 31 as year end. 43 CORPORATE INFORMATION HEADQUARTERS ADDRESS LSI Logic Corporation 1551 McCarthy Blvd Milpitas CA 95035 REGISTRAR & TRANSFER AGENT Bank of Boston c/o Boston EquiServe, LP Investor Relations Department Mail Stop 45.02.09 PO Box 644 Boston MA 02102.0644 1.800.730.6001 www.equiserve.com INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 150 Almaden Blvd San Jose CA 95113 LEGAL COUNSEL Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto CA 94304 FINANCIAL LITERATURE Publications of interest to current and potential investors, including copies of the Company's current 10-K filed with the Securities and Exchange Commission, are available upon request by calling 1.800.574.4286. Outside the U.S. and Canada, phone 408.433.7700. Ask for Department JDF. Or call 32.11.300351 within Europe for multilingual operators. Financial information is also available over the World Wide Web at http://www.lsilogic.com and by fax at 1.800.457.4286. STOCKHOLDER INQUIRIES To notify LSI Logic of address changes, lost certificates or transfers of stock, stockholders of record should contact the Company's Registrar and Transfer Agent, Bank of Boston. Stockholders of record who receive more than one copy of this annual report can contact the Bank of Boston to arrange to have their accounts consolidated. Stockholders who own LSI Logic stock through a brokerage can contact their broker to request consolidation of their accounts. INQUIRIES CONCERNING THE COMPANY Questions regarding LSI Logic's operations, historical performance or recent results may be directed to: LSI Logic Corporation Investor Relations Department 1551 McCarthy Blvd Milpitas CA 95035 408.954.4710 LSI Logic logo design, CoreWare and SeriaLink are registered trademarks; and ATMizer, CoreWare logo design, Cablestream, G10 and G10 logo design, G11, GigaBlaze, Integra, Scenario, The System on a Chip Company and TinyRISC are trademarks of LSI Logic Corporation. All other brand and product names may be trademarks of their respective companies. (C)1997, LSI Logic Corporation Printed in U.S.A. 44 CORPORATE DIRECTORY - ----------------------------------------------------------------------------------------------------------- BOARD OF DIRECTORS EXECUTIVE OFFICERS Wilfred J. Corrigan Wilfred J. Corrigan David E. Sanders Chairman Chairman Vice President Chief Executive Officer Chief Executive Officer General Counsel & Secretary R. Douglas Norby Moshe N. Gavrielov Lewis C. Wallbridge Executive Vice President Executive Vice President Vice President Chief Financial Officer LSI Logic Products Human Resources T. Z. Chu Cyril F. Hannon President Executive Vice President Hoefer Pharmacia Biotech Inc. Worldwide Operations Dr. Malcolm R. Currie W. Richard Marz Chairman Emeritus Executive Vice President Hughes Aircraft Company Geographic Markets James H. Keyes R. Douglas Norby Chairman Executive Vice President Chief Executive Officer Chief Financial Officer Johnson Controls, Inc. VICE PRESIDENTS Maniam B. Alagarstnam Bruce L. Entin Pierre Nadeau Package Department Worldwide Customer Marketing General Manager Geographic Markets LSI Logic Europe Ltd. Elias J. Antoun President Donald J. Esses Willsie H. Nelson LSI Logic K. K. U.S. Manufacturing Logistics Ronald K. Bell Amnon Fisher Richard D. Schinella General Manager General Manager Wafer Process R&D and Computer & Advanced Consumer Products Santa Clara Operations Architecture Jeffrey L. Hilbert Chiaki Terada Jean-Louis Bories Worldwide Customer Engineering Industrial Engineering ASIC Technology Geographic Markets Frank Tornaghi John P. Daane James W. Hively North America Sales General Manager ASIC Product Development Communication Products Shubha S. Tuljapurkar Charles E. Laughlin Business and Personal Systems John J. D'Errico General Manager General Manager LSI Logic Japan Semiconductor, Inc. Edward K. Wan Pan Aria North America Engineering Theodore Leno Simon P. Dolan Assembly and Test Operations Joseph M. Zelayeta Strategic Marketing Senior Vice President Byron Look Research & Development Corporate Development General Manager U.S. Wafer Fab Operations R. Gregory Miller Corporate Controller
45 STOCK INFORMATION Symbol: LSI Where traded: NYSE Actual shares outstanding at 12/31/96: 129,006,000 Average daily volume for 1996: 2,436,690
STOCK PRICE RANGE ------------------------------- 1995 1996 ---- ---- First Quarter $22.50 o 38.88 $18.25 o 29.19 Second Quarter $24.50 o 39.63 $25.50 o 42.63 Third Quarter $17.00 o 27.00 $39.13 o 62.50 Fourth Quarter $21.38 o 33.88 $30.00 o 59.25 -------------- -------------- Year $17.00 o 39.63 $18.25 o 62.50 ============== ==============
STOCK PRICE MOVEMENT Bar graph showing stock price range and ending price for each calendar month during fiscal year 1995 and 1996. Values depicted are as follows: 1995 RANGE ENDING PRICE ---- ----- ------------ JAN 22 3/8 - 18 1/4 21 5/16 FEB 27 15/16 - 21 27 1/4 MAR 29 3/16 - 25 15/16 26 1/4 APR 33 9/16 - 25 1/2 33 5/16 MAY 38 5/8 - 31 1/2 33 3/4 JUN 42 5/8 - 33 39 1/8 JUL 49 7/8 - 39 1/8 46 3/4 AUG 53 - 40 1/4 49 1/4 SEP 62 1/2 - 48 1/4 58 OCT 59 1/2 - 43 1/4 46 7/8 NOV 48 - 38 3/4 41 7/8 DEC 48 - 30 32 3/4 1996 ---- JAN 34 3/8 - 22 1/2 28 1/4 FEB 38 7/8 - 26 27 5/8 MAR 29 3/4 - 24 7/8 26 7/8 APR 37 7/8 - 26 5/8 36 MAY 39 5/8 - 28 3/4 31 1/8 JUN 31 1/4 - 24 1/2 26 JUL 27 - 17 19 1/2 AUG 24 1/2 - 18 3/4 21 7/8 SEP 25 3/4 - 20 1/8 23 1/4 OCT 28 1/4 - 21 3/8 26 1/2 NOV 33 7/8 - 26 1/2 30 1/8 DEC 33 1/4 - 26 5/8 26 3/4 TRADING VOLUME Point Graph showing total trading volume of shares in each calendar month during fiscal 1995 and 1996. Values depicted are as follows: 1995 SHARES TRADED 1996 SHARES TRADED ---- ------------- ---- ------------- JAN 27,758,400 JAN 68,889,504 FEB 23,461,000 FEB 66,151,600 MAR 23,797,600 MAR 49,794,400 APR 19,428,800 APR 43,953,300 MAY 27,639,600 MAY 61,387,000 JUN 23,221,100 JUN 41,964,400 JUL 25,048,500 JUL 66,940,200 AUG 23,804,700 AUG 36,380,700 SEP 25,160,500 SEP 46,553,900 OCT 41,672,400 OCT 56,529,900 NOV 39,745,600 NOV 46,718,600 DEC 71,075,104 DEC 33,655,800 46 LSI LOGIC EUROPE, LTD. Grenville Place The Ring Bracknell Berkshire RG12 1BP United Kingdom Tel: 44.1344.426544 Fax: 44.1344.481039 LSI LOGIC K.K. 4-1-8 Konan Minato-ku Tokyo 108 Japan Tel: 81.3.5463.7811 Fax: 81.3.5463.7825 LSI LOGIC CORPORATION OF CANADA, INC. 401 The West Mall Suite 1110 Etobicoke Ontario M9C 3J5 Canada Tel: 416.620.7400 Fax: 416.620.5005 LSI LOGIC JAPAN SEMICONDUCTOR, INC. 10 Kitahara Tsukuba-shi Ibaraki-ken 300-32 Japan Tel: 81.298.64.7229 Fax: 81.298.64.3362 LSI LOGIC HONG KONG, LIMITED 7/F Southeast Industrial Building 611-619 Castle Peak Road Tsuen Wan Hong Kong Tel: 852.2405.8600 Fax: 852.2412.7820 [LSI LOGIC LOGO] LSI LOGIC CORPORATION 1551 McCarthy Blvd Milpitas CA 95035 United States Tel: 408.433.8000 Fax: 408.954.3773 EX-21.1 6 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 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 147,059 570,223 188,093 3,116 90,410 1,051,054 1,349,377 537,718 1,952,714 345,338 143,750 0 0 1,290 1,314,929 1,952,714 1,238,694 1,238,694 695,002 695,002 351,275 0 13,610 205,115 57,432 147,184 0 0 0 147,184 1.12 1.07
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