-----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, IeqyWNhRCmPn9YJ5A2sCMn83qsqJy8pSQnKKsh/29XSLNiKa8aflLluEjgUY7FMR Dd9OltaW9fm70EdNTpqZuA== 0000891618-98-001415.txt : 19980331 0000891618-98-001415.hdr.sgml : 19980331 ACCESSION NUMBER: 0000891618-98-001415 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALTERA CORP CENTRAL INDEX KEY: 0000768251 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770016691 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16617 FILM NUMBER: 98579672 BUSINESS ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085448000 MAIL ADDRESS: STREET 1: 101 INNOVATION DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ COMMISSION FILE NUMBER: 0-16617 ALTERA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 77-0016691 (I.R.S. EMPLOYER IDENTIFICATION NO.) 101 INNOVATION DRIVE, SAN JOSE, CALIFORNIA 95134 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 544-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT: COMMON STOCK (TITLE OF CLASS) ------------------------ INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (SEC.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $3,832,950,273 AS OF FEBRUARY 28, 1998, BASED UPON THE CLOSING SALE PRICE ON THE NASDAQ NATIONAL MARKET FOR THAT DATE. THERE WERE 88,905,459 SHARES OF THE REGISTRANT'S COMMON STOCK ISSUED AND OUTSTANDING AS OF FEBRUARY 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE ITEMS 5, 6, 7 AND 8 OF PART II INCORPORATE INFORMATION BY REFERENCE FROM THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. ITEMS 11, 12 AND 13 OF PART III INCORPORATE INFORMATION BY REFERENCE FROM THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 13, 1998. ================================================================================ 2 Except for the historical information presented, the matters discussed in this Form 10-K include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of risk factors that include, but are not limited to, those discussed under the caption "Future Results" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Stockholders, which is incorporated by reference in this Form 10-K and is included in Exhibit 13.1 hereto, as well as factors discussed elsewhere in this Form 10-K. PART I ITEM 1. BUSINESS. GENERAL Altera Corporation ("Altera" or the "Company") designs, manufactures and markets programmable logic devices ("PLDs") and associated development tools. Programmable logic devices are semiconductor integrated circuits ("chips" or "ICs") that offer on-site programmability to customers using the Company's proprietary software, which operates on personal computers and engineering workstations. Founded in 1983, Altera was the first supplier of programmable logic devices and is currently a global leader in this market. The Company offers a broad line of CMOS programmable logic devices that address high-speed, high-density and lower power applications. The Company's products serve a wide range of markets, including telecommunications, data communications, computers and industrial applications. In 1997, the Company moved to new headquarters located at 101 Innovation Drive, San Jose, California 95134. The Company also reincorporated as a Delaware corporation during 1997. STRATEGY Programmable logic is one segment of the Complementary Metal Oxide Semiconductor ("CMOS") logic market, other segments of which include gate arrays, standard logic, full custom devices, cell-based ICs (also referred to as standard cells) and other forms of logic ICs, including chipsets. In a broad sense, all of these devices are indirectly competitive as they generally may be used in the same types of applications in electronic products. However, differences in cost, performance, density, flexibility and ease of use dictate the extent to which they may be directly competitive for particular applications. Programmable logic's primary advantage is that it allows for quicker design cycles meeting customers' needs for quick time-to-market. Programmable logic allows customers to experiment and iterate their designs in a relatively short amount of time and with minimum cost. In most instances, this is quicker and easier than achieving a design in a deterministic fashion. This advantage is amplified by the ability to have working silicon at the time the design is finalized. Another advantage of programmable logic is that, particularly for small volume applications, it lowers the per unit cost of producing customized components. While programmable logic inherently consumes more silicon (because of its generality and on-chip programming overhead), in many cases this cost is still less than the high fixed costs of layout and mask-making required to produce a custom IC. The cost advantage is further enhanced by the flexibility of the inventory and the fact that customization occurs closer to the end application. Due to PLD cost decreases through high-volume manufacturing and the use of emerging process technologies, Altera has been able to introduce new product families that, as compared with their predecessors, provide more functionality at about half the price for any given density. These new product families achieve the integration, density, performance and cost to compete with gate array solutions. The Company believes that its competitiveness with the gate array segment in these areas, along with the inherent advantages of programmable logic discussed above, will enable it to compete for designs traditionally served by 2 3 gate arrays. In the short term, the lower prices associated with the Company's new product offerings have slowed and will continue to slow its sales growth. However, Altera believes that these new product offerings will be important to sustaining long-term sales growth as they broaden the appeal of programmable logic. See "-- Competition." PRODUCTS Altera sells a wide range of products, with a total of more than 1,000 product options among its PLD families. The Company offers PLDs in two fundamental technologies: its MAX products which use floating gate process technology and its FLEX products which use SRAM-based process technology. Altera's proprietary software, MAX+PLUS II, is capable of programming all its PLDs. Altera also offers hardware used in programming PLDs. Devices: Altera offers a wide range of general-purpose PLD families. Each device family offers unique features as well as differing density and performance specifications for implementing particular applications. Some of Altera's major device families include the following: MAX 7000: The MAX 7000 device family is one of the fastest high-density programmable logic families in the industry. Devices in this family range from 600 to 10,000 usable gates and up to 256 I/O pins. The MAX 7000 device family, which includes MAX 7000E, MAX 7000S and MAX 7000A devices, is fabricated on an advanced CMOS EEPROM process, providing a high-density, high-speed, I/O-intensive programmable logic solution. MAX 7000S devices provide several enhanced features, including support for the JTAG boundary-scan test circuitry and in-system programmability ("ISP"). ISP functionality allows devices to be programmed after they are soldered onto the printed circuit board, thereby minimizing the possibility of lead damage or electrostatic discharge exposure. MAX 9000: The MAX 9000 device family combines the efficient macrocell architecture of MAX 7000 devices with the high-performance, predictable FastTrack Interconnect structure of FLEX devices. Devices in this family range from 6,000 to 12,000 usable gates and up to 356 I/O pins. The MAX 9000 family is the densest EPLD family in the industry with up to 560 macrocells. The EEPROM-based MAX 9000 devices are PCI-compliant and offer non-volatile 5.0-V ISP. FLEX 8000: The SRAM-based FLEX 8000 device family uses the Altera patented FastTrack Interconnect, a continuous routing structure that allows for fast, predictable interconnect delays. Devices in this family range from 2,500 to 16,000 usable gates and up to 304 I/O pins. FLEX 8000 devices have a 5.0-V supply voltage and can interface with 3.3-V devices through the MultiVolt I/O feature. These SRAM-based devices provide low standby power and in-system reconfigurabilty. FLEX 6000: Altera's SRAM-based FLEX 6000 family delivers the flexibility and time-to-market of programmable logic at prices that are competitive with gate arrays. Devices in this family range from 16,000 to 24,000 usable gates and up to 256 I/O pins. Featuring the very efficient OptiFLEX architecture, FLEX 6000 devices provide a flexible and cost-effective alternative to gate arrays for high-volume production. Every feature in the OptiFLEX architecture is targeted at producing maximum performance and utilization in the smallest possible die area. FLEX 10K: Altera's SRAM-based FLEX 10K family offers a combination of logic and memory on one chip. Devices in this family are planned to range from 10,000 to 250,000 usable gates and up to 600 I/O pins. With these high densities, the FLEX 10K family is expected to address the increasing levels of integration needed to accommodate today's complex system-on-a-chip designs. FLEX 10K devices, offered in 2.5-V, 3.3-V and 5.0-V supply voltages, have a unique embedded architecture made up of both a logic array and an embedded memory array. 3 4 Development Tools: The Company's development system software and hardware are used to design and implement logic designs on its PLDs. Altera's MAX+PLUS II software runs under the Microsoft Windows 95 and NT operating environments on personal computers in addition to the UNIX environment on SUN, HP and IBM workstations. The Company also provides interfaces to many industry standard electronic design automation ("EDA") tools, including those offered by Cadence Design Systems, Inc., Mentor Graphics Corporation and Synopsys, Inc. The Company also sells hardware for programming its PLDs. MARKETING, SALES AND CUSTOMERS The Company markets its products in the United States and Canada through a network of direct sales personnel, independent sales representatives and electronics distributors. The Company also has domestic sales management offices in major metropolitan areas throughout the United States. The Company's direct sales personnel and independent sales representatives focus on major strategic accounts. Distributors generally focus selling activities on the broad base of small and medium-size customers. In the United States, Altera's distributors currently include Arrow Electronics Inc. and Wyle Electronics (a wholly-owned subsidiary of Raab Karcher AG). These distributors are responsible for creating customer demand from its base of customers, providing technical support and other value-added services and filling customers' orders. From time to time, the Company expects that it may add or delete distributors from its selling organization as it deems appropriate to the level of business. The Company's international business is supported by a network of distributors throughout Europe and Asia. The Company has representation in every major European country, Israel, Australia, South America and various countries throughout the Pacific Rim, including Japan. International sales management offices are located in the metropolitan areas of Brussels, Hong Kong, Hsinchu (Taiwan), London, Munich, Ottawa, Paris, Seoul, Stockholm, Tokyo and Turin. Customer service and support are important aspects of the sales and marketing of the Company's products. Altera provides several levels of user support, including applications assistance, design services and customer training. The Company's applications engineering staff publishes data sheets and application notes, conducts technical seminars and provides design assistance via electronic links to the customer's design station. Customer service is supported with inventory maintained both by Altera and at distributors' locations to provide short-term delivery of chips. During each of the last three years, export sales constituted nearly half of the Company's total sales. Through 1997, almost all export sales were denominated in U.S. dollars. The Company's export sales are subject to those risks common to all export activities, including governmental regulation, possible imposition of tariffs or other trade barriers and currency fluctuations. In the year ended December 31, 1997, worldwide sales through distributors accounted for approximately 90% of total sales. In 1997, the two largest distributors accounted for 32% and 18% of sales. In 1996, the two largest distributors accounted for 29% and 15% of sales, whereas in 1995, they each accounted for 21% and 15% of sales, respectively. No single end customer accounted for more than 10% of the Company's sales in 1997, 1996 or 1995. Export sales constituted 45%, 47% and 47% of sales in 1997, 1996 and 1995, respectively. COMPETITION The CMOS Logic Market: Programmable logic is one segment of the CMOS logic market, other segments of which include gate arrays, standard logic, full custom devices, cell-based ICs (also referred to as standard cells) and other forms of logic ICs, including chipsets. In a broad sense, all of these devices are indirectly competitive as they generally may be used in the same types of applications in electronic products. However, differences in cost, performance, density, flexibility and ease of use dictate the extent to which they may be directly competitive for particular applications. As PLDs have increased in density and decreased in cost, they have become more 4 5 directly competitive with gate array products. With the introduction of the Company's FLEX 10K family of devices, which are the highest density of Altera's PLDs, and its newer FLEX 6000 devices, which are designed and priced to be very competitive with lower density gate arrays, the Company seeks to grow its segment by directly competing with companies in the gate array segment. Many of the companies in the gate array segment have substantially greater financial, technical and marketing resources than the Company. Consequently, there can be no assurance that the Company will be successful in competing in the gate array segment of the CMOS logic market. The Programmable Logic Segment: The principal factors of competition in the programmable logic segment include the capability of software development tools and system-level functional programming blocks, product performance and features, quality and reliability, pricing, technical service and support, the ability to respond rapidly to technical innovation and customer service. The Company believes it competes favorably with respect to these factors and that its proprietary device architecture and its installed base of development systems with proprietary software may provide some competitive advantage. However, as is true of the semiconductor industry as a whole, the PLD segment of the CMOS logic market is intensely competitive and is characterized by rapid technological change, rapid rates of product obsolescence and price erosion resulting from both product obsolescence and price competition. All of these factors may influence the Company's future operating results. The Company experiences significant direct competition from a number of other companies which are in the programmable logic segment of the CMOS logic market. The Company's competition in this market segment is from suppliers of products that are marketed as either field programmable gate arrays ("FPGAs") or complex PLDs ("CPLDs"). Companies that currently compete with Altera in its core business may have proprietary wafer manufacturing ability, preferred vendor status with many of the Company's customers, extensive marketing power and name recognition, greater financial resources than those of the Company and other significant advantages over the Company. Additionally, the semiconductor industry as a whole includes many large domestic and foreign companies that have substantially greater financial, technical and marketing resources than the Company. The Company expects that as the dollar volume of the programmable logic segment grows, the attractiveness of this segment to larger, more powerful competitors will continue to increase. Substantial direct or indirect competition could have a material adverse effect on the Company's future sales and operating results. MANUFACTURING The Company does not directly manufacture its silicon wafers. Altera's wafers are produced using various semiconductor foundry wafer fabrication service providers. This enables Altera to take advantage of these suppliers' high volume economies of scale, as well as easy and timely access to advancing process technology. Altera presently has its primary wafer supply arrangements with three semiconductor vendors: Sharp, TSMC and Cypress. The Company may negotiate additional foundry contracts and establish other sources of wafer supply for its products as such arrangements become economically useful or technically necessary. Although there are a number of new state of the art wafer fabrication facilities currently under construction around the world, semiconductor foundry capacity can become limited quickly and without much notice. Furthermore, since only newer fabrication facilities are able to manufacture wafers that incorporate leading edge technologies, any significant decrease in capacity of these facilities would have a material adverse effect on the Company's ability to obtain wafer supply for its newer products. Accordingly, there can be no assurance that any foundry manufacturing constraints will not pose significant problems for the Company in the future. In June 1996, Altera, TSMC and several other partners formed WaferTech LLC, a joint-venture company, to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, Altera received an 18% equity ownership in the joint-venture company and certain rights to procure output from the fab at market price. The investment was made in three installments, the last of which was paid in November 1997. In addition, the Company has an obligation to guarantee a pro 5 6 rata share of debt incurred by WaferTech up to a maximum of $45 million. WaferTech is currently seeking to secure a loan facility of up to $350 million. It is anticipated that WaferTech's initial wafer shipments will occur in the latter half of 1998. There can be no assurance that WaferTech will remain sufficiently capitalized or on schedule with its production projections, and WaferTech's failure to do so could have a material adverse effect on the Company's future operating results. The Company also owns a 17% equity interest in Cypress Semiconductor (Texas) Inc. ("CSTI"), a subsidiary of Cypress Semiconductor Corporation. Pursuant to the agreements governing this investment, Altera can obtain up to a certain number of wafers from CSTI. This investment provides Altera with the option to design and market certain sole-sourced products produced at CSTI. The Company uses this facility for the manufacture of its older architecture Classic and MAX 5000 products. Cypress Semiconductor, which has manufacturing and marketing rights to certain MAX 5000 products, also manufactures its own products in the CSTI facility. The Company depends upon its foundry vendors to produce wafers at acceptable yields and to deliver them to the Company in a timely manner. The manufacture of advanced CMOS semiconductor wafers is a highly complex process, and the Company has from time to time experienced difficulties in obtaining acceptable yields and timely deliveries from its suppliers. Good production yields are particularly important to the Company's business, including its ability to meet customers' demand for products and to maintain profit margins. The manufacture of semiconductor products is sensitive to a wide variety of factors, including the level of contaminants in the manufacturing environment, impurities in the materials used and the performance of personnel and equipment. As is common in the semiconductor industry, the Company has experienced and expects to experience production yield problems from time to time. Accordingly, no assurance can be given that the Company will not experience significant production yield problems with one or more of its product lines. Production throughput times also vary considerably among the Company's wafer suppliers. The Company has experienced delays from time to time in processing some of its products. Any prolonged inability to obtain adequate yields or deliveries could adversely affect the Company's operating results. The Company expects that, as is customary in the semiconductor business, in order to maintain or enhance competitive position, it will continue to convert its fabrication process arrangements to larger wafer sizes and smaller circuit geometries, to more advanced process technologies or to new suppliers. Such conversions entail inherent technological risks that can adversely affect yields, costs and delivery lead time. In addition, if for any reason the Company were required to seek alternative sources of supply, shipments could be delayed significantly while such sources are qualified for volume production, and any significant delay could have a material adverse effect on the Company's operating results. After wafer manufacturing is completed, each wafer is electronically sort tested using a variety of test and handling equipment. Such wafer testing is accomplished at TSMC, Sharp and the Company's Pilot Line facility in San Jose (which is used primarily for new product development). This testing is performed on equipment owned by the Company and consigned to the vendors. Resulting wafers are shipped to various Asian assembly suppliers, where good die are separated into individual chips that are then encapsulated in ceramic or plastic packages. As is the case with the Company's wafer supply business, the Company employs a number of independent suppliers for assembly purposes. This enables the Company to take advantage of subcontractor high volume manufacturing, related cost savings, speed and supply flexibility. It also provides the Company with timely access to cost-effective advanced process and package technologies. Altera purchases almost of all its assembly services from ASE (Malaysia) and ANAM (Korea). Following assembly, each of the packaged units receives final testing, marking and final inspection prior to shipment to customers. The Company obtains almost all of its final test and back end operation services from ASE, ANAM or ASAT (Hong Kong). Final testing by these assembly suppliers is accomplished through the use of Altera's proprietary test software and hardware consigned to such suppliers and of third-party commercial testers. These suppliers also handle shipment of the products to the Company's customers. Almost all of the manufacturing, assembly, testing and packaging of Altera's development system hardware products is done by outside contractors. Although the Company's wafer fabrication, assembly and 6 7 other subcontractors have not recently experienced any serious work stoppages, the economic, social and political situations in countries where certain subcontractors are located are unpredictable and can be volatile. Any prolonged work stoppages or other inability of the Company to manufacture and assemble its products would have a material adverse effect on the Company's operating results. Furthermore, economic risks, such as extreme currency fluctuations, changes in tax laws, tariff or freight rates, or interruptions in air transportation, could have a material adverse effect on the Company's operating results. BACKLOG The Company's backlog of released orders as of December 31, 1997 was approximately $114.0 million as compared to approximately $102.6 million at December 31, 1996. The Company includes in its backlog OEM customer-released orders that are requested for delivery within the next six months and distributor orders requested for delivery within the next three months. The Company produces standard products which may be shipped from inventory within a short time after receipt of an order. The Company's business has been characterized by a high percentage of orders with near-term delivery schedules (turns orders). At times, due to high demand and supply constraints in certain products, lead times can lengthen, causing an increase in backlog. However, orders constituting the Company's current backlog are cancelable without significant penalty at the option of the purchaser, thereby decreasing backlog during periods of lower demand. In addition, distributor shipments are subject to price adjustments. As discussed in the Notes to the Consolidated Financial Statements in the Company's 1997 Annual Report, portions of which are filed as Exhibit 13.1 hereto, the Company adopted a new revenue recognition method in the fourth quarter of 1997 with an effective date of January 1, 1997, which involves the deferral of revenue recognition on shipments to distributors until the product is resold to the end customers. Distributor orders accounted for approximately 90% of the Company's backlog as of December 31, 1997. For all of these reasons, backlog as of any particular date should not be used as a predictor of sales for any future period. RESEARCH AND DEVELOPMENT The Company's research and development activities have focused primarily on general-purpose programmable logic devices and on the associated development software and hardware. The Company has developed these related products in parallel to provide software support to customers simultaneous with circuit introduction. As a result of the Company's research and development efforts, it has introduced a number of new PLD families, such as the FLEX 6000 (which was introduced in 1997), FLEX 10K, MAX 7000S and MAX 9000 families. The Company has also redesigned a number of its products, including the FLEX 10KA and MAX 9000 families, to accommodate their manufacture on new wafer fabrication processes. Additionally, the Company also releases new versions of its proprietary software on a quarterly basis. The Company's research and development expenditures in 1997, 1996 and 1995 were $54.4 million, $49.5 million and $33.8 million, respectively. The Company has not capitalized research and development or software costs to date. The Company intends to continue to spend substantial amounts on research and development in order to continue to develop new products and achieve market acceptance for such products, particularly in light of the industry pattern of price erosion for mature products and increasing competition within the CMOS logic market. Even if such goals are accomplished, there can be no assurance that these products will achieve significant market acceptance. If the Company were unable to successfully define, develop and introduce competitive new products, and enhance its existing products, its future operating results would be adversely affected. PATENTS AND LICENSES The Company owns numerous United States patents and has additional pending United States patent applications on its semiconductor products. The Company also has technology licensing agreements with AMD, Cypress, Intel and Texas Instruments giving the Company royalty-free rights to design, manufacture and package products using certain patents they control. 7 8 Although the Company's patents and patent applications may have value in discouraging competitive entry into the Company's market segment and the Company believes that its current licenses will assist it in developing additional products, there can be no assurance that any valuable new patents will be granted to the Company, that the Company's patents will provide meaningful protection from competition or that any additional products will be developed based on any of the licenses that the Company currently holds. The Company believes that its future success will depend primarily upon the technical competence and creative skills of its personnel, rather than on its patents, licenses or other proprietary rights. In the future, the Company may decide to incur litigation expenses to enforce its intellectual property rights against third parties. There is no assurance that any such litigation would be successful, or that the Company's patents would be upheld if challenged. The Company, in the normal course of business, from time to time receives and makes inquiries with respect to possible patent infringements. As a result of inquiries received from third parties, it may be necessary or desirable for the Company to obtain additional licenses relating to one or more of its current or future products. There can be no assurance that such additional licenses could be obtained, and, if obtainable, could be obtained on conditions which would not have a material adverse effect on the Company's operating results. In addition, if patent litigation ensued, there can be no assurance that these third parties would not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of one or more of the Company's product families. EMPLOYEES As of December 31, 1997, the Company had 1,086 regular employees. The success of the Company is dependent in large part upon the continued service of its key management, technical, sales and support employees and on its ability to continue to attract and retain additional qualified employees. The competition for such employees is intense and their loss as employees could have an adverse effect on the Company. ITEM 2. PROPERTIES. In July 1997, the Company moved to its new headquarters facility in San Jose, California. The new campus consists of four interconnected buildings totaling approximately 500,000 square feet. Design, limited manufacturing, research, marketing and administrative activities are performed in these facilities. In June 1995, the Company purchased the approximately 25 acres of land on which the new campus sits. During 1997, $44.2 million was spent by the Company on construction of the facility, which was completed in mid-1997. The Company also leases on a short-term basis office facilities for its domestic and international sales management offices. The Company believes that its existing facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS. In June 1993, Xilinx, Inc. ("Xilinx") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. In June 1993, the Company brought suit against Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by the Company. In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware, Xilinx's state of incorporation, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of one of the Company's patents. In May 1995, Xilinx counterclaimed against the Company in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case has been transferred to California. Due to the nature of the litigation with Xilinx and because the lawsuits are still in the pre-trial stage, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000 or MAX 9000 families of products, or succeed in invalidating any of the Company's patents. Although no assurances can be given as to the results of these cases, based on the present status, management does not 8 9 believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. In August 1994, Advanced Micro Devices, Inc. ("AMD") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by AMD. In September 1994, Altera answered the complaint asserting that it is licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by the Company. In October 1997, upon completion of trials bifurcated from the infringement claims, the Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due to the nature of the litigation with AMD, and because AMD has appealed the court rulings that the Company is licensed under all of the patents asserted by AMD in the suit, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given as to the results of this case, based on its present status, management does not believe that any of such results will have material adverse effect on the Company's financial condition or results of operations. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The textual portion of the section entitled "About Your Investment" and the section entitled "Corporate Directory" in the Company's 1997 Annual Report to Stockholders for the year ended December 31, 1997 ("1997 Annual Report") are incorporated herein by reference. The Company believes factors such as quarter-to-quarter variances in financial results, announcements of new products, new orders and order rate variations by the Company or its competitors could cause the market price of its Common Stock to fluctuate substantially. In addition, the stock prices for many high technology companies experience large fluctuations, which are often unrelated to the operating performance of the specific companies. Broad market fluctuations, as well as general economic conditions such as a recessionary period or high interest rates, may adversely affect the market price of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA. The section entitled "Selected Consolidated Financial Data/Five-Year Summary" in the Company's 1997 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The textual portion of the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The section entitled "Market Risk Disclosure" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements, together with the report thereon of Price Waterhouse LLP dated January 20, 1998, in the Company's 1997 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 10 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers and directors of the Company and their ages are as follows:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Rodney Smith................. 57 Chairman of the Board of Directors, President and Chief Executive Officer C. Wendell Bergere........... 52 Vice President, General Counsel and Secretary Denis Berlan................. 47 Executive Vice President and Chief Operating Officer Erik Cleage.................. 37 Vice President, Marketing John R. Fitzhenry............ 48 Vice President, Human Resources Paul Newhagen(1)(3).......... 48 Director and Vice President, Administration Nathan Sarkisian............. 39 Vice President, Finance and Chief Financial Officer Peter Smyth.................. 59 Vice President, Sales Charles M. Clough............ 69 Director Michael A. 52 Director Ellison(1)(2)(3)........... Robert W. Reed(1)(3)......... 51 Director William E. Terry(1)(2)....... 64 Director Deborah Triant............... 48 Director
- --------------- (1) Member of Nominating Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. There are no family relationships between any of the directors or executive officers of the Company. RODNEY SMITH joined the Company in November 1983 as Chairman of the Board of Directors, President and Chief Executive Officer. Prior to that time, he held various management positions with Fairchild Semiconductor Corporation ("Fairchild"), a semiconductor manufacturer. C. WENDELL BERGERE joined the Company in August 1995 as Vice President, General Counsel and Secretary. Prior to joining the Company, from 1993 to 1995, Mr. Bergere was Special Counsel at the law firm of Sheppard, Mullin, Richter & Hampton. From 1982 to 1993, he was Vice President, General Counsel and Secretary of The Perkin-Elmer Corporation, a producer of analytical and life science systems. DENIS M. BERLAN joined the Company in December 1989 as Vice President, Product Engineering and was named Vice President, Operations and Product Engineering in October 1994. In January 1996, he was named Vice President, Operations. In January 1997, he was named Executive Vice President and Chief Operating Officer. He was previously employed by Advanced Micro Devices, Inc. ("AMD"), a semiconductor manufacturer, and by Lattice Semiconductor Corporation, a semiconductor manufacturer, in engineering management capacities. ERIK CLEAGE joined the Company as International Marketing Manager in February 1986. He became Director, Japan and Asia Pacific Sales in April 1989, and was appointed Vice President, Marketing in August 1990. Previously, he was employed by AMD and Fairchild in various positions. JOHN R. FITZHENRY joined the Company in May 1995 as Vice President of Human Resources. From 1983 to May 1995, he was employed by Apple Computer, Inc., a manufacturer of personal computers, in various human resource management positions. PAUL NEWHAGEN, a co-founder of the Company, has served as a director of the Company since July 1987 and as Vice President of Administration since December 1994. Mr. Newhagen served as Vice President of the 11 12 Company from November 1992 to February 1993, Secretary from July 1987 to January 1993, Vice President of Finance and Administration from June 1983 to November 1992, and Chief Financial Officer from June 1983 to February 1993. From June 1993 to November 1994, Mr. Newhagen served as a consultant to the Company. NATHAN SARKISIAN joined the Company in June 1992 as Corporate Controller. He was appointed Vice President, Finance and Chief Financial Officer in August 1995. Prior to joining the Company, Mr. Sarkisian held various accounting and financial positions at Fairchild, and at Schlumberger, an oil field services company. PETER SMYTH joined the Company in May 1990 as Vice President of Sales. Prior to joining the Company, Mr. Smyth served as Vice President of Sales at Precision Monolithics, Inc., a semiconductor manufacturer, and Vice President of North American Sales at Mostek, a semiconductor manufacturer. Mr. Smyth was also previously associated with Texas Instruments in a variety of sales and marketing capacities. CHARLES M. CLOUGH has served as a director of the Company since August 1997. In August 1997, Mr. Clough retired from his position as Chairman of the Board of Directors of Wyle Electronics, a distributor of semiconductor products and computer systems. From 1982 to 1997, Mr. Clough held various management positions at Wyle Electronics, including President, Chief Executive Officer and Chairman. Wyle Electronics is one of the Company's authorized distributors in the United States. Prior to joining Wyle Electronics, he had spent 27 years with Texas Instruments holding a number of management and executive positions relating to semiconductor operations, including the head of Bipolar operations, European Semiconductor group and worldwide marketing. MICHAEL A. ELLISON has served as a director of the Company since April 1984. Since October 1994, Mr. Ellison has been the Chief Executive Officer of Steller, Inc., a distributor of electronic parts. Until December 1992, he was a General Partner at Cable & Howse Ventures, a venture capital investment firm, and following that a private venture capital investor. ROBERT W. REED has served as a director of the Company since October 1994. In 1996, Mr. Reed retired from his position as Senior Vice President of Intel Corporation, a semiconductor manufacturer. From 1983 to 1991 Mr. Reed was Intel's Chief Financial Officer. WILLIAM E. TERRY has served as a director of the Company since August 1994. Mr. Terry is a former director and Executive Vice President of the Hewlett-Packard Company, a diversified electronics manufacturing company. At Hewlett-Packard, he held a number of senior management positions, including general manager of Hewlett-Packard's Data Products and Instrument Groups, and subsequently had overall responsibility for the Measurement Systems Sector. He retired from Hewlett-Packard in November 1993. Mr. Terry also serves as a director of Key Tronic Corporation. DEBORAH TRIANT has served as a director of the Company since May 1996. Dr. Triant is the President and Chief Executive Officer of CheckPoint Software Technologies, Inc. ("CheckPoint"), an Internet security software company, and a director of CheckPoint's Israeli parent company, CheckPoint Software Technologies, Ltd. Prior to joining CheckPoint, Dr. Triant held various marketing and technical executive positions with Adobe Systems Inc., a computer software company, Sun Microsystems Inc., a computer networking company, and Xerox Corp., a diversified electronics manufacturer. The section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement dated April 9, 1998 filed with the Securities and Exchange Commission (the "Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference. 12 13 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Director Compensation" and the section entitled "Certain Business Relationships" in the Company's Proxy Statement are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS. The following documents from the Annual Report to Stockholders are filed as part of this report: Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997 Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997 Notes to the Consolidated Financial Statements Report of Independent Accountants 2. FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted as they are either not required, not applicable, or the required information is included in the financial statements or notes thereto. 13 14 3. EXHIBITS.
EXHIBIT NUMBER EXHIBIT ------- ------- 3.1 Certificate of Incorporation filed with the Delaware Secretary of State on March 25, 1997 (which became the Certificate of Incorporation of the Registrant on June 19, 1997).(15) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(15) # 4.1 Specimen copy of certificate for shares of Common Stock of the Registrant. 4.2 Indenture Agreement dated as of June 15, 1995 by and between Registrant and the First National Bank of Boston, as Trustee.(11) 4.3 Form of Convertible Subordinated Note due 2002.(11) 4.4 First Supplemental Indenture dated as of June 19, 1997 to Indenture dated as of June 15, 1995.(15) 10.1* License Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.2* Supply Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.3(a)+ 1987 Stock Option Plan, and forms of Incentive and Nonstatutory Stock Option Agreements, as amended March 22, 1995 and as restated effective May 10, 1995.(12) 10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription Agreement, as amended May 10, 1995.(12) 10.6* Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation, dated June 19, 1987.(1) 10.6(a)* Termination Agreement dated November 23, 1993, regarding Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation.(7) 10.11 Form of Sales Representative Agreement.(1) 10.22* Advanced Micro Devices, formerly MMI, Settlement Agreement and associated Series E Preferred Stock Purchase Agreement and Patent License Agreement, all dated March 31, 1987.(1) 10.25 Product Distribution Agreement with Wyle Electronics Marketing Group, effective May 16, 1984, as amended.(1) #10.26 Form of Indemnification Agreement entered into with each of the Company's officers and directors. 10.30(a)* Amendment No. 2 to Technology License and Manufacturing Agreement with Texas Instruments Incorporated, dated effective October 1, 1990.(5) 10.31 Product Distribution Agreement with LEX Electronics, Inc., formerly Schweber Electronics Corporation effective December 22, 1988, as amended.(2) 10.31(a) Consent to Assignment of Product Distribution Agreement, effective September 23, 1991.(6) 10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director Nonstatutory Stock Option Agreement, as amended January 18, 1995 and as restated effective May 10, 1995.(10) 10.34* Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc., dated April 24, 1990.(4) 10.34(a)* Amendment Number 1 dated November 23, 1993, regarding Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc.(7)
14 15
EXHIBIT NUMBER EXHIBIT ------- ------- 10.35 Master Distribution Agreement with Japan Macnics Corporation dated June 26, 1986, as amended effective March 18, 1987.(6) 10.37 LSI Products Supply Agreement with Sharp Corporation, dated October 1, 1993.(7) 10.38+ Altera Corporation Nonqualified Deferred Compensation Plan and Trust Agreement dated February 1, 1994, and form of Deferred Compensation Agreement.(7) 10.39 Wafer Supply Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.40 Option Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.41 Memorandum of Intent dated October 1, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.42 Amendment No. 1 dated as of October 1, 1995 to Wafer Supply Agreement dated as of June 26, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. And to Option Agreement 1 dated as of June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.43 Option Agreement 2 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.44 Option Agreement 3 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.45(a)+ 1996 Stock Option Plan. 10.45(b) Form of Stock Option Agreement under 1996 Stock Option Plan.(13) 10.46 Owner/Contractor Agreement for Construction between Registrant and Rudolph and Sletten, Inc. dated January 10, 1996.(13) #10.47 Second Amended and Restated Limited Liability Company Agreement of Wafertech, LLC, a Delaware limited liability company, dated as of October 28, 1997.(17) 10.48 Purchase Agreement by and between Taiwan Semiconductor Manufacturing Co., Ltd., as Seller, and Analog Devices, Inc., the Registrant and Integrated Silicon Solutions, Inc., as Buyers (dated as of June 25, 1996).(14) 10.49 Recission (dated as of June 25, 1996) of Option Agreement 1 dated as of June 26, 1995 by and between the Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(14) 10.50 Agreement and Plan of Merger dated June 18, 1997.(15) 11.1 Computation of Earnings per Share.(16) #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (to be deemed filed only to the extent required by the instructions to Exhibits for Reports on Form 10-K). #18.1 Letter of Price Waterhouse LLP regarding Change in Accounting Principle. #21.1 Subsidiaries of the Registrant. #23.1 Consent of Price Waterhouse LLP. #24.1 Power of Attorney (included on page 17). #27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to identically numbered exhibits filed in response to Item 16(a), "Exhibits," of the registrant's Registration Statement on Form S-1 (File No. 33-17717), as amended, which became effective March 29, 1988. (2) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1988. 15 16 (3) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1989. (4) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended March 31, 1990, as amended by a Form 8 filed on July 13, 1990. (5) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1990. (6) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated by reference to identically numbered exhibits field in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. (8) Incorporated by reference to identically numbered exhibits field in response to Item 7, "Exhibits," of the registrant's Report on Form 8-K dated October 15, 1994 and 8-KA dated December 15, 1994. (9) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended September 30, 1994. (10) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1994. (11) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (12) Incorporated by reference to identically numbered exhibits filed in response to Item 8, "Exhibits," of the registrant's Registration Statement on Form S-8 (File No. 33-61085), as amended, which became effective July 17, 1995. (13) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1995. (14) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1996. (15) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1997. (16) Incorporated by reference to Note 3 to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997. (17) Exhibits to this document are incorporated by reference to the exhibits to the identically numbered document filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1996. * Confidential treatment has previously been granted for portions of this exhibit pursuant to an order of the Commission. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) thereof. # Filed herewith. (b) REPORTS ON FORM 8-K. None. 16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf, by the undersigned thereto duly authorized. ALTERA CORPORATION By: /s/ NATHAN SARKISIAN ------------------------------------ Nathan Sarkisian Vice President, Finance and Chief Financial Officer March 25, 1998 POWER OF ATTORNEY Know all persons by these present, that each person whose signature appears below constitutes and appoints Nathan Sarkisian, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY IN WHICH SIGNED DATE --------- ------------------------ ---- /s/ RODNEY SMITH President, Chief Executive March 25, 1998 - -------------------------------------------------------- Officer (Principal Rodney Smith Executive Officer) and Chairman of the Board of Directors /s/ NATHAN SARKISIAN Vice President -- Finance March 25, 1998 - -------------------------------------------------------- and Chief Financial Officer Nathan Sarkisian (Principal Financial and Accounting Officer) /s/ CHARLES M. CLOUGH Director March 25, 1998 - -------------------------------------------------------- Charles M. Clough /s/ MICHAEL A. ELLISON Director March 25, 1998 - -------------------------------------------------------- Michael A. Ellison /s/ PAUL NEWHAGEN Director March 25, 1998 - -------------------------------------------------------- Paul Newhagen /s/ ROBERT W. REED Director March 25, 1998 - -------------------------------------------------------- Robert W. Reed /s/ WILLIAM E. TERRY Director March 25, 1998 - -------------------------------------------------------- William E. Terry /s/ DEBORAH TRIANT Director March 25, 1998 - -------------------------------------------------------- Deborah Triant
17 18 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Certificate of Incorporation filed with the Delaware Secretary of State on March 25, 1997 (which became the Certificate of Incorporation of the Registrant on June 19, 1997).(15) 3.2 By-laws of the Registrant as adopted May 5, 1997 (which became the By-laws of the Registrant on June 19, 1997).(15) # 4.1 Specimen copy of certificate for shares of Common Stock of the Registrant. 4.2 Indenture Agreement dated as of June 15, 1995 by and between Registrant and the First National Bank of Boston, as Trustee.(11) 4.3 Form of Convertible Subordinated Note due 2002.(11) 4.4 First Supplemental Indenture dated as of June 19, 1997 to Indenture dated as of June 15, 1995.(15) 10.1* License Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.2* Supply Agreement dated as of July 12, 1994 with Intel Corporation.(9) 10.3(a)+ 1987 Stock Option Plan, and forms of Incentive and Nonstatutory Stock Option Agreements, as amended March 22, 1995 and as restated effective May 10, 1995.(12) 10.4(b)+ 1987 Employee Stock Purchase Plan, and form of Subscription Agreement, as amended May 10, 1995.(12) 10.6* Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation, dated June 19, 1987.(1) 10.6(a)* Termination Agreement dated November 23, 1993, regarding Technology License and Manufacturing Agreement with Cypress Semiconductor Corporation.(7) 10.11 Form of Sales Representative Agreement.(1) 10.22* Advanced Micro Devices, formerly MMI, Settlement Agreement and associated Series E Preferred Stock Purchase Agreement and Patent License Agreement, all dated March 31, 1987.(1) 10.25 Product Distribution Agreement with Wyle Electronics Marketing Group, effective May 16, 1984, as amended.(1) #10.26 Form of Indemnification Agreement entered into with each of the Company's officers and directors. 10.30(a)* Amendment No. 2 to Technology License and Manufacturing Agreement with Texas Instruments Incorporated, dated effective October 1, 1990.(5) 10.31 Product Distribution Agreement with LEX Electronics, Inc., formerly Schweber Electronics Corporation effective December 22, 1988, as amended.(2) 10.31(a) Consent to Assignment of Product Distribution Agreement, effective September 23, 1991.(6) 10.33(b)+ 1988 Director Stock Option Plan and form of Outside Director Nonstatutory Stock Option Agreement, as amended January 18, 1995 and as restated effective May 10, 1995.(10) 10.34* Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc., dated April 24, 1990.(4) 10.34(a)* Amendment Number 1 dated November 23, 1993, regarding Foundry and PROM II.5 Process Technology License Agreement with Cypress Semiconductor Corporation and Cypress Semiconductor (Texas) Inc.(7)
18 19
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.35 Master Distribution Agreement with Japan Macnics Corporation dated June 26, 1986, as amended effective March 18, 1987.(6) 10.37 LSI Products Supply Agreement with Sharp Corporation, dated October 1, 1993.(7) 10.38+ Altera Corporation Nonqualified Deferred Compensation Plan and Trust Agreement dated February 1, 1994, and form of Deferred Compensation Agreement.(7) 10.39 Wafer Supply Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.40 Option Agreement dated June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(11) 10.41 Memorandum of Intent dated October 1, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.42 Amendment No. 1 dated as of October 1, 1995 to Wafer Supply Agreement dated as of June 26, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd. And to Option Agreement 1 dated as of June 26, 1995 between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.43 Option Agreement 2 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.44 Option Agreement 3 dated as of October 1, 1995 by and between Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(13) 10.45(a)+ 1996 Stock Option Plan. 10.45(b) Form of Stock Option Agreement under 1996 Stock Option Plan.(13) 10.46 Owner/Contractor Agreement for Construction between Registrant and Rudolph and Sletten, Inc. dated January 10, 1996.(13) #10.47 Second Amended and Restated Limited Liability Company Agreement of Wafertech, LLC, a Delaware limited liability company, dated as of October 28, 1997.(17) 10.48 Purchase Agreement by and between Taiwan Semiconductor Manufacturing Co., Ltd., as Seller, and Analog Devices, Inc., the Registrant and Integrated Silicon Solutions, Inc., as Buyers (dated as of June 25, 1996).(14) 10.49 Recission (dated as of June 25, 1996) of Option Agreement 1 dated as of June 26, 1995 by and between the Registrant and Taiwan Semiconductor Manufacturing Co., Ltd.(14) 10.50 Agreement and Plan of Merger dated June 18, 1997.(15) 11.1 Computation of Earnings per Share.(16) #13.1 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (to be deemed filed only to the extent required by the instructions to Exhibits for Reports on Form 10-K). #18.1 Letter of Price Waterhouse LLP regarding Change in Accounting Principle. #21.1 Subsidiaries of the Registrant. #23.1 Consent of Price Waterhouse LLP. #24.1 Power of Attorney (included on page 17). #27.1 Financial Data Schedule.
- --------------- (1) Incorporated by reference to identically numbered exhibits filed in response to Item 16(a), "Exhibits," of the registrant's Registration Statement on Form S-1 (File No. 33-17717), as amended, which became effective March 29, 1988. 19 20 (2) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1988. (3) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1989. (4) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended March 31, 1990, as amended by a Form 8 filed on July 13, 1990. (5) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1990. (6) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated by reference to identically numbered exhibits field in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1993. (8) Incorporated by reference to identically numbered exhibits field in response to Item 7, "Exhibits," of the registrant's Report on Form 8-K dated October 15, 1994 and 8-KA dated December 15, 1994. (9) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended September 30, 1994. (10) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1994. (11) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1995. (12) Incorporated by reference to identically numbered exhibits filed in response to Item 8, "Exhibits," of the registrant's Registration Statement on Form S-8 (File No. 33-61085), as amended, which became effective July 17, 1995. (13) Incorporated by reference to identically numbered exhibits filed in response to Item 14(a), "Exhibits," of the registrant's Report on Form 10-K for the fiscal year ended December 31, 1995. (14) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1996. (15) Incorporated by reference to identically numbered exhibits filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1997. (16) Incorporated by reference to Note 3 to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1997. (17) Exhibits to this document are incorporated by reference to the exhibits to the identically numbered document filed in response to Item 6(a), "Exhibits," of the registrant's Report on Form 10-Q for the quarter ended June 30, 1996. * Confidential treatment has previously been granted for portions of this exhibit pursuant to an order of the Commission. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) thereof. # Filed herewith. 20 EX-4.1 2 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.1 COMMON STOCK [ALTERA LOGO] COMMON STOCK NUMBER SHARES [SEAL] [SEAL] SFU ALTERA CORPORATION THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS TRANSFERABLE IN OF THE STATE OF DELAWARE BOSTON, MA OR NEW YORK, NY THIS CERTIFIES THAT CUSIP 021441 10 0 ---------------------------------------- IS THE RECORD HOLDER OF ---------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF =============================== ALTERA CORPORATION ============================= transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: ------------------- [SEAL] /s/ C. WENDELL BERGERE /s/ RODNEY SMITH ---------------------- ----------------------- Secretary President and Chief Executive Officer Countersigned and registered: BANKBOSTON, NA Transfer Agent and Registrar By: [SIG] ------------------------------------ Authorized Signature 2 ALTERA CORPORATION The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF TRAN MIN ACT -- ...................Custodian............... TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act........................................ in common (State)
Additional abbreviations may also be used though not in the above list. For value received,___________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ ________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated________________________ X_______________________________________________ THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed THE SIGNATURE SHOULD BE GUARANTEED BY A BROKERAGE FIRM OR A FINANCIAL INSTITUTION THAT IS A MEMBER OF A SECURITIES APPROVED MEDALLION PROGRAM, SUCH AS SECURITIES TRANSFER AGENTS MEDALLION PROGRAM (STAMP), STOCK EXCHANGES MEDALLION PROGRAM (SEMP) OR NEW YORK STOCK EXCHANGE, INC., MEDALLION SIGNATURE PROGRAM (MSP). EX-10.26 3 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.26 INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of this _____ day of _______________, 1997 by and between Altera Corporation, a Delaware corporation (the "Company"), and _________________ ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. (a) Third-Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, appeal, arbitration, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, Page 1 2 create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee believed to be in or not opposed to the best interests of the Company and its shareholders. 2. Expenses: Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all expenses (including attorneys' fees) incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three (3) business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under Page 2 3 this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers, If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense, and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. Page 3 4 3. Additional Indemnification Rights; Nonexclusivity. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's By-laws or by statute, In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors, an officer or other corporate agent, such changes shall be, inso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute, or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors, an officer, or other corporate agent, such changes, to the extent not otherwise required by such law, statute, or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its By-laws, any agreement, any vote of shareholders or disinterested directors, the Delaware General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered proceeding. 4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 6. Directors' and Officers' Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure Page 4 5 the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors' and officers' liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be indemnified of liability under the Delaware General Corporation Law. (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, Page 5 6 and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Company; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale of sale and purchase by Indemnitee of securities of the Company in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall also include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect Page 6 7 to such action, unless as a part of such action, a court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. 16. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware without regard to conflict of laws and provisions thereof. Page 7 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ALTERA CORPORATION -------------------------------------- By: C. Wendell Bergere Title: Vice President, General Counsel and Secretary Address: 101 Innovation Drive San Jose, CA 95134 AGREED TO AND ACCEPTED: INDEMNITEE: - --------------------------------- - --------------------------------- - --------------------------------- (address) Page 8 EX-10.47 4 RESTATED LIMITED LIABILITY COMPANY AGREEMENT 1 EXHIBIT 10.47 SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF WAFERTECH, LLC A DELAWARE LIMITED LIABILITY COMPANY DATED AS OF OCTOBER 28, 1997 ------------------------------------------------------------ 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND RULES OF CONSTRUCTION........................................1 1.1 DEFINITIONS..................................................................1 1.2 RULES OF CONSTRUCTION.......................................................10 ARTICLE 2 ORGANIZATIONAL MATTERS......................................................10 2.1 FORMATION OF COMPANY........................................................10 2.2 NAME........................................................................10 2.3 FICTITIOUS BUSINESS NAME STATEMENT; OTHER CERTIFICATES......................10 2.4 PRINCIPAL EXECUTIVE OFFICE; OTHER OFFICES...................................11 2.5 AGENTS FOR SERVICE OF PROCESS...............................................11 2.6 BUSINESS AND PURPOSE OF THE COMPANY.........................................11 2.7 TERM OF THE COMPANY.........................................................12 2.8 INITIAL MEMBERS; STATUS OF MEMBERS..........................................12 2.9 LIABILITY OF MEMBERS........................................................12 2.10 COMPETITION; CONFLICT OF INTEREST...........................................12 2.11 BUSINESS PLAN...............................................................13 2.12 MEMBER INTELLECTUAL PROPERTY................................................13 2.13 FORMATION AUTHORIZATION.....................................................15 2.14 REIMBURSEMENT OF TSMC EXPENSES..............................................15 ARTICLE 3 AUTHORIZED CAPITAL; CAPITAL CONTRIBUTIONS...................................15 3.1 AUTHORIZED CAPITAL..........................................................15 3.1 INITIAL CAPITAL CONTRIBUTIONS...............................................16 3.3 ADDITIONAL CAPITAL CONTRIBUTION.............................................17 3.4 CONSEQUENCES OF FAILURE TO CONTRIBUTE.......................................17 3.5 CAPITAL ACCOUNTS............................................................22 3.6 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY; COMPANY LOANS AND GUARANTEES..................................................................23 3.7 RIGHTS WITH RESPECT TO CAPITAL..............................................24 ARTICLE 4 DISTRIBUTIONS...............................................................25 4.1 CASH AVAILABLE FOR DISTRIBUTION.............................................25 4.2 TAX DISTRIBUTIONS...........................................................26 4.3 DISCRETIONARY DISTRIBUTIONS.................................................26 4.4 AMOUNTS WITHHELD............................................................26 ARTICLE 5 ALLOCATION OF PROFITS AND LOSSES............................................27 5.1 ALLOCATION OF NET PROFIT AND LOSS...........................................27 5.2 RESIDUAL ALLOCATIONS........................................................28 5.3 OTHER ALLOCATION RULES......................................................28
3 5.4 TAX ALLOCATIONS.............................................................28 ARTICLE 6 MANAGEMENT OF THE COMPANY...................................................28 6.1 MANAGEMENT BY DIRECTORS.....................................................28 6.2 NUMBER AND DESIGNATION OF DIRECTORS; OBSERVER OF THIRD PARTY INVESTORS......29 6.3 MEETINGS OF DIRECTORS.......................................................29 6.4 POWERS OF DIRECTORS.........................................................30 6.5 ANNUAL INFORMATIONAL MEETING OF MEMBERS.....................................32 6.6 COMPENSATION COMMITTEE......................................................32 6.7 EXPENSE REIMBURSEMENT.......................................................33 6.8 INSURANCE...................................................................33 6.9 OFFICERS....................................................................33 6.10 MEMBER CONSENTS.............................................................35 6.11 BEST INTEREST OF THE COMPANY................................................35 ARTICLE 7 MEMBER REPRESENTATIONS AND WARRANTIES.......................................35 7.1 NATURE OF MEMBER'S INTEREST.................................................36 7.2 MEMBER REPRESENTATIONS AND WARRANTIES.......................................36 ARTICLE 8 RESTRICTIONS ON TRANSFER; PREEMPTIVE RIGHT; ADMISSION OF NEW MEMBERS; RIGHT OF FIRST REFUSAL......................................................37 8.1 RESTRICTIONS ON TRANSFER....................................................37 8.2 GENERAL TRANSFER PROVISIONS.................................................38 8.3 PREEMPTIVE RIGHTS...........................................................40 8.4 ADMISSION OF NEW MEMBERS....................................................41 8.5 RIGHT OF FIRST REFUSAL......................................................41 8.6 SPECIAL TRANSFER PROVISION..................................................42 8.7 SPECIAL RIGHT OF MANAGING MEMBERS OTHER THAN TSMC TO PURCHASE...............43 ARTICLE 9 BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS...................................43 9.1 MAINTENANCE OF BOOKS AND RECORDS............................................43 9.2 INSPECTION RIGHTS...........................................................44 9.3 RIGHTS TO RECEIVE COPIES OF DOCUMENTS.......................................45 9.4 BANK ACCOUNTS...............................................................45 9.5 TAX MATTERS HANDLED BY TAX MATTERS PARTNER..................................45 9.6 FEDERAL INCOME TAX ELECTIONS MADE BY TAX MATTERS PARTNER....................46 9.7 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS................................46 ARTICLE 10 EVENT OF DEFAULT; TERMINATION OF MEMBERSHIP.................................46 10.1 EVENT OF DEFAULT............................................................46 10.2 TERMINATION OF MEMBER.......................................................48 10.3 PURCHASE RIGHT..............................................................48
-ii- 4 10.4 NOTICE OF INTENT TO PURCHASE................................................48 10.5 ELECTION TO PURCHASE LESS THAN ALL OF THE TERMINATED MEMBER'S INTEREST......49 10.6 PAYMENT OF PURCHASE PRICE...................................................49 10.7 CLOSING OF PURCHASE OF TERMINATED MEMBER'S INTEREST.........................50 ARTICLE 11 TERMINATION AND DISSOLUTION.................................................50 11.1 TERMINATION.................................................................50 11.2 DISSOLUTION.................................................................50 11.3 WINDING UP..................................................................51 11.4 DISTRIBUTION OF ASSETS......................................................52 11.5 TIME FOR WINDING UP.........................................................53 11.6 FINAL ACCOUNTING; CERTIFICATES OF CANCELLATION..............................53 ARTICLE 12 INCENTIVE PLANS.............................................................53 12.1 AUTHORIZATION OF INCENTIVE PLANS............................................53 12.2 ADMISSION OF PLAN PARTICIPANTS..............................................53 ARTICLE 13 TSMC LAND OPTION; NEW VENTURE RIGHTS........................................54 13.1 LAND OPTION.................................................................54 13.2 NEW FAB VENTURE RIGHT OF FIRST REFUSAL......................................54 13.3 FURTHER ASSURANCES..........................................................54 ARTICLE 14 CHANGE OR CONVERSION TO A GENERAL CORPORATION...............................54 14.1 MERGER OR CONSOLIDATION TO A GENERAL CORPORATION............................54 14.2 REGISTRATION RIGHTS.........................................................55 14.3 VOTING ARRANGEMENTS.........................................................55 14.4 OPTIONS.....................................................................55 ARTICLE 15 STANDARD OF CARE; INDEMNIFICATION...........................................57 15.1 STANDARD OF CARE............................................................57 15.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS................57 15.3 EXPENSES....................................................................57 15.4 INDEMNIFICATION RIGHTS NON-EXCLUSIVE........................................58 15.5 ERRORS AND OMISSIONS INSURANCE..............................................58 15.6 ASSETS OF THE COMPANY.......................................................58 ARTICLE 16 AMENDMENTS..................................................................58 16.1 AMENDMENT, ETC. OF LIMITED LIABILITY COMPANY AGREEMENT......................58 16.2 AMENDMENT, ETC..............................................................58 ARTICLE 17 CONDITIONS PRECEDENT........................................................58 17.1 CONDITIONS TO MEMBERS' PERFORMANCE..........................................58 17.2 CONDITIONS TO TSMC'S PERFORMANCE............................................59
-iii- 5 17.3 CONDITIONS TO ADI'S PERFORMANCE.............................................59 17.4 CONDITIONS TO ALTERA'S PERFORMANCE..........................................60 17.5 CONDITIONS TO ISSI'S PERFORMANCE............................................60 17.6 CONDITIONS TO THE THIRD PARTY INVESTORS' PERFORMANCE........................60 ARTICLE 18 CONFIDENTIALITY.............................................................61 18.1 EXCHANGE OF INFORMATION AND NONDISCLOSURE...................................61 18.2 CONFIDENTIALITY AGREEMENTS FOR VISITORS AND EMPLOYEES.......................61 18.3 THIRD PARTY REQUEST FOR INFORMATION.........................................61 18.4 REPORTING LOSS, THEFT OR MISAPPROPRIATION...................................62 18.5 BREACH OF CONFIDENTIALITY...................................................62 ARTICLE 19 ANCILLARY AGREEMENTS........................................................62 19.1 EXECUTION AND DELIVERY......................................................62 19.2 TERMINATION OF MANUFACTURING AGREEMENT; FUTURE PURCHASE AGREEMENT...........63 ARTICLE 20 DISPUTE RESOLUTION; ARBITRATION.............................................63 20.1 NEGOTIATION BETWEEN EXECUTIVES..............................................63 20.2 MEDIATION...................................................................63 20.3 CLAIMS SUBJECT TO ARBITRATION...............................................64 ARTICLE 21 LIMITATION ON DAMAGES; CONTRACTUAL LIMITATIONS PERIOD.......................66 21.1 LIMITATION ON DAMAGES.......................................................66 21.2 CONTRACTUAL LIMITATIONS PERIOD..............................................67 ARTICLE 22 FORCE MAJEURE...............................................................67 22.1 FORCE MAJEURE...............................................................67 22.2 NOTIFICATION................................................................67 22.3 RESPONSE TO FORCE MAJEURE...................................................67 22.4 LIMITATIONS ON APPLICABILITY OF FORCE MAJEURE...............................68 ARTICLE 23 GENERAL PROVISIONS..........................................................68 23.1 SEVERABILITY................................................................68 23.2 NEUTRAL INTERPRETATION; WAIVER..............................................68 23.3 NOTICES.....................................................................68 23.4 TIME OF THE ESSENCE.........................................................69 23.5 GOVERNING LAW...............................................................69 23.6 ENTIRE AGREEMENT............................................................69 23.7 WAIVER......................................................................69 23.8 COOPERATION.................................................................69 23.9 COUNTERPARTS................................................................69 23.10 EXHIBITS AND SCHEDULES......................................................69
-iv- 6 23.11 ATTORNEYS' FEES.............................................................69 23.12 DATE OF PERFORMANCE.........................................................70 23.13 SURVIVAL....................................................................70 23.14 SURVIVAL OF RIGHTS..........................................................70 23.15 THIRD-PARTY BENEFICIARIES...................................................70 23.16 PARTITION...................................................................70 23.17 GOVERNING LANGUAGE OF AGREEMENT.............................................70 23.18 CONSENT TO JURISDICTION AND SERVICE OF PROCESS..............................70 23.19 LIQUIDATED DAMAGES..........................................................71 23.20 AUTHORIZED REPRESENTATIVES..................................................71 23.21 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE...........................72 23.22 WAIVER OF CONFLICT OF INTEREST..............................................72 23.23 AMENDMENT AND RESTATEMENT...................................................72
-v- 7 LIST OF EXHIBITS Exhibit A - Capital Contributions Exhibit B - Certificate of Formation Exhibit C - Confidentiality Agreements (1) Visitor Confidentiality Agreement (2) Employee Invention Assignment and Confidentiality Agreement Exhibit D - Description of Real Property Exhibit E - Possible Future Restructuring Exhibit F - Future Purchase Agreement Exhibit G Allocation Rules Exhibit H Senior Executive Incentive Plan Exhibit I Employee Incentive Plan -vi- 8 SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF WAFERTECH, LLC THIS SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (the "Agreement") is dated as of October 28, 1997 by and among TSMC Development, Inc., a Delaware corporation ("TSMC"), Analog Devices, Inc., a Massachusetts corporation ("ADI"), Altera Corporation, a Delaware corporation ("ALTERA"), Integrated Silicon Solutions, Inc., a Delaware corporation ("ISSI") and each of the other Persons identified on the signature page hereof as a Member (as hereinafter defined) hereunder. WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors (as hereinafter defined) as of June 25, 1996 (the "EFFECTIVE DATE") formed a limited liability company organized under the laws of the State of Delaware in the United States of America, pursuant to that certain Limited Liability Company Agreement by and among TSMC, ADI, Altera, ISSI and the Third Party Investors, dated as of June 25, 1996 (the "ORIGINAL AGREEMENT"), the purpose of which is to construct a foundry which shall provide foundry services for the manufacture of IC wafers in accordance with the terms of this Agreement. WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors as of August 9, 1996 amended and restated the Original Agreement. WHEREAS, TSMC, ADI, ALTERA, ISSI and the Third Party Investors wish to further amend and restate the Original Agreement as herein amended and restated; NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration had and received, each of the parties hereto agrees as follows: ARTICLE 1 DEFINITIONS AND RULES OF CONSTRUCTION 1.1 DEFINITIONS. In addition to the terms defined elsewhere in this Agreement, the following words and expressions shall have the meanings set forth below: 1.1.1 "AAA" means the American Arbitration Association. 1.1.2 "ACT" means the Delaware Limited Liability Company Act set forth in Title 6, Sections 18-101 through 18-1109 of the Delaware Code, as amended from time to time. Any reference to the Act shall automatically include a reference to any subsequent or successor limited liability company law in Delaware. 9 1.1.3 "ADDITIONAL CAPITAL CONTRIBUTION" is defined in Section 3.2. 1.1.4 "ADVANCED PROCESS AGREEMENT" means that certain Advanced Process License Agreement dated as of April 10, 1996, between TSMC and TSMC International Investment Ltd., a British Virgin Islands corporation ("TSMC IIL"), whereby TSMC has been granted a license to certain future processes and know-how of TSMC IIL which Advanced Process Agreement has been assigned by TSMC to the Company as described in Section 3.1.1. 1.1.5 "AFFILIATE" means, when used with reference to a specified Person: (i) With respect to any corporation, limited liability company, partnership or other business enterprise: (a) which owns or controls, directly or indirectly, fifty percent (50%) or more of the voting rights with respect to the election of directors or managers, or which has practical control directly or indirectly, of any party to this Agreement; (b) of which fifty percent (50%) or more of the voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any party to this Agreement; or (c) of which fifty percent (50%) or more of the total voting rights with respect to the election of directors or managers is owned or controlled, directly or indirectly, by, or which is under the practical control directly or indirectly of, any corporation, limited liability company, partnership or other business enterprise qualifying under subsections (a) or (b) above; and (ii) With respect to any natural person, any relative of such Person or such Person's spouse, whether by blood, marriage or adoption. 1.1.6 "AGREEMENT" means this Amended and Restated Limited Liability Company Agreement, including all Exhibits (which are hereby incorporated into and made a part of this Agreement by this reference), as originally executed and as amended from time to time, as the context requires. 1.1.7 "APPROVAL OF MEMBERS HOLDING A MAJORITY IN PERCENTAGE INTEREST" means the written consent by, or approval at a meeting of Preferred Members by, a Preferred Member singularly owning, or Preferred Members collectively owning, more than fifty percent (50%) of the Percentage Interests owned by all of the Preferred Members. 1.1.8 "APPROVAL OF MEMBERS HOLDING NOT LESS THAN 71% IN PERCENTAGE INTEREST" OR "APPROVED BY MEMBERS HOLDING NOT LESS THAN 71% IN PERCENTAGE INTEREST" means the written consent by, or approval at a meeting of Preferred Members by, Preferred Members owning 71% or more of the Percentage Interests owned by all of the Preferred Members. 1.1.9 "APPROVAL OF MEMBERS HOLDING NOT LESS THAN 87% IN PERCENTAGE INTEREST" means the written consent by, or approval at a meeting of Preferred Members by, Preferred Members owning 87% or more of the Percentage Interests owned by all of the Preferred Members. -2- 10 1.1.10 "ANCILLARY AGREEMENTS" mean (i) the Confidentiality Agreements, (ii) the Manufacturing Agreement, (iii) the Technology License and Assistance Agreement, (iv) the Advanced Process Agreement, (v) the Assignments of each of the Manufacturing Agreement, the Technology License and Assistance Agreement and the Advanced Process Agreement, (vi) the Registration Rights Agreement, (vii) the Purchase Agreement, (viii) the TSMC Land Option and (ix) the Future Purchase Agreement. 1.1.11 "BOARD OF DIRECTORS" is defined in Section 6.1. 1.1.12 "BUSINESS DAY" means a day on which banking institutions are open for business in Seattle, Washington and San Jose, California other than a Saturday or Sunday. 1.1.13 "BUSINESS PLAN" is defined in Section 2.11. 1.1.14 "CAPITAL ACCOUNT" is defined in Section 3.5. 1.1.15 "CAPITAL CONTRIBUTION" means the total amount of cash and the agreed fair market value (net of liabilities) of other property contributed to the Company by a particular Member, as contemplated in Section 3.2, plus any subsequent contributions of cash and the agreed fair market value (net of liabilities) of any other property subsequently contributed to the Company by that Member as an Additional Capital Contribution. 1.1.16 "CASH AVAILABLE FOR DISTRIBUTION" is defined in Section 4.1.2. 1.1.17 "CERTIFICATE OF FORMATION" means the certificate to be filed with the Office of the Delaware Secretary of State for the purpose of forming the Company, attached hereto as Exhibit B. 1.1.18 "CODE" means the Internal Revenue Code of 1986, as amended (or any corresponding provision or provisions of any succeeding law). 1.1.19 "COMMON MEMBER" means any Member who owns Common Shares. 1.1.20 "COMMON SHARES" means one or more of the 13.5 million shares authorized by Section 3.1 and having the rights and privileges as stated in Section 3.1.1. 1.1.21 "COMPANY" means WaferTech, LLC. 1.1.22 "COMPANY LOANS" means any loans or advances made by any Member to the Company as contemplated in Section 3.6.2. 1.1.23 "CONFIDENTIAL INFORMATION" means confidential or secret information, including information protected under the Confidentiality Agreements or confidential or secret information protected under any of the Ancillary Agreements, including but not limited to Trade -3- 11 and Industrial Secrets (as defined in the Technology License and Assistance Agreement) and Proprietary Information (as defined in the Manufacturing Agreement). 1.1.24 "CONFIDENTIALITY AGREEMENTS" mean that certain Member's Confidentiality Agreement dated May 25, 1996 executed by the Company and each Member and the Visitor Confidentiality Agreements executed by the Company and each Visitor (as provided in Article 18) substantially in the form attached hereto as Exhibit C(1). 1.1.25 "DEFAULTING MEMBER" means (1) a Preferred Member who fails to make such Preferred Member's Second Part Capital Contribution or Third Part Capital Contribution hereunder or an Additional Capital Contribution under the circumstances described in Section 3.4.2.2, and (2) a Member who otherwise breaches this Agreement in a manner that constitutes an Event of Default. 1.1.26 "DELAWARE CORPORATION" is defined in Section 14.1. 1.1.27 "DEPRECIATION" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable as determined for book purposes under GAAP. 1.1.28 "DILUTION EVENT" means an event resulting in reduction of a Member's Percentage Interest in the Company as contemplated in Section 3.4.2.1 or Section 3.6.4 of this Agreement if the Additional Capital Contribution or guaranteed debt which the Member did not provide or guarantee, as the case may be, was used for purposes other than the completion of the Foundry in accordance with the Business Plan. 1.1.29 "DIRECTOR" is defined in Section 6.2.1, and includes voting and nonvoting Directors. 1.1.30 "DISSOLUTION DATE" shall mean the first date on which one of the events set forth in Section 11.2 shall occur. 1.1.31 "ECONOMIC INTEREST" means a Person's right to share in the Net Profit, Net Loss or similar items of, and to receive distributions from, the Company, resulting from the assignment or other transfer of Preferred or Common Shares where the assignee or transferee thereof is not admitted as a Member pursuant to Article 8. An Economic Interest does not include any other rights of a Member including, without limitation, the right to vote or to participate in the management of the Company, or, except as provided in Sections 9.2 and 9.3, any right to information concerning the business and affairs of the Company. 1.1.32 "EVENT OF DEFAULT" is defined in Section 10.1. 1.1.33 "FISCAL YEAR" means each twelve (12) month period commencing January 1 and through and including December 31 and including as the first Fiscal Year, the period from the Effective Date to and including December 31, 1996. -4- 12 1.1.34 "FORCE MAJEURE" means any one or more of the following: acts of war declared or undeclared, nationalization, expropriation, civil unrest or other public disturbance, fire, storm, floods, typhoon, tidal wave, hurricane, cyclone or other severe weather conditions, earthquake, or other Acts of God, legal restraints, governmental or like interference, judicial action, accidental damage to equipment, as well as any other cause outside the reasonable control of a Member. "Force Majeure" also includes the failure to obtain such license(s) and other approvals, including export licenses, as are required by United States law or other applicable law for the equipment, technical information, software, technology and Proven Products to be provided pursuant to the terms of this Agreement, the Technology License and Assistance Agreement or the Advanced Process Agreement. 1.1.35 "FUTURE PURCHASE AGREEMENT" is defined in Section 19.2. 1.1.36 "FOUNDRY" is defined in Section 2.6.1. 1.1.37 "GAAP" means generally accepted accounting principles in the United States of America. 1.1.38 "GOVERNMENTAL INTERVENTION" means (i) any action taken by any government or agency thereof, subsequent to the formation of the Company, which is material and adverse to any Member, or (ii) any recommendations by any government or agency thereof to the Members or any of them individually, requiring directly or indirectly, formally or informally, alteration or modification of any term or condition of this Agreement or of the Ancillary Agreements, or of the performance of the Members under this Agreement or the Ancillary Agreements in a manner which is material and adverse to one Member. 1.1.39 "IC" means integrated circuit. 1.1.40 "INCENTIVE PLAN" means the Senior Executive Incentive Plan and Employee Incentive Plan and includes any other incentive plan (1) approved by the Board of Directors and (2) Approved by Members holding not less than 71% in Percentage Interest. 1.1.41"INDEMNITEE" is defined in Section 15.1 hereof. 1.1.42 "INITIAL CAPITAL CONTRIBUTION" means the Capital Contribution of a Member as of the date hereof. "TOTAL INITIAL CAPITAL CONTRIBUTION" means the sum of the "Initial Capital Contributions," of all of the Members, as of the date hereof. 1.1.43 "INTELLECTUAL PROPERTY RIGHTS" means (a) all patent rights and all right, title and interest in and to all letters patent and applications for letters patent, and all other government-issued or -granted indicia of invention ownership, including any reissue, division, term extensions, continuation or continuation-in-part applications; (b) all copyrights and all other literary property and author rights, and all right, title and interest in and to all copyrights, copyright registrations, certificates of copyrights and copyrighted interests; (c) all trademarks, -5- 13 trade names and service marks, and all rights, title and interest in and to all applications, certifications and registrations therefor; (d) all mask work rights, mask work applications, and mask work registrations; (e) all rights, title and interest in and to all trade secrets and trade secret rights; and (f) any licenses or license rights with respect to the foregoing. 1.1.44 "INTEREST" means either (i) a Membership Interest, or (ii) an Economic Interest, as the case may be. Each Member's Interest shall be represented by Common and Preferred Shares; provided, however, that the Company's stock records shall in the absence of manifest error be conclusive as to any Member's ownership of Common and Preferred Shares. At such time as any Interest of any Member is changed, the appropriate number of Shares held by such Member shall also be deemed transferred to reflect such change. Subject to the requirements of Article 8 with respect to transfers of Interests, the Company shall issue additional Share certificates to the Members to reflect ownership of additional Shares and shall, upon surrender of Share certificates or delivery of an affidavit of lost certificate together with appropriate indemnity, issue new Share certificates to reflect transfers, reductions or other adjustments to the ownership of Shares. 1.1.45 "IPO" means an underwritten initial public offering of securities made pursuant to an effective Registration Statement under the Securities Act of 1933, as amended, and the Rules and Regulations of the Securities and Exchange Commission thereunder. 1.1.46 "LAND" is defined in Section 1.1.78. 1.1.47 "MANAGING MEMBERS" means TSMC, ADI, Altera and ISSI. 1.1.48 "MANUFACTURING AGREEMENT" means that certain Manufacturing Agreement dated as of February 16, 1996, by and between TSMC and Taiwan Semiconductor Manufacturing Co. Ltd. of Taiwan ("TSMC Taiwan"), pursuant to which TSMC Taiwan has agreed to purchase all IC wafers manufactured by TSMC for the time and on the terms therein specified, which Manufacturing Agreement has been assigned by TSMC to the Company as described in Section 3.1.1. 1.1.49 "MEMBER" means a Person who: (i) Has been admitted to the Company as a member in accordance with the Certificate of Formation or this Agreement, or an assignee of an Interest who has become a Member pursuant to Article 8, or has exercised an Option granted pursuant to Article 12 and has complied in all respects with the requirements for exercising such Option; and (ii) Has not resigned, withdrawn or been expelled as a Member or, if other than an individual, been dissolved. Reference to a "Member" shall be to any one of the Members. Reference to an "Initial Member" shall be to any one of the Members who are such on the Effective Date. -6- 14 1.1.50 "MEMBERSHIP INTEREST" means ownership by a Member of (i) one or more Preferred Shares; or (ii) one or more Common Shares. 1.1.51 "NET PROFIT" and "NET LOSS" mean, for each Fiscal Year or other period, an amount equal to the Company's taxable income or loss for such year or period, as the case may be, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Company that is exempt from U.S. federal income tax and not otherwise taken into account in computing Net Profit or Net Loss shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Net Profit or Net Loss shall be subtracted from such taxable income or loss; (iii) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for U.S. Federal income tax purposes shall be computed in accordance with the Section 704(b) Regulations by reference to the book basis and fair market value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its book basis and fair market value; (iv) In lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account depreciation as determined for book purposes in accordance with the Section 704(b) Regulations for such Fiscal Year or other period; and (v) Notwithstanding any other provision of this subsection, any items of income, gain, loss or deduction which are specifically allocated to any Member shall not be taken into account in computing Net Profit or Net Loss. 1.1.52 "NON-DEFAULTING MEMBERS" means each Preferred Member who has made such Member's Second Part Capital Contribution or Third Part Capital Contribution or an Additional Capital Contribution under the circumstances described in Section 3.4.2.2 hereunder, and is not otherwise in breach of this Agreement in a manner that constitutes an Event of Default. 1.1.53 "OFFERING NOTICE" is defined in Section 8.5.1 1.1.54 "OFFICER" means an officer of the Company. 1.1.55 "OPTION" means a stock option granted pursuant to an Incentive Plan. -7- 15 1.1.56 "PERCENTAGE INTEREST" means the Interest of a Member or the holder of an Economic Interest in the Company, expressed as a percentage of the Interests of all of the Members and holders of an Economic Interest. The Percentage Interests shall initially be as set forth on Exhibit A and shall be adjusted from time to time as herein provided. Notwithstanding the foregoing, however, for the purpose only of determining the Percentage Interest required for any vote or approval, including, but not limited to, the approvals contemplated by Sections 3.6.1, 6.4.2, 6.4.3, 8.1.1, 8.1.2, 11.2 and Article 16, the Percentage Interest shall be calculated without counting the Common Shares and without giving effect to the issuance of options or grant of any equity interest in the Company pursuant to any Incentive Plan. 1.1.57 "PERSON" means a natural person, partnership (whether general or limited), limited liability company, trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case whether domestic or foreign. 1.1.58 "PREFERRED MEMBER" means any Member who owns Preferred Shares. 1.1.59 "PREFERRED SHARES" means one or more of the 225 million shares authorized by Section 3.1 and having the rights and privileges as stated in Section 3.1.2. 1.1.60 "PRODUCTS" is defined in the Manufacturing Agreement. 1.1.61 "PROHIBITED PERSON" means a Person (i) who is in the business of providing foundry services (other than TSMC or any Affiliate thereof, and other than as permitted pursuant to the last two sentences of Section 2.10.1), or (ii) whose admission as a Member could reasonably be economically inimical to the interests of the Company or to any Member. The Board of Directors and the Members pursuant to Section 6.4.2 shall determine who is a Prohibited Person. 1.1.62 "PROPERTY" means the assets of the Company, both tangible and intangible, or any portion thereof. 1.1.63 "PROJECT" is defined in Section 2.6.1. 1.1.64 "PROVEN PRODUCTS" is defined in the Manufacturing Agreement. 1.1.65 "PURCHASE AGREEMENT" means that certain Purchase Agreement dated as of the Effective Date by and between TSMC Taiwan, Altera, ADI and ISSI, pursuant to which each of Altera, ADI and ISSI commit to purchase a designated amount of IC wafers from TSMC Taiwan. 1.1.66 "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated as of the Effective Date by, between and among the Company and each Member. -8- 16 1.1.67 "REGULATIONS" means the U.S. Federal income tax regulations promulgated by the Treasury Department under the Code, as such regulations may be amended from time to time. All references herein to a specific Section of the Regulations shall be deemed also to refer to any corresponding provisions of succeeding Regulations. 1.1.68 "REMAINING MEMBER" is defined in Section 10.2.3. 1.1.69 "SECRETARY OF STATE" means the Office of the Secretary of State of the State of Delaware. 1.1.70 "SECTION 704(B) REGULATIONS" means the final or temporary income tax regulations under Section 704(b) of the Code relating to the determination of a partner's distributive share of partnership income, gain, loss, deduction or credit (or item thereof), and to the extent not inconsistent with any final or temporary regulations, any outstanding proposed income tax regulations under Section 704(b) of the Code. All references to Section 704(b) Regulations shall be deemed also to refer to any corresponding provisions of any succeeding regulations to such Section 704(b) of the Code. 1.1.71 "SELLING MEMBER" is defined in Section 8.5.1. 1.1.72 "TAX MATTERS PARTNER" means the person designated as such in Section 9.5. 1.1.73 "TECHNOLOGY LICENSE AND ASSISTANCE AGREEMENT" means that certain Technology License and Assistance Agreement dated as of February 20, 1996, by and between TSMC Technology, Inc. and TSMC, providing for TSMC Technology, Inc. to provide certain services to TSMC and granting a license to use certain technology to TSMC, which Technology License and Assistance Agreement has been assigned by TSMC to the Company as described in Section 3.1.1. 1.1.74 "TERMINATED MEMBER" is defined in Section 10.2.3. 1.1.75 "THIRD PARTY INVESTORS" means the persons signing this Agreement other than TSMC, ADI, ALTERA, ISSI and participants in the Incentive Plans who become Members. 1.1.76 "TRANSFER" is defined in Section 8.1.1. 1.1.77 "TSMC LAND OPTION" means that certain Option Agreement dated as of the Effective Date between the Company and TSMC whereby the Company granted an option to TSMC to purchase all or part of the Land (as defined therein), hereinafter the "Land". 1.1.78 "UNPAID CAPITAL PREFERENCE" means, with respect to any Preferred Member, such Member's Capital Contribution reduced by distributions to such Member pursuant to Section 4.3.1 hereof. -9- 17 1.1.79 "WASHINGTON ACT" means the Washington Limited Liability Act, codified at Title 25, Chapter 25.15 of the Revised Code of Washington. Any reference to the Washington Act shall automatically include a reference to any subsequent or successor limited liability law in Washington. 1.2 RULES OF CONSTRUCTION. For purposes of this Agreement: 1.2.1 GENERAL. Unless the context otherwise requires, (i) "or" is not exclusive; (ii) words in the singular include the plural and vice versa; (iii) words in the masculine include the feminine and neuter and vice versa; and (iv) words such as "herein," "hereinafter," "hereto," "hereby," and "hereunder," when used in this Agreement, refer to this Agreement as a whole, unless the context otherwise requires. 1.2.2 ARTICLES AND SECTIONS; HEADINGS. References to Articles and Sections are to Articles and Sections of this Agreement unless stated otherwise. Article and Section headings used in this Agreement are for convenience of reference only and shall not be used in construing or interpreting this Agreement. 1.2.3 OTHER AGREEMENTS. References herein to any agreement, schedule or other instrument, including, without limitation, any other Ancillary Agreement shall, unless the context otherwise requires (or the definition thereof otherwise specifies), be deemed references to the same as it may from time to time be amended, modified or extended. ARTICLE 2 ORGANIZATIONAL MATTERS 2.1 FORMATION OF COMPANY. The parties have formed the Company pursuant to the provisions of the Act by filing the Certificate of Formation with the Secretary of State. 2.2 NAME. The name of the Company is "WaferTech, LLC". 2.3 FICTITIOUS BUSINESS NAME STATEMENT; OTHER CERTIFICATES. The Directors have registered the Company as a foreign limited liability company in the State of Washington and shall from time to time register the Company as a foreign limited liability company and file on behalf of the Company such fictitious or trade name statements or certificates in such other jurisdictions and offices as the Directors consider necessary, convenient or appropriate. From time to time, the Directors shall file such certificates of amendment, certificates of cancellation, or other certificates as the Directors reasonably deem necessary, convenient or appropriate under the Act, under the Washington Act or under the laws of any jurisdiction in which the Company is doing business to establish and continue the Company as a limited liability company or to protect the limited liability of the Members. 2.4 PRINCIPAL EXECUTIVE OFFICE; OTHER OFFICES. The Company shall maintain its principal executive office, which shall be its principal place of business in the -10- 18 State of Washington, at Camas, or any other location determined by the Directors. The Company shall also maintain a registered office in Delaware, which shall be at the business office of the Company's agent for service of process in Delaware. The Company may maintain such other offices as determined by the Directors. 2.5 AGENTS FOR SERVICE OF PROCESS. The name and address of the Company's agent for service of process in Washington is the Corporation Service Company, c/o 600 First Avenue, Suite 500, Seattle, Washington 98104. The name and address of the Company's agent for service of process in Delaware is The Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805. 2.6 BUSINESS AND PURPOSE OF THE COMPANY. 2.6.1 GENERAL CHARACTER OF BUSINESS. The general character of the business to be conducted by the Company shall be to provide foundry services for the manufacture of IC wafers in North America to meet the specifications of the purchasers of such IC wafers in accordance with the terms and conditions of this Agreement and the Ancillary Agreements. In addition, the Company may provide testing services, tooling services, ASIC design services, computer assisted design services, maintain a design library, or provide other related services for integrated circuits. The Company shall purchase, develop and improve a portion of certain real property located in Camas, Washington that is the subject of option agreements for the benefit of TSMC, as described in Exhibit D hereto (which, subject to the TSMC Land Option, is referred to herein as the "REAL PROPERTY"). The Company shall construct and manage a foundry, or "FAB" (the "FOUNDRY") on the Real Property, subject to the TSMC Land Option, to manufacture and produce IC wafers (subsumed in the definition of "PROVEN PRODUCTS") (collectively, the "PROJECT") and to conduct any other activities, operations or business (including the borrowing of money, the encumbering of the Company's assets for security and the entry into contracts) directly and reasonably related to the Project and its use and development. In accordance with Section 3.1.1, TSMC has assigned the Manufacturing Agreement to the Company, so that during the Manufacturing Agreement's term, TSMC Taiwan shall have an obligation to purchase not less than 85% of Calculated Installed Capacity (as defined in the Manufacturing Agreement) but shall have a right to purchase up to 100% of Calculated Installed Capacity and TSMC has assigned the Technology License and Assistance Agreement and Advanced Process Agreement to the Company so that specified technical services and technology shall be provided to the Company. The Managing Members shall order and take or pay for Products from TSMC Taiwan as contemplated in the Purchase Agreement. The Managing Members shall cause the Company to conduct the business of the Company in compliance with all material laws and regulations. 2.6.2 OTHER PURPOSES. Subject to Section 2.6.1, the Company may carry on any lawful business, purpose or activity, in accordance with this Agreement, but the Company shall not engage in the business of granting policies of insurance or assuming insurance risks or banking. The Company shall possess and may exercise all the powers and privileges granted by the Act or by any other law or by this Agreement, together with any powers incidental thereto, so -11- 19 far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company as set forth in Section 2.6.1. 2.7 TERM OF THE COMPANY. The Company was established and commenced on the Effective Date. The Company shall dissolve on the Dissolution Date. Notwithstanding the foregoing, the Company may be dissolved prior to the Dissolution Date as provided in this Agreement or pursuant to the Act. 2.8 INITIAL MEMBERS; STATUS OF MEMBERS. 2.8.1 INITIAL MEMBERS. The Initial Members shall be those Persons listed as Members on Exhibit A. 2.8.2 STATUS OF MEMBERS. The Initial Members and any additional or substituted Members shall be "members" of the Company, as that term is used in the Act, subject to the terms and provisions of this Agreement. The Managing Members shall have authority as specified herein. 2.9 LIABILITY OF MEMBERS. No Member shall be obligated personally for any debt, obligation or liability of the Company, whether arising in contract, tort or otherwise, solely by reason of being a Member. 2.10 COMPETITION; CONFLICT OF INTEREST. 2.10.1 MEMBER COMPETITION. Subject to the provisions of the Confidentiality Agreements, and except as hereinafter provided, any Member may engage in, acquire or possess an interest or interests in other business ventures of any nature or description, independently or with others and neither the Company not any Member shall have any rights in or to such independent ventures or the income or profits derived therefrom. Notwithstanding the foregoing, each Member acknowledges, understands and agrees that pursuant to Section 3.1.1, TSMC has contributed to the Company proprietary, trade secret, know-how and other Confidential Information and that TSMC would not have entered into this Agreement with a Prohibited Person. Further, each Member acknowledges, understands and agrees that monetary compensation would not be an adequate inducement for TSMC to enter into this Agreement with a Prohibited Person. Accordingly, each Member except TSMC agrees that so long as such Member shall be a Member and for a period of two years thereafter, such Member shall not acquire or possess a controlling interest, directly or indirectly, by operation of law or otherwise, in any venture (an "OTHER VENTURE") (not including TSMC or an Affiliate thereof) that has as one of its primary purposes the provision of foundry services for the manufacture of IC wafers for sale to third-parties not affiliated with such Other Venture and not for the Member's own use or the use of other parties affiliated with the Other Venture. This restriction shall not limit the existing ventures of any Member, or future ventures in which any Member has a non-controlling minority interest, from selling IC wafers to third parties not affiliated with such Other Venture. This Section shall not limit the ability of TSMC or any of its Affiliates to enter into any Other Venture or subject to Section 13.2, to construct any other foundry. -12- 20 2.10.2 CONFLICT OF INTEREST. Subject to Section 3.6, the fact that a Person is employed by or is directly or indirectly interested in or connected with any Person employed by the Company to render any service or from whom the Company may buy merchandise shall not prohibit the Company from employing or dealing with such Person; provided, however, that any contract, employment or other arrangement with such Person shall be on an arm's-length basis and in accordance with competitive rates and other terms prevailing throughout the industry for similar goods or services. 2.11 BUSINESS PLAN. On the Effective Date each Initial Member received a preliminary annual operating budget and business plan of the Company for Fiscal Years 1996 through 2002, which was prepared by TSMC and its Affiliates in good faith for planning purposes and is incorporated herein by this reference (as it may be amended from time to time, the "BUSINESS PLAN"). Each Managing Member agrees to use reasonable commercial efforts in accordance with the terms of this Agreement to facilitate the implementation of the Business Plan by the Company. Notwithstanding the foregoing, the Members acknowledge that the Business Plan is a projection only and, as a forward looking statement, reflects certain anticipated goals, which may not be realized. The Members further acknowledge that the Business Plan does not constitute an assurance, representation, warranty or agreement by any Member or the Company for any purpose, including but not limited to, the purpose of determining whether to enter into this Agreement. Any material change or amendment to the Business Plan shall require the Approval of Members holding not less than 71% in Percentage Interest, as provided in Section 6.4.2. 2.12 MEMBER INTELLECTUAL PROPERTY. 2.12.1 GRANT OF LICENSES. Each Member, including TSMC and its Affiliates to the extent not provided for pursuant to the Technology License and Assistance Agreement or the Advanced Process Agreement, shall grant or extend to the Company the rights, licenses or cross licenses from third parties obtained or held by such Member as the same are related to and required for the manufacture of IC wafers by the Company, to the extent that any such action is not in conflict with such Member's agreements with third parties. In case any third party agreement requires the payment of fees or royalties to a third party in the event of such grant or extension, the Company shall be offered the option to accept the grant or extension and to pay such fees or royalties. 2.12.2 SHARING OF TECHNOLOGY. Any Managing Member (other than TSMC or its Affiliates, to which the terms of the Technology License and Assistance Agreement and Advanced Process License Agreement will apply), which has knowledge or know-how relating to the manufacture of IC wafers may offer to provide such knowledge or know-how to the Company in consideration for the right to use the knowledge or know-how developed by the Company relating to that knowledge or know-how provided by such Member. The terms and conditions of any such exchange of knowledge or know-how shall be determined by mutual agreement between the applicable Managing Member and the Company. Notwithstanding the foregoing, any such Managing Member (other than TSMC or its Affiliates) shall not use the -13- 21 knowledge or know-how developed by the Company to manufacture any products competitive with the Products produced for any other Managing Member (other than TSMC or its Affiliates). 2.12.3 CO-DEVELOPMENTS. In the event personnel of the Company and any Managing Member co-develop (i.e. both parties substantially and significantly contribute to the development) devices, ICs, processes or apparatus relating to the subject matter of this Agreement, the Manufacturing Agreement, the Purchase Agreement, or the Future Purchase Agreement, then the Intellectual Property Rights created by such co-development shall be jointly owned by the Company and the applicable Managing Member without accounting to each other, both parties having the right under the Intellectual Property Rights obtained with respect to such co-development to make, have made, use, modify, lease, sell, or otherwise dispose of products and to license (with a right to sub-license) such Intellectual Property Rights, subject to the other party's rights therein but without the necessity of obtaining the consent of the other party. The Company and applicable Managing Member shall cooperate in applying for, prosecuting and maintaining patents and copyright and mask work registrations for such co-developments and shall equally divide the expenses thereof. Notwithstanding the preceding sentence, either the Company or the applicable Managing Member may elect not to share the expenses of any such applications in any or all countries, in which case the other party may file and/or prosecute at its own expense and shall have sole control and ownership of such applications and any patents, copyright or mask work registrations issuing thereon, subject to a non-exclusive non-transferable, paid-up and royalty-free, worldwide license under such patents, copyright and mask right registrations in favor of the non-electing party to make, have made, use, modify, lease, sell, or otherwise dispose of products to the extent of the rights granted by such patents and registrations (with the right to sublicense only to Affiliates). The Company or the applicable Managing Member, as the case may be, shall be obligated to share the expenses referred to in the preceding sentence unless such party provides written notice of its election not to do so to the other party within thirty (30) days of a written request from such other party. An election not to share expenses shall be irrevocable. 2.13 FORMATION AUTHORIZATION. Each of the Members ratifies and approves the acts of TSMC prior to the date of this Agreement taken to (i) handle matters with respect to the formation and establishment of the Company, (ii) commit to the acquisition of the Real Property including the grant of the TSMC Land Option, (iii) commit to the construction of the Foundry, and (iv) commit to the purchase of such equipment as is required by the Company to commence the Project (collectively, the "ORGANIZATIONAL MATTERS"). Each Member authorizes TSMC to continue to implement the Organizational Matters in accordance with this Agreement. TSMC will attempt to obtain favorable terms for such Organizational Matters, and the Members will cooperate to discuss and resolve any issues in connection therewith. 2.14 REIMBURSEMENT OF TSMC EXPENSES. By execution and delivery of this Agreement, the Members agree that the following out-of-pocket expenses incurred by TSMC, or its Affiliates, upon presentation by TSMC to the Company of an itemization of such expenses, shall be reimbursed by the Company. Such expenses may include the following: -14- 22 2.14.1 Any and all reasonable expenses incurred for the acquisition of the Real Property including but not limited to those incurred in the site selection and permitting activities; 2.14.2 Any and all reasonable fees and expenses incurred to commit to construction of the Foundry; 2.14.3 Any and all fees and expenses charged by the counsel, consultants and specialists retained in connection with the formation of the Company, the acquisition of the Real Property and the construction of the Foundry; and 2.14.4 Any and all other fees and expenses incurred in handling the matters authorized in Section 2.13 or this Section 2.14. An estimate of such expenses as of the Effective Date was delivered to each Initial Member on the Effective Date. ARTICLE 3 AUTHORIZED CAPITAL; CAPITAL CONTRIBUTIONS 3.1 AUTHORIZED CAPITAL. The Company shall have the authority to issue up to TWO HUNDRED TWENTY FIVE MILLION (225,000,000) Preferred Shares and up to THIRTEEN MILLION FIVE HUNDRED THOUSAND (13,500,000) Common Shares. To acknowledge and reflect the relative Capital Contributions previously made and to be made by the Members, the Company shall issue to each Member that number of Preferred Shares and/or Common Shares specified on the attached Exhibit A as amended from time to time in accordance with this Agreement. The Company shall maintain stock records reflecting such ownership. Shares may be transferred, to the extent permitted by the terms of this Agreement, solely by submitting to the Company a written power of attorney to assign and transfer the Shares on the stock records of the Company. Unless otherwise authorized by the Board of Directors, no certificates will be issued reflecting such ownership. 3.1.1 Except as otherwise provided in this Agreement or the Act, the Common Shares shall have no right to vote or manage the business and affairs of the Company and shall have solely the rights and privileges provided by this section. 3.1.1.1 The Common Shares shall have the right to participate in distributions as provided by Article 4 and Section 11.4. 3.1.1.2 The Common Shares shall have the right to information concerning the business and affairs of the Company, as provided in this Agreement and under the Act. 3.1.1.3 The Common Shares shall, upon issuance thereof in exchange for the consideration specified by the terms of the option grant, be fully paid and non-assessable and shall have no obligation for Additional Capital Contributions. -15- 23 3.1.2 The Preferred Shares shall have the rights and privileges provided by this Agreement, including without limitation the following: 3.1.2.1 The Preferred Shares shall have the right to vote as provided by Section 6.4.2 and other provisions requiring the Approval of Members holding not less than 71% in Percentage Interest, Approval of Members holding not less than 87% in Percentage Interest and the Approval of Members holding a Majority in Percentage Interest. 3.1.2.2 The Preferred Shares shall have the distribution and liquidation preferences as provided by Article 4 and Section 11.4. 3.1.2.3 The Preferred Shares shall have the sole right to manage the business and affairs of the Company. 3.2 INITIAL CAPITAL CONTRIBUTIONS. 3.2.1 FIRST PART CAPITAL CONTRIBUTION. Subject to the satisfaction or waiver of the conditions precedent set forth in Article 17, on the Effective Date (sometimes referred to herein as the "FIRST CONTRIBUTION DATE") each Initial Member contributed to the Company in good same day funds an amount of cash equal to the cash contribution set forth opposite such Initial Member's name on Exhibit A under the column "FIRST PART CAPITAL CONTRIBUTION" and in addition TSMC contributed to the Company (i) the Manufacturing Agreement, the Technology License and Assistance Agreement and the Advanced Process Agreement, by assigning such agreements to the Company, and (ii) all rights and interests of TSMC in the Real Property, the Foundry and all equipment purchased by TSMC ("FIRST PART CAPITAL CONTRIBUTION"). 3.2.2 SECOND PART CAPITAL CONTRIBUTION. On November 30, 1996 (the "SECOND CONTRIBUTION DATE"), each Initial Member contributed to the Company an amount of cash equal to the cash contribution set forth opposite such Initial Member's name on Exhibit A under the column "Second Part Capital Contribution" (the "SECOND PART CAPITAL CONTRIBUTION"). 3.2.3 THIRD PART CAPITAL CONTRIBUTION. On November 3, 1997 (the "THIRD CONTRIBUTION DATE"), each Initial Member shall contribute to the Company an amount of cash equal to the cash contribution set forth opposite such Initial Member's name on Exhibit A under the column "Third Part Capital Contribution" (the "THIRD PART CAPITAL CONTRIBUTION"). 3.2.4 PERCENTAGE INTEREST. Upon making each such Capital Contribution, each Initial Member shall be credited for its Capital Contribution and shall have the Percentage Interest in the Company as set forth with respect to such Initial Member on Exhibit A. -16- 24 3.3 ADDITIONAL CAPITAL CONTRIBUTION. No Member shall be obligated to or shall make any additional capital contribution to the Company in excess of such Member's portion of the Initial Capital Contribution provided for in Section 3.2 ("ADDITIONAL CAPITAL CONTRIBUTION") except that the Board of Directors may approve and require Preferred Members to make Additional Capital Contributions. The Board of Directors shall send to each Preferred Member written notice of the Additional Capital Contribution including a description of the purpose of the Additional Capital Contribution, a statement of the potential benefits to the Company and to Members who make such Additional Capital Contribution and a statement of the potential impact upon each Member pursuant to Section 3.4.1 if such Member does not make the Additional Capital Contribution (the "Additional Capital Contribution Notice"). If a proposed Additional Capital Contribution, together with all prior Additional Capital Contributions, exceeds in the aggregate an amount equal to 15% of the Total Initial Capital Contribution, as set forth on Exhibit A hereto, such Additional Capital Contribution must also be Approved by Members holding not less than 71% in Percentage Interest as provided in Section 6.4.2. Following approval as set forth above and subject to Section 3.4.2.1., all Preferred Members shall contribute their Additional Capital Contributions to the Company in proportion to their respective Percentage Interests promptly at such time or times as may be so established by the Board of Directors for the payment thereof. 3.4 CONSEQUENCES OF FAILURE TO CONTRIBUTE. 3.4.1 DEFAULT ON SECOND PART OR THIRD PART CAPITAL CONTRIBUTION. In the event any Preferred Member fails to pay its Second Part Capital Contribution or its Third Part Capital Contribution as contemplated in this Agreement, such Defaulting Member shall pay to the Non-Defaulting Members which have made their required Second Part Capital Contributions or Third Part Capital Contributions, as the case may be, as a partial liquidated payment for damages suffered by the Company and the Non-Defaulting Members as a result of such failure to pay, a cash payment equal to 10% of the Second Part Capital Contribution or Third Part Capital Contribution, as the case may be, of the Defaulting Member. Such cash payment shall be distributed among the Non-Defaulting Members according to their respective Percentage Interests. Such Defaulting Member's Membership Interest thereupon and without more shall be terminated and the following procedures shall apply: 3.4.1.1 MISSING CAPITAL CONTRIBUTION. The Non-Defaulting Members shall have the right, but not the obligation to, subject to the provisions of Section 8.6, contribute that portion of the Capital Contribution to have been funded by the Defaulting Member ("MISSING CAPITAL") in proportion to the respective Percentage Interest of each electing Non-Defaulting Member. If any Non-Defaulting Member elects to contribute none or less than all of such Non-Defaulting Member's pro rata share of the Missing Capital, then the other Non-Defaulting Members may elect to contribute the remaining portion of the Missing Capital in proportion to their respective Percentage Interests. If less than all of the Missing Capital is contributed by Non-Defaulting Members, subject to the provisions of Section 8.6, one or more new Preferred Members, if approved pursuant to Section 8.4, may be admitted as a Preferred Member or Members to contribute any remaining Missing Capital to the Company. If the entire Missing Capital is not contributed, the Initial Capitalization of the Company shall be reduced -17- 25 accordingly. Following such process, the Percentage Interest of all Preferred Members shall, subject to the last sentence of Section 3.4.1.4, be adjusted so that each Preferred Member's Percentage Interest (including that of any new Preferred Member) shall be determined by multiplying (1) the aggregate Percentage Interests of all of the Preferred Members times (2) a fraction, the numerator of which is the aggregate amount of such Preferred Member's Capital Contributions and the denominator of which is the sum of all Preferred Member's Capital Contributions (including that of any new Preferred Member) and each Preferred Member's Capital Account Balance shall be adjusted accordingly. As used in the preceding sentence, Capital Contributions shall include those portions of Capital Contributions made by a Defaulting Member or a Terminated Member that are credited to the Capital Account Balances of Non-Defaulting Members or Remaining Members following a transfer of part of the Defaulting Member's Interest or Terminated Member's Interest under clause (ii) of either of Section 3.4.1.4 or Section 10.5. For purposes of the remainder of this Section 3.4, any reference to a Non-Defaulting Member shall include any new Preferred Member admitted in connection with a failure to contribute Capital described in Section 3.4.1.1. 3.4.1.2 PURCHASE RIGHT. Upon termination of a Defaulting Member's Membership Interest pursuant to this Section and after giving effect to Section 3.4.1.1, subject to the provisions of Section 8.6, the Non-Defaulting Members shall have the right to purchase and the Defaulting Member shall have the obligation to sell, the Defaulting Member's Interest in the Company in the manner contemplated in Sections 3.4.1.3 through 3.4.1.6, inclusive. The purchase price for such Interest shall be an amount equal to 50% of the cash Capital Contributions of the Defaulting Member as of the termination date of the Defaulting Member. Such reduction in value shall constitute partial compensation for damages suffered by the Company and the Non-Defaulting Members as a result of the failure by the Defaulting Member to contribute the Second Capital Contribution or Third Capital Contribution, as the case may be. The Board of Directors shall give notice to all Non-Defaulting Members of such purchase price. 3.4.1.3 OPTION OF NON-DEFAULTING MEMBERS TO PURCHASE. Each Non-Defaulting Member shall have the right, but not the obligation, to elect to purchase a portion of the Defaulting Member's Interest, as hereinafter provided. Any Non-Defaulting Member so electing shall notify the Directors in writing within thirty (30) days after the notice from the Directors referred to in Section 3.4.1.2 above, of such Non-Defaulting Member's desire to purchase a portion of the Defaulting Member's Interest. The failure of any Non-Defaulting Member to submit such notice within the applicable period shall constitute an election on the part of the Non-Defaulting Member not to purchase any of the Defaulting Member's Interest. Each Non-Defaulting Member so electing to purchase shall be entitled to purchase a portion of the Defaulting Member's Interest in the same proportion that the Percentage Interest of the Non-Defaulting Member bears to the aggregate of the Percentage Interest of all of the Non-Defaulting Members electing to purchase a portion of the Defaulting Member's Interest. 3.4.1.4 ELECTION TO PURCHASE LESS THAN ALL OF THE DEFAULTING MEMBER'S INTEREST. If any Non-Defaulting Member elects to purchase none or less than all of such Non-Defaulting Member's pro rata share of the remaining Defaulting Member's Interest, then subject to the provisions of Section 8.6, the other Non-Defaulting Members may elect to -18- 26 purchase that Interest remaining in proportion to their respective Percentage Interests. Each Non-Defaulting Member who purchases part of the Defaulting Member's Interest shall succeed to a pro rata share of the Defaulting Member's Unpaid Capital Preference and Capital Account Balance. If the Non-Defaulting Members do not purchase the entire Interest of the Defaulting Member, then subject to the provisions of Section 8.6, one or more new Members, if approved pursuant to Section 8.4, may be admitted as a Member and purchase the remaining Defaulting Member's Interest by paying for such Interest in cash. If the entire remaining Interest has not been purchased, with respect to all or any remaining share of the Defaulting Member's Interest, the Defaulting Member shall have only an Economic Interest, and without limiting the generality of the foregoing, shall not be a Managing Member, shall not be entitled to designate a Director hereunder and any current Director or Directors appointed by such Member shall be deemed to be removed and the number of Directors on the Board of Directors shall be reduced accordingly. In such event, as partial compensation for damages suffered by the Company and the Non-Defaulting Members, (i) the Defaulting Member's remaining Interest shall be reduced by fifty percent (50%) and the Non-Defaulting Members' Interests shall be increased pro rata accordingly, (ii) the Defaulting Member's Capital Account Balance and Unpaid Capital Preference shall be reduced by 50%, and the difference shall be added to the Capital Account Balances and Unpaid Capital Preferences of the Non-Defaulting Members, pro rata according to their Interests, and (iii) solely for purposes of determining the Managing Members' and a Defaulting Member's rights and obligations to purchase the output of the Foundry under the Purchase Agreement or Future Purchase Agreement (which rights and obligations shall be a function, to be specified in each of those agreements, of the Managing Members' and Defaulting Member's Percentage Interests), effect shall not be given to any increase or decrease in a Managing Member's or Defaulting Member's Percentage Interest attributable to (A) the operation of clause (i), or (B) any reduction (x) in the Capital Contribution of the Defaulting Member due to (I) that portion of the Missing Capital that is not contributed by any other Person or (II) that portion of the Missing Capital contributed by a Person other than a Managing Member or a new Member who will become a party to the Purchase Agreement or Future Purchase Agreement (a "NEW BUYER") or (y) in the total Capital Contributions of Members due to that portion of the Missing Capital that is not contributed by any Person. 3.4.1.5 PAYMENT OF PURCHASE PRICE. The purchase price shall be paid by the electing Non-Defaulting Members by either of the following methods, each of which may be selected separately by the electing Non Defaulting Members in their respective sole discretion: (i) The Non-Defaulting Members shall at the consummation of the purchase of the Defaulting Member's Interest ("CLOSING") pay in cash the total purchase price for the Defaulting Member's Interest; or (ii) The Non-Defaulting Members shall pay at the Closing one-fifth (1/5) of the purchase price in cash and the balance of the purchase price shall be paid in four equal annual principal installments, plus accrued interest, and be payable each year on the anniversary date of the Closing. The unpaid principal balance shall accrue interest at the current applicable U.S. Federal rate as provided in the Code for the month in which the initial payment is made, but the Non-Defaulting Members shall have the right to prepay in full or in part at any -19- 27 time without penalty. The obligation of each purchasing Non-Defaulting Member to pay its portion of the balance due shall be evidenced by a separate promissory note executed by the respective Non-Defaulting Member. Each such promissory note shall be in an original principal amount equal to the portion owed by the respective purchasing Non-Defaulting Member. The promissory note executed by each purchasing Non-Defaulting Member shall be secured by a pledge of that portion of the Defaulting Member's Interest purchased by such Non-Defaulting Member. 3.4.1.6 CLOSING OF PURCHASE OF DEFAULTING MEMBER'S INTEREST. The Closing for the sale of a Defaulting Member's Interest pursuant to this Section 3.4 shall be held at 10:00 a.m. at the principal office of Company no later than sixty (60) days after the determination of the purchase price. At the Closing, the Defaulting Member or such Defaulting Member's legal representative shall deliver to the electing Non-Defaulting Members an instrument of transfer (containing warranties of title and no encumbrances) conveying the Defaulting Member's Interest free and clear of all liens, charges and encumbrances whatsoever, except as permitted by the purchaser thereof. The Defaulting Member or such Defaulting Member's legal representative, the Company and the Non-Defaulting Members shall do all things and execute and deliver all documents as may be necessary or convenient to consummate such sale and purchase in accordance with the terms and provisions of this Agreement. Without limiting the generality of the foregoing, each Defaulting Member hereby appoints each Non-Defaulting Member as its attorney-in-fact and agent, with full power and authority to take all actions and execute and deliver all agreements, deeds, leases, releases, assignments, bills of sale, security instruments and any other document which, in the sole judgment of such Non-Defaulting Member, is necessary or convenient to consummate such sale and purchase. 3.4.2 FAILURE TO PAY ADDITIONAL CAPITAL CONTRIBUTION. 3.4.2.1 FAILURE TO PAY ADDITIONAL CAPITAL CALL NOT APPROVED BY NON-PAYING MEMBER. The provisions of this Section 3.4.2.1 shall apply in the event a Member fails to make an Additional Capital Contribution: (i) requiring the Approval of Members holding not less than 71% in Percentage Interest as provided in Section 6.4.2.5, if such non-paying Member did not consent to such Additional Capital Contribution, or (ii) not requiring the consent of Members pursuant to Section 6.4.2.5 and (x) not approved by such Member's representative on the Board of Directors if such Member has a representative on the Board of Directors, or (y) if such Member does not have a representative on the Board of Directors. Such a Member shall be referred to in this Section as a "NON-PAYING MEMBER." In such event, the other Members who have made the Additional Capital Contribution (the "PAYING MEMBERS") shall have the right, but not the obligation, subject to the provisions of Section 8.6, to contribute that portion of the Additional Capital Contribution to have been funded by the Non-Paying Member ("MISSING ADDITIONAL CAPITAL") in proportion to the respective Percentage Interests of each electing Paying Member. If any Paying Member elects to contribute none, or less than all of such Paying Member's pro-rata share of the Missing Additional Capital, then the other Paying Members may elect to contribute the remaining portion in proportion to their respective Percentage Interests. If less than all of the Missing Additional Capital is contributed by the Paying Members, one or more new investors, approved as provided in Section 8.4, may be admitted as a Preferred -20- 28 Member to pay to the Company the remaining Missing Additional Capital. (Such a new Member shall be treated as a Paying Member for purposes of the remainder of this Section 3.4.2.1.) The failure of the Non-Paying Member to make an Additional Capital Contribution under the circumstances specified in this Section shall not constitute an Event of Default under this Agreement, but the Percentage Interests of all Preferred Members shall be adjusted so that each Preferred Member's Percentage Interest (including that of the new Member, if any), shall be determined by multiplying (1) the aggregate Percentage Interests of all of the Preferred Members times (2) a fraction, the numerator of which is the aggregate amount of each Preferred Member's Capital Contributions and the denominator of which is the sum of all Preferred Members' Capital Contributions (including that of the new Member, if any). As used in the preceding sentence, Capital Contributions shall include those portions of Capital Contributions made by a Defaulting Member or a Terminated Member that are credited to the Capital Account Balances of Non-Defaulting Members or Remaining Members following a transfer of part of the Defaulting Member's or Terminated Member's Interest to such Members under clause (ii) of either of Section 3.4.1.4 or Section 10.5. Notwithstanding the foregoing, if the Board of Directors in its reasonable discretion determines that the fair market value of the Company as of the date immediately prior to the requested Additional Capital Contribution is less than total Capital Contributions made to such date, the Preferred Members' Percentage Interests (including that of the new Member, if any), shall be adjusted to reflect a fraction, the numerator of which is (A) the fair market value of the Company multiplied by the Percentage Interest of each Preferred Member as of such date, plus (B) the Additional Capital Contribution made by such Member (if any), and the denominator of which is such fair market value of the Company as of such date plus the total Additional Capital Contributions of all Members (including that of the new Member, if any). The Board of Directors in its reasonable discretion shall determine the fair market value of the Company except that any Director who was elected by a Non-Paying Member shall not vote or otherwise participate in any such determination. Each Member's Capital Account shall be adjusted as provided in Section 3.4. If the failure to make the Additional Capital Contribution is a Dilution Event, each Managing Member's right to receive and obligation to take the output of the Foundry pursuant to the Purchase Agreement and the Future Purchase Agreement shall be adjusted contemporaneously to give effect to the changes in Members' Percentage Interests. If the failure to make the Additional Capital Contribution is not a Dilution Event each Managing Member's right to receive and obligation to take the output of the Foundry pursuant to the Purchase Agreement and Future Purchase Agreement shall not be affected in which case the provisions of Section 8.6 with respect to an increase in the obligations of new Members or Members acquiring an additional Percentage Interest pursuant to such agreements shall not apply. Additionally, a Non-Paying Member shall not be entitled to acquire directly or indirectly any Products of the Company, the production of which has been funded, enabled or otherwise facilitated by such Additional Capital Contribution made by the Paying Members, and the production of which was described in the Additional Capital Contribution Notice. 3.4.2.2 DEFAULT FOLLOWING MEMBERS APPROVAL OF ADDITIONAL CAPITAL CONTRIBUTION. This Section 3.4.2.2 shall apply in the event a Member fails to make an Additional Capital Contribution or any installment payment of an Additional Capital Contribution that has been: (i) approved by such Defaulting Member, if the Additional Capital -21- 29 Contribution is one requiring Approval of Members holding not less than 71% in Percentage Interest as provided in Section 6.4.2.5, or (ii) approved by such Member's representative on the Board of Directors (if such Defaulting Member has a representative on the Board of Directors) if the Additional Capital Contribution is not one requiring Approval of Members holding not less than 71% in Percentage Interest as provided in Section 6.4.2.5. In either circumstance, the Defaulting Member's Membership Interest shall be terminated and the procedures set forth in Sections 3.4.1.1 through 3.4.1.6 inclusive, shall apply. 3.5 CAPITAL ACCOUNTS. The Capital Accounts of the Members shall be determined and maintained throughout the full term of the Company in accordance with the capital account rules of Section 1.704-1(b)(2)(iv) of the Section 704(b) Regulations (relating to maintenance of capital accounts). 3.5.1 Each Member shall have a capital account ("CAPITAL ACCOUNT") which shall be credited (increased) by: 3.5.1.1 the amount of such Member's cash capital contributions to the Company and the agreed net fair market value of property other than cash contributed to the Company by such Member (net of liabilities secured by such contributed property that the Company is considered to have assumed or taken subject to for purposes of Section 752 of the Code); 3.5.1.2 the amount of Net Profits and items thereof allocated to it pursuant to Article 5 hereof; and 3.5.1.3 any other increase required to be made to the Capital Account of the Member by the Section 704(b) Regulations, to the extent not otherwise provided for herein. 3.5.2 Each Member's Capital Account shall be debited (decreased) by: 3.5.2.1 the amount of Net Losses and items thereof allocated to such Member pursuant to Article 5 hereof; 3.5.2.2 all amounts paid, distributed or deemed distributed to it pursuant to Article 4 hereof, and the fair market value of property distributed to it (in each case, net of liabilities securing such distributed property that such Member is considered to have assumed or taken subject to under Section 752 of the Code); and 3.5.2.3 any other reductions in the Capital Account of the Member required by the Section 704(b) Regulations, to the extent not otherwise provided for herein. 3.5.3 In the discretion of the Board of Directors, the capital accounts may be adjusted to reflect a revaluation of Company property to the extent permitted by the Section 704(b) Regulations in connection with capital contributions to the Company by new or existing Members resulting in a change of Percentage Interests held by the Members, or in -22- 30 connection with distributions by the Company to a retiring or continuing Member as consideration for an Interest in the Company. 3.6 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY; COMPANY LOANS AND GUARANTEES. 3.6.1 TRANSACTIONS BETWEEN MEMBERS AND THE COMPANY. With the written approval of the Board of Directors, and the written consent of Preferred Members with no economic interest in the transaction in question ("DISINTERESTED MEMBERS") holding a majority of the Percentage Interests of Disinterested Members, a Member or an Affiliate of a Member may transact business or contract with the Company so long as the terms of any such transaction are at fair market value and are comparable to those that could be obtained between independent parties negotiating at arm's-length. The representatives of the contracting Member on the Board of Directors shall not be prohibited from participating in the decision made to enter into any such transaction. All Members agree that the terms of the Ancillary Agreements and the Incentive Plans satisfy the standard set forth in this Section 3.6.1, that such documents are deemed to have been approved by the Board of Directors and the Members and that no further action or approval by the Board of Directors or the Members to approve such instruments or transactions is required. 3.6.2 LOANS TO THE COMPANY. With the approval of the Board of Directors, and the consent of the Members contemplated in Section 6.4.2, a Member may lend money to, act as a surety, guarantor or endorser for, or guarantee or assume one or more specific obligations of, or provide collateral for the Company (collectively, "COMPANY LOANS"), and, subject to applicable law, has the same rights and obligations with respect to any Company Loan as a Person who is not a Member; provided, however, that each Managing Member shall have the option to participate in any such Company Loan pro rata in accordance with such Managing Member's Percentage Interest. Unless otherwise agreed to in writing by the Board of Directors, Company Loans shall not be considered capital contributions or be reflected in the balance of any Capital Account. Each Company Loan shall be a debt due from the Company to the lending Member, shall bear interest at the rate agreed to between such Member and the Company and, except as otherwise expressly provided in this Agreement or agreed between such Member and the Company at the time such funds are advanced, shall be repaid as soon as practicable to such Member. 3.6.3 PROHIBITION ON LOANS TO MEMBERS. The Company shall not lend money to, act as a surety, guarantor or endorser for, or guaranty or assume any obligations of any Member (other than, with respect to Common Members, such loans as may be approved by the Board of Directors). 3.6.4 GUARANTEES. To the extent a Member guarantee is required by an institutional lender to the Company, the Board of Directors shall send to each Preferred Member written notice of the required guarantee including a description of the purpose of the loan the Members are being asked to guarantee, a statement of the potential benefits of the loan to the Company and the Members who guarantee the loan and a statement of the potential impact upon -23- 31 each Member pursuant to this Section if such Member does not guarantee the loan (the "GUARANTEE NOTICE"). The Preferred Members agree to provide, to a maximum aggregate amount of US$250 Million, a several guarantee of the Company's debt according to their respective Percentage Interests. If any Preferred Member fails to provide, in whole or in part, a guarantee as specified above, such failure shall not constitute an Event of Default under this Agreement, but the Percentage Interests of the Preferred Members shall be adjusted so that each Preferred Member's Percentage Interest shall be determined by multiplying (1) the aggregate Percentage Interests of all of the Preferred Members times (2) a fraction, the numerator of which represents the aggregate amount of each Preferred Member's Capital Contribution plus any amount such Member guaranteed as provided for above, and the denominator of which represents the sum of all Preferred Members' Capital Contributions (other than Common Members) plus the total amount guaranteed by the Members. In addition, the Unpaid Capital Preference and Capital Account of the Preferred Member who fails to approve in whole or in part a guarantee, as specified above, shall be adjusted in substantially the same manner as Percentage Interests. The Preferred Shares owned by each Preferred Member shall be adjusted accordingly to reflect such adjustments in each Preferred Member's Percentage Interest. As used in the preceding sentence, Capital Contributions shall include those portions of Capital Contributions made by a Defaulting Member or Terminated Member that are credited to the Capital Account Balances of Non-Defaulting Members or Remaining Members following a transfer of part of the Defaulting Member's or Terminated Member's Interest to such Members under clause (ii) of either of Section 3.4.1.4 or Section 10.5. If the failure to guarantee the Company's debt is not a Dilution Event each Member's right to receive and obligation to take the output of the Foundry pursuant to the Purchase Agreement and Future Purchase Agreement shall not be affected. However, if such failure is a Dilution Event, the Members' right to receive and obligation to take the output of the Foundry pursuant to the Purchase Agreement and the Future Purchase Agreement shall be adjusted contemporaneously to reflect the change in Percentage Interests. Additionally, if a Member fails to provide a guarantee as specified above, such Member shall not be entitled to acquire directly or indirectly any Products of the Company, the production of which has been funded, enabled or otherwise facilitated by the proceeds of any Company debt such Member failed to guarantee, the production of which was described in the Guarantee Notice. 3.7 RIGHTS WITH RESPECT TO CAPITAL. 3.7.1 CAPITAL. No Member shall have the right to withdraw all or any part of its Capital Contribution. No Member shall have any right to the return of all or any part of its Capital Contribution except through distributions as provided in this Agreement. 3.7.2 NO INTEREST ON CAPITAL CONTRIBUTIONS. Except as expressly provided in this Agreement, no Capital Contribution of any Member shall bear any interest or otherwise entitle the contributing Member to any compensation for use of the contributed capital. 3.7.3 DISTRIBUTION IN KIND. Except as provided in Article 19, no Member shall have the right to demand and receive any distribution in any form other than cash, -24- 32 regardless of the nature of its Capital Contribution. No Member shall be compelled to accept a distribution of any asset in kind to the extent that the percentage of the asset distributed to such Member exceeds a percentage of that asset that is equal to the percentage in which such Member shares in distributions from the Company. ARTICLE 4 DISTRIBUTIONS 4.1 CASH AVAILABLE FOR DISTRIBUTION. Cash Available for Distribution shall be distributed to the Members in accordance with the following: 4.1.1 DETERMINATION. The Company shall distribute, from time to time, pursuant to Sections 4.1.3, 4.2 and 4.3 as determined by the Board of Directors and approved by the Members as provided in Section 6.4.2, Cash Available For Distribution, if any, to the Members as provided in this Article 4. 4.1.2 DEFINITION OF CASH AVAILABLE FOR DISTRIBUTION. For purposes of this Agreement, "Cash Available For Distribution" means the cash available for distribution to Members after giving effect to the following: (i) projected cash available from operations of the Company as determined by the Board of Directors; (ii) cash on hand of the Company; (iii) a prudent level of reserves for the Company, as determined by the Board of Directors; (iv) projected cash needed for operations of the Company including for payment of debt and for future Special Tax Distributions to Members, as such are determined by the Board of Directors; and ( v) the anticipated total project costs for any new foundry to be developed by the Company or retrofit of the Foundry which have been approved by the Members in accordance with Section 6.4.2. 4.1.3 FINAL SALE. Notwithstanding the foregoing provisions, all distributions and proceeds resulting from a final sale or other event causing a dissolution of the Company shall be applied in the manner set forth in Section 11.4 and not in the manner set forth in this Section 4.1. 4.2 TAX DISTRIBUTIONS. For each Fiscal Year, the Company shall distribute to its Members in accordance with the amount of Net Profit allocated to them in such Fiscal Year and to the extent available from the cash resources of the Company (including borrowings), before calculation of Cash Available for Distribution, within ninety (90) days after the end of each Fiscal Year (a "SPECIAL TAX DISTRIBUTION"), an aggregate amount of cash equal to the excess of (i) the product of (A) the Company's aggregate amount of Net Profit for the Fiscal Year determined for this purpose only without regard to the adjustments set forth in clauses (iii) and (iv) of Section 1.1.52 and (B) the highest applicable composite marginal rate borne by any Initial Member for U.S. Federal, state and local taxes for such Fiscal Year over (ii) the aggregate net cash distributions previously made to the Members with respect to such Fiscal Year pursuant to this Section 4.2. All amounts withheld under Section 4.4 shall be deemed to be distributions to the respective Members for purposes of this Section 4.2. -25- 33 4.3 DISCRETIONARY DISTRIBUTIONS The Board of Directors, following the approval of the Members pursuant to Section 6.4.2, may make additional distributions ("DISCRETIONARY DISTRIBUTIONS") of Cash Available for Distribution (as defined in Section 4.1.2) as it deems appropriate at any time prior to the commencement of the liquidation of the Company. 4.3.1 REDUCTION OF UNPAID CAPITAL PREFERENCE. All Discretionary Distributions shall be made solely to the Preferred Members in proportion to their respective Unpaid Capital Preferences at the time of distribution until each Preferred Member's Unpaid Capital Preference equals zero. 4.3.2 RESIDUAL DISTRIBUTIONS. The balance, if any, of any Discretionary Distributions shall be made to the Members pro rata in accordance with their respective Percentage Interests. 4.4 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution or allocation to the Company or the Members shall be treated for all purposes under this Agreement as amounts distributed to the Members pursuant to this Article 4. The Board of Directors is authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any U.S. Federal, state, or local government any amounts required to be so withheld pursuant to the Code or any provisions of any other U.S. Federal, state or local law and shall allocate such amounts to the Members with respect to which such amount was withheld. ARTICLE 5 ALLOCATION OF PROFITS AND LOSSES 5.1 ALLOCATION OF NET PROFIT AND LOSS. In each fiscal period Net Profit and Net Loss of the Company shall be allocated among the Members (consistent with and subject to the rules stated in Exhibit G) as follows: 5.1.1 NET LOSS. 5.1.1.1. Net Loss shall be allocated first, to each Member with a positive Capital Account balance, in the amount of such positive balance; provided, however, that if the amount of Net Loss to be allocated is less than the sum of the Capital Account balances of all Members having positive Capital Account balances, then the Net Loss shall be allocated to the Members in such proportions and in such amounts as would result in the Capital Account balance of each Member equaling, as nearly as possible, the amount such Member would be distributed if the Company (i) sold all of its assets at their respective adjusted tax bases (or, if different, their book values as determined pursuant to Treasury Regulation Section 1.704-1(b)(2)), (ii) paid all of its liabilities in accordance with their terms and (iii) distributed the balance of the proceeds from such sale in accordance with Section 4.3 hereof; and -26- 34 5.1.1.2 Thereafter, Net Loss shall be allocated among the Members in proportion to their respective Percentage Interests. 5.1.2 NET PROFIT. 5.1.2.1 Net Profit shall be allocated first, to any Members having negative Capital Account balances, in proportion to and to the extent of such negative balances. 5.1.2.2 Thereafter, Net Profit shall be allocated to the Members in such proportions and in such amounts as would result in the Capital Account balance of each Member equaling, as nearly as possible, the amount such Member would be distributed if the Company (i) sold all of its assets at their respective adjusted tax bases (or, if different, their book values as determined pursuant to Treasury Regulation Section 1.704-1(b)(2)), (ii) paid all of its liabilities in accordance with their terms and (iii) distributed the balance of the proceeds from such sale in accordance with Section 4.3 hereof. 5.1.3 CAPITAL ACCOUNT ADJUSTMENTS. Adjustments to the Capital Accounts pursuant to Sections 3.5.1.3 and 3.5.2.3 shall be allocated among the Capital Accounts of the Partners in the same manner as Net Profit and Net Loss. 5.2 RESIDUAL ALLOCATIONS. Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Net Profit or Net Losses, as the case may be, for the Fiscal Year, consistent with the rules stated in Exhibit G. 5.3 OTHER ALLOCATION RULES. 5.3.1 The Members are aware of the income tax consequences of the allocations made by this Article 5 and agree to be bound by the provisions of this Article 5 in reporting their shares of Company income and loss for income tax purposes. 5.3.2 For purposes of determining the Net Profits, Net Losses, or any other items allocable to any period, Net Profits, Net Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Board of Directors using any permissible method under Code Section 706 and the Regulations thereunder. 5.4 TAX ALLOCATIONS. 5.4.1 Except as otherwise provided in this Section 5.4, for income tax purposes each item of income, gain, loss and deduction (collectively, "TAX ITEMS") shall be allocated among the Members in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Sections 5.1 - 5.2. -27- 35 5.4.2 Notwithstanding Section 5.4.1, Tax Items with respect to Property that is contributed to the Company by a Member shall be shared among the Members for income tax purposes in accordance with the "traditional method" pursuant to Regulations promulgated under Section 704(c) of the Code, so as to take into account the variation, if any, between the book and tax basis of the Property contributed to the Company. 5.4.3 Any elections or other decisions relating to such allocations shall be made by the Directors in a manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.4 are solely for purposes of U.S. Federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Net Profits, Net Losses, other items, or distributions pursuant to any provisions of this Agreement. ARTICLE 6 MANAGEMENT OF THE COMPANY 6.1 MANAGEMENT BY DIRECTORS. Subject to the provisions of the Certificate of Formation and this Agreement relating to actions required to be approved by the Members, the business, property and affairs of the Company shall be managed and all powers of the Company shall be exercised by or under the direction of the Managing Members who shall act through their designated representatives as the Board of Directors ("BOARD OF DIRECTORS"). Subject to the foregoing, the Members are the "MANAGERS" of the Company as such term is defined under the Act. Notwithstanding Section 18402 of the Act, the powers of the Members and the Board of Directors to bind the Company are as set forth in this Agreement. 6.2 NUMBER AND DESIGNATION OF DIRECTORS; OBSERVER OF THIRD PARTY INVESTORS. 6.2.1 BOARD OF DIRECTORS. The Company shall have a board of seven (7) directors ("DIRECTORS"). TSMC shall designate four (4) of the Directors, one (1) of whom shall be voting and three (3) of whom shall be non-voting. Each of Altera, ADI and ISSI shall designate one (1) voting Director. Each Director shall serve at the pleasure of the Member who designated such Director. Only the Member who originally designated a Director may remove such Director, except that one or more Members holding a Majority in Interest may remove any Director appointed by a Terminated Member. Any Director may resign upon written notice to the Member who designated such Director. The resignation shall take effect upon receipt of such notice, or at such later time as shall be specified in such notice. Any vacancy occurring for any reason in the number of Directors shall be filled by the Member who originally designated the Director whose position has become vacant. 6.2.2 OBSERVER. The Third Party Investors may from time to time designate one representative, approved by TSMC, who shall serve in an advisory capacity to the Board of Directors, with no other rights, duties or authority (the "OBSERVER"). TSMC may revoke its approval of a designated Observer at any time, following which the Third Party Investors shall select an alternative Observer approved by TSMC. The Observer shall be entitled to attend such -28- 36 meetings of the Board of Directors as he is invited by the Board of Directors to attend, and to receive all materials distributed to the Directors for such meetings. The initial Observer shall be Mr. Quintin Wu. 6.3 MEETINGS OF DIRECTORS. 6.3.1 MEETINGS. Meetings of the Directors shall be held at least once each calendar quarter and may be called by the Chairman/Chief Executive Officer ("CEO") of the Company. All meetings shall be held upon seven (7) days notice by mail or four (4) days notice (or upon such shorter notice period if necessary under the circumstances) delivered personally or by telephone, e-mail or facsimile. A notice need not specify the purpose of any meeting. Notice of a meeting need not be given to any Director who signs a waiver of notice or a consent to holding the meeting (which waiver or consent need not specify the purpose of the meeting) or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior to its commencement, the lack of notice to such Director. All such waivers, consents and approvals shall be filed with the Company records or made a part of the minutes of the meeting. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment shall be given prior to the time of the adjourned meeting to the Directors who are not present at the time of the adjournment. Meetings of the Directors may be held at any place which has been designated in the notice of the meeting or at such place as may be approved by the Directors. Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all Directors participating in such meeting can hear one another. Participation in a meeting in such manner constitutes a presence in person at such meeting. 6.3.2 QUORUM; ACTION OF THE DIRECTORS. Directors elected by one or more Members holding a Majority in Interest, present at a meeting shall constitute a quorum of Directors for the transaction of business. Every action or resolution done or made by Directors holding a majority of the Director Votes (as defined below) at a meeting at which a quorum is present is the action of the Directors. Each voting Director shall hold the same number of votes as the Percentage Interest held by the Member who designated such Director ("DIRECTOR VOTES"). If the voting Director of TSMC shall not be present at a meeting, such voting Director may delegate in writing such Director's voting authority to one of the non-voting Directors nominated by TSMC. TSMC shall designate which of its Director nominees shall be its voting Director. 6.3.3 ACTION BY WRITTEN CONSENT. Any action required or permitted to be taken by the Directors may be taken by the Directors without a meeting, if Directors holding all Director Votes consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of such Directors. 6.4 POWERS OF DIRECTORS. -29- 37 6.4.1 POWERS OF DIRECTORS. Without limiting the generality of Section 6.1, but subject to Sections 3.6, 6.4.2 and 6.4.3, and to any express limitations set forth elsewhere in this Agreement, the Board of Directors shall have all powers necessary or convenient to manage and carry out the purposes, business, property and affairs of the Company, including, without limitation, the power to: 6.4.1.1 approve the annual budget; 6.4.1.2 provide for capital increase and capacity expansion of the Company; 6.4.1.3 sell, transfer, mortgage or dispose of property of the Company; 6.4.1.4 borrow, guarantee or incur long term debt; 6.4.1.5 amend the Certificate of Formation of the Company or this Agreement; 6.4.1.6 voluntarily dissolve the Company or merge the Company with another entity; 6.4.1.7 dissolve, liquidate, wind up, reorganize the Company, or any similar action; or 6.4.1.8 convert or exchange the Interests of the Members into or for, as the case may be, an interest in the Delaware Corporation as contemplated in Article 14. Subject to applicable laws and regulations, all actions of the Board of Directors shall be taken as provided in Section 6.3.2 and 6.3.3. 6.4.2 LIMITATIONS ON RIGHTS AND POWERS; APPROVAL OF MEMBERS HOLDING NOT LESS THAN 71% IN PERCENTAGE INTEREST. In addition to any affirmative vote of the Board of Directors or Members otherwise required by law or this Agreement, each of the following actions shall require the Approval of Members holding not less than 71% in Percentage Interest: 6.4.2.1 borrow, guarantee or incur long term debt in any way greater than the amount of US $25 Million in the aggregate; 6.4.2.2 determine that a Member or an Affiliate of a Member is a Prohibited Person; 6.4.2.3 convert or exchange the Interest of the Members into or for, as the case may be, an interest in the Delaware Corporation if such conversion or exchange does not occur contemporaneously with an IPO of the Delaware Corporation; -30- 38 6.4.2.4 reduce the Company's capital; 6.4.2.5 authorize or call for any Additional Capital Contribution in an amount exceeding 15% of the Total Initial Capital Contribution as set forth on Exhibit A hereto; 6.4.2.6 determine if Cash Available For Distribution exists to be distributed to the Members; 6.4.2.7 engage legal counsel to the Company or engage certified public accountants to audit and certify the financial statements of the Company; 6.4.2.8 construct another foundry or retrofit the Foundry; 6.4.2.9 create any Incentive Plan, except for the Senior Executive Incentive Plan and Employee Incentive Plan provided for in Article 12, or amend an Incentive Plan in any manner that increases the maximum aggregate awards thereunder; 6.4.2.10 make any material change or amendment to the Business Plan including, but not limited to, the capacity ramp up schedule incorporated therein; or 6.4.2.11 admit any new Member other than a participant in an Incentive Plan. 6.4.3 LIMITATIONS ON RIGHTS AND POWERS; APPROVAL OF MEMBERS HOLDING NOT LESS THAN 87% IN PERCENTAGE INTEREST. In addition to any affirmative vote of the Board of Directors or Members otherwise required by law or this Agreement, each of the following actions shall require, in addition to the approval of the Board of Directors, the Approval of Members holding not less than 87% in Percentage Interest: 6.4.3.1 Except for any action taken pursuant to Section 6.4.2.8, discontinue a material part of, add materially to or materially change the business of the Company as it is described in Section 2.6.1; 6.4.3.2 Transfer in a single transaction or in a series of related transactions, all or substantially all of the Company's business and assets; 6.4.3.3 subject to Article 16, amend, restate or alter the Certificate of Formation or this Agreement (other than an Incentive Plan or the Business Plan, which may be changed or amended as contemplated in Section 6.4.2.9 or 6.4.2.10, respectively); 6.4.3.4 merge or consolidate the Company, other than as provided in Article 14; or -31- 39 6.4.3.5 dissolve, liquidate, place into bankruptcy, wind up or reorganize the Company or any similar event, if such action does not occur contemporaneously with an IPO of the Delaware Corporation. 6.5 ANNUAL INFORMATIONAL MEETING OF MEMBERS. The Members shall hold an annual informational meeting concerning the affairs of the Company. All Members of the Company shall be entitled to attend the annual informational meeting. The annual informational meeting shall be held in the first quarter of each year with the exact time and date of the meeting to be determined by the Chairman/CEO. Notice of the annual informational meeting shall be given to all Members at least ten (10) days before the scheduled meeting. At such meeting, the Members may take any action that pursuant to this Agreement, would otherwise be taken by written consent. 6.6 COMPENSATION COMMITTEE. The Board of Directors shall appoint a Compensation Committee composed of the Directors designated by Altera and ADI and the voting Director designated by TSMC pursuant to Section 6.2.1. The Compensation Committee shall serve in an advisory capacity only to the Board of Directors and may make non-binding recommendations to the Board of Directors regarding the compensation of employees of the Company and the administration of any Incentive Plan. 6.7 EXPENSE REIMBURSEMENT. The Company shall reimburse the Members for any expenses paid by them that properly are to be borne by the Company, as approved from time to time by the Board of Directors. 6.8 INSURANCE. The Company shall maintain adequate types and amounts of insurance as determined from time to time by the Board of Directors including worker's compensation, comprehensive general liability, product liability, and fire and extended coverage, considering the risks of conducting the Company's business and the replacement value of the Project. 6.9 OFFICERS. 6.9.1 APPOINTMENT OF OFFICERS. The Officers of the Company shall include a Chairman/CEO, a Vice Chairman, a President/Chief Operating Officer ("COO"), one or more Vice Presidents, a Secretary, and a Chief Financial Officer, each of whom shall be appointed by the Board of Directors. If deemed necessary by the Board of Directors, the Company shall have such additional Officers as the Board of Directors may from time to time approve. The Officers shall serve at the pleasure or the Directors, subject to all rights, if any, of an Officer under any contract of employment with the Company. Any individual may hold any number of offices. A Member's officers, directors, members or employees, as the case may be, may serve as Officers of the Company if elected by the Directors. The Officers shall exercise such powers and perform such duties as specified in this Agreement and as shall be determined from time to time by the Directors. Notwithstanding the foregoing, no Officer shall have the power or authority to implement any of the matters specifically enumerated in Section 6.4.1, without the explicit approval of the Board of Directors. -32- 40 6.9.2 REMOVAL, RESIGNATION AND FILLING OF VACANCY OF OFFICERS. Any Officer may be removed, either with or without cause, by the Directors at any time. Any Officer may resign at any time by giving written notice to the Directors. Any resignation shall take effect at the date of the receipt of such notice or at any later time specified in such notice, and, unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Company under any contract to which such Officer is a party. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in this Agreement for regular appointments to that office. 6.9.3 DUTIES AND POWERS OF THE CHAIRMAN/CEO. The Chairman/CEO shall be the chief executive officer of the Company and, if present, shall preside at all meetings of the Members and at all meetings of the Directors. The Chairman/CEO shall have the general powers and duties of management usually vested in the office of chief executive officer of a Delaware general corporation and shall have general and active management of the business of the Company and shall see that all orders and resolutions of the Members and Directors are carried into effect. The Chairman/CEO shall have such other duties and responsibilities as may be assigned to the Chairman/CEO by the Board of Directors and which he shall accept. 6.9.4 DUTIES AND POWERS OF THE VICE CHAIRMAN. The Vice Chairman shall in the absence or disability of the Chairman/CEO perform the duties and exercise the powers of the Chairman/CEO and shall perform such other duties and have such other powers as the Directors by resolution may from time to time determine. 6.9.5 DUTIES AND POWERS OF THE PRESIDENT/COO. Subject to such supervisory powers, if any, as may be assigned by the Directors to the Chairman/CEO and Vice Chairman, the President/COO shall assist the Chairman/CEO and Vice Chairman with the general and active management of the business of the Company. The President/COO shall have authority to execute bonds, mortgages and other contracts except where required or permitted by law to be otherwise signed and executed, and except where the signing and execution thereof shall be expressly delegated by the unanimous action of the Directors to some other officer or agent of the Company. The President/COO shall perform such other duties and have such other powers as the Directors by resolution may from time to time determine. 6.9.6 DUTIES AND POWERS OF VICE-PRESIDENT. The Vice-President, or if there shall be more than one, the Vice-Presidents in the order determined by a resolution of the Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Directors by resolution may from time to time determine. 6.9.7 DUTIES AND POWERS OF SECRETARY. -33- 41 6.9.7.1 The Secretary shall attend all meetings of the Directors and all meetings of the Members, and shall record all the proceedings of the meetings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the Members and all meetings of the Directors and shall perform such other duties as may be determined by the Directors. The Secretary shall have custody of the seal, if any, and the Secretary shall have authority to affix the same to any instrument requiting it, and when so affixed, it may be attested by the Secretary's signature. The Directors may give general authority to any other officer to affix the seal of the Company, if any, and to attest the affixing by his or her signature. 6.9.7.2 The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Company's transfer agent or registrar, as determined by resolution of the Directors, a register, or a duplicate register, showing the names of all Members and their addresses and their Percentage Interests. The Secretary shall also keep all documents described in Section 9.1 and such other documents as may be required under the Act. The Secretary shall perform such other duties and have such other authority as may be prescribed elsewhere in this Agreement or from time to time by the Directors. The Secretary shall have the general duties, powers and responsibilities of a secretary of a Delaware general corporation. 6.9.8 DUTIES AND POWERS OF CHIEF FINANCIAL OFFICER. 6.9.8.1 The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Company, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, Membership Interests and Economic Interests. The books of account shall at all reasonable times be open to inspection by any Director. 6.9.8.2 The Chief Financial Officer shall have the custody of the funds and securities of the Company, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company, and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Directors. 6.9.8.3 The Chief Financial Officer shall disburse the funds of the Company as may be ordered by the Directors, taking proper vouchers for such disbursements, and shall render to the CEO and the Directors, at their regular meetings, or when Members so require, at a meeting of the Members an account of all his or her transactions as treasurer and of the financial condition of the Company. 6.9.8.4 The Chief Financial Officer shall perform such other duties and shall have such other responsibility and authority as may be prescribed elsewhere in this Agreement or from time to time by the Directors. The Chief Financial Officer shall have the general duties, powers and responsibility of a Chief Financial Officer of a Delaware general corporation, and shall be the chief financial and accounting officer of the Company. -34- 42 6.10 MEMBER CONSENTS. Except for actions approved by unanimous written consent of all Preferred Members, no action requiring written consent of the Preferred Members shall become effective until five (5) Business Days after all Preferred Members have been notified of such action in accordance with Section 23.3. 6.11 BEST INTEREST OF THE COMPANY. In managing the affairs of the Company the Members and the Board of Directors will take into account, among other things, the best interests of the Company and the best interests of the Members as a whole, and will endeavor not to take any action prejudicial to any Member unless, in the sole determination of the Board of Directors, such action is in the best interests of the Company or the best interests of the Members as a whole. ARTICLE 7 MEMBER REPRESENTATIONS AND WARRANTIES 7.1 NATURE OF MEMBER'S INTEREST. The Interest of each Member constitutes personal property of such Member. No Member has any interest in the Property. 7.2 MEMBER REPRESENTATIONS AND WARRANTIES. 7.2.1 POWER AND AUTHORITY. Each Member (other than natural persons) represents and warrants that such Member has full corporate power and authority to enter into this Agreement and to consummate and perform the transactions contemplated hereby. Each Member (other than natural persons) further represents and warrants that this Agreement has been duly authorized by it. 7.2.2 GOOD STANDING. Each Member (other than natural persons) represents and warrants that it is duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation. 7.2.3 EXECUTION. Each Member represents and warrants that the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or violate its charter documents or any law, rule, regulation, court order, contract, agreement, judgment or decree binding upon or applicable to such Member or by which the property of such Member is bound or affected in a manner that would materially and adversely affect such Member's performance hereunder and thereunder. 7.2.4 INVESTMENT REPRESENTATIONS. 7.2.4.1 KNOWLEDGE. Each Member (other than Participants in the Incentive Plans) represents and warrants that such Member (i) has such knowledge, skill and experience in business and financial matters, that such Member is capable of evaluating the merits and risks of an investment in the Company and the suitability thereof as an investment for such Member, (ii) has sufficient net worth to sustain a loss of all such Member's interest in the Company without economic hardship if such a loss should occur and can bear the economic risk -35- 43 of such Member's investment in the Company, (iii) understands that an investment in the Company involves a considerable degree of risk of loss by such Member, (iv) has reviewed this Agreement and each of the Ancillary Agreements and has received such other documents and information as such Member has requested and has had an opportunity to ask questions of and receive satisfactory answers from the Company concerning the terms and conditions of the investment contemplated under this Agreement, and based thereon believes that such Member can make an informed investment decision, and (v) (if not a natural person) was not formed for the specific purpose of making an investment in the Company. 7.2.4.2 INVESTMENT INTENT. Each Member represents and warrants that such Member is acquiring such Member's Interest for investment for such Member's own account and not with a view to, or for resale in connection with, any distribution thereof, subject, nevertheless, to the condition that, except as otherwise provided herein, the disposition of the property of each Member shall at all times be within such Member's control. By execution of this Agreement, each Member represents and warrants that, except as otherwise permitted by this Agreement, such Member has no agreement, contract, or understanding with any person or entity to sell, transfer, or grant rights in any of such Member's Interest. 7.2.5 SECURITIES LAWS. EACH MEMBER REPRESENTS AND WARRANTS THAT SUCH MEMBER UNDERSTANDS THAT SUCH MEMBER'S INTEREST HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER APPLICABLE U.S. FEDERAL OR STATE SECURITIES LAWS BY REASON OF CERTAIN EXEMPTIONS FROM THE REGISTRATION PROVISIONS THEREOF WHICH DEPEND UPON, AMONG OTHER THINGS, THE BONA FIDE NATURE OF SUCH MEMBER'S REPRESENTATIONS AND INVESTMENT INTENT AS EXPRESSED HEREIN, AND UNDERSTANDS THAT NO PUBLIC MARKET NOW EXISTS, OR MAY EVER EXIST, FOR THE INTERESTS. 7.2.6 STATEMENTS IN BUSINESS PLAN. EACH MEMBER REPRESENTS AND WARRANTS THAT SUCH MEMBER UNDERSTANDS THAT THE STATEMENTS CONTAINED IN THE BUSINESS PLAN THAT ARE NOT HISTORICAL STATEMENTS ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THE RISK THAT ACTUAL RESULTS OF OPERATIONS MAY NOT MATCH THOSE PRESENTED THEREIN. 7.2.7 ACCREDITED INVESTOR. Each Initial Member represents and warrants that it is an institutional investor or accredited investor meeting the standards of sophistication normally expected of an investor in a transaction exempt from the registration provisions of the United States Securities Act of 1933, as amended, under Section 4(2) thereof or as defined in Regulation D promulgated thereunder, with respect to the purchase of the Interests. 7.2.8 NO COMMISSIONS. Each Member represents and warrants that no person has or will have, as a result of the transactions contemplated by this Agreement, any rights, interest or valid claim against or upon the Company or any other party hereto for any -36- 44 commission, fee or other compensation as a finder or broker because of any act or omission by such Member or any agent of such Member. Each Member agrees to indemnify and hold the Company and each other party hereto harmless against any and all costs and liabilities as a result of any such claim arising from any such act or omission by such Member. ARTICLE 8 RESTRICTIONS ON TRANSFER; PREEMPTIVE RIGHT; ADMISSION OF NEW MEMBERS; RIGHT OF FIRST REFUSAL 8.1 RESTRICTIONS ON TRANSFER. 8.1.1 NO TRANSFER WITHOUT CONSENT. Until the fifth anniversary of the Effective Date, except with the prior unanimous consent of the Preferred Members or as provided in Sections 3.4.1, 3.4.2.2, 8.1.2, or 10.3 through 10.7, inclusive, no Preferred Member may sell, convey, transfer, assign, mortgage, pledge, hypothecate or otherwise encumber in any way ("TRANSFER") all or any portion of such Member's Interest. In addition, the Transfer of Common Shares by a Participant in an Incentive Plan shall be subject to the restrictions provided in such Incentive Plan. As used in this Agreement, a Transfer shall not include a reincorporation or merger not entered into for the purpose of, and not having the effect of, changing or influencing the control of such Member. From and after the fifth anniversary of the Effective Date, no Member may Transfer all or any portion of such Member's Interest except (i) with the prior written consent of other Preferred Members holding not less than a majority of the Percentage Interests held by such other Preferred Members and (ii) in compliance with Section 8.5. This Section 8.1.1 shall not apply to a Transfer by a Member to its wholly-owned subsidiary, or to a Transfer pursuant to Section 14.1. 8.1.2 TRANSFER FOLLOWING APPROVAL OF NEW FOUNDRY. Notwithstanding the provisions of Section 8.1.1, a Preferred Member may Transfer such Member's Interest if (i) such Transfer follows the approval of the construction of a new foundry by the Company by the Board of Directors and the Preferred Members as provided in Section 6.4.2.8 and the Preferred Member proposing to Transfer its Interest did not consent to the construction of such new foundry by the Company, and (ii) the provisions of Section 8.5 have been complied with. A Transfer pursuant to this Section 8.1.2 shall be limited to a Preferred Member's Economic Interest if the Board of Directors of the Company in its reasonable discretion determines that a Transfer of the Preferred Member's Membership Interest will jeopardize the Company's treatment as a partnership for federal or state tax purposes. 8.1.3 NO TRANSFER TO COMPETITOR. Without the prior unanimous written consent of the Managing Members, no Transfer may be made by a Member of such Member's Interest to a Prohibited Person. 8.1.4 TRANSFER IN VIOLATION VOID. Any attempted Transfer not permitted hereunder shall be null and void ab initio. If, notwithstanding the foregoing, a Transfer not permitted hereunder is determined by a court of competent jurisdiction to be valid, any transferee taking pursuant thereto shall receive only the Economic Interest of the transferring -37- 45 Member. Any Member who Transfers or purports or attempts to Transfer an Interest in violation of Section 8.1 shall promptly pay over and be liable to the non-breaching Members, according to their respective Percentage Interests, for the total transfer price of such Interest, received and to be received, in addition to, and not in lieu of, any other right or remedy which the non-breaching Members may have, at law or in equity, or pursuant to Article 10, all subject to Article 21. 8.2 GENERAL TRANSFER PROVISIONS. Notwithstanding any other provisions of this Agreement: 8.2.1 NO VIOLATION OF LAW. No portion of, or interest in, an Interest may be the subject of a Transfer without assurances to the Company that are satisfactory to non-transferring Preferred Members that the proposed Transfer does not violate any law applicable to the Company. The nontransferring Preferred Members may, among other things, require (i) a written opinion addressed to the Company, in form and substance satisfactory to the non-transferring Preferred Members, of legal counsel acceptable to the non-transferring Preferred Members, to the effect that the proposed Transfer is exempt from registration under the Securities Act of 1933, as amended (or a "no action" letter from the staff of the Securities and Exchange Commission satisfactory to the non-transferring Preferred Members, to the effect that such Transfer is exempt from such registration); (ii) registration under applicable state securities laws or a written opinion addressed to the Company, in form and substance satisfactory to the non-transferring Preferred Members, of legal counsel acceptable to the Company, to the effect that such Transfer is exempt under applicable state securities laws; (iii) a written opinion addressed to the Company, in form and substance satisfactory to the non-transferring Preferred Members, of legal counsel acceptable to the non-transferring Preferred Members, to the effect that any such contemplated Transfer will not require the Company to register under the Investment Company Act of 1940, require that the Company or any Member register as an investment adviser under the Investment Advisers Act of 1940, or cause the Company to lose its partnership status for U.S. Federal income tax purposes; and (iv) representations and warranties concerning the facts and circumstances establishing the basis for the availability of exemptions from registration under the Securities Act of 1933, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and other reasonable assurances relating to any other applicable laws, from the proposed substituted or proposed transferee Member. 8.2.2 TRANSFEREE TO BE BOUND BY THIS AGREEMENT. In addition to any other requirements contained in this Agreement pertaining to a Transfer of Interests, as a condition precedent to any Transfer, the prospective transferee shall, for the express benefit of the Company and each non-transferring Member, agree to be bound by all of the terms of this Agreement and to make such reasonable representations and warranties as the Preferred Members may request. 8.2.3 DELAY IN TRANSFER. Except as may occur upon conversion of the Company or upon transfers of Interest to a corporation pursuant to Section 14.1, if, in the determination of the non-transferring Preferred Members, a proposed Transfer would, alone or in conjunction with one or more other Transfers cause the Company to lose its partnership status or terminate its partnership existence for U.S. Federal income tax purposes, such Transfer (if -38- 46 otherwise permitted) shall be delayed in whole or in part until the earliest time as determined by the non-transferring Preferred Members that such Transfer may occur without causing the Company to lose its partnership status or to terminate for U.S. Federal income tax purposes. If at any time more than one Transfer is being delayed under this Section 8.2.3, such Transfers shall be made in the order in which the Company received written notice of the proposed Transfers under this Section. 8.2.4 LIABILITY OF TRANSFEROR. Except as may occur upon conversion of the Company or upon Transfers of Interest to a corporation pursuant to Section 14.1, any Member who voluntarily Transfers or attempts to Transfer any portion of or interest in its Interest, if such a Transfer causes or would cause the Company to lose its partnership status or terminate its partnership existence for U.S. Federal income tax purposes, shall be liable to the Company and promptly shall pay for any incremental costs, taxes, fines, penalties, damages or losses which may be due from the Company or the Members or suffered by the Company or the Members, including costs of enforcement of the Company's power to void or otherwise prohibit such Transfer or attempted Transfer. 8.2.5 NO RELEASE. No Transfer of all or any portion of, or interest in, an Interest, whether or not in compliance with this Article 8 and even if it results in the substitution of the transferee as a new Member, shall release the transferor from those liabilities to the Company which survive such Transfer. 8.3 PREEMPTIVE RIGHTS. 8.3.1 PREEMPTIVE RIGHT. Subject to Section 8.6, if the Company shall propose to issue, sell or distribute any Membership Interest or any option, warrant or right to acquire, or any security convertible into or exchangeable for any of the foregoing, each Preferred Member shall, subject to the provisions of Section 8.6, have a right of first refusal to participate in such issuance, sale or distribution on a pro rata basis in accordance with the respective Percentage Interest held by each Preferred Member so that following such issuance, sale or distribution each Preferred Member would acquire or have the right to acquire, if each Preferred Member had elected to acquire such Preferred Member's pro rata portion, the same Percentage Interest in the Company as each Preferred Member had by reasons of such Preferred Member's Percentage Interest prior to such issuance, sale or distribution. 8.3.2 PROCEDURE. The Company shall provide each Preferred Member with notice of any such proposed issuance which notice shall specify the nature of the proposed issuance, the consideration to be received therefor, the identity of the proposed purchaser, and the terms upon which such issuance shall be undertaken. Each Preferred Member shall have the right to elect to purchase from the Company a portion of the Interest referred to in the notice at the same price and on the same terms as specified in the notice for a period of sixty (60) days after the giving of the notice but not thereafter. A Preferred Member shall exercise this right by delivering in writing to the Company notice of such Preferred Member's intent to purchase such Preferred Member's pro rata share along with the purchase price therefore. If any Preferred Member shall elect to purchase none, or less than all of the offered Interest, the other Preferred -39- 47 Members shall have the right to purchase the pro rata share of the Preferred Member who has declined to purchase the offered Interest, according to each purchasing Preferred Member's pro rata share of such Interest, for a successive period of thirty (30) days thereafter. All or any portion of the Interest not so purchased may be issued as specified in the notice within a period of forty-five (45) days after the expiration of such ninety (90) day period specified above. 8.3.3 LIMITATION. Notwithstanding the foregoing, the provisions of this Section 8.3 shall not apply to any of the following: (i) any issuance, sale or distribution in connection with the conversion of each Member's Interest in the Company to an interest in the Delaware Corporation as provided for in Article 14, (ii) the transactions contemplated by Sections 3.4.1, 3.4.2, 3.6.4 or 10.5, or (iii) the sale, issuance or grant of any Shares, options, warrants or other rights to Officers, Directors or employees of the Company pursuant to any Incentive Plan. 8.4 ADMISSION OF NEW MEMBERS. A new Member may be admitted to the Company only if Section 8.3 has been complied with and upon the Approval of Members holding not less than 71% in Percentage Interest (without consideration of the Percentage Interest of any Defaulting Member, Selling Member, Terminated Member or Non-Paying Member). Prior to any new Member acquiring the Interest of a Managing Member, the Managing Member proposing to Transfer its Interest shall disclose to the other Preferred Members, whether it is proposed that the new Member shall, following the Transfer, designate such Managing Member's representative on the Board of Directors, and hold the decision making authority of the Managing Member for decisions which pursuant to this Agreement require the consent of the Managing Members. Any Transfer approved pursuant to the first sentence of this Section shall then be an approval of the Transfer of the rights specified in the disclosure notice. 8.4.1 CAPITAL CONTRIBUTION. The type and amount of Capital Contribution which must be made by a new Member shall be determined by the Approval of Members holding not less than 71% in Percentage Interest (without consideration of the Percentage Interest of any Defaulting Member, Selling Member, Terminated Member or Non-Paying Member). 8.4.2 TIME OF ADMISSION. A new Member shall not be deemed admitted into the Company until the Capital Contribution required of such Person shall have been made and such Person has become a party to this Agreement. 8.4.3 ADJUSTMENT OF INTERESTS. Upon admission of a new Member, the Percentage Interests of all previously existing Members shall be adjusted to reflect the addition of such new Member and such new Member's Capital Contribution. 8.5 RIGHT OF FIRST REFUSAL. 8.5.1 If any Preferred Member ("SELLING MEMBER") intends to Transfer its Interest or any part thereof (the "OFFERED INTEREST") (except to a wholly-owned subsidiary), it shall notify the Company and the other Preferred Members of its intention to do so ("OFFERING -40- 48 NOTICE"). The Offering Notice shall specify the nature of the Transfer, the consideration to be received therefor, the identity of the proposed purchaser (or lender, as the case may be), and the terms upon which such Member intends to undertake such Transfer. Within thirty (30) days after receipt of the Offering Notice, the Preferred Members other than the Selling Member shall have the right, but not the obligation, subject to Section 8.6, to elect to purchase from the Selling Member a portion of the Offered Interest referred to in the Offering Notice at the same price and on the same terms as specified in the Offering Notice for a period of thirty (30) days after the giving of the Offering Notice (or make the loan, if the same involves an encumbrance, hypothecation or mortgage, upon the same terms on which said loan was to be made therefor) by delivering in writing to the Company an offer to purchase (or loan) a portion of the Offered Interest of the Selling Member. Each Preferred Member so electing to purchase shall be entitled to purchase a portion of such Offered Interest in the same proportion that such Preferred Member's Percentage Interest bears to the aggregate of the Percentage Interests of all of the Preferred Members electing to purchase the Offered Interest. In the event any Preferred Member elects to purchase less than all of such Preferred Member's pro rata share of such Offered Interest ("SHORTFALL"), subject to Section 8.6, the other Preferred Members may elect to purchase their pro rata share of the Shortfall. Within sixty (60) days after the election notice of the Preferred Members who so elect, the purchase shall be consummated on the terms and conditions set forth in the Offering Notice of the Selling Member (or if the same involves a mortgage, encumbrance or other hypothecation, the loan shall be consummated upon the terms and conditions of the loan set forth in the Offering Notice). 8.5.2 If none of the other Preferred Members elect to purchase the Offered Interest (or elect to make the loan specified), or the election is made for less than all of the Offered Interest, then the Selling Member, subject to Section 8.6, within thirty (30) days after the expiration of said sixty (60) day period, may undertake and complete the Transfer to any Person the identity of which was disclosed in the Offering Notice for that portion of the Offered Interest not undertaken to be purchased by the other Preferred Members provided, however, that the proposed transferee has been approved by the other Preferred Members as specified in Sections 8.1.1, 8.1.3, and 8.4, as such Sections may be applicable to the Transfer, and the provisions of Section 8.6 have been complied with. The Transfer shall not be undertaken at a lower price or upon more favorable terms than specified in the Offering Notice. If the Selling Member does not then consummate the original proposed Transfer within ninety (90) days after the date of the Offering Notice, or within the time scheduled for closing by the purchasing person, firm or corporation, whichever is later, then all restrictions of this Section shall apply as though no Offering Notice had been given. 8.6 SPECIAL TRANSFER PROVISION. Any Managing-Member who elects pursuant to Sections 3.4, 8.1, 8.5 or 10.3 of this Agreement to acquire an additional Interest in the Company (which Interest was previously held by or was to be held by a Managing Member) shall at the time such Member's Percentage Interest is increased also have an increase in such Member's rights and obligations to purchase the output of the Foundry pursuant to the Purchase Agreement or Future Purchase Agreement corresponding to the additional Percentage Interest being acquired. Any New Buyer which acquires pursuant to Section 3.4, 8.1, 8.5 or 10.3 hereof an Interest that was previously held by a Managing Member or other Person holding rights and -41- 49 obligations to purchase the output of the Foundry pursuant to the Purchase Agreement or Future Purchase Agreement shall at the time of such acquisition acquire rights and obligations to purchase the output of the Foundry corresponding to the Percentage Interest being acquired. If at any time (a) a Member's or other Person's Percentage Interest changes as a result of (i) a Transfer in accordance herewith, (ii) a failure to pay a Second Part Capital Contribution, Third Part Capital Contribution, or Additional Capital Contribution, (iii) a failure to guarantee a loan to the Company in accordance herewith, (iv) an Event of Default, or (v) any other provision hereunder and (b) in the reasonable opinion of the Board of Directors, such change, in conjunction with the provisions herein and in the Purchase Agreement or Future Purchase Agreement for adjusting the Managing Members' purchase rights or obligations under such agreements, produces an inequitable or unintended result, then the Board of Directors, with the concurrence of all Managing Members that are parties to the Purchase Agreement or Future Purchase Agreement, may adjust the purchase rights and obligations of such Members in such manner as the Board of Directors determines in good faith is equitable under the circumstances. 8.7 SPECIAL RIGHT OF MANAGING MEMBERS OTHER THAN TSMC TO PURCHASE. This Section shall apply if pursuant to Sections 3.4, 8.3, 8.5, or 10.3 of this Agreement, TSMC provides notice to the Company of its intention to acquire an additional Interest in the Company which, after the Percentage Interests of all Members are adjusted in connection with such transaction, would result in TSMC having a Percentage Interest which, when combined with the Percentage Interest of the Third Party Investors', would equal or exceed a 71% Percentage Interest of all Preferred Members. Prior to the completion of any such transaction, the Board of Directors shall provide written notice to each Managing Member of this provision and the option of such Managing Members (other than TSMC and excluding any Managing Member whose Interest is being offered pursuant to Sections 3.4, 8.5 or 10.3 of this Agreement (the "SUBJECT INTEREST")) to purchase, in addition to their pro rata portion of the Subject Interest, a pro rata portion of the Excess Subject Interest (including the right to purchase a pro rata portion of any shortfall resulting from another Member's election to purchase less than its entire pro rata allocation). As used in this Section 8.7, the term "EXCESS SUBJECT INTEREST" means the portion of the Subject Interest which TSMC has elected to purchase which would cause TSMC and the Third Party Investors to jointly hold a Percentage Interest equal to or exceeding 71% of all Preferred Members. Each such Managing Member shall have the right to purchase its pro rata share of the Excess Subject Interest by giving notice within thirty (30) days of the notice received from the Board of Directors pursuant to this Section of such Member's intent to acquire its pro rata share of the Excess Subject Interest. If such Managing Members do not elect to purchase all of the Excess Subject Interest, TSMC may proceed with its acquisition of any portion of the Excess Subject Interest not so acquired. ARTICLE 9 BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS 9.1 MAINTENANCE OF BOOKS AND RECORDS. The Company shall cause books and records of the Company to be maintained in accordance with GAAP (except for the Capital Accounts which shall be maintained in accordance with the Regulations as provided in Section 3.5), and shall give reports to the Members in accordance with prudent business practices -42- 50 and the Act. The annual accounting period of the Company shall be the Fiscal Year. The books and records of the Company shall be audited annually by a certified public accounting firm nationally recognized in the United States, selected by the Board of Directors and approved by the Members as provided for in Section 6.4.2.7. The Company shall promptly upon receipt make available to the Managing Members all preliminary drafts of financial statements that it receives from the Company's certified public accountants. Not less than five (5) days before the financial statements of the Company become final, the Company shall provide each of the Managing Members with a copy of the draft of the financial statements of the Company and during this period, shall provide each of the Managing Members with the opportunity to comment on such financial statements. The initial firm of certified public accountants is Arthur Andersen & Co. LLP. There shall be kept at the principal business office of the Company specified in Section 2.4 the following Company documents: 9.1.1 A current list of the full name and last known business or residence address of each Member and each holder of an Economic Interest, set forth in alphabetical order, together with the amount of cash and a description and statement of the agreed value of any other property or services that were Capital Contributions of each Member and that each Member has agreed to contribute to the Company in the future, the date on which each Member became a Member, and the share in Net Profit and Net Loss of each Member and holder of an Economic Interest; 9.1.2 A copy of the Certificate of Formation and any amendments thereto, together with any powers of attorney pursuant to which the Certificate of Formation and any amendments thereto were executed; 9.1.3 Copies of the Company's U.S. Federal, state, local and other income tax or information returns and reports, if any, for the six most recent taxable years; 9.1.4 A signed counterpart of this Agreement and any amendments hereto, together with any powers of attorney pursuant to which this Agreement and any amendments hereto were executed; 9.1.5 Copies of the financial statements of the Company, if any, for the six (6) most recent Fiscal Years; 9.1.6 The Company's books and records as they relate to internal affairs of the Company for at least the current and past four (4) Fiscal Years; 9.1.7 Any other information necessary to provide true and full information regarding the status of the business and financial condition of the Company; and 9.1.8 Other information regarding the affairs of the Company as is reasonable or prudent. -43- 51 9.2 INSPECTION RIGHTS. Each Member and each holder of an Economic Interest has the right upon reasonable request, for purposes reasonably related to the interest of that Person as a Member or holder of an Economic Interest, to inspect and copy during normal business hours any of the books and records required to be maintained in accordance with Section 9.1. Such right may be exercised by such Person or by that Person's agent or attorney. 9.3 RIGHTS TO RECEIVE COPIES OF DOCUMENTS. Upon the request of a Member or holder of an Economic Interest, for purposes reasonably related to the interest of that Person as a Member or holder of an Economic Interest, the Member who has custody of the following documents shall promptly deliver to the Member or holder of an Economic Interest, at the expense of the Company, a copy of this Agreement and a copy of the documents listed in Sections 9.1.1 and 9.1.3 of this Agreement. 9.4 BANK ACCOUNTS. The bank accounts of the Company shall be maintained in such banking institutions as the Board of Directors shall determine. 9.5 TAX MATTERS HANDLED BY TAX MATTERS PARTNER. 9.5.1 TSMC is hereby designated the "TAX MATTERS PARTNER" (as defined in Code Section 6231), and is authorized and required to represent the Company (at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including administrative and judicial proceedings, and to expend Company funds for professional services and costs associated therewith. The Tax Matters Partner will control all decisions with respect to such proceedings, but will keep the Board of Directors and other Managing Members reasonably informed with respect to such proceedings and will provide the other Managing Members the opportunity to offer comments and suggestions with respect to such proceedings to the extent practicable. Each Member agrees to cooperate with the Tax Matters Partner and to do or refrain from doing any or all things reasonably requested by the Tax Matters Partner with respect to the conduct of such proceedings. The Tax Matters Partner shall arrange for the preparation and timely filing of all returns required to be filed by the Company. Any Member receiving advice that the Internal Revenue Service or any state or foreign revenue service intends to examine any income tax return of the Company shall promptly notify the Tax Matters Partner. 9.5.2 The Tax Matters Partner shall exert commercially reasonable efforts to adopt positions and make elections for tax purposes which (i) minimize the sum of the current taxable income and gain, and (ii) maximize the sum of the current taxable losses, deductions, and credits, to the Managing Members as a group. In addition, notwithstanding any other provision of this Agreement, the Tax Matters Partner shall cause all Company tax returns and other related tax filings to be prepared in such manner as to reflect that any income, gain, loss, or deduction recognized by the Company as the result of an adjustment, reallocation or recharacterization by any tax authority of the tax treatment of any transaction between the Company and a Member or an Affiliate of a Member as originally reported on any tax return filed for the Company shall be specially allocated to such Member for the taxable year of the adjustment, reallocation or recharacterization and for each taxable year thereafter so that the tax consequences to the other -44- 52 Members shall, to the extent possible, have the same cumulative aggregate tax consequences as if no such adjustment, reallocation or recharacterization had occurred. No such adjustment shall be reflected in the Capital Accounts of the Members. Not less than thirty (30) days before actual filing, the Tax Matters Partner shall provide to all of the other Managing Members a copy of each of the final returns and other administrative or judicial filings of the Company relating to income taxation, and during this period, shall provide the other Managing Members with the opportunity to comment on such returns and filings. The Members agree that, except as otherwise approved in advance by the Board of Directors, no Member shall take any position in any such administrative proceeding inconsistent with the tax returns filed by the Company, provided such tax returns are prepared in a manner consistent with this Agreement. Nothing in this Agreement shall be construed to provide the Tax Matters Partner with rights, powers or privileges relating to tax administrative proceedings in excess of the minimum rights, powers and privileges provided to the Tax Matters Partner by Code Sections 6221, et. seq., and the Treasury Regulations thereunder. 9.6 FEDERAL INCOME TAX ELECTIONS MADE BY TAX MATTERS PARTNER. Except as otherwise provided herein, the Tax Matters Partner on behalf of the Company may make all elections for U.S. Federal, state and local income tax purposes, including but not limited to, the following: 9.6.1 USE OF ACCELERATED DEPRECIATION METHODS. To the extent permitted by applicable law and regulations, the Company may elect to use an accelerated depreciation method on any depreciable unit of the assets of the Company. 9.6.2 ADJUSTMENT OF BASIS OF ASSETS. In case of a transfer of all or part of the Interest of any Member, the Company may elect, pursuant to Sections 734, 743, and 754 of the Code, to adjust the basis of the assets of the Company. 9.7 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS. The Members are aware of the income tax consequences of the allocations made by this Agreement and hereby agree to be bound by the provisions of this Agreement in reporting their shares of the Company income and loss for income tax purposes in a manner consistent with the tax returns filed by the Company, provided such tax returns are prepared in a manner consistent with this Agreement. ARTICLE 10 EVENT OF DEFAULT; TERMINATION OF MEMBERSHIP 10.1 EVENT OF DEFAULT. The occurrence of any one or more of the following events shall be a breach and a default ("EVENT OF DEFAULT") hereunder: 10.1.1 A Member shall fail to perform a material obligation of this Agreement or of any of the Ancillary Agreements and, (except for breaches contemplated in Sections 10.1.5 or 10.1.6 of this Agreement, which provide for no opportunity to cure, and except for breaches for which another cure period is specified herein), does not cure or remedy the default within sixty -45- 53 (60) days thereafter. Notwithstanding the foregoing, the breach or failure to perform any of the following Sections shall not be, or be deemed to be, an Event of Default: Sections 3.4.1, 3.4.2, and 3.6.4 (each of which shall be treated as provided in such Sections). 10.1.2 Any representation, warranty or statement made by a Member under or pursuant to this Agreement or any Ancillary Agreement or under any affidavit, certificate or other instrument executed in connection with any of the foregoing, shall be false or misleading in any material respect as of the Effective Date or shall become so at any time prior to the Dissolution Date, and such Member does not cure the same within thirty (30) days written notice thereof. 10.1.3 A Member shall (i) be adjudicated as bankrupt or insolvent; (ii) make a general assignment for the benefit of its creditors; (iii) file a petition, answer or consent seeking, or have entered against it (or fail reasonably to contest the material allegations of any petition for) an order for relief (or any similar remedy) under any provision of Title 11 of the United States Code or any other U.S. Federal or state law relating to insolvency, bankruptcy, rehabilitation, liquidation or reorganization, or consent to the institution of any proceedings thereunder; (iv) convene a general meeting of its creditors, or any class thereof, for the purpose of effecting a general moratorium upon or general extension or composition of its debts; (v) fail to pay such Member's debts as they mature; (vi) admit in writing that such Member is generally not able to pay its debts as they mature; or (vii) apply for or consent to the appointment of a receiver, trustee, custodian, liquidator or other similar official of all or a substantial portion of such Member's assets. 10.1.4 Any one or more of the following occurs: (i) a petition is filed or any case or proceeding described in Section 10.1.3 above is commenced against any Member or against the assets thereof, unless such petition and the case or proceeding initiated thereby is dismissed within sixty (60) days from the date of the filing; (ii) an answer is filed by any Member admitting the allegations of any such petition; or (iii) a court of competent jurisdiction enters an order, judgment or decree appointing, without the consent of any Member, a custodian, trustee, agent or receiver of it, or for all or a substantial part of its property, or authorizing the taking possession by a custodian, trustee, agent or receiver of it, or of all or a substantial part of its property unless such appointment is vacated or dismissed or such possession is terminated within sixty (60) days from the date of such appointment or commencement of such possession, but not later than 5 days before the proposed sale of any assets of such Member by such custodian, trustee, agent or receiver. 10.1.5 A Member files a certificate of dissolution or otherwise dissolves, terminates or liquidates, or is merged with or is consolidated into any other corporation, limited liability company, partnership, or other entity other than an Affiliate of such Member, except for a merger or consolidation not entered into for the purpose of and not having the effect of changing or influencing the control of the Member. 10.1.6 A Member becomes a Prohibited Person or an Affiliate of a Prohibited Person. -46- 54 10.2 TERMINATION OF MEMBER. If an Event of Default occurs and is not cured within the applicable time period (if any) specified in Section 10.1, the defaulting Member shall be terminated as a Member, and all rights and privileges of such former Member under this Agreement shall be adjusted and disposed of as follows: 10.2.1 If the Event of Default is as provided or described in any of Section 10.1.1, Section 10.1.2 or Section 10.1.5, the Member shall be terminated as a Member upon the vote of the non-defaulting Preferred Members with a majority of the Preferred Shares owned by non-defaulting Members. 10.2.2 For all other Events of Default, termination of Membership shall occur immediately following the elapse of the specified cure period, if any. 10.2.3 Notwithstanding any other provision of this Agreement and subject to Section 11.2.3, the termination of a Member ("TERMINATED MEMBER") as contemplated in this Section 10.2 shall not affect the rights of any other Member under this Agreement. The Company shall promptly notify a Terminated Member of such termination, but the failure to give such notice shall not affect such termination or create any rights in the Terminated Member. 10.3 PURCHASE RIGHT. Unless provided otherwise in this Agreement, upon termination of a Terminated Member as contemplated in Section 10.2, the remaining Preferred Members (a "REMAINING MEMBER") shall have the right to purchase and the Terminated Member shall have the obligation to sell, the Terminated Member's Interest as provided in Sections 10.3 through 10.7, inclusive. The purchase price for such Interest shall be an amount equal to 50% of the lesser of (i) the Terminated Member's Percentage Interest in the book value of the Company as of such termination date, or (ii) the fair market value of the Terminated Member's Interest as of such termination date as determined in the reasonable discretion of the Board of Directors, not including any Director appointed by the Terminated Member. Such reduction in value shall constitute partial compensation for damages suffered by the Remaining Members as a result of the act, omission or condition which resulted in the termination of the Terminated Member, and subject to Article 21, shall be in addition to, and not in lieu of any other right or remedy which the Remaining Members may have, at law or in equity, or pursuant to this Agreement. The Directors shall give notice to all Remaining Members of such purchase price. 10.4 NOTICE OF INTENT TO PURCHASE. Within thirty (30) days after the Directors have determined and notified the Remaining Members as to the purchase price of the Terminated Member's Interest determined in accordance with Section 10.3, each Remaining Member shall have the right, but not the obligation, to elect to purchase a portion of the Terminated Member's Interest. Any Remaining Member so electing shall notify the Directors in writing within thirty (30) days after the notice from the Directors of such Remaining Member's desire to purchase a portion of the Terminated Member's Interest. The failure of any Remaining Member to submit such notice within the applicable period shall constitute an election on the part of the Remaining Member not to purchase any of the Terminated Member's Interest. Each -47- 55 Remaining Member so electing to purchase shall be entitled to purchase a portion of the Terminated Member's Interest in the same proportion that the Percentage Interest of the Remaining Member bears to the aggregate of the Percentage Interest of all of the Remaining Members electing to purchase the Terminated Member's Interest. 10.5 ELECTION TO PURCHASE LESS THAN ALL OF THE TERMINATED MEMBER'S INTEREST. If any Remaining Member elects to purchase none or less than all of such Remaining Member's pro rata share of the Terminated Member's Interest ("SHORTFALL AMOUNT"), then subject to the provisions of Section 8.6, the other Remaining Members may elect to purchase the Shortfall Amount in proportion to their respective Percentage Interests. Each Remaining Member who purchases part of the Terminated Member's Interest shall succeed to a pro rata share of the Terminated Member's Capital Account balance. If the Remaining Members do not purchase the entire Interest of the Terminated Member, then subject to the provisions of Section 8.6, with respect to all or any remaining share of the Terminated Member's Interest, one or more new Members, if approved pursuant to Section 8.4, may be admitted as a Member or Members and purchase the Terminated Member's remaining Interest by paying for the Interest in cash. If the entire Interest of the terminated Member is not purchased, the Terminated Member shall have only an Economic Interest, and without limiting the generality of the foregoing, shall not be a Managing Member, shall not be entitled to designate a Director hereunder and any current Director or Directors appointed by such Terminated Member shall be deemed to be removed and the number of Directors on the Board of Directors shall be reduced accordingly. In such event as partial compensation for damages suffered by the Company and the Remaining Members, (i) the Terminated Member's remaining Interest shall be reduced by fifty percent (50%) and the Remaining Members' Interests shall be increased pro rata accordingly, (ii) the Terminated Member's Capital Account Balance following the purchase of any Remaining Member, if any, shall be reduced by 50%, and the difference shall be added to the Capital Account Balances of the Remaining Members, pro rata according to their Interests, and (iii) solely for purposes of determining the Managing Members' and a Terminated Member's rights and obligations to purchase the output of the Foundry under the Purchase Agreement or Future Purchase Agreement (which rights and obligations shall be a function, to be specified in each of those agreements, of the Managing Members' and Terminated Member's Percentage Interests), effect shall not be given to any increase or decrease in a Managing Member's or Terminated Member's Percentage Interest attributable to the operation of clause (i). 10.6 PAYMENT OF PURCHASE PRICE. The purchase price shall be paid by the electing Remaining Members by either of the following methods, each of which may be selected separately by the electing Remaining Members in their respective sole discretion: 10.6.1 The Remaining Members shall at the consummation of the purchase of the Terminated Member's Interest ("CLOSING") pay in cash the total purchase price for the Terminated Member's Interest; or 10.6.2 The Remaining Members shall pay at the Closing one-fifth (1/5) of the purchase price in cash and the balance of the purchase price shall be paid in four equal annual principal installments, plus accrued interest, and be payable each year on the anniversary date of -48- 56 the Closing. The unpaid principal balance shall accrue interest at the current applicable U.S. Federal rate as provided in the Code for the month in which the initial payment is made, but the Remaining Members shall have the right to prepay in full or in part at any time without penalty. The obligation of each purchasing Remaining Member to pay its portion of the balance due shall be evidenced by a separate promissory note executed by the respective Remaining Member. Each such promissory note shall be in an original principal amount equal to the portion owed by the respective purchasing Remaining Member. The promissory note executed by each purchasing Remaining Member shall be secured by a pledge of that portion of the Terminated Member's Interest purchased by such Remaining Member. 10.7 CLOSING OF PURCHASE OF TERMINATED MEMBER'S INTEREST. The Closing for the sale of a Terminated Member's Interest pursuant to this Article 10 shall be held at 10:00 a.m. at the principal office of Company no later than sixty (60) days after the determination of the purchase price. At the Closing, the Terminated Member or such Terminated Member's legal representative shall deliver to the electing Remaining Members an instrument of transfer (containing warranties of title and no encumbrances) conveying the Terminated Member's Interest free and clear of all liens, charges and encumbrances whatsoever, except as permitted by the purchaser thereof. The Terminated Member or such Terminated Member's legal representative, the Company and the Remaining Members shall do all things and execute and deliver all documents as may be necessary or convenient to consummate such sale and purchase in accordance with the terms and provisions of this Agreement. Without limiting the generality of the foregoing, each Member hereby appoints each Remaining Member as its attorney-in-fact and agent, with full power and authority to take all actions and execute and deliver all agreements, deeds, leases, releases, assignments, bills of sale, security instruments and any other document which, in the sole judgment of such Remaining Member, is necessary or convenient to consummate such sale and purchase. ARTICLE 11 TERMINATION AND DISSOLUTION 11.1 TERMINATION. This Agreement shall terminate on the first to occur of (i) the Dissolution Date or (ii) the unanimous written consent of the Preferred Members or (iii) upon consummation of the Company's merger or consolidation as contemplated in Article 14. 11.2 DISSOLUTION. The Company shall be dissolved upon the first to occur of the following events: 11.2.1 The Approval of Members holding not less than 87% in Percentage Interest if the dissolution does not occur contemporaneously with an IPO of the Delaware Corporation; 11.2.2 The action of the Board of Directors if such action occurs contemporaneously with an IPO of the Delaware Corporation; -49- 57 11.2.3 The death, retirement, insanity, incapacity, resignation, expulsion, bankruptcy or dissolution of a Managing Member, or the occurrence of any other event which terminates a Managing Member's continued membership in the Company, unless the business of the Company is continued with the written consent of other Members holding a Majority in Interest of such other Members within ninety (90) days following the occurrence of such event; 11.2.4 The appointment of a receiver, trustee or liquidator of the Project which appointment is not vacated within thirty (30) days; or the attachment, execution or other judicial seizure of the Project where such seizure is not discharged within ten (10) days thereafter; or 11.2.5 The entry of a decree of judicial dissolution under Section 18-802 of the Act; or 11.2.6 Following an act of Governmental Intervention, if written request shall be made by one Managing Member to the other Managing Members within sixty (60) days from said Governmental Intervention and the Managing Members hereto shall have entered into good faith negotiations with the objective of restructuring the relationship among the Members in a manner such that the adverse effect of said alteration or modification of this Agreement will be minimized and following which, the Managing Members cannot unanimously reach a reasonably acceptable modification to this Agreement, within six (6) months from the date of dispatch of said written request, or within such longer period of time as mutually agreed upon by the unanimous consent of the Managing Members. 11.2.7 On the thirtieth (30th) anniversary of the date of the filing of the Certificate of Formation of the Company. 11.3 WINDING UP. Upon the dissolution of the Company, TSMC (or if TSMC is no longer a Member, a liquidating trustee appointed by a Majority in Interest of the remaining Members) shall wind up the affairs of the Company (such Person or Persons herein collectively called the "LIQUIDATING PERSON"). Upon dissolution of the Company and until the filing of the certificates of cancellation pursuant to Section 11.6, the Liquidating Person may, in the name of, and on behalf of, the Company, prosecute and defend suits, whether civil, criminal or administrative, gradually settle and close the Company's business, dispose of and make reasonable provision for the Company's liabilities, and distribute to the members any remaining assets of the Company, all without affecting the liability of the Members and without imposing liability on a liquidating trustee. The Liquidating Person shall be entitled to reimbursement for out-of-pocket expenses incurred and reasonable compensation for services rendered in connection with the winding up and liquidation of the Company, as agreed by the Members. Such reimbursement shall be paid as an expense of the Company after all debts to third parties have been repaid or adequately provided for but before any repayment of loans or advances by Members. 11.4 DISTRIBUTION OF ASSETS. The Members shall continue to divide Net Profit and Net Loss and Cash Available For Distribution during the winding-up period in the -50- 58 same manner and the same priorities as provided for in Articles 4 and 5 hereof. The proceeds from the liquidation of Property shall be applied in the following order: 11.4.1 To the payment of creditors, including Members who are creditors, in satisfaction of liabilities of the Company (whether by payment of the making or reasonable provision for payment thereof) other than liabilities for which reasonable provision for payment has been made and liabilities to Members for distributions pursuant to Article 4; 11.4.2 To set up reasonable reserves for contingent or unforeseen liabilities of the Company, to be maintained in a regular trust fund account; 11.4.3 To repay pro rata all loans or advances made by the Members to the Company, but in the event the amount available for such repayment shall be insufficient, then pro rata on account thereof; 11.4.4 The balance if any, to the Members in accordance with the provisions of Section 4.3 hereof; except, if the Company shall be dissolved prior to the expiration of the period beginning on the Effective Date and ending five years from the date of Commencement of Production, as defined in the Purchase Agreement (the "SUBORDINATION PERIOD") and if such dissolution is as a result of an event of Force Majeure or a major economic or business event or condition such that the economic or business assumptions underlying the Business Plan have changed to the extent that it is economically impracticable to substantially implement the Business Plan (including, but not limited to, major claims or litigation against the Company, failure to operate the Foundry on an economically viable basis, a change in technology rendering the business of the Company obsolete, or a major economic recession), and the Board has determined to dissolve the Company with the approval of the Members as provided in Section 11.2.1, then the Manufacturing Agreement, the Technology License and Assistance Agreement, and the Advanced Process Agreement (collectively and together with the other property listed as contributed by TSMC on Exhibit A, the "TSMC CONTRIBUTED PROPERTY") shall each be terminated and the balance of the proceeds from the liquidation of Property shall be paid or distributed to the Members as follows: (i) first, to the Members in reverse chronological order (last in, first out), until the entire Cash Contribution of each is returned to each Member, without any interest, and (ii) the rest, residue and remainder, if any, to the Members in accordance with each Member's Percentage Interest. For purposes of the preceding sentence, TSMC shall be treated as if it had contributed pursuant to the First Part Capital Contribution described in Section 3.1.1 hereof, an amount of cash ("PROPERTY CASH"), in addition to the cash contribution of TSMC described in such Section 3.1.1, equal to the product of (x) the initial agreed value of the TSMC Contributed Property as shown on Exhibit A and (y) the Permitted Percentage. For purposes of this Section 11.4.4, the term "PERMITTED PERCENTAGE" shall be and mean zero percent (0%) on and before the Commencement of Production, increasing daily thereafter at an annual rate of twenty percent (20%) until the Permitted Percentage is one hundred percent (100%) on the last day of the Subordination Period. -51- 59 Where the distribution pursuant to this Section 11.4 consists both of cash (or cash equivalents) and non-cash property, the cash (or cash equivalents) shall first be distributed, in a descending order, to fully satisfy each category starting with the most preferred category above. To the maximum extent practicable consistent with the foregoing, non-cash property shall be returned to the Member which has contributed it. 11.5 TIME FOR WINDING UP. A reasonable time shall be allowed for the orderly liquidation of assets of the Company and the discharge or other provision of liabilities to creditors so as to enable the Liquidating Person to minimize any losses attendant upon a liquidation. 11.6 FINAL ACCOUNTING; CERTIFICATES OF CANCELLATION. Each of the Members shall be furnished with a statement, prepared by the Company's independent certified public accountant, setting forth the assets and liabilities of the Company as of the date of the complete liquidation. Upon the compliance by the Liquidating Person with the foregoing distribution plan, the Members shall cease to be such, and the Liquidating Person shall execute and cause to be filed any and all documents necessary with respect to the termination and cancellation of the Company, including, without limitation, a certificate of cancellation under Section 18-203 of the Act. ARTICLE 12 INCENTIVE PLANS 12.1 AUTHORIZATION OF INCENTIVE PLANS. The Company shall have a Senior Executive Incentive Plan and an Employee Incentive Plan (each an "INCENTIVE PLAN" and, collectively, the "INCENTIVE PLANS") in the forms attached as Exhibits H and I. The Incentive Plans shall be administered by the Board in accordance with their terms. In no event shall the aggregate rights awarded under the Incentive Plans exceed 13.5 million Common Shares. 12.2 ADMISSION OF PLAN PARTICIPANTS. Upon exercise of an option or payment of an award for Common Shares, payment of any applicable purchase price in connection with such option or award, and execution of a counterpart of this Agreement, a participant shall be admitted as a Member. Such participant shall have an initial Capital Account equal to the purchase price paid for such Common Shares, plus the amount of any income recognized on such acquisition (if any); and such Capital Account shall thereafter be determined in accordance with Section 3.5. ARTICLE 13 TSMC LAND OPTION; NEW VENTURE RIGHTS 13.1 LAND OPTION. By execution of this Agreement, the Members agree and acknowledge that as part of the Initial Capital Contribution of TSMC, and as a convenience and accommodation to the Company, TSMC has arranged for option agreements covering the Real Property to be assigned to the Company, which option agreements cover real property in excess -52- 60 of that amount necessary to construct the Foundry. On the Effective Date, the Company with the approval of the Members granted to TSMC the TSMC Land Option, whereby TSMC has the option to purchase the Land from the Company, for the Purchase Price (as defined in the TSMC Land Option). 13.2 NEW FAB VENTURE RIGHT OF FIRST REFUSAL. On the Effective Date and until the tenth (10th) anniversary of the Effective Date, TSMC has granted and hereby grants a right of first refusal to each of the Managing Members to participate in any venture controlled by TSMC or its Affiliates to construct another foundry on the Land which is the subject of the TSMC Land Option, or anywhere else in North America in proportion to their respective Percentage Interests in the Company. TSMC agrees to meet and confer with the Managing Members prior to exercise of TSMC's rights under the TSMC Land Option, in order to discuss the participation of the Managing Members in any venture related thereto. 13.3 FURTHER ASSURANCES. The Members, from time to time and as requested by a Managing Member, shall, and shall cause the Company to, execute and deliver such additional documents, give such further assurances and take any additional actions as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Article 13. ARTICLE 14 CHANGE OR CONVERSION TO A GENERAL CORPORATION 14.1 MERGER OR CONSOLIDATION TO A GENERAL CORPORATION. Subject to the approval required by Section 6.4.2.3, each Member by execution and delivery of this Agreement agrees to vote, and hereby votes, in favor of the reincorporation, merger or consolidation of the Company, pursuant to Section 18-209 of the Act, or otherwise, to change or convert the Company into a Delaware general corporation or a parent or a subsidiary of a Delaware corporation, at such time, in such manner and on such basis as the Board of Directors shall determine is in the best interests of the Company. Such change or conversion to a Delaware general corporation may be accomplished by a direct merger into a corporation, by one of the methods illustrated in Exhibit E, or by any other method the Board of Directors determines is desirable, provided, however, that each Member shall have the right to participate in proportion to its Percentage Interest in whichever method is selected by the Board of Directors. As used herein "DELAWARE CORPORATION" shall mean any corporation which through one transaction or a series of transactions involves the conversion or exchange of the Interests of those Members who choose to participate in such transaction into an interest in or the stock of such corporation in proportion to a Member's Interest in the Company as adjusted to reflect the participation of the other Members. Additionally, by execution and delivery of this Agreement, each Member agrees to take any and all actions necessary to consummate such a change or conversion, including, but not limited to, the execution and delivery of an Agreement of Merger or Consolidation and filing of a Certificate of Merger or Consolidation with the Office of the Secretary of State, in such form and on such basis as the Board of Directors may determine. -53- 61 14.2 REGISTRATION RIGHTS. In the event the Delaware Corporation undertakes an IPO, the Preferred Members shall have the registration rights provided for in the Registration Rights Agreement. At the time the Member's Interests are converted into or exchanged for an interest or shares in the Delaware Corporation, each of the Members shall use its best efforts to cause the Delaware Corporation to assume all rights, duties and obligations ascribed to it in the Registration Rights Agreement. In the event any Preferred Member's shares of the Delaware Corporation are included for sale in the initial public offering, each Preferred Member shall be entitled to include such Preferred Member's shares of the Delaware Corporation in such initial public offering on a pro rata basis. 14.3 VOTING ARRANGEMENTS. 14.3.1 CONVERSION CONTEMPORANEOUSLY WITH IPO. Each Preferred Member agrees that if the conversion or exchange of each Preferred Member's Interest into an interest in the Delaware Corporation occurs contemporaneously with an IPO of the Delaware Corporation, then such Member shall execute and deliver a voting agreement or other arrangement with a term and on such terms as may be specified by TSMC, whereby TSMC shall have authority to designate the majority of the board of directors of the Delaware Corporation. Each Member shall take any and all actions necessary and execute any and all documents necessary to give TSMC such authority. 14.3.2 CONVERSION NOT CONTEMPORANEOUSLY WITH IPO. Each Member agrees that if the conversion or exchange of each Member's Interest into an interest in the Delaware Corporation is not contemporaneous with an IPO of the Delaware Corporation, then the Articles, Bylaws, Stockholder's Agreement, and other governing documents of the Delaware Corporation shall provide for corporate governance substantially equivalent to that of the Company as set forth in this Agreement. 14.4 OPTIONS. In the event that each Member's Interest is converted or exchanged into an interest in or shares of the Delaware Corporation, any outstanding options, warrants or right to securities of the Company shall be changed or converted into similar securities of the Delaware Corporation on the same basis as a Member's Interest is changed or converted to an interest in or shares of the Delaware Corporation. 14.5 CONVERSION OF COMMON SHARES AND PREFERRED SHARES. In the event of a conversion pursuant to Section 14.1 of the Company into a Delaware corporation contemporaneously with an IPO, each Common Share and each Preferred Share shall be converted into common stock (the "COMMON STOCK") of the Delaware Corporation as hereinafter provided. 14.5.1 Each Common Share shall be convertible into one fully paid and nonassessable share of Common Stock. -54- 62 14.5.2 The Board of Directors shall have the discretion to determine the class or classes of securities of the Delaware Corporation into which all or part of each Preferred Share shall be convertible. 14.5.3 Unless otherwise approved by the Board of Directors, each Preferred Share shall be convertible into one fully paid and nonassessable share of Common Stock. ARTICLE 15 STANDARD OF CARE; INDEMNIFICATION 15.1 STANDARD OF CARE. Each Director, Officer, employee and agent shall perform its, his or her duties to the Company in good faith, in a manner he, she or it reasonably believes to be in or not opposed to the best interests of the Company, and with the care that a prudent person in a similar position would use under similar circumstances. Each Director, Officer, employee and agent of the Company and any Liquidating Person (individually, an "Indemnitee" and collectively, the "Indemnitees") acting in such capacity shall be fully protected in relying in good faith on information, opinions, reports or statements, including financial statements, books of account and other financial data, if prepared or presented by (i) one or more Directors, Officers or employees of the Company who the Indemnitee reasonably believes are reliable and competent in the matters prepared or presented, or (ii) legal counsel, certified public accountants or other persons as to matters that the Indemnitee reasonably believes are within the person's professional or expert competence. No Indemnitee shall be liable for damages to the Company or any present or former Member with respect to claims relating to its conduct for or on behalf of the Company, except to the extent that there is a final judicial determination based on clear and convincing evidence that (a) its action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Company or undertaken with reckless disregard for the best interests of the Company, or (b) with respect to any criminal action, proceeding or investigation, it had no reasonable cause to believe its conduct was unlawful. 15.2 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The Company shall indemnify, defend and hold harmless each Indemnitee from and against any and all claims, demands, causes of action, loss, liability, cost, or expense (including reasonable attorneys' fees and disbursements), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which the Indemnitee was involved or may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to the business of the Company, excluding liabilities to any Member, regardless of whether the Indemnitee is or continues to be a Director, Officer, employee, or agent of the Company, or a Liquidating Person at the time any such liability or expense is paid or incurred, to the fullest extent permitted by the Act and all other applicable laws. 15.3 EXPENSES. Expenses incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding subject to Section 15.2 shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding -55- 63 upon receipt by the Company of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that such Person is not entitled to be indemnified as authorized in Section 15.2. 15.4 INDEMNIFICATION RIGHTS NON-EXCLUSIVE. The indemnification provided by Section 15.2 shall be in addition to any other rights to which those indemnified may be entitled under any agreement, action of the Board of Directors, vote of the Members, as a matter of law or equity or otherwise, both as to action in the Indemnitee's capacity as an Officer, Director, employee, or agent of the Company or as a Liquidating Person and as to any action in another capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee. 15.5 ERRORS AND OMISSIONS INSURANCE. The Company may purchase and maintain insurance, at the Company's expense, on behalf of the Directors and Officers and such other Persons as the Directors shall determine, against any liability that may be asserted against, or any expense that may be incurred by, such Person in connection with the activities of the Company, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. 15.6 ASSETS OF THE COMPANY. Any indemnification pursuant to Section 15.2 shall be satisfied solely out of the assets of the Company. No Member shall be subject to personal liability or required to fund or to cause to be funded any obligation by reason of these indemnification provisions. ARTICLE 16 AMENDMENTS 16.1 AMENDMENT, ETC. OF LIMITED LIABILITY COMPANY AGREEMENT. Except as provided in Sections 6.4.2.9 and 6.4.2.10 and except to admit a new Member approved as contemplated in Section 6.4.2.11, this Agreement may be amended, or repealed and a new agreement may be adopted, only by (i) action of the Directors, and (ii) the Approval of Members holding not less than 87% in Percentage Interest. 16.2 AMENDMENT, ETC. OF CERTIFICATE OF FORMATION. The Certificate of Formation may be amended only by (i) action of the Directors, and (ii) the Approval of Members holding not less than 87% in Percentage Interest. ARTICLE 17 CONDITIONS PRECEDENT 17.1 CONDITIONS TO MEMBERS' PERFORMANCE. Notwithstanding anything to the contrary contained herein, on the Effective Date each of the following conditions had been satisfied: -56- 64 17.1.1 Expiration of any waiting periods that are required by the laws of the U.S. or Taiwan to expire, and obtaining all requisite governmental and other approvals, prior to the consummation of such transactions, including, but not limited to, any waiting period required under the U.S. Hart Scott Rodino Antitrust Improvement Act of 1976, as amended. 17.1.2 The execution and delivery by the Company of all Ancillary Agreements that this Agreement contemplates the Company shall execute. 17.1.3 The Certificate of Formation shall have been filed with the Office of the Delaware Secretary of State. 17.2 CONDITIONS TO TSMC'S PERFORMANCE. In addition to the conditions set forth in Section 17.1, notwithstanding anything to the contrary contained herein, on the Effective Date each of the following conditions were deemed satisfied by TSMC: 17.2.1 The truth and accuracy as of the Effective Date of each of the representations and warranties set forth in Section 7.2 made by each other Initial Member. 17.2.2 The execution and delivery by each other Initial Member of each of the Ancillary Agreements that this Agreement contemplates such Initial Member shall execute. 17.2.3 The performance by each other Initial Member of all obligations and covenants set forth in this Agreement and required to be performed on the date hereof, including without limitation, that each other Initial Member shall have made its respective First Part Capital Contribution. 17.2.4 Receipt of any necessary approval by the Taiwan Ministry of Economic Affairs of the investment in the Company by TSMC as contemplated hereby. 17.3 CONDITIONS TO ADI'S PERFORMANCE. In addition to the conditions set forth in Section 17.1, notwithstanding anything to the contrary contained herein, on the Effective Date each of the following conditions were deemed satisfied by ADI: 17.3.1 The truth and accuracy as of the Effective Date of each of the representations and warranties set forth in Section 7.2 made by each other Initial Member. 17.3.2 The execution and delivery by each other Initial Member of each of the Ancillary Agreements that this Agreement contemplates such Initial Member shall execute. 17.3.3 The performance by each other Initial Member of all obligations and covenants set forth in this Agreement and required to be performed on the date hereof, including without limitation, that each other Initial Member shall have made its respective First Part Capital Contribution. -57- 65 17.4 CONDITIONS TO ALTERA'S PERFORMANCE. In addition to the conditions set forth in Section 17.1, notwithstanding anything to the contrary contained herein, on the Effective Date each of the following condition were deemed satisfied by Altera: 17.4.1 The truth and accuracy as of the Effective Date of each of the representations and warranties set forth in Section 7.2 made by each other Initial Member. 17.4.2 The execution and delivery by each other Initial Member of each of the Ancillary Agreements that this Agreement contemplates such Initial Member shall execute. 17.4.3 The performance by each other Initial Member of all obligations and covenants set forth in this Agreement and required to be performed on the date hereof, including without limitation, that each other Initial Member shall have made its respective First Part Capital Contribution. 17.5 CONDITIONS TO ISSI'S PERFORMANCE. In addition to the conditions set forth in Section 17.1, notwithstanding anything to the contrary contained herein, on the Effective Date each of the following conditions were deemed satisfied by ISSI: 17.5.1 The truth and accuracy as of the Effective Date of each of the representations and warranties set forth in Section 7.2 made by each other Initial Member. 17.5.2 The execution and delivery by each other Initial Member of each of the Ancillary Agreements that this Agreement contemplates such Initial Member shall execute. 17.5.3 The performance by each other Initial Member of all obligations and covenants set forth in this Agreement and required to be performed on the date hereof, including without limitation, that each other Initial Member shall have made its respective First Part Capital Contribution. 17.6 CONDITIONS TO THE THIRD PARTY INVESTORS' PERFORMANCE. In addition to the conditions set forth in Section 17.1, notwithstanding anything to the contrary contained herein, on the Effective Date each of the following conditions were deemed satisfied by the Third Party Investors: 17.6.1 The truth and accuracy as of the Effective Date of each of the representations and warranties set forth in Section 7.2 made by each other Initial Member. 17.6.2 The execution and delivery by each other Initial Member of each of the Ancillary Agreements that this Agreement contemplates such Initial Member shall execute. 17.6.3 The performance by each other Initial Member of all obligations and covenants set forth in this Agreement and required to be performed on the date hereof, including without limitation, that each other Initial Member shall have made its respective First Part Capital Contribution. -58- 66 17.6.4 Receipt of any necessary approval by the Taiwan Ministry of Economic Affairs of the investment in the Company by a Third Party Investor as contemplated hereby. ARTICLE 18 CONFIDENTIALITY 18.1 EXCHANGE OF INFORMATION AND NONDISCLOSURE. In furtherance of this Agreement, or pursuant to the Ancillary Agreements the Members may from time to time come into possession of certain information and data, including business plans, fabrication techniques, processes, technology, financial information and other compilations of information, which relate to the business of the Members. Prior to the execution of this Agreement, each Initial Member has executed, and each new Member shall sign and become a party to, the Member's Confidentiality Agreement relating to such information. 18.2 CONFIDENTIALITY AGREEMENTS FOR VISITORS AND EMPLOYEES. Any employee, contractor, subcontractor or guest of TSMC, ADI, Altera or ISSI who visit the Foundry ("VISITOR") shall execute and deliver a copy of the Confidentiality Agreement in the form of Exhibit C(1). Visitors shall not be permitted to: make or compile any notes, documentation or other information, or make any photographs, drawings, tapes, films or other graphic representations. Each employee of the Company at the time of employment shall execute and deliver a copy of the Employee Invention Assignment and Confidentiality Agreement in the form of Exhibit C(2). 18.3 THIRD PARTY REQUEST FOR INFORMATION. Except as otherwise provided in this Agreement and except for private requests in the ordinary course of business for non-Confidential Information relating to the Proven Products, a Member shall immediately notify the other Preferred Members of any private or governmental request for Confidential Information or any other information or documents relating to the Proven Products or this Agreement. Each Preferred Member shall have the right to participate in any other Member's response to any such request. In the event that a Member receives any subpoena or other legal process requiring the production of information, documents, data, work papers, reports, or other materials relating to this Agreement, that Member shall: 18.3.1 give the other Preferred Members, if possible, the opportunity to participate in quashing, modifying or otherwise responding to any compulsory process in an appropriate and timely manner; and 18.3.2 cooperate fully with the other Preferred Member's efforts to narrow the scope of any such compulsory process, to obtain a protective order limiting the use or disclosure of the information sought, or in any other lawful way to obtain continued protection of the Confidential Information. Notwithstanding the foregoing, a private request to a Member from a third party for Design Rules (as defined in the Purchase Agreement) and reliability results may be disclosed -59- 67 without prior notice to the other Preferred Members if such third party executes a Confidentiality Agreement in the form of Exhibit L to the Purchase Agreement and the other Preferred Members are promptly provided with notice of the disclosure after the disclosure is made. 18.4 REPORTING LOSS, THEFT OR MISAPPROPRIATION. If any Member becomes aware of the loss, theft or misappropriation of Confidential Information which is in its possession or control, it shall notify the other Preferred Members in writing within five (5) days of its discovery of such loss, theft or misappropriation. 18.5 BREACH OF CONFIDENTIALITY. Each Member acknowledges that a breach of this Article 18 or a breach of either of the Confidentiality Agreements will result in irreparable injury to the party whose Confidential Information has been disclosed and such party shall be entitled to temporary, preliminary and permanent injunctive relief or to a protective order for any threatened or actual violation of the provisions of this Article. Each Member agrees and consents to the entry of an injunction or protective order by any court of competent jurisdiction upon a showing by the party whose Confidential Information has been disclosed that its Confidential Information is being used or disclosed contrary to the terms of this Article 18 or the Confidentiality Agreements. The foregoing provisions are in addition to, and not in limitation of, the remedies of specific performance, damages, and any other remedies at law, in equity or otherwise that the Members may have upon breach. The Members stipulate that the arbitration provisions of Article 20 shall not apply to any temporary restraining order, preliminary injunctive relief or other provisional remedy sought to prohibit a breach or threatened breach of the provisions of this Article or the Confidentiality Agreements. ARTICLE 19 ANCILLARY AGREEMENTS 19.1 EXECUTION AND DELIVERY. On or before the Effective Date, the following documents were executed and delivered by the parties thereto, and the Company executed and delivered each such document: the Confidentiality Agreements, the Registration Rights Agreement, and the Assignments of the Manufacturing Agreement, the Technology License and Assistance Agreement and the Advanced Process Agreement. 19.2 TERMINATION OF MANUFACTURING AGREEMENT; FUTURE PURCHASE AGREEMENT. Following the expiration or termination of the Manufacturing Agreement (and consequently, the termination of the Purchase Agreement), until the useful life of the Foundry has ended, the Managing Members shall enter into the Future Purchase Agreement, the form of which is attached hereto as Exhibit F, whereby the Managing Members shall have the right and obligation to purchase the output of the Foundry as provided for in the Future Purchase Agreement. Notwithstanding the foregoing, the Members agree that if the Company constructs an additional foundry on the Real Property, any rights or obligations to purchase the output of such additional foundry shall be negotiated at that time and shall not be covered by the provisions of the Purchase Agreement or the Future Purchase Agreement. ARTICLE 20 -60- 68 DISPUTE RESOLUTION; ARBITRATION 20.1 NEGOTIATION BETWEEN EXECUTIVES. Each of the Members and the Company shall attempt in good faith to resolve any dispute, controversy or claim ("Dispute") arising out of or relating to this Agreement promptly by negotiations between executives who have authority to settle the Dispute. Any Member or the Company may give the other Preferred Members and the Company written notice of any Dispute not resolved in the normal course of business. Within twenty (20) days after delivery of such a notice, executives of the Members and the Company involved in the Dispute who have authority to settle the Dispute shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. If the matter has not been resolved within thirty (30) days after such notice, unless extended by the agreement of the parties involved in the Dispute in writing (the "Negotiation Period"), the matter shall be subject to mediation as provided in Section 20.2. If a Member or the Company intends to be accompanied at a meeting by an attorney, the other involved parties shall be given at least three (3) Business Days' notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this provision are confidential and shall be treated as compromise and settlement negotiations for purpose of the United States Federal Rules of Evidence and state rules of evidence. 20.2 MEDIATION. Any Dispute not settled pursuant to Section 20.1 shall be submitted to mediation administered by the American Arbitration Association under its Commercial Mediation Rules (such mediation, "MEDIATION"), before resorting to arbitration as hereinafter provided. The Mediation shall be completed within forty-five (45) days of its initiation pursuant to the Commercial Mediation Rules, unless all the parties involved in the Dispute otherwise agree. Executives of all parties involved in the Dispute with authority to resolve the Dispute shall participate in the Mediation. The Mediation shall take place in San Jose, California. The parties shall attempt in good faith to reach agreement on the appointment of a mediator. If they cannot so agree, the mediator shall be appointed pursuant to the Commercial Mediation Rules; provided, however, that the mediator appointed shall have a background in the semiconductor industry. The parties involved in the Dispute shall each pay their own expenses of Mediation, including attorney's fees, and shall share equally the mediator's fees and expenses. 20.3 CLAIMS SUBJECT TO ARBITRATION. Except as otherwise specified below, any Dispute arising out of or relating to this Agreement, or the breach or termination thereof, and not resolved pursuant to Section 20.1 or Section 20.2 shall be resolved by binding arbitration in accordance with the Federal Arbitration Act, 9 U.S.C. Section 1 et seq. (the "FAA"), and the Commercial Arbitration Rules and, where the amount in controversy exceeds $1,000,000, the Supplementary Procedures for Large Complex Disputes, of the AAA (collectively, the "RULES"). In the event of a conflict between the FAA and the Rules, the Rules shall govern. In the event of a conflict between this Article 20 and the FAA or the Rules, the provisions of this Article 20 shall govern. A court of competent jurisdiction, upon application from any party to the Dispute, may relieve the parties of their duty to arbitrate Disputes in whole or in part, or may stay any arbitration hereunder in whole or in part, if ongoing litigation between one or more of the parties and a third party (or parties) involves issues of fact or law common -61- 69 with those subject to arbitration hereunder and there exists the possibility of inconsistent judgments if such relief is not granted. Each party involved in a Dispute also reserves the right to file with a court of competent jurisdiction an application for temporary or preliminary injunctive relief, a protective order or other appropriate provisional remedy on grounds that (a) the arbitration award to which the applicant may be entitled may be rendered ineffectual in the absence of such relief; or (b) in the event of a breach or threatened breach of Article 18 hereof or the Confidentiality Agreements. 20.3.1 VENUE. The venue for such arbitration proceeding will be San Jose, California. 20.3.2 SELECTION OF ARBITRATOR AND DETERMINATION OF CONTROVERSIES. 20.3.2.1 Any Dispute subject to arbitration shall be submitted to a single neutral arbitrator, who, unless otherwise agreed by all parties involved in the Dispute, shall be a retired judge or other lawyer who is a member of the arbitration panel of the Judicial Arbitration and Mediation Service ("JAMS") or the national panel of arbitrators of the AAA and who has substantial experience in the area of the Dispute. The parties involved in the 'Dispute shall confer concerning the selection of the AAA or JAMS with the objective of selecting one or the other within thirty (30) days of the conclusion of the Mediation; provided, however, that if all parties to the Dispute do not agree on one or the other within such thirty (30) day period, the Dispute initially will be submitted simultaneously to both the AAA and JAMS for the sole purpose of picking the arbitrator. If the parties to the Dispute select the arbitrator from the JAMS panel, then the term "RULES" as used herein shall mean the then-prevailing JAMS rules. The AAA (or JAMS, as the case may be) simultaneously shall submit to each party involved in the Dispute an identical list of five proposed qualified arbitrators drawn from the applicable panel of commercial arbitrators. If the parties involved in the Dispute are unable to agree upon an arbitrator within thirty (30) days from the date that the AAA (or JAMS, as the case may be) submits such list to the parties involved in the Dispute, then the AAA (or JAMS, as the case may be) shall simultaneously submit to each party involved in the Dispute a second identical list of five additional proposed qualified arbitrators drawn from the applicable panel of commercial arbitrators. If for any reason, the appointment of an arbitrator cannot be made from either list, the AAA (or JAMS, as the case may be) may make the appointment from among other qualified members of the panel without the submission of additional lists to the parties involved in the Dispute. If the Dispute is initially submitted to both the AAA and JAMS for the purpose of picking the arbitrator, then both the AAA and JAMS simultaneously shall submit to each party lists of five proposed qualified arbitrators drawn from the applicable panel (with each party receiving the identical list from AAA and the identical list from JAMS), and if the parties are unable to agree upon an arbitrator within thirty (30) days from the date that both the AAA and JAMS submit the first such lists to each party, then the AAA and JAMS simultaneously shall submit to each party second lists of five additional proposed qualified arbitrators (with each party receiving an identical second list from AAA and an identical second list from JAMS). If the parties for any reason are unable to select an arbitrator from the first and second lists submitted by the AAA and JAMS, then a majority of the parties shall select to arbitrate with either the -62- 70 AAA or JAMS, and the arbitration organization so selected shall make the appointment from among other qualified members of the arbitration panel of that organization without the submission of additional lists to the parties. Where the parties have initially submitted the Dispute to both the AAA and JAMS, then once an arbitrator has been appointed, the arbitration proceeding will be terminated with the arbitration organization that has not been selected and the parties shall equally share the costs and fees of the arbitration organization so terminated. If for any reason the parties to the Dispute have not selected an arbitrator within ninety (90) days of the conclusion of the Mediation, then the arbitration shall be conducted with the AAA. No matter how selected, the arbitrator shall have no prior or existing affiliation or relationship with any party involved in the Dispute or its counsel, and shall sign an oath of impartiality upon appointment. 20.3.2.2 The parties involved in the Dispute shall be entitled to obtain pre-hearing discovery through depositions and requests for the inspection and copying of documents and other items upon reasonable notice and to obtain the issuance of a subpoena duces tecum therefor in accordance with applicable law, including without limitation 9 U.S.C. Section 7 and (notwithstanding Section 1297.17 of the California Code of Civil Procedure) Section 1283.05 of the California Code of Civil Procedure; provided that depositions shall not be taken unless leave to do so is first granted by the arbitrator. As between the parties involved in the Dispute, the arbitrator shall have the power to enforce the rights, remedies, procedures, duties, liabilities and obligations of discovery by the imposition of the same terms, conditions, consequences, sanctions and penalties as may be imposed in like circumstances in a civil action by a U.S. Federal court. 20.3.3 ARBITRATION AWARD AND JUDICIAL REVIEW. The arbitrator, in deciding any Dispute, shall base his or her decision on the record and in accordance with this Agreement and applicable law. In no event shall the arbitrator make any ruling, finding or award that does not conform to the terms and conditions of this Agreement, is not supported by the weight of the evidence, or is contrary to statute, administrative regulations or established judicial precedents. The arbitration award shall be a factually detailed, reasoned opinion stating the arbitrator's findings of fact and conclusions of law. Unless the arbitrator for good cause determines otherwise, the final award shall include attorneys' fees, costs and expenses of the prevailing party, including expert and non-expert witness fees and the prevailing party's share of the administrative fee and the arbitrator's fees and expenses, if any. Notwithstanding any other provisions of this Agreement, the arbitrator shall have no jurisdiction to award damages in contravention of Article 21 hereof. The arbitration award shall be subject to judicial review in accordance with 9 U.S.C. Sections 10-12; provided, however, that the arbitration award shall also be vacated to the extent that the arbitrator exceeds his or her authority as set forth in this Section 20.3.3, and, on balance, the party seeking vacation of the award has been materially and adversely affected thereby. Judgment may be entered on the award by the United States District Court in accordance with 9 U.S.C. Section 9. 20.3.4 DERIVATIVE ACTION. Pursuant to Section 20.3, a Member may initiate and pursue in the right of the Company any Dispute arising out of or relating to -63- 71 a transaction which is the subject matter of Section 2.10.2 or Section 3.6.1. The parties to any such Dispute shall first attempt to resolve the Dispute pursuant to Section 20.1 or 20.2. ARTICLE 21 LIMITATION ON DAMAGES; CONTRACTUAL LIMITATIONS PERIOD 21.1 LIMITATION ON DAMAGES. 21.1.1 WITH THE EXCEPTION OF ANY LOSS, LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO DISCLOSURE OF CONFIDENTIAL INFORMATION IN VIOLATION OF ARTICLE 18, NO MEMBER SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSS OR DAMAGE (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS OR LOSS OF USE) SUFFERED BY ANY OTHER MEMBER ARISING FROM OR RELATING TO A MEMBER'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER A COVENANT, WARRANTY, REPRESENTATION, TERM OR CONDITION HEREOF. EXCEPT AS SPECIFICALLY PROVIDED IN THE PRECEDING SENTENCE, EACH MEMBER WAIVES AND RELINQUISHES CLAIMS FOR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES. NOTWITHSTANDING SUCH WAIVER AND RELINQUISHMENT, WITH RESPECT TO ANY LOSS, LIABILITY, DAMAGE OR OBLIGATION ARISING OUT OF OR RELATING TO DISCLOSURE OF CONFIDENTIAL INFORMATION IN VIOLATION OF ARTICLE 18, A MEMBER SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGE (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS OR LOSS OF USE) SUFFERED BY ANY OTHER MEMBER ARISING FROM OR RELATING TO A MEMBER'S PERFORMANCE, NON-PERFORMANCE, BREACH OF OR DEFAULT UNDER SAID ARTICLE 18. 21.1.2 NO MEMBER SHALL HAVE THE RIGHT TO RECOVER PUNITIVE DAMAGES FROM THE OTHER MEMBER, AND EACH MEMBER HEREBY WAIVES AND RELINQUISHES ANY AND ALL PUNITIVE DAMAGE CLAIMS. 21.1.3 THE LIMITATIONS ON LIABILITY AND DAMAGES SET FORTH IN SECTIONS 21.1.1 AND 21.1.2 APPLY TO ALL CAUSES OF ACTION THAT MAY BE ASSERTED HEREUNDER, WHETHER SOUNDING IN BREACH OF CONTRACT, BREACH OF WARRANTY, TORT, PRODUCT LIABILITY, NEGLIGENCE OR OTHERWISE. 21.2 CONTRACTUAL LIMITATIONS PERIOD. Any arbitration, litigation, judicial reference or other legal proceeding involving the parties shall be commenced within two (2) years after the accrual of the cause of action, except for arbitration, litigation, judicial reference or other legal proceedings in respect to claims for indemnification under the provisions of this Agreement, which indemnification claims shall be commenced within the statutory limitations period provided by applicable law. -64- 72 ARTICLE 22 FORCE MAJEURE 22.1 FORCE MAJEURE. Subject to the limitations set forth in Section 22.4, should any Member be prevented from performing such Member's contractual obligations under this Agreement due to the cause or causes of Force Majeure, that Member shall not be liable to any other Member for any delay or failure of performance caused by any Force Majeure events; nor shall that Member be deemed to have committed an Event of Default hereunder. Notwithstanding the foregoing, a Force Majeure event shall not excuse a Member's obligation to pay money. However, a monetary obligation shall be suspended until cessation of such Force Majeure event if, and only if, the Force Majeure event actually and directly renders physically impossible a Member's payment of money due under this Agreement. 22.2 NOTIFICATION. The Member prevented or delayed by a Force Majeure event in the performance of any obligation hereunder shall promptly notify the other Members of the occurrence of any Force Majeure event in writing by cable, telex or telecopier. 22.3 RESPONSE TO FORCE MAJEURE. Should the delay caused by any events of Force Majeure continue for more than ninety (90) days, the Members shall settle all questions of further performance of this Agreement through good faith negotiations as soon as possible with the objective of restructuring the relationship among them such that the effects of such events of Force Majeure are minimized. If the Members do not agree in writing on a mutually acceptable solution within six (6) months of a Member's request for such negotiations, the Board of Directors shall have the authority to deem the Member subject to the Force Majeure event to have committed an Event of Default at which time, the Member shall become a Terminated Member, without necessity for a vote of the Members, and, without limitation, shall be subject to the provisions of Sections 10.3 through 10.7, inclusive. 22.4 LIMITATIONS ON APPLICABILITY OF FORCE MAJEURE. This Article 22 shall be void and inapplicable to any Member (i) if such Member fails to use reasonable diligence to remedy any Force Majeure event that prevents or delays that Member's performance hereunder by continuously pursuing such actions as that Member reasonably can take under the circumstances; and (ii) in the event of a strike, lockout or other labor disruption, if the Member is found by the National Labor Relations Board or other governmental agency having jurisdiction to have caused such strike, lockout or labor disruption or if such Member refuses to enter into bargaining with respect to such strike, lockout or labor disruption. ARTICLE 23 GENERAL PROVISIONS 23.1 SEVERABILITY. If any provision of this Agreement is, or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, such provision shall be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the Members, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. -65- 73 23.2 NEUTRAL INTERPRETATION; WAIVER. Each party hereto has received independent legal advice from its attorneys with respect to the advisability of executing this Agreement and the meaning of the provisions hereof. Each party hereto waives any real, apparent, possible or inchoate conflict in connection with, arising out of or resulting from the representation of any Member and its Affiliates, and the Company by the same law firm. The provisions of this Agreement shall be construed as to their fair meaning, and not for or against any party hereto based upon any attribution to such party as the source of the language in question. 23.3 NOTICES. Any notices, demands, requests, waivers or other communications required or permitted to be given to a party hereunder shall be in writing in the English language and shall be delivered or sent to such party at its address set forth on Exhibit A hereto, or such other address as such party may hereafter specify, and shall be deemed given (i) when personally delivered to such party, (ii) when transmitted by facsimile and receipt of such transmission is confirmed by facsimile, (iii) 24 hours after dispatch via an established overnight courier service, or (iv) three (3) days after mailing by prepaid first class, certified mail with return receipt requested. 23.4 TIME OF THE ESSENCE. Time is of the essence with respect to each provision of this Agreement. 23.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, United States of America, without regard to conflicts of laws principles. 23.6 ENTIRE AGREEMENT. Except as provided in Section 23.23, this Agreement, the Ancillary Agreements, the Incentive Plans and that certain letter from TSMC Taiwan to the Initial Members dated as of the Effective Date (the "LETTER OF ASSURANCES") constitute and contain the entire agreement of the Members, and supersede any and all prior or contemporaneous negotiation, correspondence, understandings, representations, warranties and agreements between the Members, written or oral, respecting the subject matter hereof or thereof. Other than as contained herein and as provided in Section 23.23, in the Ancillary Agreements or in the Letter of Assurances, no representation, warranty, statement, or condition is binding on the parties hereto or thereto, or has any force or effect whatsoever. 23.7 WAIVER. No waiver of any provision of this Agreement shall be effective unless and until made in writing and signed by each party hereto. No waiver, forbearance or failure by any party hereto of its right to enforce any provision of this Agreement shall constitute a waiver or estoppel of such party's right to enforce any other provision of this Agreement or a continuing waiver by such party of compliance with any provision. 23.8 COOPERATION. Each party hereto shall cooperate with each other party hereto and shall take such further action and shall execute and deliver such further documents as may be necessary or desirable in order to carry out the provisions and purposes of this -66- 74 Agreement. Each party, recognizing that there may be drafting errors in and among this Agreement, the Ancillary Agreements and the Letter of Assurances, agrees that it will cooperate with each other party to exercise good faith efforts to correct any such drafting errors. 23.9 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 23.10 EXHIBITS AND SCHEDULES. All Exhibits and Schedules to which reference is made in this Agreement are deemed to be incorporated by reference into this Agreement, whether or not actually attached hereto. 23.11 ATTORNEYS' FEES. In the event of any arbitration, mediation, litigation or other proceeding involving the parties to this Agreement to enforce any provision of this Agreement, to enforce any remedy available upon default under this Agreement, or seeking a declaration of the rights of a party under this Agreement, the prevailing party shall be entitled to recover from the other such attorneys' fees and costs as may be reasonably incurred, including the cost of reasonable investigation, preparation and professional or expert consultation incurred by reason of such litigation. Notwithstanding the foregoing, (a) in an arbitration proceeding the award of attorneys' fees shall be governed by the provisions of Section 20.3.3, and (b) in a mediation each party shall pay its own attorneys' fees in accordance with Section 20.2. 23.12 DATE OF PERFORMANCE. If the date on which any performance required hereunder is other than a Business Day, then such performance shall be required as of the next following Business Day. 23.13 SURVIVAL. Following early termination or the elapse or expiration of this Agreement, the provisions of Article 1, Section 7.2, Article 9, Article 14, Article 15, Article 16, Article 20, Article 21 and Article 23 shall survive and remain in full force and effect in accordance with their terms. 23.14 SURVIVAL OF RIGHTS. This Agreement shall be binding upon, and, as to permitted or accepted successors, transferees and assigns, inure to the benefit of the Members and the Company and their respective heirs, legatees, legal representatives, successors, transferees and assigns, in all cases whether by the laws of descent and distribution, merger, reverse merger, consolidation, sale of assets, other sale, operation of law or otherwise. 23.15 THIRD-PARTY BENEFICIARIES. There are no third-party beneficiaries of this Agreement except Indemnitees. 23.16 PARTITION. Each Member hereby irrevocably waives any and all rights, duties, obligations and benefits with respect to any action for partition of Company Property or to compel any sale or appraisal thereof or of any deceased Member's interest therein. Further, all rights, duties, benefits and obligations including inventory and appraisal of the Company assets or sale of a deceased Member's interest therein, provision for which is made in the law of -67- 75 Delaware, or on account of the operation of any other role or law of any other jurisdiction to compel any sale or appraisal of Company assets or sale or appraisal of a deceased Member's interest therein, are hereby irrevocably waived and dispensed with. The Interest of a deceased Member shall be subject to the provisions of this Agreement. 23.17 GOVERNING LANGUAGE OF AGREEMENT. This Agreement is in the English language only, which language shall be controlling in all respects, and all other versions thereof in any other language shall be for accommodation only and shall not be binding upon each party hereto. All communications to be made or given pursuant to this Agreement shall be in the English language. 23.18 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Each party hereto irrevocably Consents to the jurisdiction of the courts located in San Jose, California, agrees, subject to the provisions of Article 20 and Article 21, that any action, suit or proceeding by or among the Members (or any of them) or the Company and any Member may be brought in any such court sitting in San Jose, California and waives any objection which the Member may now or hereafter have concerning jurisdiction and venue, whether based on considerations of personal jurisdiction, forum non conveniens or on any other ground. Each party hereto hereby irrevocably designates, appoints and empowers the Secretary of State of California to receive for and on behalf of such party service of process in the State of California and further irrevocably consents to the service of process outside of the territorial jurisdiction of said courts by mailing copies thereof by registered or certified United States mail, postage prepaid, to such party's last known address- as shown in the records of the Company with the same effect as if such party were a resident of the State of California and had been lawfully served in such state. Nothing in this Agreement shall affect the right to service of process in any other manner permitted by law. Any process served on the California Secretary of State in accordance with the preceding sentence shall also be noticed to the served party's last known address established in accordance with Section 23.3, in a manner permitted by such Section 23.3. Each party hereto further agrees that final judgment against it in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction within or outside the State of California by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and the amount of such judgment. 23.19 LIQUIDATED DAMAGES. All provisions of this Agreement, including without limitation those relating to the valuation of a Member's Interest or adjustments in Percentage Interests, have been negotiated by the parties hereto at arm's-length, and each party affirms that all such provisions are fair, just and equitable. Without limiting the generality of the foregoing, the provisions of Sections 3.4, 3.6.4, 8.1.4, 8.2.4, 10.3, 10.5 and 22.3 reflect the parties' best estimates of liquidated compensatory damages and do not constitute a penalty, and no party shall make any claim or allegation to the contrary. 23.20 AUTHORIZED REPRESENTATIVES. Until changed by a party hereto by written notice to each of the other parties, the following individuals, and only such individuals, are authorized to act on behalf of the party so designating them as its authorized representative -68- 76 with full power and authority to speak for and bind such Member in connection with all matters arising under this Agreement or relating to the business of the Company: TSMC ---------------------------------- ALTERA Rodney Smith ---------------------------------- ADI Rob Marshall ---------------------------------- ISSI Jimmy Lee ---------------------------------- COMPANY Kenneth Smith ---------------------------------- The Third Party Investors pursuant to a Power of Attorney and Proxy contained in Subscription Agreements dated as of June 5, 1996 have designated Donald W. Brooks as their attorney-in-fact and authorized representative, who shall be their only representative authorized to act on their behalf, with full power and authority to vote, speak for and bind such Third Party Investors in connection with all matters arising under this Agreement or relating to the business of the Company. 23.21 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE. The parties hereto shall have all rights, remedies and recourse granted in this Agreement, in any other agreements entered into between the parties hereto and available at law or in equity, and except as otherwise provided in this Agreement or the Ancillary Agreements the same (i) shall be cumulative and concurrent; (ii) may be pursued separately, successively or concurrently; (iii) may be exercised as often as occasion therefore shall arise, it being agreed that the exercise or failure to exercise any right, remedy or recourse shall in no event be construed as a waiver or release thereof; and (iv) are intended to be, and shall be, non-exclusive. 23.22 WAIVER OF CONFLICT OF INTEREST. EACH OF THE MEMBERS HAS BEEN REPRESENTED BY SEPARATE COUNSEL IN CONNECTION WITH THIS AGREEMENT AND THE ANCILLARY AGREEMENTS. SUCH COUNSEL HAS NOT REPRESENTED THE COMPANY PRIOR TO THE EFFECTIVE DATE. THE ATTORNEYS, ACCOUNTANTS AND OTHER EXPERTS WHO HAVE PERFORMED SERVICES FOR THE MEMBERS IN THE PAST MAY PERFORM SERVICES FOR THE COMPANY AND MAY CONTINUE TO ALSO PERFORM SERVICES FOR THE SEPARATE MEMBERS IN THE FUTURE. TO THE EXTENT THAT SUCH DUAL REPRESENTATION CONSTITUTES A CONFLICT OF INTEREST, THE COMPANY AND THE MEMBERS HEREBY EXPRESSLY WAIVE ANY SUCH CONFLICT OF INTEREST WITH RESPECT TO ANY SUCH DUAL REPRESENTATION RELATIVE TO THE NEGOTIATION AND EXECUTION OF THIS AGREEMENT AND THE ANCILLARY AGREEMENTS. -69- 77 23.23 AMENDMENT AND RESTATEMENT. This Agreement amends, restates and supersedes the Original Agreement. The operative effect of this Agreement and the rights and obligations of each Member hereunder relate back to the Effective Date. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] -70- 78 [SIGNATURE PAGE TO SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. TSMC DEVELOPMENT, INC. By /s/ MORRIS CHANG ------------------------------------- Name Morris Chang ----------------------------------- Its ------------------------------------ ANALOG DEVICES, INC. By /s/ JOSEPH E. MCDONOUGH ------------------------------------- Name Joseph E. McDonough ----------------------------------- Its Vice President, Finance & CFO ------------------------------------ ALTERA CORPORATION By /s/ RODNEY SMITH ------------------------------------- Name Rodney Smith ----------------------------------- Its President & CEO ------------------------------------ INTEGRATED SILICON SOLUTIONS, INC. By /s/ JIMMY LEE ------------------------------------- Name Jimmy Lee ----------------------------------- Its President & CEO ------------------------------------ -71- 79 EXHIBIT G The allocation provisions below are included in this agreement to satisfy certain provisions of the Treasury Regulations issued pursuant to Section 704 of the Internal Revenue Code. Notwithstanding any other provision of this Agreement, these provisions shall be taken into account in allocating items of income, gain, loss, and deduction among the Members so that, to the extent possible, the net amount of such allocations of any items to each Member shall be equal to the net amount that would have been allocated to each such Member if these provisions had not been applicable. To the extent that allocations taking into account the provisions below vary from those which would have occurred in the absence of such provisions, items of income, gain and loss shall be allocated to the Preferred Members in later years to minimize or eliminate the effect of such provisions as the Preferred Members shall deem appropriate. Income Offset. No loss shall be allocated to a Member if such allocation causes or increases a deficit balance in such Member's Capital Account. In determining the extent to which the previous sentence is satisfied, each Member's Capital Account also shall be adjusted, solely for purposes of this requirement, to take into account the items and adjustments required by Treas. Reg. Section 1.704-1(b)(2)(ii)(d) as modified by Treas. Reg. Section 1.704-2(g)(1) and 1.704-2(i)(5). Allocations pursuant to this provision shall be offset by other allocations (consistent with this Agreement) as soon as possible so that net allocations to the Members of losses shall be the same as if no allocations had been made pursuant to this Section. This provision is intended to comply with the requirements of Treas. Reg. Section 1.704-1 (b)(2)(ii)(d)-and shall be interpreted in accordance therewith. Minimum Gain Chargeback. If for any Fiscal Year there is a net decrease in Company minimum gain as defined in Treas. Reg. Section 1.704-1(b)(2), each Member shall be specially allocated items of Company gross income and gross gain for such year (and, if necessary, for succeeding years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g), except as otherwise provided in Regulations Section 1.704-2(f)(2), 1.704-2(f)(3), 1.704-(2)(f)(4), and 1.704-2(0(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This provision is intended to comply with the minimum gain chargeback requirement of Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. Member Minimum Gain Chargeback. If during a fiscal year there is a net decrease in member nonrecourse debt minimum gain, each Member who has a share of that member nonrecourse debt minimum gain (determined in accordance with Regulations Section 1.704-2(i)(5)) as of the beginning of such year shall be specially allocated items of Company income and gain for such year (and, if necessary, for succeeding years) in an amount equal to such Member's share of the 80 net decrease in member nonrecourse debt minimum gain, determined in accordance with Regulations Section 1.704-2(i)(4) (and taking into account the exceptions provided therein). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This provision is intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. Member Nonrecourse Deductions. Any member nonrecourse deductions, determined in accordance with Treas. Reg. Section 1.704-2(i)(1) for any fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the member nonrecourse debt to which such member nonrecourse deductions are attributable in accordance with Regulations Section 1.704-2(i). Deemed Capital Account Balance. Solely for purposes of Section 5.1.1.1 and Section 5.1.2.2, the Capital Account balance of each Member shall be determined by increasing the amount in such Member's Capital Account by the amount such Member is deemed obligated to restore to the Company under Treasury Regulation Section 1.704-1(b)(2)(ii)(d) as a result of the application of Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5). -2- EX-13.1 5 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 ABOUT YOUR INVESTMENT Stock Ownership Profile The Company estimates that at December 31, 1997, there were more than 35,000 holders of Altera stock. Stock Price Altera's initial public offering took place on March 31, 1988. The Company's price-to-earnings ratio at each year-end for the last five years, was as follows:
1993 1994 1995 1996 1997 - ---- ---- ---- ---- ---- 32.7 26.2 26.2 29.6 21.4
Excludes R&D in-process write-off associated with the acquisition of Intel's programmable logic business in 1994 and the cumulative effect of change in accounting principle in 1997. Trading Volume The average trading volume in the Company's stock decreased 36% in 1997 over 1996, as measured by Nasdaq. Trading volume in 1997 averaged 2.8 million shares per day, compared to 4.4 million per day in 1996, and 3.4 million in 1995, retroactively adjusted for 2-for-1 splits of the Company's common stock in the second quarter of 1995 and the fourth quarter of 1996. Officers, Directors Institutional Investors 80% & Employees 5% Individuals 15% [Pie Chart] Estimated Stock Ownership [Graph] Comparative Stock Performance [Bar Graph] Average Daily Volume 2 SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Five-Year Summary STATEMENTS OF OPERATIONS DATA: - ----------------------------------------------------------------------------------------------------------------------- Sales $631,114 $497,306 $401,598 $198,796 $140,279 Cost of sales 236,958 191,958 158,808 77,672 58,470 -------------------------------------------------------------------- Gross profit 394,156 305,348 242,790 121,124 81,809 Research and development 54,417 49,513 33,849 45,994 16,847 Selling, general, and administrative 112,784 87,742 74,658 45,771 35,202 -------------------------------------------------------------------- Income from operations $226,955 $168,093 $134,283 $ 29,359 $ 29,760 ==================================================================== Income before income taxes and cumulative effect of change in accounting principle $229,571 $169,137 $137,891 $ 31,496 $ 31,392 ==================================================================== Income before cumulative effect of change in accounting principle $151,517 $109,135 $ 86,871 $ 14,608 $ 21,195 Cumulative effect of change in accounting principle 18,064 -- -- -- -- -------------------------------------------------------------------- Net income $133,453 $109,135 $ 86,871 $ 14,608 $ 21,195 ==================================================================== Income per share before cumulative effect of change in accounting principle: Basic $ 1.71 $ 1.25 $ 1.00 $ 0.18 $ 0.26 Diluted 1.55 1.16 0.95 0.17 0.25 Net income per share: Basic $ 1.51 $ 1.25 $ 1.00 $ 0.18 $ 0.26 Diluted 1.37 1.16 0.95 0.17 0.25 Shares used in computing income per share: Basic 88,525 87,406 86,625 83,253 80,967 Diluted 102,616 100,813 95,931 86,490 83,983 The following are pro forma amounts with the change in accounting principle related to sales recognition applied retroactively to years prior to 1997: Sales $631,114 $497,006 $400,162 $198,156 $140,813 Gross profit 394,156 305,181 241,864 120,705 82,149 Income from operations 226,955 167,926 133,357 28,940 30,100 Net income 151,517 109,090 86,287 14,344 21,424 Net income per share: Basic $ 1.71 $ 1.25 $ 1.00 $ 0.17 $ 0.26 Diluted 1.55 1.16 0.95 0.17 0.26 BALANCE SHEET DATA: - ----------------------------------------------------------------------------------------------------------------------- Working capital $430,371 $295,020 $346,242 $121,479 $ 94,895 Total assets 952,518 778,212 715,554 213,882 155,757 Long-term debt 230,000 230,000 288,600 -- -- Stockholders' equity 536,687 370,245 255,189 158,019 121,699 Book value per share 6.02 4.23 2.93 1.84 1.49
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Sales 1997 sales of $631.1 million represents a 27% increase from 1996 sales of $497.3 million and a 57% increase from 1995 sales of $401.6 million. Two-thirds of the increase from 1996 was the result of increased sales of the Company's newer products, principally the FLEX 10K, MAX 7000S, and MAX 9000 product families. Sales of the Company's mainstream products, the MAX 7000 and FLEX 8000 families, accounted for the balance of the year over year increase. The increase in 1996 sales, as compared to 1995 sales, was driven by higher unit sales of the Company's MAX 7000 product family. Over the last two years, sales of the Company's mature products have declined. Sales in North America increased 32% from 1996 to 1997 as compared to the overall sales increase of 27%. North America accounted for 55% of total sales for 1997 as compared to 53% in 1996. Sales growth in Europe and Japan was 22% and 23%, respectively, while sales in Asia Pacific grew more slowly at 13%. In the prior year, sales growth was relatively consistent in each of the different geographic regions. The increase in sales of the FLEX 10K family was the single largest contributor to sales growth in 1997. The FLEX 10K family was first introduced in 1995 and has been one of the fastest growing product families ever introduced by the Company. The FLEX 10K family of devices presently offers densities up to 250,000 logic gates and additionally, has embedded array blocks that provide on-chip memory capability. The MAX 7000 product family was again the highest selling of any of the Company's families -- accounting for over 44% of the Company's sales in 1997. Since its introduction in 1992, the MAX 7000 family has become an industry standard in programmable logic. However, this family is approaching maturity in its product life cycle. The annual rate of sales growth of the MAX 7000 family declined from the prior year and was lower than the aggregate growth rate of the Company. Sales of the MAX 7000 family declined through the second half of the year from their peak in the second quarter. Management expects sales for the MAX 7000 family to remain flat or decline in 1998 and, given the high percentage base of revenues of this family, this will adversely impact the Company's overall growth rate in 1998 and future years. The Company's MAX 7000S family, introduced in 1996, is an enhanced version of the MAX 7000 family that offers more functionality at lower prices. Sales of the MAX 7000S family have grown rapidly throughout 1997, partially offsetting the decline in sales of the MAX 7000 family. However, sales of the MAX 7000S were a relatively small portion of total sales in 1997, and there can be no assurance that any future growth in sales of the MAX 7000S family will fully or partially offset the expected decline in sales of the MAX 7000 family. The end markets served by the Company in 1997 remained consistent with prior years. Communications accounted for 56% of sales, computing accounted for 23% of sales, industrial applications were 12% of sales and the balance was spread over several end markets. The communications segment accounted for the largest dollar increase from 1996 to 1997, comprising nearly half of the $133.8 million increase in total sales. Expansion of the communications equipment industry, both telecommunications and networking, has been the most important driver of the Company's growth for the last several years. The Company's future growth rate will depend on continued expansion of these end markets as well as the Company's ability to maintain or increase market share. However, in 1997, it was the computing segment that grew the fastest in percentage terms, increasing more than 50% over the prior year. Sales in the computing segment grew rapidly in the first half of 1997 and in the second quarter accounted for 26% of total sales. However, sales in this segment declined during the second half of 1997 and by the fourth quarter accounted for less than 20% of total sales. Both the rapid increase and the subsequent decline of sales in the computing segment relate to a limited number of projects with certain customers; management does not expect similar programs to occur in this segment in 1998. [BAR GRAPH] [BAR GRAPH] SALES UNITS SOLD (DOLLARS IN MILLIONS) (IN MILLIONS) 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Major items in the statements of operations, expressed as a percentage of sales, were as follows: YEAR ENDED DECEMBER 31
1997 1996 1995 - ----------------------------------------------------------------- Cost of sales 38% 39% 40% Gross margin 62% 61% 60% Research and development 9% 10% 8% Selling, general, and administrative 18% 17% 19% Operating income 36% 34% 33% Interest expense 2% 3% 2% Interest and other income, net 2% 3% 3% Provision for income taxes 12% 12% 13% Cumulative effect of change in accounting principle 3% -- -- Net income 21% 22% 22% - -----------------------------------------------------------------
GROSS MARGIN Over the last three years, gross margin as a percentage of sales has increased from 60.5% in 1995, to 61.4% in 1996 and to 62.4% in 1997. In 1996, rapid reductions in product cost resulting from declining wafer prices and the migration of products to more advanced processes were mostly offset by multiple price reductions on many of the Company's products, including the MAX 7000 and FLEX 8000 families. In 1997, the cost and pricing environments were more stable. The cost reductions in 1997 were less dramatic and resulted primarily from the introduction of new families using improved, lower cost manufacturing processes. The new products manufactured with these processes are sold at commensurately lower prices. The margin improvement experienced in 1997 resulted from continued incremental cost reductions which were not fully offset by price reductions. RESEARCH AND DEVELOPMENT Over the course of the last two years, the Company has introduced the FLEX 10KA, MAX 7000S, and FLEX 6000 families. The FLEX 10K and FLEX 10KA families are high density SRAM-based products that also offer on-chip RAM. The FLEX 6000 family, introduced in 1997, was designed to offer programmability at a low price point and offers price parity with gate array products at densities of 24,000 gates and below. The MAX 7000S family extends the MAX 7000 family with improved performance and additional features such as in-system programmability or ISP. As a percent of sales, research and development expenses were 8.4% in 1995, 10.0% in 1996, and 8.6% in 1997. Expenses were at a relative high in 1996 due to prototype and pre-production expenses associated with the MAX 7000S, MAX 9000, and FLEX 10K product families. SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative expenses increased 29% from 1996 to 1997 and increased slightly as a percentage of sales, rising to 17.9% in 1997 from 17.6% in 1996. Selling, general, and administrative expenses include commission and incentive expenses, advertising and promotional expenditures, legal expenses, and salary expenses related to field sales, marketing, and administrative personnel. The increased expenditures over the last three years are mainly driven by higher marketing and administrative headcount, new and expanded international sales offices, and higher commissions on the increased sales volumes. In 1997, the Company established its international sales headquarters in Hong Kong, and deployed its international order entry and customer service functions to Hong Kong and the United Kingdom. Also in 1997, the Company replaced its main business information systems with a newer and more capable enterprise-wide management information system running on a [BAR GRAPH] [BAR GRAPH] GROSS MARGIN RESEARCH & DEVELOPMENT (PERCENTAGE OF SALES) (DOLLARS IN MILLIONS) 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS distributed computing platform. This new system was activated in January 1998. The Company intends to add more functionality and enhanced features to the new system throughout the course of 1998 and in future years. The Company added significant personnel to install and support this and ancillary systems in late 1996 and throughout 1997. Altera has over twenty field sales offices and markets its products through distributors, representatives, and its own direct sales force. Approximately 90% of the Company's sales are made through distributors. The Company will continue to increase sales resources in markets and regions where it anticipates increased local resources will increase sales, enhance competitive position, or improve customer service. OPERATING INCOME Operating income was $134.3 million in 1995, $168.1 million in 1996, and $227.0 million in 1997. As a percent of sales, operating income has increased from 33.4% in 1995 to 33.8% in 1996, and 36.0% in 1997. The increase in operating income is primarily the result of the improvements in gross margin over the three year period and to a lesser degree the general trend toward reduced operating expenses (selling, general, and administrative plus research and development). INTEREST EXPENSE Interest expense decreased to $11.7 million in 1997 from $12.3 million in 1996. Interest expense relates to the convertible subordinated notes issued in June 1995 and includes interest expense and amortization, partially offset by capitalized interest related to the construction of the new headquarters. The decrease in interest expense from 1996 to 1997 is primarily attributable to higher capitalized interest in 1997. The Company does not expect to capitalize any interest in 1998. INTEREST AND OTHER INCOME, NET Interest and other income increased to $14.3 million in 1997 from $13.3 million in 1996 and $11.0 million in 1995. The increase over the three year period resulted from increased cash balances available for investment throughout the year. TAXES Altera's effective tax rate was 34% in 1997 compared to 35% in 1996 and 37% in 1995. The reduction from 1996 to 1997 was the result of an increase in research and development tax credits and a change in the geographic mix of income. The reduction in the rate from 1995 to 1996 was due to an increased amount of earned interest income from tax-exempt investments and research and development tax credits. ACCOUNTING CHANGE In October 1997, the Company changed its accounting method for recognizing revenue on sales to distributors with an effective date of January 1, 1997. The Company previously recognized revenue upon shipment to distributors net of appropriate reserves for sales returns and allowances. Following the accounting change, revenue recognition on shipments to distributors is deferred until the products are resold to the end customers. The Company believes that deferral of revenue on distributor sales and related gross margins until the product is shipped by the distributors results in a more meaningful measurement of results of operations and is more consistent with industry practice and, therefore, is a preferable method of accounting. The cumulative effect in prior years of the change in accounting method was a charge of $18.1 million (net of $9.3 million of income taxes) or $0.18 per diluted share. FUTURE RESULTS Future operating results will depend on the Company's ability to develop, manufacture, and sell complicated semiconductor components and complex software that offer customers greater value than solutions offered by competing vendors. The Company's efforts in this regard may not be successful. The Company plans to sustain future growth by offering programmable chips for applications that are presently served by gate array vendors. These vendors have well-established market positions and a solution that has been proven technically feasible and economically competitive over several decades. There can be no assurance that the Company will be successful in [BAR GRAPH] SG&A (PERCENTAGE OF SALES) 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS displacing gate array vendors in the targeted applications and densities. Furthermore, other programmable logic vendors are targeting these applications and may be successful in securing market share to the exclusion of Altera. Moreover, standard cell technologies are increasingly used by the Company's customers to achieve greater integration in their systems; this may not only impede the Company's efforts to penetrate the gate array market but may also displace the Company's products in the applications that it presently serves. The Company's future growth will depend on its ability to continue to expand the programmable logic market. The Company is highly dependent upon subcontractors to manufacture silicon wafers and perform assembly, testing, and shipping services. The vast majority of the Company's products are manufactured, stored, and shipped to customers by subcontractors located in Asia, principally Japan, Taiwan, Korea, and Malaysia. Several of these countries are experiencing significant economic disruptions including volatile exchange rates, rising unemployment, insolvencies, and government fiscal austerity programs. Disruptions or adverse supply conditions arising from market conditions, political strife, labor disruptions and other factors could have adverse consequences on the Company's future results. For example, in 1997 there were production interruptions caused by fires in two Taiwanese wafer fabrication plants not utilized by Altera. Natural or man-made disasters, normal process fluctuations, and variances in manufacturing yields could have severe negative impact on the Company's operating capabilities. The Company has sought to diversify its operating risk by participating in the WaferTech joint venture to manufacture silicon wafers with other partners in Camas, Washington. The majority partner, TSMC, has never built or operated a wafer fabrication plant outside of Taiwan. Start-up or operating difficulties of WaferTech will impair the Company's operating performance and will also have negative financial ramifications as the Company will consolidate WaferTech's operating results as minority income. Also, a number of factors outside of the Company's control, including general economic conditions and cycles in world markets, exchange rate fluctuations, or a lack of growth in the Company's end markets could adversely impact future results. An important component of the Company's growth over the last several years, the networking equipment market, has demonstrated slowing growth in the last two years. Should this trend continue, the Company's growth in future years may be limited. Because of the foregoing and other factors that might affect the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors should not use historical trends to anticipate future results. In addition, the cyclical nature of the semiconductor industry and other factors have resulted in a highly volatile price of the Company's common stock. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements for periods beginning after December 15, 1997. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources including unrealized gains and losses on available-for-sale securities. Reclassification of financial statements for earlier periods for comparative purposes is required. The Company will adopt SFAS No. 130 beginning in 1998 and does not expect such adoption to have a material effect on the consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements for periods beginning after December 15, 1997. It also establishes standards for related disclosures about products and 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS services, geographic areas, and major customers. It is not expected that adoption of SFAS No. 131 will have any impact on the Company's consolidated financial statements. Liquidity and Capital Resources OPERATING ACTIVITIES During 1997, the Company generated $201.6 million in net cash from operating activities which was primarily attributable to net income of $133.5 million adjusted by non-cash items including the cumulative effect of change in accounting principle of $18.1 million, depreciation and amortization of $27.1 million, a decrease in accounts receivable and other assets of $17.8 million, and an increase in accounts payable and accrued liabilities and deferred income on sales to distributors of $41.8 million. Offsetting these were increases in deferred income taxes of $8.4 million, inventories of $23.1 million, and a decrease in income taxes payable of $5.2 million. These increases in the use of cash were primarily the result of an increase in sales volumes from 1996 to 1997. INVESTING ACTIVITIES Net cash used for investing activities in 1997 was $282.6 million. The Company made its final payment on the WaferTech joint venture of $56.2 million in November 1997. The Company completed construction of its headquarters facility and occupied the facility in June 1997. Expenditures for the facility were $44.2 million in 1997. Other capital expenditures were primarily for test equipment and for a new management information system and associated hardware and installation costs. Additionally, the Company purchased $144.7 million (net) of short-term investments. Over the last three years, excluding the headquarters facility, the Company's capital equipment purchases have been primarily for semiconductor test and design equipment, and communication and information systems software and hardware. FINANCING ACTIVITIES In 1997, financing activities generated $33.0 million through the issuance of common stock to employees through various option and employee stock purchase plans, and ancillary tax benefits. In 1996, the Company made payments of $57.1 million to TSMC as deposits for future wafer purchases. In 1997, $6.7 million of these deposits were applied to wafer purchases. In 1995, the Company raised net proceeds of $224.8 million on the sale of convertible subordinated notes. The convertible subordinated notes are due in June 2002 and bear an interest rate of 5.75%, payable semiannually. The notes are convertible at the option of the holder into shares of the Company's common stock at a price of $25.59 per share. The notes are callable by the Company no sooner than June 1998. At December 31, 1997, Altera had $377.6 million of cash, cash equivalents, and short-term investments available to finance future growth, no short-term obligations, and $230.0 million of long-term debt. Management believes that operational capital expenditures in 1998 will approximate the expenditures in 1997, less the expenditures for the headquarters facility. Altera believes the available sources of funds and cash expected to be generated from operations will be adequate to finance current operations and capital expenditures through at least 1998. MARKET RISK DISCLOSURE As of December 31, 1997, the Company's investment portfolio consisted of fixed income securities of $360.3 million (see Note 4 of Notes to the Consolidated Financial Statements). These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 1997, the decline in the fair value of the portfolio would not be material. Additionally, the Company has the ability to hold its fixed income investments until maturity and, therefore, the Company would not expect to recognize such an adverse impact in income or cash flows. The Company has international sales and facilities and is, therefore, subject to foreign currency rate exposure. To date, the exposure to the Company related to exchange rate volatility has not been significant. If the foreign currency rates fluctuate by 10% from rates at December 31, 1997, the effect on the Company's [BAR GRAPH] [BAR GRAPH] [BAR GRAPH] TOTAL ASSETS WORKING CAPITAL CAPITAL EXPENDITURES (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS) 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS financial position and results of operations would not be material. However, there can be no assurance that there will not be a material impact in the future. YEAR 2000 COMPLIANCE Most computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When a computation referencing the year 2000 is performed, these systems may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. Computations referencing the year 2000 might be invoked at any time, but are likely to begin occurring in the year 1999. The Company recently implemented new information systems which are year 2000 compliant and does not anticipate that it will incur material expenditures for the resolution of any year 2000 issues relating to either its own information systems, databases and programs, or its software products. However, the Company could be adversely impacted by year 2000 issues faced by major distributors, suppliers, customers, vendors, and financial service organizations with which the Company interacts. Management is in the process of determining the impact, if any, that third parties who are not year 2000 compliant may have on the operations of the Company. EMPLOYEES Over the course of 1997, the number of regular employees increased 18% to 1,086 at year end. Sales per employee was $630,000 in 1997, compared to $553,000 in 1996, and $519,000 in 1995. IMPACT OF CURRENCY AND INFLATION The Company purchases the majority of its materials and services in U.S. dollars, and its foreign sales are also billed in U.S. dollars. However, certain contracts for silicon wafer purchases are denominated in Japanese yen, and the volume of such contracts increased significantly in 1995 and 1996, and decreased in 1997. The appreciation of the U.S. dollar with respect to the yen had a positive impact on the Company's margin during 1996 and 1997. The declining value of the dollar with respect to the yen had an adverse impact on the Company's margin during the first six months of 1995. The Company was able to mitigate much of that impact with improved yields and efficiencies. In addition, in the third quarter of 1995, the Company purchased yen forward contracts in an amount approximately equal to its expected yen requirements for that quarter. As of December 31, 1995 and throughout 1996 and 1997, the Company had no open foreign exchange contracts for the purchase or sale of foreign currencies. In January 1998, the Company entered into a forward exchange contract to purchase Malaysian ringgit to meet a portion of its firm contractual commitments of ringgit required in 1998. Depending on market conditions, Altera may choose to hedge its currency exposure by purchasing or selling forward foreign exchange contracts. In addition, the impacts of other foreign currency exchange rate fluctuations may be material in the future as a result of increased volatility in certain foreign currencies in which the Company conducts business. The effects of inflation upon Altera's financial results have not been significant to date. [BAR GRAPH] [BAR GRAPH] [BAR GRAPH] BOOK VALUE STOCKHOLDERS' SALES PER PER SHARE EQUITY EMPLOYEE (DOLLARS) (DOLLARS IN MILLIONS) (DOLLARS IN THOUSANDS) 9 CONSOLIDATED BALANCE SHEETS
December 31 (IN THOUSANDS, EXCEPT PAR VALUE AMOUNT) 1997 1996 - -------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 22,761 $ 70,788 Short-term investments 354,808 210,062 ----------------------- Total cash, cash equivalents, and short-term investments 377,569 280,850 Accounts receivable, less allowance for doubtful accounts of $3,008 and $2,399 55,251 68,486 Inventories 98,883 75,798 Deferred income taxes 63,076 45,402 Other current assets 21,423 2,451 ----------------------- Total current assets 616,202 472,987 Property and equipment, net 152,417 89,804 Investments 179,167 206,671 Other assets 4,732 8,750 ----------------------- $952,518 $778,212 ======================= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 20,649 $ 13,279 Accrued liabilities 16,688 20,866 Accrued compensation 20,226 14,136 Deferred income on sales to distributors 128,268 68,343 Income taxes payable -- 5,183 Notes payable and short-term obligations -- 56,160 ----------------------- Total current liabilities 185,831 177,967 Convertible subordinated notes 230,000 230,000 ----------------------- Total liabilities 415,831 407,967 Commitments and contingencies Stockholders' equity: Common stock: $.001 par value; 400,000 shares authorized; 89,185 and 87,604 shares issued and outstanding 89 88 Capital in excess of par value 123,544 90,556 Retained earnings 413,054 279,601 ----------------------- Total stockholders' equity 536,687 370,245 ----------------------- $952,518 $778,212 =======================
See accompanying notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF OPERATIONS AND STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Operations Sales $ 631,114 $ 497,306 $ 401,598 Cost of sales 236,958 191,958 158,808 ------------------------------------------- Gross profit 394,156 305,348 242,790 Research and development 54,417 49,513 33,849 Selling, general, and administrative 112,784 87,742 74,658 ------------------------------------------- Income from operations 226,955 168,093 134,283 Interest expense (11,701) (12,284) (7,401) Interest and other income, net 14,317 13,328 11,009 ------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle 229,571 169,137 137,891 Provision for income taxes 78,054 60,002 51,020 ------------------------------------------- Income before cumulative effect of change in accounting principle 151,517 109,135 86,871 Cumulative effect of change in accounting principle 18,064 -- -- ------------------------------------------- Net income $ 133,453 $ 109,135 $ 86,871 =========================================== Per Share: Basic Income before cumulative effect of change in accounting principle $ 1.71 $ 1.25 $ 1.00 Cumulative effect of change in accounting principle (.20) -- -- ------------------------------------------- Net income $ 1.51 $ 1.25 $ 1.00 =========================================== Diluted Income before cumulative effect of change in accounting principle $ 1.55 $ 1.16 $ 0.95 Cumulative effect of change in accounting principle (.18) -- -- ------------------------------------------- Net income $ 1.37 $ 1.16 $ 0.95 =========================================== Shares used in computing income per share: Basic 88,525 87,406 86,625 Diluted 102,616 100,813 95,931 -------------------------------------------
Common Stock and Capital in (IN THOUSANDS) Excess of Par Value Retained Earnings - --------------------------------------------------------------------------------------- Stockholders' Equity Balance, December 31, 1994 $ 73,146 $ 84,873 Tax benefit resulting from employee stock transactions 5,269 Issuance of 1,165 shares 5,030 Net income 86,871 ---------------------------------- Balance, December 31, 1995 83,445 171,744 Tax benefit resulting from employee stock transactions 4,492 Issuance of 787 shares 5,760 Repurchase of 300 shares (3,053) (1,278) Net income 109,135 ---------------------------------- Balance, December 31, 1996 90,644 279,601 Tax benefit resulting from employee stock transactions 20,044 Issuance of 1,581 shares 12,945 Net income 133,453 ---------------------------------- Balance, December 31, 1997 $ 123,633 $ 413,054 ==================================
See accompanying notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 133,453 $ 109,135 $ 86,871 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle 18,064 -- -- Depreciation and amortization 27,105 20,884 12,166 Deferred income taxes (8,368) (8,063) (24,974) Changes in assets and liabilities: Accounts receivable, net 13,235 (13,968) (22,856) Inventories (23,085) (20,377) (16,944) Other assets 4,548 3,059 (4,341) Accounts payable and accrued liabilities 9,282 (7,220) 19,121 Deferred income on sales to distributors 32,555 13,849 31,884 Income taxes payable (5,183) 943 2,894 ----------------------------------------------------------- Cash provided by operating activities 201,606 98,242 83,821 ----------------------------------------------------------- Cash Flows from Investing Activities Capital expenditures (80,879) (45,172) (45,820) Other long-term investments (56,997) (86,240) (500) Net change in short-term investments (144,746) 75,748 (234,855) ----------------------------------------------------------- Cash used for investing activities (282,622) (55,664) (281,175) ----------------------------------------------------------- Cash Flows from Financing Activities Tax benefit from employee stock transactions 20,044 4,492 5,269 Net proceeds from issuance of common stock 12,945 5,760 5,030 Repurchase of common stock -- (4,331) -- Convertible subordinated notes -- -- 224,825 Payment of notes payable -- (57,120) -- ----------------------------------------------------------- Cash provided by (used for) financing activities 32,989 (51,199) 235,124 ----------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (48,027) (8,621) 37,770 Cash and cash equivalents at beginning of year 70,788 79,409 41,639 ----------------------------------------------------------- Cash and cash equivalents at end of year $ 22,761 $ 70,788 $ 79,409 =========================================================== Cash paid during the year for: Income taxes $ 77,853 $ 62,347 $ 64,122 Interest 13,225 13,225 6,392 Supplemental disclosure of non-cash activities: Cancellation of notes payable related to wafer capacity -- 63,400 -- Remaining obligations related to WaferTech -- 56,160 --
See accompanying notes to consolidated financial statements. 12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1: Company and Business Altera Corporation (Altera or the Company) designs, develops, manufactures, and markets CMOS programmable logic integrated circuits and associated engineering development software and hardware. The Company's major markets are communications, computing, and industrial applications. The Company's export sales were $281.7, $231.7, and $187.4 million for 1997, 1996, and 1995, respectively. Sales to Europe were $127.1, $103.8, and $84.2 million and sales to Japan were $117.0, $94.8, and $78.9 million in 1997, 1996, and 1995, respectively. In 1997, the two largest distributors accounted for 32% and 18% of sales. In 1996, the two largest distributors accounted for 29% and 15% of sales, whereas in 1995, they each accounted for 21% and 15% of sales, respectively. Note 2: Significant Accounting Policies BASIS OF PRESENTATION Altera has a fiscal year that ends on the Friday nearest December 31st. For presentation purposes, the consolidated financial statements and notes refer to the calendar month end. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts; actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 1997 presentation. Such reclassifications had no effect on previously reported results of operations or retained earnings. REINCORPORATION On June 19, 1997, the Company was reincorporated in the State of Delaware. In connection with the reincorporation, as approved by the stockholders, the number of authorized shares of the Company's common stock was increased to four hundred million (400,000,000) and each share of common stock was assigned a par value of $.001. The accompanying financial statements have been restated to give effect to the reincorporation. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-term investments are held as securities available for sale and are carried at their market value as of the balance sheet date which approximated cost. The amortized cost of debt securities are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains or losses are determined on the specific identification method and are reflected in income. Net unrealized gains or losses are recorded directly in stockholders' equity except that those unrealized losses that are deemed to be other than temporary are reflected in income. INVENTORIES Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market. The inventories at December 31, 1997 and 1996 were comprised of the following components:
DECEMBER 31 ----------------------------- (IN THOUSANDS) 1997 1996 - ----------------------------------------------------------------------------- Purchased parts and raw materials $ 1,503 $ 1,773 Work in process 67,442 56,870 Finished goods 29,938 17,155 ----------------------------- Total inventories $98,883 $75,798 =============================
13 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DEPRECIATION AND AMORTIZATION Depreciation and amortization are computed using the straightline method. Estimated useful lives of two to five years are used for equipment and office furniture and forty years for buildings. Amortization of leasehold improvements is computed using the shorter of the remaining facility lease term or the estimated useful life of the improvements. As of December 31, 1997, the costs of the Company's new headquarters building include $4.0 million of capitalized interest incurred during the construction and development period. Property and equipment at December 31, 1997 and 1996 was comprised of the following components:
DECEMBER 31 ---------------------------------- (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------------------ Land $ 20,496 $ 19,925 Building 75,111 32,955 Equipment 102,953 75,453 Office furniture and equipment 9,767 9,508 Leasehold improvements 1,884 3,493 ---------------------------------- Property and equipment, at cost 210,211 141,334 Accumulated depreciation and amortization (57,794) (51,530) ---------------------------------- Property and equipment, net $ 152,417 $ 89,804 ==========================================================================================
The Company evaluates the recoverability of its property and equipment and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. REVENUE RECOGNITION The Company recognizes revenue from product sales upon shipment to OEMs and end-users. Reserves for sales returns and allowances are recorded at the time of shipment. The Company's sales to distributors are made under agreements allowing for returns or credits under certain circumstances and, effective the first day of 1997, the Company defers recognition of revenue on sales to distributors until products are resold by the distributor to the end-user. See Note 5. FOREIGN EXCHANGE CONTRACTS The Company purchases the majority of its materials and services in U.S. dollars and its foreign sales are also billed in U.S. dollars. However, certain contracts for silicon wafer purchases are denominated in Japanese yen. At times, the Company enters into foreign exchange option or forward contracts to hedge against currency fluctuations which affect these and other transactions. As of December 31, 1997, the Company had no open foreign exchange contracts for the purchase or sale of foreign currencies, but may choose to enter into such contracts in the future should conditions appear favorable. In January 1998, the Company entered into a forward exchange contract, maturing at various intervals through May 1998, to purchase $1.1 million of Malaysian ringgit. STOCK SPLITS All share data have been retroactively restated to reflect a 2-for-1 split of the Company's outstanding common stock which was reflected in the stock price as of January 7, 1997 and was effective as to the shareholders of record on December 18, 1996. The share data has also been adjusted in 1995 to reflect a 2-for-1 stock split which was reflected in the stock price as of June 1, 1995 and was effective as to the shareholders of record on May 10, 1995. 14 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS STOCK-BASED COMPENSATION PLANS The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the grant date. Accordingly, no compensation has been recognized for its stock option plans. The Company provides additional pro forma disclosures as required under SFAS No. 123, "Accounting for Stock-Based Compensation." See Note 10. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Company's financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, notes payable and accounts payable, the carrying amounts approximate fair value due to their short maturities. The estimated fair value for the convertible notes (with a carrying amount of $230.0 million at December 31, 1997) is approximately $314.0 million. The fair value for the convertible subordinated notes is primarily based on quoted market prices. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company places its short-term investments in a variety of financial instruments and, by policy, limits the amount of credit exposure through diversification and by restricting its investments to highly rated securities. The Company sells its products to distributors and original equipment manufacturers throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires collateral, such as letters of credit, whenever deemed necessary. DEPENDENCE ON WAFER SUPPLIERS The Company does not directly manufacture finished silicon wafers. The Company's strategy has been to maintain relationships with wafer foundries. The Company has been successful in maintaining such relationships (Notes 6 and 7). However, there can be no assurance that the Company will be able to satisfy its future wafer needs from current or alternative manufacturing sources. This could result in possible loss of sales or reduced margins. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements for periods beginning after December 15, 1997. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources including unrealized gains and losses on available-for-sale securities. Reclassification of financial statements for earlier periods for comparative purposes is required. The Company will adopt SFAS No. 130 beginning in 1998 and does not expect such adoption to have a material effect on the consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements for periods beginning after December 15, 1997. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. It is not expected that adoption of SFAS No. 131 will have any impact on the consolidated financial statements. 15 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 3: Income Per Share The Company adopted SFAS No. 128, "Earnings Per Share," during the fourth quarter of 1997. SFAS No. 128 requires presentation of both basic and diluted net income per share on the face of the income statement. All prior period net income per share data presented has been restated in accordance with SFAS No. 128. Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted net income per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted net income per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options. A reconciliation of the numerators and denominators of the basic and diluted income per share is presented below:
YEAR ENDED DECEMBER 31 ------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Basic: Income before cumulative effect of change in accounting principle $ 151,517 $ 109,135 $ 86,871 Cumulative effect of change in accounting principle (18,064) -- -- ------------------------------------------------ Net income $ 133,453 $ 109,135 $ 86,871 ================================================ Weighted shares outstanding 88,525 87,406 86,625 ------------------------------------------------ Per share: Income before cumulative effect of change in accounting principle $ 1.71 $ 1.25 $ 1.00 Cumulative effect of change in accounting principle (0.20) -- -- ------------------------------------------------ Net income $ 1.51 $ 1.25 $ 1.00 ================================================ Diluted: Income before cumulative effect of change in accounting principle $ 151,517 $ 109,135 $ 86,871 Effect of 5.75% convertible subordinated notes 7,224 7,440 4,397 ------------------------------------------------ Income before cumulative effect of change in accounting principle including the effect of dilutive securities 158,741 116,575 91,268 Cumulative effect of change in accounting principle (18,064) -- -- ------------------------------------------------ Net income $ 140,677 $ 116,575 $ 91,268 ================================================ Weighted shares outstanding 88,525 87,406 86,625 Effect of dilutive securities: Stock options 5,101 4,417 4,528 5.75% convertible subordinated notes 8,990 8,990 4,778 ------------------------------------------------ 102,616 100,813 95,931 ================================================ Per share: Income before cumulative effect of change in accounting principle $ 1.55 $ 1.16 $ 0.95 Cumulative effect of change in accounting principle (0.18) -- -- ------------------------------------------------ Net income $ 1.37 $ 1.16 $ 0.95 ================================================
Note 4: Marketable Securities The Company's portfolio of marketable securities consists of the following:
DECEMBER 31 -------------------------- (IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------- Money market funds $ 763 $ 19,951 Municipal bonds 315,987 218,295 U.S. government and agency obligations 13,540 13,112 Corporate bonds 24,919 9,190 Other debt securities 5,055 8,432 -------------------------- $360,264 $268,980 - --------------------------------------------------------------------------
16 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1997 and 1996, the net unrealized holding gains and losses on securities were immaterial. The marketable securities at December 31, 1997 and 1996 by contractual maturity are shown below.
DECEMBER 31 -------------------------- (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------ Due in one year or less $ 58,191 $ 96,056 Due after one year through two years 302,073 172,924 -------------------------- $360,264 $268,980 - ------------------------------------------------------------------------
Note 5: Accounting Change - Recognition of Revenue on Sales to Distributors In October 1997, the Company changed its accounting method for recognizing revenue on sales to distributors with an effective date of January 1, 1997. The Company previously recognized revenue upon shipment to distributors net of appropriate reserves for sales returns and allowances. Following the accounting change, revenue recognition on shipments to distributors is deferred until the products are resold to the end customers. The Company believes that deferral of revenue on distributor sales and related gross margins until the product is shipped by the distributors results in a more meaningful measurement of results of operations and is more consistent with industry practice and, therefore, is a preferable method of accounting. The cumulative effect in prior years of the change in accounting method was a charge of $18.1 million (net of $9.3 million of income taxes) or $0.18 per diluted share. The estimated pro forma effect of the accounting change on the current and prior years' results are as follows:
YEAR ENDED DECEMBER 31 -------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- As reported: Sales $631,114 $497,306 $401,598 Net income 133,453 109,135 86,871 Diluted net income per share 1.37 1.16 0.95 Pro forma amounts with the change in accounting principle related to revenue recognition applied retroactively: Sales 631,114 497,006 400,162 Net income 151,517 109,090 86,287 Diluted net income per share 1.55 1.16 0.95 - ----------------------------------------------------------------------------------------------
Note 6: Investments and Obligations At December 31, 1997, Altera's long-term investments primarily relate to an investment in WaferTech, LLC (WaferTech) of $140.4 million, the long-term portion of deposits with Taiwan Semiconductor Manufacturing Corporation (TSMC) for future wafer allocations of $33.6 million (Note 7) and the Company's investment in Cypress Semiconductor (Texas) Inc. (CSTI), a subsidiary of Cypress Semiconductor Corporation, of $5.2 million. In June 1996, Altera, TSMC, and several other partners formed WaferTech, a joint-venture company, to build and operate a wafer manufacturing plant in Camas, Washington. In return for a $140.4 million cash investment, Altera received an 18% equity ownership in the joint-venture company and certain rights to procure up to 27% of the factory's production at market prices. The investment was made in three installments of $42.1 million each in June and November of 1996 and $56.2 million in November 1997. In addition, the Company has an obligation to guarantee a pro rata 17 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS share of debt incurred by WaferTech, up to a maximum of $45.0 million. The Company accounts for this investment under the equity method based on the Company's ability to exercise significant influence on the operating and financial policies of WaferTech. The Company's share of WaferTech's results for 1997 and 1996 was not material. Altera owns a 17% equity interest in CSTI and has the right to purchase a percentage of the wafers produced by CSTI approximately equal to the Company's percentage ownership of CSTI. The Company accounts for this investment under the cost method. Note 7: Notes Payable In 1995, the Company entered into several agreements with TSMC, whereby it agreed to make certain deposits to TSMC for future wafer capacity allocations extending into 2001. The Company made cash deposits amounting to $2.4 million in 1995 and issued promissory notes for $120.5 million representing partial prepayments for wafers to be supplied under these agreements. During the second quarter of 1996, the Company and TSMC renegotiated these agreements, resulting in the cancellation of all notes payable and a refund of certain prepayments, except for a $57.1 million prepayment made in January 1996 for wafer capacity from 1997 through 2000. Under the terms of the agreement related to the $57.1 million prepayment, TSMC agrees to provide the Company with wafers manufactured using TSMC processes and according to the Company's specifications, and the Company agrees to purchase and TSMC agrees to supply, a specific capacity of wafers per year through 2000. Subsequent billings for actual wafers used from TSMC will reduce the prepaid balance. The prepayments are generally nonrefundable if the Company does not purchase the full prepaid capacity unless the Company identifies a third-party purchaser, acceptable to TSMC, for the capacity. Note 8: Commitments The Company leases certain of its sales facilities under non-cancelable lease agreements expiring at various times through 2002. The leases require the Company to pay property taxes, insurance, maintenance, and repair costs. Future minimum lease payments under all non-cancelable operating leases as of December 31, 1997 are $2.2 million in 1998 and $2.0 million, $1.9 million, $1.6 million, and $1.6 million in the years 1999 through 2002, respectively. Rental expense under all operating leases amounted to $4.4 million, $4.0 million, and $3.2 million in 1997, 1996, and 1995, respectively. The Company has a standby letter of credit facility in the amount of 1.5 billion yen (approximately $11.6 million). The terms of this facility require immediate funding of any draws against any letters of credit issued under the facility. The facility requires the Company to comply with certain covenants regarding net worth and financial ratios. Note 9: Convertible Subordinated Notes In June 1995, the Company issued $230.0 million of convertible subordinated notes due in June 2002 and bearing an interest rate of 5.75%, payable semiannually. The notes are convertible into shares of the Company's common stock at a price of $25.59 per share. Discounts, commissions, and expenses, which are being amortized over the seven-year life of the notes, reduced the net proceeds to $224.8 million. Accumulated amortization at December 31, 1997 and 1996 amounted to approximately $2.0 million and $1.2 million, respectively. The notes are callable by the Company no sooner than June 1998. 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 10: Stock-Based Compensation Plans At December 31, 1997, the Company has four stock-based compensation plans, which are described below. The Company applies APB No. 25 in accounting for its plans. Accordingly, no compensation cost has been recognized for its three fixed stock option plans and its stock purchase plan. STOCK OPTION PLANS There are 16.2 million shares of common stock reserved for issuance under the 1987 Stock Option Plan, 5.3 million shares of common stock are reserved for issuance under the 1996 Stock Option Plan and 940,000 shares of common stock are reserved for issuance under the Company's 1988 Director Stock Option Plan. The Director Stock Option Plan provides for the periodic issuance of stock options to members of the Company's Board of Directors who are not also employees of the Company. Under all Stock Option Plans, the exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is 10 years. Options granted prior to October 1997 generally vest over five years at annual increments as determined by the Board of Directors. In October 1997, the Board of Directors amended the terms of the 1996 Stock Option Plan whereby options granted subsequent to September 30, 1997 will generally vest over four years at annual increments as determined by the Board of Directors. The number of shares for which options were exercisable was approximately 3,488,000, 2,960,000, and 2,050,000 at December 31, 1997, 1996, and 1995, respectively. A summary of the Company's stock option activity and related weighted average exercise prices within each category for each of the years ended December 31, 1997, 1996, and 1995 relating to the Company's stock option plans are as follows:
---------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------------- (SHARE AMOUNTS IN THOUSANDS) Shares Price Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------------- Options outstanding at January 1, 12,500 $ 5.07 10,059 $ 3.02 9,128 $ 2.57 Stock options: Granted 2,016 43.32 3,433 26.25 2,346 22.60 Exercised (1,400) 6.05 (620) 28.54 (839) 2.91 Forfeited (683) 16.42 (372) 13.40 (576) 6.54 ---------------------------------------------------------------------------- Options outstanding at December 31, 12,433 $ 8.00 12,500 $ 5.07 10,059 $ 3.02 - -----------------------------------------------------------------------------------------------------------------------
The fair value of each option grant, as defined by SFAS No.123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the fair value on the grant date. To compute the estimated grant date fair value of the Company's stock option grants in 1997, 1996, and 1995, respectively, the Black-Scholes method was used with the following weighted-average assumptions: expected volatility of 40.6%, 36.4%, and 34.6%, risk-free interest rates of 6.2%, 5.9%, and 6.6%, expected lives from vesting date of 0.56, 0.41, and 0.45 years, and dividend yields of 0%. The weighted-average fair value per share of stock options granted in 1997, 1996, and 1995 were $18.41, $10.23, and $8.74, respectively. 19 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about fixed stock options outstanding at December 31, 1997:
-------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------------ Number Weighted Number Outstanding Average Weighted- Exercisable Weighted Range of at 12/31/97 Remaining Average at 12/31/97 Average Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price - ------------------------------------------------------------------------------------------------------------------------------ $ 1.81- $ 6.12 3,434 4.50 years $ 3.48 2,440 $ 3.12 $ 6.13- $ 9.25 1,796 6.47 $ 7.15 331 $ 7.24 $ 9.26- $20.88 1,597 8.10 $ 17.49 166 $ 14.72 $ 20.89- $31.38 3,071 8.25 $ 25.50 432 $ 25.98 $ 31.39- $38.69 1,233 8.94 $ 34.99 112 $ 34.81 $ 38.70- $49.57 1,049 9.31 $ 47.97 7 $ 44.90 $ 49.58- $63.82 253 9.55 $ 54.51 -- -- - ------------------------------------------------------------------------------------------------------------------------------
Effective January 30, 1998, the Company offered employees, except all officers and director level employees, the right to reprice their stock options granted from January 1, 1995 through January 19, 1998. The repriced options have an exercise price of $34.25, the fair value of the Company's common stock on the effective date, and the vesting schedule of such options was extended by three months. In connection with this action, approximately 1.3 million options were repriced which previously had a weighted average exercise price of $48.50. EMPLOYEE STOCK PURCHASE PLAN Under the 1987 Employee Stock Purchase Plan, the Company is authorized to issue up to 2.8 million shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose each year to have up to 10 percent of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock is 85 percent of the lower of the closing price at the beginning or at the end of each six-month offering period. Approximately 75 to 80 percent of eligible employees have participated in the Plan in the last two years. Sales under the Employee Stock Purchase Plan in 1997, 1996, and 1995 were 173,294, 167,626, and 326,646 shares of common stock at an average price of $25.46, $21.49, and $7.91 per share, respectively. At December 31, 1997, there were 178,038 shares available for future purchases under the Employee Stock Purchase Plan. Compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1997,1996, and 1995, respectively: an expected life of six months for all years; expected volatility of 44.7%, 38.4%, and 30.7%; risk-free interest rates of 5.3%, 5.1%, and 6.0%; and dividend yields of 0%. The weighted-average fair value per share of those purchase rights granted in 1997,1996, and 1995, as defined by SFAS No.123, was $11.65, $5.55, and $4.35, respectively. The Company received a $20.0 million, $4.5 million, and $5.3 million tax benefit in 1997, 1996, and 1995, respectively, on the exercise of non-qualified stock options and on the disposition of stock acquired with an incentive stock option or through the Employee Stock Purchase Plan. PRO FORMA NET INCOME AND NET INCOME PER SHARE Had the Company recorded compensation costs based on the estimated grant date fair value as defined by SFAS No.123, for awards granted under its Stock Option Plans and Stock Purchase Plan, the Company's net income and net income per share would have been reduced to the pro forma amounts below for the years ended December 31, 1997, 1996, and 1995:
- ---------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------- Pro forma net income (in thousands) $ 116,054 $ 99,885 $ 83,815 Pro forma net income per share: Basic $ 1.31 $ 1.14 $ .97 Diluted 1.21 1.08 .92 - ----------------------------------------------------------------------------------------
20 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The pro forma amounts reflect compensation expense related to 1997, 1996, and 1995 stock option grants only. In future years, the annual compensation expense will increase as a result of the fair value of stock options granted in those future years. Note 11: Common Stock Repurchases On July 15, 1996, the Board of Directors authorized the repurchase of up to 2 million shares of the Company's common stock. The repurchased shares offset the dilution caused by the Company's employee stock purchase and stock option plans. During July 1996, the Company repurchased 300,000 shares of common stock for a total price of $4.3 million. In January 1998, the Company repurchased an additional 540,000 shares of common stock for a total price of $17.0 million. The repurchased shares were retired upon acquisition. Note 12: Litigation In June 1993, Xilinx, Inc. (Xilinx) brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. In June 1993, the Company brought suit against Xilinx, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of certain patents held by the Company. In April 1995, the Company filed a separate lawsuit against Xilinx in Delaware, Xilinx's state of incorporation, seeking monetary damages and injunctive relief based on Xilinx's alleged infringement of one of the Company's patents. In May 1995, Xilinx counterclaimed against the Company in Delaware, asserting defenses and seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Xilinx. Subsequently, the Delaware case has been transferred to California. Due to the nature of the litigation with Xilinx and because the lawsuits are still in the pre-trial stage, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that Xilinx will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Company's MAX 5000, MAX 7000, FLEX 8000, or MAX 9000 families of products, or succeed in invalidating any of the Company's patents. Although no assurances can be given as to the results of these cases, based on the present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. In August 1994, Advanced Micro Devices ("AMD") brought suit against the Company seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by AMD. In September 1994, Altera answered the complaint asserting that it is licensed to use the patents which AMD claims are infringed and filed a counterclaim against AMD alleging infringement of certain patents held by the Company. In October 1997, upon completion of trials bifurcated from the infringement claims, the Court ruled that the Company is licensed under all patents asserted by AMD in the suit. In December 1997, AMD filed a Notice of Appeal of the Court's rulings. Due to the nature of the litigation with AMD, and because AMD has appealed the court rulings that the Company is licensed under all of the patents asserted by AMD in the suit, the Company's management cannot estimate the total expense, the possible loss, if any, or the range of loss that may ultimately be incurred in connection with the allegations. Management cannot ensure that AMD will not succeed in obtaining significant monetary damages or an injunction against the manufacture and sale of the Classic, MAX 5000, MAX 7000, FLEX 8000, MAX 9000, FLEX 10K, and FLASHlogic product families, or succeed in invalidating any of the Company's patents remaining in the suit. Although no assurances can be given to 21 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS the results of this case, based on its present status, management does not believe that any of such results will have a material adverse effect on the Company's financial condition or results of operations. Note 13: Income Taxes The Company's income before taxes is composed primarily of domestic income. The Company expects that the proportion of foreign income before taxes will increase in the future. The components of the provision for income taxes were as follows:
YEAR ENDED DECEMBER 31 --------------------------------------- (IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------------------------- Current tax expense: United States $ 70,399 $ 57,680 $ 64,931 State 14,328 9,799 10,663 Foreign 1,695 586 400 --------------------------------------- Total current tax expense 86,422 68,065 75,994 Deferred taxes (8,368) (8,063) (24,974) --------------------------------------- Total provision for income taxes $ 78,054 $ 60,002 $ 51,020 - --------------------------------------------------------------------------------------
Deferred tax assets (liabilities) were as follows:
DECEMBER 31 ------------------------ (IN THOUSANDS) 1997 1996 - --------------------------------------------------------------------- Assets: Accrued expenses and reserves $ 56,592 $ 38,404 Acquisition costs 7,273 7,282 State taxes 4,200 3,675 Other 1,726 1,590 ------------------------ Gross deferred tax assets 69,791 50,951 Deferred tax liabilities (2,084) (909) Deferred tax asset valuation allowance (4,631) (4,640) ------------------------ Net deferred tax assets $ 63,076 $ 45,402 - ---------------------------------------------------------------------
The change in deferred taxes includes $9.3 million of deferred taxes included in the cumulative effect of change in accounting principle. The valuation allowance of $4.6 million at December 31, 1997 and 1996 is attributable to deferred tax assets from the 1994 acquisition of Intel's programmable logic business. Sufficient uncertainty exists regarding the realizability of these assets and, accordingly, valuation allowances are required. The provision for taxes reconciles to U.S. statutory taxes as follows:
YEAR ENDED DECEMBER 31 ---------------------------------------- (IN THOUSANDS) 1997 1996 1995 - --------------------------------------------------------------------------------------- Tax provision at U.S. statutory rates $ 80,350 $ 59,198 $ 48,262 State taxes, net of federal benefit 7,290 6,172 6,315 Interest income on municipal obligations (4,270) (2,975) (1,435) Other, net (5,316) (2,393) (2,122) ---------------------------------------- Total provision for income taxes $ 78,054 $ 60,002 $ 51,020 - ---------------------------------------------------------------------------------------
22 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 14: Quarterly Financial Information (UNAUDITED)
First Second Third Fourth (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Sales As originally reported $ 142,439 $ 164,115 $ 162,126 $ 157,088 Effect of revenue recognition change 3,604 1,742 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 146,043 165,857 162,126 157,088 ------------------------------------------------------------------ Gross profit As originally reported 88,345 102,872 101,377 98,121 Effect of revenue recognition change 2,343 1,098 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 90,688 103,970 101,377 98,121 ------------------------------------------------------------------ Cumulative effect of change in accounting principle 18,064 ------------------------------------------------------------------ Net income As originally reported 34,056 39,729 38,811 36,650 Effect of revenue recognition change (16,518) 725 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 17,538 40,454 38,811 36,650 ------------------------------------------------------------------ Basic income per share: Income before cumulative effect of accounting change As originally reported 0.39 0.45 0.44 0.41 Effect of revenue recognition change 0.02 0.01 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 0.41 0.46 0.44 0.41 ------------------------------------------------------------------ Cumulative effect of change in accounting principle (0.20) ------------------------------------------------------------------ Net income As originally reported 0.39 0.45 0.44 0.41 Effect of revenue recognition change (0.19) 0.01 -- -- As restated for first three quarters and as reported for fourth quarter 0.20 0.46 0.44 0.41 ------------------------------------------------------------------ Diluted income per share: Income before cumulative effect of accounting change As originally reported 0.35 0.40 0.40 0.38 Effect of revenue recognition change 0.01 0.01 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 0.36 0.41 0.40 0.38 ------------------------------------------------------------------ Cumulative effect of change in accounting principle (0.18) ------------------------------------------------------------------ Net income As originally reported 0.35 0.40 0.40 0.38 Effect of revenue recognition change (0.16) 0.01 -- -- ------------------------------------------------------------------ As restated for first three quarters and as reported for fourth quarter 0.19 0.41 0.40 0.38 ------------------------------------------------------------------ 1996 Sales $ 137,098 $ 116,295 $ 116,728 $ 127,185 Gross profit 84,044 71,446 71,634 78,224 Net income 31,440 24,265 24,118 29,312 Basic net income per share 0.36 0.28 0.28 0.33 Diluted net income per share 0.33 0.26 0.26 0.31 Pro forma amounts for 1996 assuming the change in accounting principle related to revenue recognition was applied retroactively: Sales 133,329 114,919 116,885 131,873 Gross profit 81,628 70,524 71,739 81,290 Net income 29,894 23,675 24,185 31,336 Basic net income per share 0.34 0.27 0.28 0.36 Diluted net income per share 0.32 0.25 0.26 0.33
23 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Altera Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Altera Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 5 to the consolidated financial statements, in 1997 the Company changed its method of recognizing revenue. /s/ PRICE WATERHOUSE LLP San Jose, California January 20, 1998 24 Corporate Directory Board of Directors Rodney Smith Chairman, President, and Chief Executive Officer Altera Corporation Charles M. Clough Former Chairman, President, and Chief Executive Officer Wyle Electronics Michael A. Ellison Chief Executive Officer Steller, Inc. Paul Newhagen Vice President, Administration Altera Corporation Robert W. Reed Former Senior Vice President Intel Corporation William E. Terry Former Director and Executive Vice President Hewlett-Packard Company Deborah Triant, Ph.D. President and Chief Executive Officer CheckPoint Software Technologies, Inc. Corporate Officers Rodney Smith President and Chief Executive Officer C. Wendell Bergere Vice President, General Counsel, and Secretary Denis Berlan Executive Vice President and Chief Operating Officer Erik R. Cleage Vice President, Marketing John R. Fitzhenry Vice President, Human Resources Paul Newhagen Vice President, Administration Thomas J. Nicoletti Vice President, Investor Relations and Business Development Nathan Sarkisian Vice President, Finance and Chief Financial Officer Peter Smyth Vice President, Sales Appointed Officers Bahram Ahanin Vice President, CAD and Design Automation Donald Faria Vice President, Customer Marketing Bruce Mielke Vice President, Product Engineering Timothy J. Southgate Vice President, Software Engineering Clifton S. Tong Vice President, Product Marketing John E. Turner Vice President, Design Engineering Corporate Headquarters 101 Innovation Drive San Jose, California 95134 (408) 544-7000 Independent Accountants Price Waterhouse LLP San Jose, California Form 10-K A copy of the Company's Form 10-K, as filed with the Securities and Exchange Commission (without exhibits), is available from: Altera Corporation 101 Innovation Drive San Jose, California 95134 (408) 544-7707 Stock Listing Altera's common stock is quoted on The Nasdaq Stock Market under the symbol "ALTR." For the past two years, the quarterly high and low closing sales prices for the common stock were:
1997 1996 ------------------------------------------------- Quarter High Low High Low - ------------------------------------------------------------- First 48 1/8 35 7/8 38 1/2 22 9/16 Second 54 42 1/16 31 3/16 18 13/16 Third 64 7/8 49 3/8 27 5/8 14 Fourth 53 3/4 30 9/16 38 7/8 24 7/8 - -------------------------------------------------------------
Registrar/Transfer Agent Boston EquiServe, L.P. Investor Relations P.O. Box 8040 Boston, MA 02266-8040 (781) 575-3120 Altera, FLEX, FLEX 10K, FLEX 10KA, FLEX 10KE, FLEX 8000, FLEX 6000, MAX, MAX 9000, MAX 9000A, MAX 7000, MAX 7000S, MAX 5000, Classic, FLASHlogic, MAX+PLUS, MAX+PLUS II, and individual device designations are trademarks and/or service marks of Altera Corporation in the United States and other countries. Altera Corporation acknowledges the trademarks of other organizations for their respective products or services mentioned in this document. EX-18.1 6 LETTER OF PRICE WATERHOUSE LLP 1 EXHIBIT 18.1 January 20, 1998 To the Board of Directors of Altera Corporation Dear Directors: We have audited the consolidated financial statements included in Altera Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 and issued our report thereon dated January 20, 1998. Note 5 to the consolidated financial statements describes a change in the Company's method for recognizing revenue from the time product is shipped to distributors to the time product is shipped from the distributors to the end customers. It should be understood that the preferability of one acceptable method of revenue recognition over another has not been addressed in any authoritative accounting literature and in arriving at our opinion expressed below, we have relied on management's business planning and judgment. Based on our discussions with management and the stated reasons for the change, we believe that such change represents, in your circumstances, the adoption of a preferable alternative accounting principle for revenue recognition in conformity with Accounting Principles Board Opinion No. 20. Yours very truly, /s/ PRICE WATERHOUSE LLP - -------------------------------------- Price Waterhouse LLP EX-21.1 7 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION YEAR NAME OF INCORPORATION ORGANIZED ---- ---------------- --------- Altera GmbH Germany 1989 Altera Foreign Sales Corporation Barbados 1989 Nihon Altera KK Japan 1990 Altera France SARL France 1990 Altera Italia s.r.l. Italy 1991 Altera (UK) Limited United Kingdom 1992 Altera Corporation (M) Sdn Bhd Malaysia 1995 Altera B.V.B.A. Belgium 1996 Altera AB Sweden 1996 Altera International, Inc. Cayman Islands 1997 Altera International Limited Hong Kong 1997 Altera Taiwan Co., Ltd. Taiwan 1997
EX-23.1 8 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-22877, No. 33-37159, No. 33-57350, No. 33-61085, No. 333-06859 and No. 333-32555) of Altera Corporation of our report dated January 20, 1998 appearing on page 32 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. /s/ PRICE WATERHOUSE LLP -------------------------------------- PRICE WATERHOUSE LLP San Jose, California March 26, 1998 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 22,761 354,808 55,251 3,008 98,883 616,202 210,211 57,794 952,518 185,831 230,000 0 0 123,633 413,054 952,518 631,114 631,114 236,958 236,958 167,201 0 11,701 229,571 78,054 151,517 0 0 18,064 133,453 1.51 1.37 For Purposes of This Exhibit, Primary means Basic.
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