-----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, AMAAUMusdnA9uQu9Ii3WMjBY6SgF8D2fbYvAJPW+6RDGSU18NcHngJt5226sIyAN xngvIXbbApIMY6eadt1lGw== /in/edgar/work/20000630/0000913293-00-000040/0000913293-00-000040.txt : 20000920 0000913293-00-000040.hdr.sgml : 20000920 ACCESSION NUMBER: 0000913293-00-000040 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE SEMICONDUCTOR CORP /DE/ CENTRAL INDEX KEY: 0000913293 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 770057842 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22594 FILM NUMBER: 666118 BUSINESS ADDRESS: STREET 1: 3099 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134-2006 BUSINESS PHONE: 4083834900 MAIL ADDRESS: STREET 1: 3099 N FIRST ST CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 0001.txt ANNUAL REPORT 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 APRIL 1, 2000, or [ ] Transition report pursuant to section 13 or 15(d) of the securities exchange act of 1934 For the transition period from __________ to __________. Commission file number: 0-22594 ALLIANCE SEMICONDUCTOR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0057842 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 2575 AUGUSTINE DRIVE SANTA CLARA, CALIFORNIA 95054-2914 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code is (408) 855-4900 Registrant's website address is HTTP://WWW.ALSC.COM ------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, par value $0.01 NASDAQ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant has filed all documents and reports required to be filed under Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes X No ----- ----- As of June 19, 2000, there were 41,464,780 shares of Registrant's Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 19, 2000, based upon the closing price of the Common Stock on the NASDAQ National Market for such date, was approximately $1,154,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Stockholders ("Proxy Statement") to be filed pursuant to Regulation 14A of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, which is anticipated to be filed within 120 days after the end of Registrant's fiscal year ended April 1, 2000, are incorporated by reference into Part III hereof. - 1 - =============================================================================== PART I FORWARD LOOKING STATEMENTS When used in this report, the words "expects," anticipates," "believes," "estimates" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements, are subject to risks and uncertainties and include the following statements concerning the timing of new product introductions; the functionality and availability of products under development; trends in the personal computer, networking, telecommunications, instrumentation and consumer markets, in particular as they may affect demand for or pricing of the Company's products; the percentage of export sales and sales to strategic customers; the percentage of revenue by product line; the availability and cost of products from the Company's suppliers; changes in stock price of Broadcom Corporation, Chartered Semiconductor, United Microelectronics Corporation, Vitesse Semiconductor Corporation and PMC-Sierra, Inc.; adverse changes in value of investments made by Alliance Venture Management, LLC; and the Company's potential status as Investment Act of 1940 reporting company. These risks and uncertainties include those set forth in Item 1 of Part I hereof (entitled "Business") and in Item 7 of Part II hereof (entitled "Factors That May Affect Future Results") and elsewhere in this Report. These risks and uncertainties, or the occurrence of other events, could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statement is based, in whole or in part. ITEM 1 BUSINESS OVERVIEW Alliance Semiconductor Corporation was incorporated in California on February 4, 1985 and reincorporated in Delaware on October 26, 1993. Unless the context indicates otherwise, the terms "Alliance" and the "Company" refer to Alliance Semiconductor Corporation, a Delaware corporation, and its direct and indirect subsidiaries. The Company designs, develops and markets high performance memory and memory intensive logic products to the personal computer, networking, telecommunications, instrumentation and consumer markets. Market trends, such an increased emphasis on high-throughput applications, including networking, graphics, multimedia, computer, consumer, and telecommunications products, have created opportunities for high performance memory products. The Company addresses these opportunities with its families of static random access memories ("SRAMs") and dynamic random access memories ("DRAMs"), characterized by high storage capacity (density), fast access times and low power consumption. The semiconductor industry is highly cyclical and has been subject to significant downturns at various times that have been characterized by diminished product demand, production overcapacity and undercapacity, and accelerated erosion of selling prices. During much of fiscal 1999, 1998 and 1997 the market for certain of the Company's DRAM and SRAM devices continued to experience excess supply relative to demand, which resulted in a significant downward trend in average selling prices. Although the Company is unable to predict future trends in average selling prices, historically the semiconductor industry has experienced significant annual declines in average selling prices. The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience (as it did throughout much of fiscal 1999, 1998 and 1997) rapid erosion in product pricing which is not within the control of the Company and which could have an adverse material effect on the Company's results of operations. The Company is unable to predict the future prices for its products. - 2 - Throughout this report, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal year ended March 31, 2000 contained 52 weeks while the fiscal years ended March 31, 1999 and March 31, 1998 contained 53 weeks and 52 weeks, respectively. INDUSTRY BACKGROUND Traditionally, large manufacturing companies, such as Samsung, Hyundai, Micron, NEC, Toshiba, Hitachi and Cypress Semiconductor, have dominated the markets for SRAMs and DRAMs. The majority of the memory products from these manufacturers have consisted of commodity products, which have relatively predictable, multi-year product life cycles and thus require more focus on process technology and production cost and less on design. In recent years, certain technology trends dramatically increased the performance requirements for SRAMs and DRAMs, creating new design challenges and market opportunities for emerging semiconductor companies. The proliferation of more powerful personal computers and workstations in recent years and the increasing emphasis on high-throughput networking, graphics, multimedia and telecommunications products have created mass market opportunities for high speed and low power SRAMs and high speed DRAMs. SRAMs and DRAMs are forms of "volatile" memory, meaning that such devices retain their memory only when connected to a power supply. In contrast, flash memory is a form of "non-volatile" memory, which retains its memory even when the power supply is turned off. The demand for flash memory has increased in recent years. In addition to being a preferred method of storing the basic input/output system ("BIOS") for computers, a variety of applications make use of flash memory (for instance, cellular phone handsets often allow users to "store" frequently-dialed numbers in flash memory; such memory is retained when the handset power is turned off). Embedded-memory applications are growing rapidly, as manufacturers of items from cell phones to toasters are introducing "smart" machines that use integrated circuits to improve performance. Embedding memory and logic on a single chip may produce significant advantages in size and speed. TECHNOLOGY The Company has focused on using innovative design techniques to develop high performance SRAMs and DRAMs that can be manufactured using a simple CMOS manufacturing process. The Company combines both SRAM and DRAM design approaches in creating its SRAM and DRAM products, and believes that merging these techniques enables it to design SRAMs that feature some of the density attributes of DRAMs and to design DRAMs that feature some of the speed attributes of SRAMs. Since its inception in 1985, the Company has accumulated substantial experience in designing SRAM and DRAM products. The Company believes that the die sizes (the physical sizes of its complete, unpackaged, memory circuits) of many of its products are smaller than those of competing products, providing the Company with a key competitive advantage. Because yields increase significantly as die size decreases, the Company believes that its small die sizes have been a major contributor to its generally high manufacturing yields. Small die sizes also generally result in additional benefits, such as lower die cost, increased speed, greater reliability and lower power consumption. In addition to having small die sizes, many of the Company's products are designed to be manufactured using a CMOS process with fewer steps than required for competitive memory products. The Company's competitors often require a greater number of mask steps and/or more complex manufacturing processes to achieve similar performance of such products. Because yields typically decline as manufacturing complexity and the number of process steps increase, the simpler manufacturing process utilized by the Company has contributed to its generally high manufacturing yields. The Company also believes that a simpler manufacturing process leads to faster time to market and shorter manufacturing cycle times. The Company's development strategy is to leverage its proprietary design modules, which have been created using its design philosophies. These modules, which are scaleable in size, can be used by the Company as building blocks for new products, resulting in shorter design cycles. The Company believes that this design strategy also enables it to maximize the performance, yield and cost advantages of its basic designs and sustain them over time in successive generations of higher performance and higher density products. - 3 - PRODUCTS HIGH SPEED CMOS SRAMS Sales of the Company's SRAM products accounted for 43% of the Company's net revenues in fiscal 2000. During fiscal year's 1999 and 1998, SRAM products contributed approximately 58% and 27%, respectively, of the Company's net revenues. Focused on the telecommunications, networking and wireless markets, the Company currently offers SRAM products in broad range densities, packages, speed grades and low-power ranges from 64 Kbit to 4 Kbit with speeds as fast as 10ns and stand by power as low as 20uA. Currently the Company's volume SRAM products are manufactured using 0.35 and 0.25 micron technology, with development to 0.18 micron technology underway. HIGH SPEED CMOS DRAMS Sales of the Company's DRAM products accounted for 56% of the Company's net revenues in fiscal 2000. During fiscal years 1999 and 1998, DRAM products contributed 40% and 66%, respectively, of the Company's net revenues. During fiscal year 2000, the Company continued to increase its volume of production of 4 Mbit and 16 Mbit DRAM products in the 256 Kbit x 16 and 1 Mbit x 16 configurations using technologies down to 0.25 micron. HIGH SPEED CMOS FLASH MEMORIES During fiscal 2000, the Company changed its focus from 5V to 3V flash memory products (which use a single, nominal, 3-volt power supply for read and programming functions). The Company has sampled the 8 Mbit product with access times as fast as 80ns, and has achieved functional silicon on 4 Mbit product. To date, the Company has not derived significant revenue from flash memory products. NETWORK HARDWARE ACCELERATORS In fiscal year 1999, the Company announced that it expected to introduce the first product of an Internet Protocol Routing Processor ("IPRP") family that will leverage the Company's logic and embedded memory technology, to enable hardware accelerated wire speed routing of IP packets, in multi-ported Gigabit and Terabit routers. These IPRP devices could become integral components in mission critical and multimedia enhanced high-end routers, which are being deployed to build the next generation Internet infrastructure. The Company achieved working silicon of the first product of IPRP family during the quarter ended April 3, 1999. However, these prototypes did not achieve all the specifications necessary to introduce the product, including the desired speed. The Company spent the entire fiscal year 2000 redesigning the product and has not yet produced a marketable product. While the Company plans on continuing its effort to produce an IPRP product, there can be no assurance that the Company can or will do so. PRODUCT DEVELOPMENT Timely development and introduction of new products are essential to maintaining the Company's competitive position. The Company currently develops all of its products in-house and had on staff 79 development personnel (38 in the United States and 41 in India) as of April 1, 2000. The Company uses a workstation-based computer-aided design environment to design and prototype new products. The Company's design process uses network computing, high-level design methodologies, simulators, circuit synthesizers and other related tools. During fiscal 2000, 1999 and 1998, the Company spent approximately $14.6 million, $14.1 million and $15.3 million respectively, on product development activities. The Company plans to continue to invest substantial amounts in development to design additional products. The markets for the Company's products are characterized by rapid technological change, evolving industry standards and product obsolescence. The Company's future success will be highly dependent upon the timely completion and introduction of new products at competitive performance levels. The success of new products depends on a variety of factors, including product selection, successful and timely completion of product development, the Company's ability to secure sufficient foundry capacity for volume manufacturing of wafers, achievement of acceptable wafer fabrication yields (the proportion of good die on a silicon wafer) by the Company's independent foundries and the Company's ability to offer products at competitive prices. There can be no assurance that the Company will be able to identify new product opportunities successfully, or to develop and bring to market such new products in a timely and cost effective manner, or that the Company will be able to - 4 - respond effectively to new technological changes or new product announcements by others. There also can be no assurance that the Company can secure adequate foundry capacity for the production of such products, or obtain acceptable manufacturing yields necessary to enable the Company to offer products at competitive prices. Additionally, there can be no assurance that the Company's products will gain or maintain market acceptance. Such inabilities could materially and adversely affect the Company's results of operations. The markets for SRAMs, DRAMs, and flash memory products are volatile and subject to rapid technological and price change. Any inventory of products for those markets may be subject to obsolescence and price erosion, which could materially and adversely affect the Company's results of operations. CUSTOMERS The Company's primary customers are major domestic and international manufacturers of personal computer and computer peripherals, consumer, networking, telecommunications and wireless products, including; 3Com, Pace Micro Technology, Lucent, Sony, IBM, Toshiba, Acer, Alcatel, Nokia, Solectron, Jabil, Newbridge Networks, Efficient Networks, General Instruments, Seagate, Brother and Pioneer. A decline in demand in these industries or lack of success in developing new markets or new products could have a material adverse effect on the Company's results of operations. The Company believes that if its sales penetration into these markets increases, its customer base will diversify not only by product application but also geographically. There can be no assurance that such sales penetration into these markets will, in fact, increase. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. During fiscal year 2000, the Company moved all of its SRAM production out of Taiwan. The Company intends to sell its remaining SRAM inventory that was manufactured in Taiwan outside the United States. See Note 13 of Notes to Consolidated Financial Statements. Sales to the Company's customers are typically made pursuant to specific purchase orders, which may be canceled by the customer without enforceable penalties. For the fiscal year ended March 31, 2000, one customer accounted for approximately 10% of the Company's net revenues. For the fiscal year ended March 31, 1999, two customers accounted for approximately 15% and 13% of the Company's net revenues. For the fiscal year ended March 31, 1998, one customer accounted for approximately 18% of the Company's net revenues. See Note 1 of Notes to Consolidated Financial Statements. Historically, the semiconductor industry in general, and the semiconductor memory business in particular, has experienced cyclical downturns in business that happen every few years. The industry experienced such a downturn in the mid 1990's and has been recovering over the last few years, as has the Company. The Company fully expects that another downturn will occur in the next few years. And while the Company is trying to take precautions so that it will not be carrying significant inventory (as happened in the last downturn) when the next downturn occurs, it is difficult to predict when the downturn will occur and customers start canceling orders. There can be no assurance that the Company will be able to manage its business in a manner so as to prepare for the next downturn, when it occurs. Additionally, even if the Company is able to prepare for the downturn, any such downturn will none-the-less have a significant and material negative impact on the Company's ability to sell products and results of operations and such a negative impact on the Company may last several years. SALES AND MARKETING The Company markets and distributes its products through a network of manufacturers' representatives and distributors throughout North America, Europe, Asia and the rest of the world. The Company uses manufacturers' representatives and distributors who are not subject to minimum purchase requirements and who can discontinue marketing the Company's products at any time. Many of the Company's distributors are permitted to return a limited amount of product purchased in exchange for future orders. The loss of one or more manufacturers' representatives or distributors could have a material adverse effect on the Company's results of operations. The Company believes that its relations with its manufacturers' representatives and distributors generally are good. - 5 - The Company believes that customer service and technical support are important competitive factors in selling to major customers. The Company provides technical support to its customers worldwide. Distributors and manufacturers' representatives supplement the Company's efforts by providing additional customer service at a local level. The Company also works closely with its customers in qualification of its products and providing the needed quality and reliability data. The Company believes that close contact with its customers not only improves the customers' level of satisfaction but also provides important insights into future market directions. International revenues accounted for approximately 59%, 50% and 41% of net revenues in fiscal 2000, 1999 and 1998, respectively. The Company expects that international sales will continue to represent a significant portion of net revenues. In addition, the Company's products are manufactured, assembled and tested by independent third parties primarily located in Asia and North America, and the Company has in the past, and intends in the future, to make investments in certain foundries in Asia or elsewhere in order to secure production capacity. Due to its international sales and independent third party manufacturing, assembly and testing operations, the Company is subject to the risks of conducting business internationally. These risks include unexpected changes in regulatory requirements, delay resulting from difficulty in obtaining export licenses of certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks in connection with its international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because the Company's international sales generally are denominated in U.S. dollars, fluctuations in the U.S. dollar could increase the price in local currencies of the Company's products in foreign markets and make the Company's products relatively more expensive than competitors' products that are denominated in local currencies. Although the Company to date has not experienced any material adverse effect on its results of operations as a result of such regulatory, geopolitical and other factors, there can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. See Note 15 of Notes to Consolidated Financial Statements. MANUFACTURING The Company subcontracts its manufacturing to independent foundries, which allows the Company to avoid the significant capital investment required for wafer fabrication facilities. The Company, however, has entered into agreements providing for the investment of significant sums for the formation of companies to build and operate manufacturing facilities or to obtain guaranteed capacity, as described below. As a result, the Company focuses its resources on product design and development, quality assurance, marketing and sales, and customer support. The Company designs its products using proprietary circuit modules and standard fabrication processes in order to operate within the process parameters of its contract manufacturers. The Company's major foundries are United Microelectronics Corporation ("UMC") in Taiwan and Japan, Chartered Semiconductor Manufacturing Ltd. ("Chartered") in Singapore and National Semiconductor Corporation in the United States. The Company has entered into foundry production agreements with all of its major foundries. Although the Company believes it currently has adequate capacity to address market requirements, there can be no assurance that in the future the Company's current foundries, together with any additional sources, would be willing or able to satisfy all of the Company's requirements on a timely basis. The Company has encountered delays in the qualification process and production ramp-up in the past, and qualification of or production ramp-up at any additional foundries could take longer than anticipated. The Company has entered into equity arrangements in order to obtain an adequate supply of wafers; especially wafers manufactured using advanced process technologies. The Company will continue to consider various possible transactions, including but not limited to equity investments in independent wafer manufacturers, in exchange for guaranteed production; the formation with others of new companies to own and operate foundries; the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods; and the licensing of certain of the Company's designs, in order to obtain an adequate supply of wafers using advanced process technologies. There can be no assurance, however, that the Company would be able to consummate any such transaction in a timely manner, or at all, or on terms commercially acceptable to the Company. In February and April 1995, the Company purchased shares of Chartered for approximately $51.6 million and entered into a manufacturing agreement under which Chartered would provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance so chooses. In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the - 6 - purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19.0% of the outstanding shares and 25% of the total wafer capacity. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and acquired approximately 3.2% of the outstanding shares of USIC. The Company has the right to purchase approximately 3.7% of the manufacturing capacity of the facility. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000 Alliance owned approximately 283.3 million shares, or approximately 3.2%, of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. There can be no assurance that the Company's current foundries, together with any additional sources, will be able or willing to satisfy all of the Company's requirements on a timely basis. The Company has encountered delays in qualification and production ramp-up in the past and the production ramp-up at any additional foundries could take longer than anticipated. In the event that the Company's foundries are unable or unwilling to satisfy the Company's requirements in a timely manner, the Company's results of operations could be materially adversely affected. In addition, some of UMC's foundries are located in the Science-Based Industrial Park in Hsin-Chu City, Taiwan. The Company currently expects these foundries to supply the substantial portion of the Company's products in fiscal 2001. Disruption of operations at the Company's foundries for any reason, including work stoppages, fire, earthquakes as was the case in September 1999, or other natural disasters, could cause delays in shipments of the Company's products, and could have a material adverse effect on the Company's results of operations. In or about October 1997, a fire caused extensive damage to one of UMC's foundries, not used by the Company, which is located in the Hsin-Chu Science-Based Industrial Park. There have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse effect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations. The Company is using multiple sources for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products, and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. The Company purchases semiconductor wafers from these foundries pursuant to various agreements. The Company believes that its relationship with each of these foundries is good. However, UMC and Chartered manufacture similar products which are sold to the Company's competitors. Reliance on these foundries involves several risks, including; constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance, costs and loss of production due to seismic activity, weather conditions and other factors. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations. There can be no assurance that problems affecting manufacturing yields of the Company's products will not occur in the future such as occurred during late in fiscal 1996. - 7 - The Company uses offshore subcontractors, which are located primarily in Taiwan and Singapore for die assembly and testing. In the assembly process, the silicon wafers are separated into individual dies that are then assembled into packages and tested in accordance with procedures developed by the Company. Following assembly, the packaged devices are further tested and inspected pursuant to the Company's quality assurance program before shipment to customers. While the timeliness, yield and quality of product deliveries from the Company's suppliers of assembly and test services have been acceptable to date, there can be no assurance that problems will not occur in the future. Any significant disruption in adequate supplies from these subcontractors, or any other circumstances that would require the Company to qualify alternative sources of supply, could delay shipment and result in the loss of customers, limitations or reductions in the Company's revenue, and other adverse effects on the Company's results of operations. Most of the Company's wafer foundries, assembly and testing facilities comply with the requirements of ISO 9000. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced by such suppliers. The occurrence of such price increases could have a material adverse effect on the Company's results of operations. The Company also is subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. Shortages of raw materials or disruptions in the provision of services by the Company's assembly or testing houses or other circumstances that would require the Company to seek alternative sources of supply, assembly or testing could lead to constraints or delays in timely delivery of the Company's products. Such constraints or delays may result in the loss of customers, limitations or reductions in the Company's revenue or other adverse effects on the Company's results of operations. The Company's reliance on outside foundries and independent assembly and testing houses involves several other risks, including reduced control over delivery schedules, quality assurance and costs. Interruptions in supply at the Company's foundries or assembly or testing houses may cause delays in delivery of the Company's products. The occurrence of any supply or other problem resulting from the risks described above could have a material adverse effect on the Company's results of operations. COMPETITION The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, product obsolescence and heightened international competition in many markets. Many of the Company's customers may be purchasing products from both the Company and the Company's competitors. The Company's principal competitors include Cypress Semiconductor Corporation; Integrated Device Technology, Inc.; Integrated Silicon Solutions, Inc.; Micron Technology, Inc.; AMD; NEC; Samsung; Toshiba; and other U.S., Japanese, Korean, and Taiwanese manufacturers. Most of the Company's competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than the Company. During an industry recession such as occurred in 1998, 1997 and 1996 in the SRAM and DRAM markets, companies that have broader product lines and longer-standing customer relationships may be in a stronger competitive position than the Company. In addition, as the Company enters new markets, the Company may face additional competition. Markets for most of the Company's products are characterized by intense price competition. The Company's future success will be highly dependent upon the successful development and timely introduction of new products that meet the needs of the market at a competitive price. There can be no assurance that the Company will be able to develop or market any such products successfully. The Company believes that its ability to compete successfully depends on a number of factors both within and outside of its control, including price, product quality, performance, success in developing new products, adequate foundry capacity, sources of raw materials, efficiency of production, timing of new product introductions by competitors, protection of Company products by effective utilization of intellectual property laws and general market and economic conditions. There can be no assurance that the Company will be able to compete successfully in the future. LICENSES, PATENTS AND MASKWORK PROTECTION The Company seeks to protect its proprietary technology by filing patent applications in the United States and registering its circuit designs pursuant to the Semiconductor Chip Protection Act of 1984. As of June 21, 2000, the Company holds 54 United States patents covering certain aspects of its product designs or manufacturing technology, which patents expire between 2009 and 2018. The Company also has 24 pending United States - 8 - patent applications, six of which have been allowed and are expected to be issued as patents. No assurance can be given that the claims allowed on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its products business. There can be no assurance that any existing or future patent applications by the Company will result in issued patents with the scope of the claims sought by the Company, or at all, that any current or future issued or licensed patents, trade secrets or know-how will afford sufficient protection against competitors with similar technologies or processes, or that any patents issued will not be infringed upon or designed around by others. In addition, there can be no assurance that others will not independently develop proprietary technologies and processes, which are the same as or substantially, equivalent or superior to those of the Company. From time to time, the Company is contacted by companies who hold patents which they claim the Company infringes. As of June 19, 2000, the Company is in discussions with two companies who have made such claims. If the Company determines that the Company possibly infringes a patent and the patent appears valid, the Company will negotiate a license, if possible. There can be no assurance that the Company has not or will not infringe prior or future patents owned by others, that the Company will not need to acquire licenses under patents belonging to others for technology potentially useful or necessary to the Company, or that such licenses will be available to the Company, if at all, on terms acceptable to the Company. Copyrights and maskwork protection are also key elements in the conduct of the Company's business. The Company also relies on trade secrets and proprietary know-how, which it seeks to protect by confidentiality agreements with its employees and consultants, and with third parties. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that its trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. The semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will receive in the future, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties. The ultimate conclusion with respect to any alleged infringement must be determined by a court or administrative agency in the event of litigation, and there can be no assurance that a court or administrative agency would determine that the Company's products do not infringe the patents in question. Patent litigation is inherently uncertain and the Company cannot predict the result of any such litigation or the level of damages that could be imposed if it were determined that certain of the Company's products or processes infringe any of the patents in question. The Company currently is in litigation with Advanced Micro Devices, Inc. ("AMD") concerning claims by AMD that the Company's flash memory devices infringe two AMD patents. See Item 3 - Legal Proceedings, below. There can be no assurance that other third parties will not assert claims against the Company with respect to existing or future products or that, in the case of the existing or potential allegations described above or any new dispute, licenses to disputed third-party technology will be available on reasonable commercial terms, if at all. In the event of litigation to determine the validity of any third-party claims (or claims against the Company for indemnification related to such third-party claims), including the claims and potential claims referred to in the preceding paragraph, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, and expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured or sold, including Asia, Europe or Latin America, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. - 9 - BACKLOG Sales of the Company's products are made pursuant to standard purchase orders. Purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in the customers' requirements and to price renegotiations. In addition, orders typically may be canceled at the discretion of the buyer without enforceable penalty. The Company's business, in line with that of much of the semiconductor industry is characterized by short lead-time orders and quick delivery schedules. Also, the Company's actual shipments depend on the manufacturing capacity of the Company's foundries. Finally, capacity constraints or unexpected manufacturing delays may prevent the Company from meeting the demand for certain of its products. Therefore backlog is not necessarily indicative of future sales. INVESTMENTS CHARTERED SEMICONDUCTOR CORPORATION In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2.", if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up", or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, in which the Company decided not to participate. The Companies shares are now subject to an additional three-month "lock-up" which expires in August 2000. In June 2000, the underwriter of the secondary offering released the Company from the lockup, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Since Chartered is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to Chartered. In addition, because Chartered is a semiconductor manufacturer, it is subject to additional risks, such at fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurances that the Company's investment in Chartered will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is very likely that Chartered, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of Chartered stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in Chartered. UNITED MICROELECTRONICS CORPORATION In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19% of the outstanding shares and 25% of the total wafer capacity. In April 1998, the Company received approximately US$31.7 million In connection with the sale of 35 million shares of USC, and the Company had the right to receive an additional New Taiwan Dollars ("NTD") 665 million upon the occurrence of certain potential future events, including the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, this right resulted in Alliance's receipt of approximately NTD 665 million (US$ 21.5 million) as a result of the merger between USC and UMC. - 10 - Following the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC made a stock distribution to its employees, thereby the Company's ownership in USC was reduced to 15.1% of the outstanding shares. In April 1999, USC issued 46 million shares to the Company by way of dividend distribution as well as distributions to other entities. As a result of these distributions, the Company owned approximately 14.8% of the outstanding shares. Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights, the board seat, and certain contractual rights, Alliance had participated in both strategic and operating decisions of USC on a routine basis, had rights of approval with respect to major business decisions and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its proportionate share of equity income of USC of $9.5 million, $10.9 million, and $15.5 million, net of tax, respectively. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC has the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. The Company received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. As a result of the merger, at March 31, 2000, the Company owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As the Company no longer has an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expires in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger, the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short term portion of the investments. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% of the Company's holdings at March 31, 2000), is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment - 11 - will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. If the Company sells more that 50% of its original holdings of UMC, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Since UMC is in the semiconductor business, as is the Company, it will be subject to the same fluctuations in market value as is the Company, and may experience downturns in value at the same time the Company is experiencing such downturns. All of the risks that the Company may experience as a semiconductor company are also applicable to UMC. In addition, because UMC is a semiconductor manufacturer, it is subject to additional risks, such as fires and other disasters, excess fabrication capacity, and other risks known to semiconductor manufacturers. There can be no assurance that the Company's investment in UMC will increase in value or even maintain its value. Because of the cyclical nature of the semiconductor industry, it is very likely that UMC, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of UMC stock. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in UMC, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in UMC. MAVERICK NETWORKS, INC. / BROADCOM CORPORATION In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for imbedded memory in an internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split. Broadcom's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Broadcom's and the Company's, sometimes move as a group, it is likely that Broadcom's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in Broadcom will increase in value or even maintain its value. ALLIANCE VENTURE MANAGEMENT, LLC In October 1999, the Company formed Alliance Venture Management, LLC, ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds by allowing them limited participation in the profits of the various investment funds through the management fees paid by the investment funds. In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Ventures I") and Alliance Ventures II, LP ("Alliance Ventures II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts. - 12 - At Alliance Venture Management's inception in November 1999, series A member units and series B member units in Alliance Venture Management were created. The unit holders of Series A units and Series B units receive management fees of 15% of investment gains realized by Alliance Ventures I and Alliance Ventures II, respectively. In February 2000, upon the creation of Alliance Ventures III, LP ("Alliance Ventures III"), the management agreement for Alliance Venture Management was amended to create series C member units which are entitled to receive a management fee of 16% of investment gains realized by Alliance Ventures III. Each of the owners of the Series A, B and C member units paid the initial carrying value for their shares of the member units. While the Company owns 100% of the common units in Alliance Venture Management, it does not hold any series A, B or C member units and does not participate in the management fees generated by the management of the investment funds. Several of the Company's senior management hold the majority of the units of Alliance Venture Management. After Alliance Ventures I was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.3 million in 10 companies, with a fund allocation of $20 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures, has invested approximately $4.4 million in 8 companies, from a total fund allocation of $15 million. As of March 31, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $2 million in one company, from a total fund allocation of $100 million. Certain of the Company's officers have formed private venture funds which invest in some of the same investments as the Company. Additionally, an outside venture fund is being formed in which certain of the Company's officers and employees, as well as the Company itself, are planning to make similar venture investments. Alliance Venture Management generally directs the individual funds to invest in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky, and many venture funds have a large percentage of investments decrease in value or fail. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company has invested in these types of investments. OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on a chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. As a result of the merger, the Company recognized approximately $69 million pre-tax, non-operating gain, in its fiscal fourth quarter ending March 31, 2000, based on the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date of the merger. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned 852,447 shares of Vitesse. - 13 - On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock that had been acquired by Alliance Ventures I in exchange for its sale of one million shares of Orologic as follows:
Shares of Vitesse ----------------- Alliance 632,876 11.21% shares to be held in escrow for 95,417 Alliance Alliance Venture Management 124,154 ----------------- Total shares resulting from sale of 852,447 1,000,000 Orologic shares =================
Alliance Ventures Management then immediately distributed the Vitesse shares to its unit holders. Vitesse's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like Vitesse's and the Company's, sometimes move as a group, it is likely that Vitesse's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in Vitesse will increase in value or even maintain its value. MALLEABLE TECHNOLOGIES, INC. / PMC-SIERRA, INC. In 1999, the Company made an investment in a start-up called Malleable Technologies, Inc. ("Malleable"). This investment was transferred to Alliance Venture I, LP, upon its creation. In June 2000, PMC-Sierra, Inc. ("PMC"), announced that it agreed to acquire Malleable. According to the terms of the proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC does not already own. In connection with the proposed merger, Alliance Ventures I will receive approximately 79,000 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company will report a gain based on the closing share price of PMC on the date of the merger. Based on the closing share price of PMC on June 14, 2000, the estimated pretax gain from this transaction is approximately $11 million. PMC's stock, like many other high technology stocks, has historically experienced material and significant fluctuations in market value, and will probably continue to do so in the future. Additionally, because it is common that high technology stocks, like PMC's and the Company's, sometimes move as a group, it is likely that PMC's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in early 2000. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value. THE INVESTMENT COMPANY ACT OF 1940 Following a special study after the stock market crash of 1929 and the ensuing Depression, Congress enacted the Investment Company Act of 1940 (the "Act"). The Act was primarily meant to regulate mutual funds, such as the families of funds offered by the Fidelity and Vanguard organizations (to pick two of many), and the smaller number of closed-end investment companies that are traded on the public stock markets. In those cases the funds in question describe themselves as being in the business of investing, reinvesting and trading in securities and generally own relatively diversified portfolios of publicly traded securities that are issued by companies that the investment companies do not control. The fundamental intent of the Act is to protect the interests of public investors from fraud and manipulation by the people who establish and operate such investment companies, which constitute large pools of liquid assets that could be used improperly, or be not properly safeguarded, by the persons in control of them. When the Act was written, its drafters (and Congress) also felt that a company could, either deliberately or inadvertently, come to have the defining characteristics of an investment company without proclaiming that fact or being willing to voluntarily submit itself to regulation as an acknowledged investment company, and that investors in such a company could be just as much in need of protection as are investors in companies that are openly and deliberately established as investment companies. In order to deal with this perceived potential abuse, the Act and rules under it contain provisions and set forth principles that are designed to differentiate "true" operating companies from companies that may be considered to have sufficient investment-company-like characteristics to require regulation by the Act's complex procedural and substantive requirements. These provisions apply to companies that own or hold securities, as well as companies that invest, reinvest and trade in securities, and particularly focus on determining the primary nature of a company's activities, including whether an investing - 14 - company controls and does business through the entities in which it invests or, instead, holds its securities investments passively and not as part of an operating business. For instance, under what is, for most purposes, the most liberal of the relevant tests, a company may become subject to the Act's registration requirements if it either holds more than 45% of its assets in, or derives more than 45% of its income from, investments in companies that the investor does not primarily control or through which it does not actively do business. In making these determinations the Act generally requires that a company's assets be valued on a current fair market value basis, determined on the basis of securities' public trading price or, in the case of illiquid securities and other assets, in good faith by the company's board of directors. The Company viewed its investments in Chartered, USC and USIC as operating investments primarily intended to secure adequate wafer manufacturing capacity; as previously noted, the Company's access to the manufacturing resources that it obtained in conjunction with those investments will decrease if the Company ceases to own at least 50% of its original investments in the enterprises, as modified, in the cases of USC and USIC, by their merger into UMC. In addition, the Company believes that, before USC's merger into UMC, the Company's investment in USC constituted a joint venture interest that the staff of the Securities and Exchange Commission (the "SEC") would not regard as a security for purposes of determining the proportion of the Company's assets that might be viewed as having been held in passive investment securities. However, because of the success during the last year of the Company's investments, including its strategic wafer manufacturing investments, at least from the time of the completion of the merger of USC and USIC into UMC in January 2000 the Company believes that it could be viewed as holding a much larger portion of its assets in investment securities than is presumptively permitted by the Act for a company that is not registered under it. On the other hand, the Company also believes that the investments that it currently holds in Chartered and UMC, even though in companies that the Company does not control, should be regarded as strategic deployments of Company assets for the purpose of furthering the Company's memory chip business, rather than as the kind of financial investments that generally are considered to constitute investment securities. Applying certain other tests that the SEC utilizes in determining investment company status, the Company has never held itself out as an investment company; its historical development has focused almost exclusively on the memory chip business; the activities of its officers and employees have been overwhelmingly addressed to achieving success in the memory chip business; and until the past year, its income (and losses) have derived almost exclusively from the memory chip business. Accordingly, the Company believes that it should be regarded as being primarily engaged in a business other than investing, reinvesting, owning, holding or trading in securities, and shortly expects to apply to the SEC for an order under section 3(b)(2) of the Act confirming its non-investment-company status. However, if the Company's investments in Chartered and UMC are now viewed as investment securities, it must be conceded that an unusually large proportion of the Company's assets could be viewed as invested in assets that would, under most circumstances, give rise to investment company status. Therefore, while the Company believes that it has meritorious arguments as to why it should not be considered an investment company and should not be subject to regulation under the Act, there can be no assurance that the SEC will agree. And even if the SEC grants some kind of exemption from investment company status to the Company, it may place significant restrictions on the amount and type of investments the Company is allowed to hold, which might force the Company to divest itself of many of its current investments. Significant potential penalties may be imposed upon a company that should be registered under the Act but is not, and the Company intends to proceed expeditiously to resolve its status. If the Company does not receive an exemption from the SEC, the Company would be required to register under the Act as a closed-end management investment company. In the absence of exemptions granted by the SEC (if it determines to do so in its discretion after an assessment of the public interest), the Act imposes a number of significant requirements and restrictions upon registered investment companies that do not normally apply to operating companies. These would include, but not be limited to, a requirement that at least 40% of the Company's board of directors not be "interested persons" of the Company as defined in the Act and that those directors be granted certain special rights with respect to the approval of certain kinds of transactions (particularly those that pose a possibility of giving rise to conflicts of interest); prohibitions on the grant of stock options that would be outstanding for more than 120 days and upon the use of stock for compensation (which could be highly detrimental to the Company in view of the competitive circumstances in which it seeks to attract and retain qualified employees); and broad prohibitions on affiliate transactions, such as the compensation arrangements applicable to the management of Alliance Venture Management, many kinds of incentive compensation arrangements for management employees and joint investment by persons who control the Company in entities in which the Company is also investing (which could require the Company to abandon or significantly restructure its management arrangements, particularly with respect to its investment activities). While the Company could apply - 15 - for individual exemptions from these restrictions, there could be no guarantee that such exemptions would be granted, or granted on terms that the Company would deem practical. Additionally, the Company would be required to report its financial results in a different form from that currently used by the Company, which would have the effect of turning the Company's Statement of Operations "upside down" by requiring that the Company report its investment income and the results of its investment activities, instead of its operations, as its primary sources of revenue. While the Company is working diligently to deal with these investment company issues, there can be no assurance that a manageable solution will be found. The SEC may be hesitant to grant an exemption from investment company status in the Company's situation, and it may not be feasible for the Company to operate in its present manner as a registered investment company. As a result, the Company might be required to divest itself of assets that it considers strategically necessary for the conduct of its operations, to reorganize as two or more separate companies, or both. Such divestitures or reorganizations could have a material adverse effect upon the Company's business and results of operations. EMPLOYEES As of April 1, 2000, the Company had 161 full-time employees, consisting of 79 in research and development, 5 in marketing, 15 in sales, 29 in administration and 33 in operations. Of the 79 research and development employees (38 in the US and 41 in India), 34 have advanced degrees. In 1997, the Company opened a design center in India. The Company believes that the Company's future success will depend, in part, on its ability to continue to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The Company's employees are not represented by any collective bargaining unit, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. The Company has recently experienced and may continue to experience growth in the number of its employees and the scope of its operating and financial systems, resulting in increased responsibilities for the Company's management. To manage future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire, train, motivate and manage its employees. There can be no assurance that the Company will be able effectively to manage future growth, and the failure to do so could have a material adverse effect on the Company's results of operations. The Company will depend to a large extent on the continued contributions of its founders, N. Damodar Reddy, Chairman of the Board, Chief Executive Officer and President of the Company, and his brother C.N. Reddy, Executive Vice President and Chief Operating Officer of the Company (collectively referred to as the "Reddys"), as well as other officers and key design personnel, many of whom would be difficult to replace. During fiscal 2000 and subsequently, a number of officers and design personnel left the Company to pursue various other opportunities. The future success of the Company will depend on its ability to attract and retain qualified technical and management personnel, particularly highly-skilled design engineers involved in new product development, for whom competition is intense. The loss of either of the Reddys or key design personnel could delay product development cycles or otherwise have a material adverse effect on the Company's business. The Company is not insured against the loss of any of its key employees, nor can the Company assure the successful recruitment of new and replacement personnel. ITEM 2 FACILITIES The Company's executive offices and its principal marketing, sales and product development operations are located in a 56,600 square foot leased facility in Santa Clara, California under a lease which expires in June 2006. The Company has an option to extend the lease for a term of five years. The Company also leases office space in Hsin-Chu, Taiwan to manage the logistics of the wafer fabrication, assembly and testing of the Company's products in Taiwan. The Company leases an engineering office in Bangalore, India, and has purchased a parcel of land in an office park under development in Hyderabad, India, for product development. Additionally, the Company leases sales offices in Natick, Massachusetts; Heathrow, Florida; San Diego, California: Berkshire, United Kingdom; Taipei, Taiwan; and Japan. - 16 - ITEM 3 LEGAL PROCEEDINGS In March 1996, a putative class action lawsuit was filed against the Company and certain of its officers and directors and others in the United States District Court for the Northern District of California, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. The complaint alleged that the Company, N.D. Reddy and C.N. Reddy also had liability under Section 20(a) of the Exchange Act. The complaint, brought by an individual who claimed to have purchased 100 shares of the Company's common stock on November 2, 1995, was putatively brought on behalf of a class of persons who purchased the Company's common stock between July 11, 1995 and December 29, 1995. In April 1997, the Court dismissed the complaint, with leave to file an amended complaint. In June 1997, plaintiff filed an amended complaint against the Company and certain of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to dismiss the amended complaint. In March 1998, the court ruled in defendants' favor as to all claims but one, and dismissed all but one claim with prejudice. In April 1998, defendants requested reconsideration of the ruling as to the one claim not dismissed. In June 1998, the parties stipulated to dismiss the remaining claim without prejudice, on the condition that in the event the dismissal with prejudice of the other claims is affirmed in its entirety, such remaining claim shall be deemed dismissed with prejudice. In June 1998, the court entered judgment dismissing the case pursuant to the parties' stipulation. Plaintiffs have appealed the court's ruling dismissing the claims and the parties have filed appeal briefs. The Company intends to continue to defend vigorously against any claims asserted against it, and believes it has meritorious defenses. Due to the inherent uncertainty of litigation, the Company is not able to reasonably estimate the potential losses, if any, that may be incurred in relation to this litigation. In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a wholly-owned subsidiary of the Company, was served with a complaint filed in Federal Court alleging that ASIC had infringed two patents owned by AMD related to flash memory devices, and seeking injunctive relief and damages. In March 1997, the Company was added as a defendant. In April 1996, the Court allowed AMD to expand its claims to include several new flash products which had been recently announced by the Company. In January and February 2000, both parties filed for motions for summary judgment. Each defendant has denied the allegations of the complaint and asserted a counterclaim for declaration that each of the AMD patents is invalid and not infringed by such defendant. A trial date is currently set for September 2000. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. The appeal brief and reply briefs have been filed and the parties are awaiting oral arguments before the Court in June 2000. In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999, the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand - 17 - determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination will be transmitted to the CIT on June 26, 2000 for consideration. The decision of the CIT can be further appealed to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. In April 2001, the Company will have an opportunity to request a review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties, if any, owed on imports from April 2000 through March 2001 will remain undetermined until the conclusion of the review in early 2002. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. At March 31, 2000, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that DRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing DRAMs was materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requested the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily determined that there was a reasonable indication that the imports of the products under investigation were injuring the United States industry. In May 1999 the DOC issued a preliminary affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after May 28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the preliminary "all others" rate) of the entered value of such DRAMs, an antidumping margin calculated by weight-averaging the antidumping margins of individually investigated respondent companies. The Company posted a bond to cover deposits on such entries. In October 1999 the DOC issued a final affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on December 8, 1999, the ITC issued a final negative determination of injury. Consequently, the investigation was terminated, the suspension of liquidation lifted, and the bond posted in September 1999 released. In January 2000, Micron filed an appeal in the CIT challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs were not causing material injury to the U.S. industry. On March 21, 2000 the appeal of the ITC decision was dismissed by the CIT. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning executive officers of the Company as of the date of this report is set forth below:
Name Age Position - ---------------- ---- -------------------------------------------------- N. Damodar Reddy 61 Chairman, President and Chief Executive Officer C.N. Reddy 44 Executive Vice President, Chief Operating Officer, Director and Secretary David Eichler 51 Vice President, Finance and Administration and Chief Financial Officer Bradley Perkins 43 Vice President and General Counsel Ritu Shrivastava 49 Vice President, Technology Development
- 18 - N. Damodar Reddy is the co-founder of the Company and has served as the Company's Chairman of the Board, Chief Executive Officer and President from its inception in February 1985. Mr. Reddy also served as the Company's Chief Financial Officer from June 1998 until January 1999 . From September 1983 to February 1985, Mr. Reddy served as President and Chief Executive Officer of Modular Semiconductor, Inc., and from 1980 to 1983, he served as manager of Advanced CMOS Technology Development at Synertek, Inc., a subsidiary of Honeywell, Inc. Prior to that time, Mr. Reddy held various research and development and management positions at Four Phase Systems, a subsidiary of Motorola, Inc., Fairchild Semiconductor and RCA Technology Center. Mr. Reddy is a member of the board of directors of two publicly traded companies, Sage, Inc. and eMagin Corporation. He holds an M.S. degree in Electrical Engineering from North Dakota State University and an M.B.A. from Santa Clara University. N. Damodar Reddy is the brother of C.N. Reddy. C.N. Reddy is the co-founder of the Company and has served as the Company's Secretary and director since its inception in February 1985. Beginning in February 1985, Mr. Reddy served as the Company's Vice President - Engineering. In May 1993, he was appointed Senior Vice-President - Engineering and Operations of the Company. In December 1997, he was appointed Executive Vice President and Chief Operating Officer. From 1984 to 1985, he served as Director of Memory Products of Modular Semiconductor, Inc., and from 1983 to 1984, Mr. Reddy served as a SRAM product line manager for Cypress Semiconductor Corporation. From 1980 to 1983, Mr. Reddy served as a DRAM development manager for Texas Instruments, Inc. and, before that, he was a design engineer with National Semiconductor Corporation for two years. Mr. Reddy holds an M.S. degree in Electrical Engineering from Utah State University. C.N. Reddy is named inventor of over 15 patents related to SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy. David Eichler joined the Company in January 1999, and was appointed Vice President Finance and Administration and Chief Financial Officer. Prior to joining the Company, Mr. Eichler was Vice President Finance and Chief Accounting Officer for Adobe Systems Incorporated in 1998. From 1994 to 1998, he was Senior Vice President Finance & Administration and Chief Financial Officer for Hyundai Electronics America. He has also held senior financial management positions at Syntex Corporation, Oki Semiconductor and Tandem Computers Incorporated. Bradley A. Perkins joined the Company in January 1999, and was appointed Vice President and General Counsel. Prior to joining the Company, Mr. Perkins was Vice President, General Counsel and Secretary at Mission West Properties (formerly Berg & Berg Developers), from January 1998 to January 1999. From November 1991 to January 1998, Mr. Perkins was with Valence Technology, Inc., where he was Vice President, General Counsel and Secretary. From August 1988 to November 1991, Mr. Perkins was Assistant General Counsel and Intellectual Property Counsel with VLSI Technology, Inc. Ritu Shrivastava joined the Company in November 1993, and was appointed Vice President - Technology Development in August 1995. Mr. Shrivastava was designated as an executive officer of the Company in July 1997. Prior to joining the Company, Dr. Shrivastava worked at Cypress Semiconductor Corporation for more than 10 years in various technology management positions, the last one being Director of Technology Development. Prior to that time, Dr. Shrivastava was with Mostek Corporation for 3 years, responsible for CMOS development. Dr. Shrivastava served on the Electrical Engineering faculty at Louisiana State University where he also received his Ph.D.. Dr. Shrivastava completed his Masters and Bachelor's degrees in Electrical Communication Engineering from Indian Institute of Science, Bangalore, India and a Bachelor's degree in Physics from Jabalpur University, India. Dr. Shrivastava is named inventor in over 9 patents related to various technologies, and is a Senior Member of IEEE. - 19 - ================================================================================ PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the NASDAQ National Market under the symbol ALSC. The Company completed its initial public offering on December 1, 1993. The following table sets forth, for the periods indicated the high and low closing sale prices on NASDAQ for the Company's Common Stock.
Fiscal Year High Low ----------- ---------- 1999 1st Quarter $9.62 $2.56 2nd Quarter 3.66 2.09 3rd Quarter 5.12 1.94 4th Quarter 5.56 2.50 2000 1st Quarter $11.56 $2.63 2nd Quarter 12.94 7.69 3rd Quarter 16.69 9.00 4th Quarter 26.31 14.81 2001 1st Quarter $29.38 $14.00 (through June 19, 2000)
As of June 19, 2000, there were approximately 131 holders of record of the Company's Common Stock. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings, if any, for development of its business and, therefore, does not anticipate that it will declare or pay cash dividends on its capital stock in the foreseeable future. - 20 - ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes selected consolidated financial information for each of the five fiscal years ended March 31st and should be read in conjunction with the consolidated financial statements and notes relating thereto.
Year Ended March 31, ----------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues $89,153 $47,783 $118,400 $82,572 $201,098 Cost of revenues 58,428 60,231 117,400 84,630 158,159 -------- -------- ------- -------- -------- Gross profit (loss) 30,725 (12,448) 1,000 (2,058) 42,939 Operating expenses: Research and development 14,568 14,099 15,254 15,012 14,664 Selling, general and 15,962 12,652 18,666 10,344 17,202 administrative -------- -------- ------- -------- -------- Income (loss)from 195 (39,199) (32,920) (27,414) 11,073 operations Gain on investments 1,049,130 15,823 - - - Other income, net 29 (1,126) 287 6,498 1,753 -------- -------- ------- -------- -------- Income (loss) before 1,049,354 (24,502) (32,633) (25,661) 17,571 income taxes Provision for income taxes 410,348 8,397 (11,421) (8,990) 6,852 -------- -------- ------- -------- -------- Income (loss) before 639,006 (32,899) (21,212) (16,671) 10,719 equity in investees Equity in income of 9,094 10,856 15,475 - - investees -------- -------- ------- -------- -------- Net income (loss) $648,100 $(22,043) $(5,737) $(16,671 $10,719 ======== ======== ======= ======== ======== Net income (loss) per share: Basic $15.49 $(0.53) $(0.15) $(0.43) $0.28 ======== ======== ======= ======== ======== Diluted $15.07 $(0.53) $(0.15) $(0.43) $0.26 ======== ======== ======= ======== ======== Weighted average number of common shares: Basic 41,829 41,378 39,493 38,653 37,900 ======== ======== ======= ======== ======== Diluted 42,992 41,378 39,493 38,653 40,633 ======== ======== ======= ======== ======== Year ended March 31, ----------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital $615,937 $22,102 $39,879 $78,000 $106,171 Total assets 1,520,442 193,557 243,668 232,486 263,238 Stockholders' equity 963,955 163,570 189,111 204,594 219,381 Long term obligations 2,714 578 1,276 2,219 -
- 21 -
Fiscal Year 2000 Fiscal Year 1999 ------------------------------------------ ----------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ---------- --------- ---------- ---------- --------- --------- --------- ---------- Operating Summary: (in thousands, except per share data) Net revenues $28,833 $23,497 $19,112 $17,711 $13,879 $13,282 $10,472 $10,150 Cost of revenues 18,241 15,412 12,304 12,470 8,332 10,864 13,544 27,491 ---------- --------- ---------- ---------- --------- --------- --------- ---------- Gross profit (loss) 10,592 8,085 6,808 5,241 5,547 2,418 (3,072) (17,341) Operating expenses: Research and 3,789 3,330 4,244 3,206 3,087 3,285 3,511 4,216 development Selling, general and 3,355 6,753 3,108 2,745 2,981 2,863 2,797 4,011 administrative ---------- --------- ---------- ---------- --------- --------- --------- ---------- Income (loss) from 3,448 (1,998) (544) (710) (521) (3,730) (9,380) (25,568) operations Gain on investments 988,717 5,111 3,696 51,606 - - - 15,823 Other income 233 (56) (269) 121 (476) (387) (180) (83) (expense), net ---------- --------- ---------- ---------- --------- --------- --------- ---------- Income (loss) before 992,398 3,057 2,883 51,017 (997) (4,117) (9,560) (9,828) income taxes Provision (benefit) 410,945 (963) 1,186 (819) - - - 8,397 for income taxes ---------- --------- ---------- ---------- --------- --------- --------- ---------- Income (loss) before 581,453 4,020 1,697 51,836 (997) (4,117) (9,560) (18,225) equity in income of investees Equity in income (368) 5,134 2,796 1,532 1,555 2,064 3,691 3,546 (loss) of investees ---------- --------- ---------- ---------- --------- --------- --------- ---------- Net income (loss) $581,085 $9,154 $4,493 $53,368 $558 $(2,053) $(5,869) $(14,679) ========== ========= ========== ========== ========= ========= ========= ========== Net income (loss) per share: Basic $13.88 $0.22 $0.11 $1.28 $0.01 $(0.05) $(0.14) $(0.36) ========== ========= ========== ========== ========= ========= ========= ========== Diluted $13.48 $0.21 $0.10 $1.27 $0.01 $(0.05) $(0.14) $(0.36) ========== ========= ========== ========== ========= ========= ========= ========== Weighted average number of common shares: Basic 41,864 41,858 41,812 41,608 41,573 41,512 41,456 40,963 ========== ========= ========== ========== ========= ========= ========= ========== Diluted 43,118 42,944 42,995 42,149 41,840 41,512 41,456 40,963 ========== ========= ========== ========== ========= ========= ========= ==========
During fiscal year 2000, the Company experienced an increase in the average selling price and increased demand for DRAM and SRAM products. In the first fiscal 2000 quarter, the Company recognized a gain on its investment in Maverick Networks ("Maverick") when it was sold to Broadcom Corporation ("Broadcom"), for $51.6 million. In subsequent quarters, the Company recognized additional gains of $23.7 million on sale of Broadcom securities. In the third fiscal 2000 quarter, the Company also recorded a $3.6 million discretionary non-recurring compensation expense related to this transaction. In the fourth fiscal 2000 quarter, the Company recognized a gain on its investment in United Microelectronics Corporation ("UMC") of $908 million ($532 million net of tax). Also in the fourth fiscal 2000 quarter, the Company recognized a gain of $69 million ($41 million net of tax) on its investment in Orologic Corporation ("Orologic") when it was sold to Vitesse Semiconductor Corporation ("Vitesse"). In fiscal 1999, the Company recorded pre-tax charges in the first, second and third quarters of approximately $20 million for decline in market value of certain inventory and to provide additional reserves for obsolete and excess inventory. During the first quarter of fiscal 1999, the Company recorded a valuation allowance of $8.4 million with respect to the Company's previously recorded deferred tax assets. In the first quarter of fiscal 2000, when the Company recognized a gain of $51.6 million related to the sale of Maverick Networks to Broadcom Corporation, the Company released the entire $17.8 million valuation allowance and recorded the tax benefit as an offset to income. - 22 - ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements in this Management's Discussion and Analysis that are forward looking involve numerous risks and uncertainties and are based on current expectations. Actual results may differ materially. Certain of these risks and uncertainties are discussed under "Factors That May Affect Future Results." OVERVIEW The Company designs and develops high performance memory products and memory intensive logic products. These circuits are used in a wide variety of electronic products, including; desktop and portable computers, networking, telecommunications, instrumentation and consumer devices. The Company's business strategy has been to be a supplier of these products, operating on a fabless basis by utilizing independent manufacturing facilities. During fiscal 2000, DRAM products accounted for approximately 56% of net revenues, SRAM products accounted for approximately 43% of net revenues and flash products accounted for approximately 1% of net revenues. This compares to 40%, 58% and 2%, respectively, for fiscal 1999. During the latter part of fiscal 1999, the Company introduced 16-Mbit DRAM in 4-Mbit x 4 configuration. The market for memory products used in personal computers is characterized by price volatility and has experienced significant fluctuations and cyclical downturns in product demand, such as the severe price erosion of DRAMs and SRAMs in fiscal 1999, 1998 and 1997. While the Company's strategy is to increase its penetration into the networking, telecommunications, instrumentation and consumer markets with its existing SRAM, DRAM and flash products and to develop and sell in volume quantities new products complementary to its existing products, the Company may not be successful in executing such strategy. A decline in demand in the personal computer industry or lack of success in developing new markets or new products could have a material adverse effect on the Company's results of operations. RESULTS OF OPERATIONS The percentage of net revenues represented by certain line items in the Company's consolidated statements of operations for the years indicated, are set forth in the table below.
Percentage of Net Revenues for Year Ended March 31, -------------------------------------- 2000 1999 1998 ----------- ------------ ----------- Net revenues 100.0% 100.0% 100.0% Cost of revenues 65.5 126.1 99.2 ----------- ------------ ----------- Gross profit (loss) 34.5 (26.1) 0.8 Operating expenses: Research and development 16.3 29.5 12.9 Selling, general and 17.9 26.5 15.7 administrative ----------- ------------ ----------- Income( loss) from operations 0.3 (82.1) (27.8) Gain on investments 1176.8 33.2 - Other income, net 0.0 (2.4) 0.2 ----------- ------------ ----------- Income (loss) before income taxes 1177.1 (51.3) (27.6) Provision (benefit) for income 460.3 17.7 (9.7) taxes ----------- ------------ ----------- Income (loss) before equity in 716.8 (69.0) (17.9) Income of investees Equity in income of investees 10.2 22.7 13.1 ----------- ------------ ----------- Net income (loss) 727.0% (46.3)% (4.8)% =========== ============ ===========
NET REVENUES The Company's net revenues increased to $89.2 million in fiscal 2000 or approximately 87%, from $47.8 million in fiscal 1999. The increase in net revenues in fiscal 2000 was primary due to a combination of sale of new products, overall increase in average selling prices and increase in unit sales of the Company's SRAM and DRAM products. The Company's net revenues in fiscal 1999 declined to $47.8 million from $118.4 million in fiscal 1998, - 23 - a decrease of approximately 60%. The decrease in net revenues in fiscal 1999 was due to a lower average selling price and a drop in the unit shipments of the Company's SRAM, DRAM and MMUI products. Net revenue from the Company's DRAM product family in fiscal 2000 contributed $50.2 million or approximately 56%, up from $18.4 million or approximately 39% in fiscal 1999. During fiscal 2000, sales of the Company's 16-Mbit DRAM in 4-Mbit x 4 configuration, which was introduced in the latter part of fiscal 1999, increased significantly along with an overall increase in the average selling prices. DRAM net revenues for fiscal 1998 were $76.1 million or approximately 64% of total net revenues. Net revenue from the Company's SRAM product family in fiscal 2000 contributed $38.1 million or approximately 43% of the Company's revenues. In absolute dollars, this was an increase of $9.7 million but as a percent of total revenues was down 17%. SRAM average selling prices and units sales increased throughout fiscal 2000. SRAM net revenues in fiscal 1998 were $33.7 million or approximately 28% of total net revenues. The Company's flash memory products did not contribute any significant revenues for fiscal 2000 and prior years. The Company continues to focus its effort in selling in the non-PC market. Net sales to non-PC segments of the market, such as telecommunications, networking, datacom and consumer in fiscal 2000 accounted for approximately 56% compared to approximately 52% during fiscal 1999 and 25% in fiscal 1998. International net revenues in fiscal 2000 increased by approximately 121% over fiscal 1999. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest increase in international net revenues was to customers in Europe, which increased approximately 195% over fiscal year 1999. The increase was due to an overall increase in product demand and higher selling prices. See Note 15 of Notes to Consolidated Financial Statements for details of revenue by geographic area.. During fiscal 2000, one customer accounted for approximately 10% of net revenues. Two customers accounted for approximately 15% and 13% of net revenues during fiscal 1999, while one customer in fiscal 1998 accounted for approximately 18%. See Note 1 of Notes to Consolidated Financial Statements. Generally, the markets for the Company's products are characterized by volatile supply and demand conditions, numerous competitors, rapid technological change, and product obsolescence. These conditions, which could require the Company to make significant shifts in its product mix in a relatively short period of time. These changes involve several risks, including, among others, constraints or delays in timely deliveries of products from the Company's suppliers; lower than anticipated wafer manufacturing yields; lower than expected throughput from assembly and test suppliers; and less than anticipated demand and selling prices. The occurrence of any problems resulting from these risks could have a material adverse effect on the Company's results of operations. GROSS PROFIT (LOSS) The Company's gross profit for fiscal 2000 was approximately $30.7 million or 34.5% of net revenues as compared to a loss of approximately $12.4 million or approximately 26.1% of net revenues for the same period in fiscal 1999, and $1 million or approximately 0.8% in fiscal 1998. The dramatic improvement in gross profits during fiscal year 2000 was primarily the result of higher average selling prices, higher unit sales, and an increased mix of higher margin DRAM products. During fiscal 1999, the Company recorded $20 million pre-tax inventory charges in recognition of lower average selling prices together with the decline in the unit shipments for the Company's DRAM and SRAM products due to competitive market conditions. The Company's gross profit for fiscal 1998 was approximately $1 million or approximately 0.8% of net revenues and recorded a pre-tax charge of approximately $15 million, primarily to adjust the value of the Company's inventory to reflect declines in market value. The Company is subject to a number of factors that may have an adverse impact on gross profits, including the availability and cost of products from the Company's suppliers; increased competition and related decreases in unit average selling prices; changes in the mix of product sold; and the timing of new product introductions and volume shipments. In addition, the Company may seek to add additional foundry suppliers and transfer existing and newly developed products to more advanced manufacturing processes. The commencement of manufacturing at a new foundry is often characterized by lower yields as the manufacturing process is refined. There can be no assurance that the commencement of such manufacturing will not have a material adverse effect on the Company's gross profits in future periods. - 24 - RESEARCH AND DEVELOPMENT Research and development expenses consist principally of salaries and benefits for engineering design, contracted development efforts, facilities costs, equipment and software depreciation and amortization, wafer masks and tooling costs, test wafers and other expense items. Research and development expenses were approximately $14.6 million or approximately 16.3% of net revenues for fiscal 2000 as compared to $14.1 million or approximately 29.5% of net revenues for fiscal 1999, and approximately $15.3 million or approximately 12.9% of net revenues for fiscal 1998. The small increase in spending between fiscal 2000 and 1999 was due to higher mask and tooling charges while the decrease in spending between fiscal 1999 and 1998 was due to lower engineering headcount and personnel related costs, as well as, lower mask and tooling charges due to the discontinuance of the Company's graphic accelerator product line in July 1998. During fiscal 2000, the Company's development efforts focused on advanced process and design technology involving SRAMs, DRAMs and Flash memory products. The Company believes that investments in research and development are necessary to remain competitive in the marketplace and accordingly, research and development expenses may increase in absolute dollars and may also increase as a percentage of net revenue in future periods. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses generally include salaries and benefits associated with sales, sales support, marketing and administrative personnel, as well as sales commissions, outside marketing costs, travel, equipment depreciation and software amortization, facilities costs, bad debt expense, insurance and legal costs. Selling, general and administrative expenses in fiscal 2000 were approximately $16.0 million or approximately 17.9% of net revenues as compared to approximately $12.7 million or approximately 26.5% in fiscal 1999 and approximately $18.7 million or approximately 15.7% of net revenues for fiscal 1998. In fiscal 2000, the Company recorded a $3.6 million discretionary non-recurring compensation expense related to the sale of Maverick Networks, Inc. ("Maverick") to Broadcom Corporation ("Broadcom"). The decrease in spending in fiscal 1999 compared to fiscal 1998 was due principally to lower outside sales commissions which was a result of a 60% decrease in net revenues, which was partially offset by higher legal fees associated with the SRAM anti-dumping proceeding. Selling, general and administrative expenses may increase in absolute dollars, and may also fluctuate as a percentage of net revenues in the future primarily as the result of commissions, which are dependent on the level of revenues. GAIN ON INVESTMENTS On May 31, 1999, Maverick (an entity in which the Company had a 39% interest in) completed a transaction with Broadcom, resulting in the Company selling its ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax gain in the first quarter of fiscal 2000 of approximately $51.6 million. Subsequent to the transaction date, the Company's investment in Broadcom is being be accounted for as an available-for-sale marketable security in accordance with SFAS 115. During fiscal 2000, the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax gain of approximately $23.7 million. At March 31, 2000, the Company owned 487,522 shares, after being adjusted for a 2 for 1 stock split in February 2000, and recorded an additional unrealized gain of approximately $23.4 million, which is net of deferred tax of approximately $16.1 million tax, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. See Note 2 of Notes to Consolidated Financial Statements. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% - 25 - ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000, the Company owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As the Company no longer has an ability to exercise significant influence over UMC's operations, the investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US $3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued approximately $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expires in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available for sale every six months thereafter, during years three and four (i.e. 2002 to 2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short term portion of the investments. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% of the Company's holdings at March 31, 2000), is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. On March 31, 2000, Orologic completed a transaction with Vitesse, resulting in the Company selling its ownership interest in Orologic in exchange for 852,447 shares of Vitesse. Based on Vitesse's closing share price on the date of sale, the Company recognized approximately $69 million pre-tax, non-operating gain, in fiscal 2000. Subsequent to the transaction date, the Company's investment in Vitesse is being be accounted for as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owns 852,447 Vitesse shares. See Note 7 of Notes to Consolidated Financial Statements. OTHER INCOME, NET Other Income, Net represents interest income from short-term investments and interest expense on short and long-term obligations. Other Income, Net was approximately $29,000 compared to a net expense of $1.1 million in fiscal 1999 and net income of $287,000 in fiscal 1998. The change from fiscal 1999 to fiscal 2000 was attributed to higher interest income and lower interest expense. PROVISION FOR INCOME TAXES The Company's effective tax rate for fiscal years 2000, 1999 and 1998 was 39.1%, (34.3%), and 35.0%, respectively. During fiscal 2000, the Company recorded a provision for income taxes of approximately $410.3 million, primarily the result of the gains on investments of Broadcom, UMC and Vitesse. For the year ended March 31, 1999, the Company incurred a $24.5 million pretax loss, $9.8 million of which was incurred in the quarter ended June 30, 1998. As a result of the fiscal year 1999 loss, the lack of carryback potential, and the uncertainty regarding future results due to significant, rapid and unexpected product selling price declines that the Company experienced during the first and subsequent quarters of fiscal 1999, management - 26 - could no longer conclude that it was "more likely than not" that its deferred tax assets would be realized. As a result, a full valuation allowance of $8.4 million was recorded during quarter ended June 30, 1998. EQUITY IN INCOME OF INVESTEES Prior to the UMC merger discussed elsewhere, the Company had made several investments with other parties to form a separate Taiwanese company, USC. This investment was accounted for under the equity method of accounting with a ninety-day lag in reporting the Company's share of results for the entity. Equity in income of USC reflects the company's share of income earned by USC for the previous quarter. In fiscal 2000, the Company reported its share in the income of USC in the amount of $9.5 million. As a result of the merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment. In fiscal 1999, the Company reported its share in the income of USC in the amount of $10.9 million, as compared to $15.5 million reported in fiscal 1998. The 30% decrease in income between fiscal 1999 and 1998 was primarily due to lower net income and a decrease in the Company's ownership percentage from approximately 18% to 15%. The Company, through Alliance Venture Management, invested approximately $28.7 million during fiscal 2000 in three Alliance ventures funds, Alliance Ventures I, Alliance Ventures II and Alliance Ventures III. Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.3 million in ten companies, with approximately $20 million allocated to this fund. Alliance Ventures II, whose focus is in investing in internet start-up ventures, has approximately $4.4 million invested to-date in eight companies, with approximately $15 million total designated for this fund. Alliance Ventures III, whose focus is on emerging companies in the networking and communication market areas, has invested $2 million in one company and has been allocated up to $100 million for new investments. Several of the Alliance Venture investments are accounted for as the equity method due to the Company's ability to exercise significant influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of Alliance Ventures was approximately $368,000 for the year ended March 31, 2000. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's quarterly and annual results of operations have historically been, and will continue to be, subject to quarterly and other fluctuations due to a variety of factors, including: general economic conditions; changes in pricing policies by the Company, its competitors or its suppliers; anticipated and unanticipated decreases in unit average selling prices of the Company's products; fluctuations in manufacturing yields, availability and cost of products from the Company's suppliers; the timing of new product announcements and introductions by the Company or its competitors; changes in the mix of products sold; the cyclical nature of the semiconductor industry; the gain or loss of significant customers; increased research and development expenses associated with new product introductions; market acceptance of new or enhanced versions of the Company's products; seasonal customer demand; and the timing of significant orders. Results of operations could also be adversely affected by economic conditions generally or in various geographic areas, other conditions affecting the timing of customer orders and capital spending, a downturn in the market for personal computers, or order cancellations or rescheduling. Additionally, because the Company is continuing to increase its operating expenses for personnel and new product development to be able to support increased sales levels, the Company's results of operations will be adversely affected if such increased sales levels are not achieved. The markets for the Company's products are characterized by rapid technological change, evolving industry standards, product obsolescence and significant price competition and, as a result, are subject to decreases in average selling prices. The Company experienced significant deterioration in the average selling prices for its SRAM and DRAM products during fiscal years 1998, 1997 and 1996. The Company is unable to predict the future prices for its products. Historically, average selling prices for semiconductor memory products have declined and the Company expects that average-selling prices will decline in the future. Accordingly, the Company's ability to maintain or increase revenues will be highly dependent on its ability to increase unit sales volume of existing products and to successfully develop, introduce and sell new products. Declining average selling prices will also adversely affect the Company's gross margins unless the Company is able to significantly reduce its cost per unit in an amount to offset the declines in average selling prices. There can be no assurance that the Company will be able to increase unit sales volumes of existing products, develop, introduce and sell new products or significantly - 27 - reduce its cost per unit. There also can be no assurance that even if the Company were to increase unit sales volumes and sufficiently reduce its costs per unit, the Company would be able to maintain or increase revenues or gross margins. The Company usually ships more product in the third month of each quarter than in either of the first two months of the quarter, with shipments in the third month higher at the end of the month. This pattern, which is common in the semiconductor industry, is likely to continue. The concentration of sales in the last month of the quarter may cause the Company's quarterly results of operations to be more difficult to predict. Moreover, a disruption in the Company's production or shipping near the end of a quarter could materially reduce the Company's net sales for that quarter. The Company's reliance on outside foundries and independent assembly and testing houses reduces the Company's ability to control, among other things, delivery schedules. The cyclical nature of the semiconductor industry periodically results in shortages of advanced process wafer fabrication capacity such as the Company has experienced from time to time. The Company's ability to maintain adequate levels of inventory is primarily dependent upon the Company obtaining sufficient supply of products to meet future demand, and any inability of the Company to maintain adequate inventory levels may adversely affect its relations with its customers. In addition, the Company must order products and build inventory substantially in advance of products shipments, and there is a risk that because demand for the Company's products is volatile and subject to rapid technology and price change, the Company will forecast incorrectly and produce excess or insufficient inventories of particular products. This inventory risk is heightened because certain of the Company's key customers place orders with short lead times. The Company's customers' ability to reschedule or cancel orders without significant penalty could adversely affect the Company's liquidity, as the Company may be unable to adjust its purchases from its independent foundries to match such customer changes and cancellations. The Company has in the past produced excess quantities of certain products, which has had a material adverse effect on the Company's results of operations. There can be no assurance that the Company in the future will not produce excess quantities of any of its products. To the extent the Company produces excess or insufficient inventories of particular products, the Company's results of operations could be adversely affected, as was the case in fiscal 1999, 1998 and 1997, when the Company recorded pre-tax charges totaling approximately $20 million, $15 million and $17 million, respectively, primarily to reflect a decline in market value of certain inventory. The Company currently relies on independent foundries to manufacture all of the Company's products. Reliance on these foundries involves several risks, including constraints or delays in timely delivery of the Company's products, reduced control over delivery schedules, quality assurance and costs and loss of production due to seismic activity, weather conditions and other factors. In or about October 1997, a fire caused extensive damage to United Integrated Circuits Corporation ("UICC"), a foundry joint venture between UMC and various companies. UICC is located next to UMC in the Hsin-Chu Science-Based Industrial Park, where Company has products manufactured. UICC suffered an additional fire in January 1998, and since October 1996, there have been at least two other fires at semiconductor manufacturing facilities in the Hsin-Chu Science-Based Industrial Park. There can be no assurance that fires or other disasters will not have a material adverse affect on UMC in the future. In addition, as a result of the rapid growth of the semiconductor industry based in the Hsin-Chu Science-Based Industrial Park, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could adversely affect the Company's foundries' ability to supply the Company's products, which could have a material adverse effect on the Company's results of operations or financial condition. Although the Company continuously evaluates sources of supply and may seek to add additional foundry capacity, there can be no assurance that such additional capacity can be obtained at acceptable prices, if at all. The occurrence of any supply or other problem resulting from these risks could have a material adverse effect on the Company's results of operations, as was the case during the third quarter of fiscal 1996, during which period manufacturing yields of one of the Company's products were materially adversely affected by manufacturing problems at one of the Company's foundry suppliers. There can be no assurance that other problems affecting manufacturing yields of the Company's products will not occur in the future. There is an ongoing risk that the suppliers of wafer fabrication, wafer sort, assembly and test services to the Company may increase the price charged to the Company for the services they provide, to the point that the Company may not be able to profitably have its products produced at such suppliers. The occurrence of such price increases could have a material adverse affect on the Company's results of operations. The Company conducts a significant portion of its business internationally and is subject to a number of risks resulting from such operations. Such risks include political and economic instability and changes in diplomatic and trade relationships, foreign currency fluctuations, unexpected changes in regulatory requirements, delays resulting - 28 - from difficulty in obtaining export licenses for certain technology, tariffs and other barriers and restrictions, and the burdens of complying with a variety of foreign laws. Current or potential customers of the Company in Asia, for instance, may become unwilling or unable to purchase the Company's products, and the Company's Asian competitors may be able to become more price-competitive relative to the Company due to declining values of their national currencies. There can be no assurance that such factors will not adversely impact the Company's results of operations in the future or require the Company to modify its current business practices. Additionally, other factors may materially adversely affect the Company's results of operations. The Company relies on domestic and offshore subcontractors for die assembly and testing of products, and is subject to risks of disruption in adequate supply of such services and quality problems with such services. The Company is subject to the risks of shortages of goods or services and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. The Company faces intense competition, and many of its principal competitors and potential competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer-standing relationships with customers than does the Company, any of which factors may place such competitors and potential competitors in a stronger competitive position than the Company. The Company's corporate headquarters are located near major earthquake faults, and the Company is subject to the risk of damage or disruption in the event of seismic activity. There can be no assurance that any of the foregoing factors will not materially adversely affect the Company's results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Upon adoption of SFAS No. 133, we will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. We believe the adoption of this statement will not have a significant effect on our results of operations. Current pending litigation, administrative proceedings and claims are set forth in Item 3 - Legal Proceedings and in Item 1 - Licenses, Patents and Maskwork Protection, above. The Company intends to vigorously defend itself in the litigation and claims and, subject to the inherent uncertainties of litigation and based upon discovery completed to date, management believes that the resolution of these matters will not have a material adverse effect on the Company's financial position. However, should the outcome of any of these actions be unfavorable, the Company may be required to pay damages and other expenses, or may be enjoined from manufacturing or selling any products deemed to infringe the intellectual property rights of others, which could have a material adverse effect on the Company's financial position or results of operations. Moreover, the semiconductor industry is characterized by frequent claims and litigation regarding patent and other intellectual property rights. The Company has from time to time received, and believes that it likely will in the future receive, notices alleging that the Company's products, or the processes used to manufacture the Company's products, infringe the intellectual property rights of third parties, and the Company is subject to the risk that it may become party to litigation involving such claims (the Company currently is involved in patent litigation). In the event of litigation to determine the validity of any third-party claims (such as the current patent litigation), or claims against the Company for indemnification related to such third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from other matters. In the event of an adverse ruling in such litigation, the Company might be required to cease the manufacture, use and sale of infringing products, discontinue the use of certain processes, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology. In addition, depending upon the number of infringing products and the extent of sales of such products, the Company could suffer significant monetary damages. In the event of a successful claim against the Company and the Company's failure to develop or license a substitute technology, the Company's results of operations could be materially adversely affected. The Company also, as a result of an antidumping proceeding commenced in February 1997, must pay a cash deposit equal to 50.15% of the entered value of any SRAMs manufactured (wafer fabrication) in Taiwan, in order to import such goods into the U.S. Although the Company may be refunded such deposits in the future (see Item 3 - Legal Proceedings, above), the deposit requirement, and the potential that all entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 1999 will be liquidated at the bond rate or deposit rate in effect at - 20 - the time of entry, may materially adversely affect the Company's ability to sell in the United States SRAMs manufactured (wafer fabrication) in Taiwan. The Company manufactures (wafer fabrication) SRAMs in Singapore (and has manufactured SRAMs in the United States as well), and may be able to support its U.S. customers with such products, which are not subject to antidumping duties. There can be no assurance, however, that the Company will be able to do so. In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that dynamic random access memories ("DRAMs") fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing DRAMs was materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requested the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily determined that there was a reasonable indication that the imports of the products under investigation were injuring the United States industry. In May 1999, the DOC issued a preliminary affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after May 28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the preliminary "all others" rate) of the entered value of such DRAMs, an antidumping margin calculated by weight-averaging the antidumping margins of individually investigated respondent companies. The Company posted a bond to cover deposits on such entries. In October 1999 the DOC issued a final affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on December 8, 1999, the ITC issued a final negative determination of injury. Consequently, the investigation was terminated, the suspension of liquidation lifted, and the bond posted in September 1999 released. In January 2000, Micron filed an appeal in the CIT challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs were not causing material injury to the U.S. industry. On March 21, 2000, the appeal of the ITC decision was dismissed by the CIT. The Company, through Alliance Venture Management, invests in startup, pre-IPO (initial public offering) companies. These types of investments are inherently risky and many venture funds have a large percentage of investments decrease in value or fail. Most of these startup companies fail, and the investors lose their entire investment. Successful investing relies on the skill of the investment managers, but also on market and other factors outside the control of the managers. Recently, the market for these types of investments has been successful and many venture capital funds have been profitable, and while the Company has been successful in its recent investments, there can be no assurance as to any future or continued success. It is likely there will be a downturn in the success of these types of investments in the future and the Company will suffer significant diminished success in these investments. There can be no assurance, and in fact it is likely, that many or most, and maybe all of the Company's venture type investments may fail, resulting in the complete loss of some or all the money the Company invested. As a result of the foregoing factors, as well as other factors affecting the Company's results of operations, past performance should not be considered to be a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. In addition, stock prices for many technology companies are subject to significant volatility, particularly on a quarterly basis. If revenues or earnings fail to meet expectations of the investment community, there could be an immediate and significant impact on the market price of the Company's Common Stock. Due to the foregoing factors, it is likely that in some future quarter or quarters the Company's results of operations may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had approximately $34.8 million in cash and cash equivalents, an increase of $28.6 million from March 31, 1999; and approximately $615.9 million in net working capital, an increase of approximately $593.8 million from approximately $22.1 million at March 31, 1999. Additionally, the Company had short-term investments in marketable securities whose fair value at March 31, 2000 was $883.3 million. Refer to Notes 2-5,7 and 16 of Notes to the Consolidated Financial Statements for further details. - 30 - During fiscal year 2000, operating activities used cash of $3.5 million. This was primarily the result of net income, the impact of non-cash items such as depreciation and amortization, non-cash investment gains related primarily to the merger of USC and USIC into UMC and Broadcom, net of deferred taxes, offset in part by growth in inventory and accounts receivable, accounts payable and taxes payable. Cash used in operating activities of $23.6 million in fiscal year 1999 was primarily due to the operating loss of $22 million, while the cash provided from operating activities in fiscal year 1998 of $6.9 million was primarily related to the growth in working capital items. Investing activities provided cash in the amount of $38.9 million in fiscal 2000 as the result of the proceeds from the sale of a portion of the Company's holdings in Broadcom of $48.9 million, additional proceeds from the April 1998 sale of USC stock of $21.5 million, offset in part, by investments made by Alliance Ventures of $28.7 million. Investing activities in fiscal 1999 provided cash in the amount of $25.0 million as the result of proceeds from the sale of a portion of the Companies holdings in USC, which were offset, in part, by additional investments in USIC and other start-up companies and purchases of equipment. In fiscal 1998 investing activities used cash in the amount of $21.0 million which was primarily the result of additional investments in USC of $17.6 million and $2.4 million in purchases of equipment. Net cash used in financing activities in fiscal 2000 was approximately $6.8 million compared to cash provided by financing activities in fiscal 1999 of approximately $1.8 million, and cash used in financing activities of approximately $0.2 million in fiscal 1998. The use of cash for financing activities in fiscal 2000 was primarily the result of repurchase of 720 thousand shares of the Company's common stock for $12.5 million offset, by a decrease in restricted cash of approximately $2.3 million, and proceeds from sale of common stock of approximately $4.7 million. Cash provided by financing activities in fiscal 1999 primarily reflects a decrease in restricted cash of approximately $1.3 million and net proceeds from the issuance of common stock, offset, in part, by principal lease payments of $1.5 million. The Company believes these sources of liquidity, and financing opportunities available to it will be sufficient to meet its projected working capital and other cash requirements for the foreseeable future. However, it is possible that the Company may need to raise additional funds to fund its activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. The Company could raise such funds by selling some its short term investments, selling more stock to the public or to selected investors, or by borrowing money. The Company may not be able to obtain additional funds on terms that would be favorable to its shareholders and the Company, or at all. If the Company raises additional funds by issuing additional equity, the ownership percentages of existing shareholders would be reduced. In order to obtain an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company has entered into and will continue to consider various possible transactions, including equity investments in or loans to foundries in exchange for guaranteed production capacity, the formation of joint ventures to own and operate foundries, as was the case with Chartered Semiconductor or UMC, or the usage of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods. Manufacturing arrangements such as these may require substantial capital investments, which may require the Company to seek additional equity or debt financing. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on satisfactory terms. Additionally, the Company has entered into and will continue to enter into various transactions, including the licensing of its integrated circuit designs in exchange for royalties, fees or guarantees of manufacturing capacity. Refer to Part I, Item 1- Investments and Notes 3 and 4 in the Notes to the Consolidated Financial Statements. - 31 - ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have exposure to the impact of foreign currency fluctuations and changes in market values of our investments. These investments operate in markets that have experienced significant exchange rate and market price fluctuations over the year ended March 31, 2000. These entities, in which we hold varying percentage interests, operate and sell their products in various global markets; however, the majority of their sales are denominated in U.S. dollars, and therefore, their foreign currency risk is reduced. We did not hold any derivative financial instruments for trading purposes as of March 31, 2000. INVESTMENT RISK As of March 31, 2000, our short-term investment portfolio consisted of marketable equity securities in Chartered Semiconductor, UMC, Broadcom Corporation, and Vitesse Semiconductor, the future whose value of which is subject to market value fluctuations. Refer to Notes 2,3,4,5 and 7 for further details. FOREIGN CURRENCY RISK Based on our overall currency rate exposure at March 31, 2000, a near term 10% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance that there will not be a material impact in the future. As of June 20, 2000, the Company owned approximately 339.9 million shares of UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable in the United States, they are subject to foreign currency risk. The market value of these holdings on June 20, 2000 based on the price per share of NTD 87 and the NTD/US dollar exchange rate of NTD $30.833 per US$ is US$ 959 million. The value of these investments could be impacted by foreign currency fluctuations which could have a material impact on the financial condition and results of operations of the Company in the future. ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS The index to the Company's Consolidated Financial Statements and Schedules, and the report of the independent accountants appear in Part III of this Form 10-K. Selected quarterly financial data appears in Item 6 above. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. - 32 - =============================================================================== PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Other than the information required pursuant to Item 405 of Regulation S-K, the information required by this item concerning executive officers of the Company is set forth in Part I of this Form 10-K after Item 4. The information required by this item with respect to directors is incorporated by reference to the section captioned "Election of Directors" in the proxy statement. ITEM 11 EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the section captioned "Executive Compensation" contained in the Proxy Statement. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section captioned "Certain Transactions" contained in the Proxy Statement. ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) (I) FINANCIAL STATEMENTS - See Index to Consolidated Financial Statements on page F-1 of this Form 10-K Annual Report. (II) REPORT OF INDEPENDENT ACCOUNTANTS - See Index to Consolidated Financial Statements on F-1 of this Form 10-K Annual Report. (2) (I) SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS - See Index to Consolidated Financial Statements on F-1 of this Form 10-K Annual Report. (II) FINANCIAL STATEMENTS OF UNITED SEMICONDUCTOR CORPORATION, A TAIWANESE COMPANY - The following financial statements are filed as part of this report: Financial Statements of United Semiconductor Corporation for the Fiscal Year Ended December 31, 1998. (3) EXHIBITS - See Exhibit Index on page 34 of this Form 10-K Annual Report. - 33 - =============================================================================== EXHIBIT INDEX
Exhibit Document Description Number - ----------- -------------------------------------------------------------- 3.01(A) Registrant's Certificate of Incorporation 3.02(A) Registrant's Certificate of Elimination of Series A Preferred Stock 3.03(F) Registrant's Certificate of Amendment of Certificate of Incorporation 3.04(A) Registrant's Bylaws 4.01(A) Specimen of Common Stock Certificate of Registrant 10.01+(K) Registrant's 1992 Stock Option Plan adopted by Registrant on April 7, 1992 and amended through September 19, 1996, and related documents 10.02+(A) Registrant's Directors Stock Option Plan adopted by Registrant on October 1, 1993 and related documents 10.03+(A) Form of Indemnity Agreement used between Registrant and certain of its officers and directors 10.04+(K) Form of Indemnity Agreement used between the Registrant and certain of its officers 10.05(B) Sublease Agreement dated February 1994 between Registrant and Fujitsu America, Inc. 10.06(B) Net Lease Agreement dated February 1, 1994 between Registrant and Realtec Properties I L.P. 10.07*I Subscription Agreement dated February 17, 1995, by and among Registrant, Singapore Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. 10.8*I Manufacturing Agreement dated February 17, 1995, between Registrant and Chartered Semiconductor Manufacturing Pte. Ltd. 10.9(D) Supplemental Subscription Agreement dated March 15, 1995, by and among Registrant, Singapore Technology Pte. Ltd. and Chartered Semiconductor Manufacturing Pte. Ltd. 10.10*(D) Supplemental Manufacturing Agreement dated March 15, 1995, between Registrant and Chartered Semiconductor Manufacturing Pte. Ltd. 10.11*(E) Foundry Venture Agreement dated July 8, 1995, by and among Registrant, S3 Incorporated and United Microelectronics Corporation 10.12*(E) Foundry Capacity Agreement dated July 8, 1995, by and among Registrant, Fabco, S3 Incorporated and United Microelectronics Corporation 10.13*(F) Foundry Venture Agreement dated September 29, 1995, between Registrant and United Microelectronics Corporation 10.14*(F) Foundry Capacity Agreement dated September 29, 1995, by and among Registrant, FabVen and United Microelectronics Corporation 10.15*(F) Written Assurances Re: Foundry Venture Agreement dated September 29, 1995 by and among Registrant, FabVen and United Microelectronics Corporation 10.16*(G) Letter Agreement dated June 26, 1996 by and among Registrant, S3 Incorporated and United Microelectronics Corporation 10.17(H) Stock Purchase Agreement dated as of June 30, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.18*(H) Amendment to Fabco Foundry Capacity Agreement dated as of July 3, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.19(H) Side Letter dated July 11, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.20+(I) 1996 Employee Stock Purchase Plan 10.21(J) Letter Agreement dated December 23, 1996 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.22(K) Trademark License Agreement dated as of October 17, 1996 between Registrant and Alliance Semiconductor International Corporation, a Delaware corporation, as amended through May 31, 1997 10.23(K) Restated Amendment to FabCo Foundry Venture Agreement dated as of February 28, 1997 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.24(K) Letter Agreement dated April 25, 1997 by and among Registrant, S3 Incorporated, United Microelectronics Corporation and United Semiconductor Corporation 10.25*(K) Restated DRAM Agreement dated as of February 28, 1996 between Registrant and United Microelectronics Corporation 10.26*(K) First Amendment to Restated DRAM Agreement dated as of March 26, 1996 between Registrant and United Microelectronics Corporation 10.27*(K) Second Amendment to Restated DRAM Agreement dated as of July 10, 1996 between Registrant and United Microelectronics Corporation 10.28(K) Promissory Note and Security Agreement dated March 28, 1997 between Registrant and Matrix Funding Corporation 10.29*(L) Sale and Transfer Agreement dated as of March 4, 1998 10.30(M) Alliance Venture Management, LLC Limited Liability Company Operating Agreement dated October 15, 1999 10.31(M) Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated February 28, 2000 10.32(M) Alliance Ventures I, LP Agreement of Limited Partnership dated November 12, 1999 10.33(M) Alliance Ventures II, LP Agreement of Limited Partnership dated November 12, 1999 10.34(M) Alliance Ventures III, LP Agreement of Limited Partnership dated February 28, 2000 21.01(M) Subsidiaries of Registrant 23.01(M) Consent of PricewaterhouseCoopers LLP (San Jose, California) 23.02(M) Consent of PricewaterhouseCoopers (Hsinchu, Taiwan, R.O.C.) 27.01(M) Financial Data Schedule (filed only with the electronic version of the Form 10-K)
+ MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT REQUIRED TO BE FILED AS AN EXHIBIT TO THIS FORM 10-K. * CONFIDENTIAL TREATMENT HAS BEEN GRANTED WITH RESPECT TO CERTAIN PORTIONS OF THIS DOCUMENT. - 34 - ** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN PORTIONS OF THIS DOCUMENT. (A)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 33-69956-LA) DECLARED EFFECTIVE BY THE COMMISSION ON NOVEMBER 30, 1993. (B)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S ANNUAL REPORT ON FORM 10-KSB FILED WITH THE COMMISSION ON JUNE 29, 1994. (C)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM SB-2 (FILE NO. 33-90346-LA) DECLARED EFFECTIVE BY THE COMMISSION ON MARCH 28, 1995. (D)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON APRIL 28, 1995. (E)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON JULY 24, 1995. (F)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON OCTOBER 23, 1995. (G)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON AUGUST 13, 1996. (H)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON NOVEMBER 12, 1996. (I)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-13461) FILED WITH THE COMMISSION ON OCTOBER 4, 1996. (J)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FILED WITH THE COMMISSION ON FEBRUARY 11, 1997. (K)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S ANNUAL REPORT ON FORM 10-K FILED WITH THE COMMISSION ON JUNE 27, 1997. (L)THE DOCUMENT REFERRED TO IS HEREBY INCORPORATED BY REFERENCE FROM REGISTRANT'S CURRENT REPORT ON FORM 8-K FILED WITH THE COMMISSION ON MARCH 19, 1998. (M) THE DOCUMENT REFERRED TO IS FILED HEREWITH. - 35 - =============================================================================== SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIANCE SEMICONDUCTOR CORPORATION June 28, 2000 By: /S/ N. DAMODAR REDDY ------------------------------------ N. Damodar Reddy Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) June 28, 2000 By: /S/ DAVID EICHLER ------------------------------- David Eichler Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints N. Damodar Reddy and Bradley A. Perkins or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ N. DAMODAR REDDY Director, Chairman of the Board, June 28, 2000 - ------------------------- N. Damodar Reddy President and Chief Executive Officer /S/ DAVID EICHLER Vice President, Finance and June 28, 2000 - ------------------------- David Eichler Administration and Chief Financial Officer /S/ C. N. REDDY Director, Chief Operating June 28, 2000 - ------------------------- C. N. Reddy Officer and Secretary /S/ SANFORD L. KANE Director June 28, 2000 - ------------------------- Sanford L. Kane /S/ JON B. MINNIS Director June 28, 2000 - ------------------------- Jon B. Minnis - 36 -
ALLIANCE SEMICONDUCTOR CORPORATION Index to Consolidated Financial Statements PAGES CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants........................................F-2 Consolidated Balance Sheets as of March 31, 2000 and 1999................F-3 Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998............................................................F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000, 1999 and 1998..................................................F-5 Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998............................................................F-6 Notes to Consolidated Financial Statements ..............................F-7 FINANCIAL STATEMENT SCHEDULE: Report of Independent Accountants........................................F-22 Schedule II - Valuation and Qualifying Accounts..........................F-23
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Alliance Semiconductor Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Alliance Semiconductor Corporation and its subsidiaries at March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California April 25, 2000 F-2
ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) March 31, ------------------------- 2000 1999 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $34,770 $6,219 Restricted cash 2,804 5,175 Short term investments (Notes 883,300 - 2,3,4,5 and 7) Accounts receivable, net (Note 2) 15,858 8,943 Inventory (Note 2) 37,439 12,927 Related party receivables (Note 14) 1,778 1,815 Other current assets 1,958 1,709 ----------- ------------ Total current assets 977,907 36,788 Property and equipment, net (Note 2) 9,990 9,943 Investment in Chartered Semiconductor - 51,596 (Note 3) Investment in United Semiconductor - 77,310 Corp.(Note 4) Investment in United Silicon, Inc. - 16,799 (Note 4) Investment in United Microelectronics 505,478 - Corp. (excluding short term portion) (Notes 2 and 4) Alliance Ventures investments (Note 6) 26,646 - Other assets 421 1,121 ----------- ------------ Total assets $1,520,442 $193,557 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $27,133 $8,046 Accrued liabilities 10,388 5,325 Income taxes payable 6,641 - Deferred income taxes (Note 9) 316,903 - Current portion of capital lease 905 1,315 obligation ----------- ------------ Total current liabilities 361,970 14,686 Long term obligations 1,517 - Long term capital lease obligation 1,197 578 Deferred income taxes (Note 9) 191,803 14,723 ----------- ------------ Total liabilities 556,487 29,987 ----------- ------------ Commitments and contingencies (Notes 8,12 and 13) Stockholders' equity: Preferred stock, $0.01 par value; 5,000 shares authorized; none issued - - and outstanding Common stock, $0.01 par value; 100,000 shares authorized; 42,406 and 41,609 424 416 shares issued and 41,686 and 41,609 shares outstanding Additional paid-in capital 193,260 185,025 Treasury stock (720 shares at cost) (12,468) - Retained earnings (deficit) 644,595 (3,505) Accumulated other comprehensive income 138,144 (18,366) (loss) (Note 2) ----------- ------------ ----------- ------------ Total stockholders' equity 963,955 163,570 ----------- ------------ Total liabilities and $1,520,442 $193,557 stockholders' equity =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-3
ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended March 31, --------------------------------- 2000 1999 1998 ---------- --------- --------- Net revenues $89,153 $47,783 $118,400 Cost of revenues 58,428 60,231 117,400 ---------- --------- --------- Gross profit (loss) 30,725 (12,448) 1,000 Operating expenses: Research and development 14,568 14,099 15,254 Selling, general and 15,962 12,652 18,666 administrative ---------- --------- --------- Income (loss) from 195 (39,199) (32,920) operations Gain on investments 1,049,130 15,823 - Other income, net 29 (1,126) 287 ---------- --------- --------- Income (loss) before 1,049,354 (24,502) (32,633) income taxes Provision (benefit) for 410,348 8,397 (11,421) income taxes ---------- --------- --------- Income (loss) before 639,006 (32,899) (21,212) equity in income of investees Equity in income of 9,094 10,856 15,475 investees ---------- --------- --------- Net Income (loss) $648,100 $(22,043) $(5,737) ========== ========= ========= Net Income (loss) per share: Basic $15.49 $(0.53) $(0.15) ========== ========= ========= Diluted $15.07 $(0.53) $(0.15) ========== ========= ========= Weighted average number of common shares: Basic 41,829 41,378 39,493 ========== ========= ========= Diluted 42,992 41,378 39,493 ========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3
ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) Accumulated Common Stock Additional Other Retained Total -------------------------- Paid In Treasury Comprehensive Earnings Stockholder's Shares Amount Capital Stock Income(loss) (Deficit) Equity ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at 38,984,901 $390 $180,012 $- $(83) $24,275 $204,594 March 31, 1997 Issuance of common 1,465,087 14 3,087 - - - 3,101 stock under employee stock plans Cumulative - - - - (12,847) - translation adjustments Net loss - - - - - (5,737) Total comprehensive (18,584) loss ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at 40,449,988 404 183,099 - (12,930) 18,538 189,111 March 31, 1998 Issuance of common 1,158,635 12 1,926 - - - 1,938 stock under employee stock plans Cumulative - - - - (5,436) - translation adjustments Net loss - - - - - (22,043) Total comprehensive loss (27,479) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at 41,608,623 416 185,025 - (18,366) (3,505) 163,570 March 31, 1999 Issuance of common 797,482 8 4,719 - - - 4,727 stock under employee stock plans Repurchase of -(1) - (12,468) - - - (12,468) common stock Tax Benefit on - - 3,516 - - - 3,516 exercise of stock options Cumulative - - - - 18,366 - translation adjustments Unrealized gain on investments - - - - 138,144 - (net of tax, $94,814) Net income - - - - - 648,100 Total 804,610 comprehensive income ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at 42,406,105(1) $424 $193,260 $(12,468) $138,144 $644,595 $963,955 March 31, 2000 ============ ============ ============ ============ ============ ============ ============
(1) At March 31, 2000, the Company held 720,000 shares in treasury stock, which have not been retired. After taking in account these treasury shares, the net outstanding shares at March 31, 2000 was 41,686,105. The accompanying notes are an integral part of these consolidated financial statements. F-4
ALLIANCE SEMICONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended March 31, --------------------------------- 2000 1999 1998 ---------- --------- ---------- Cash flows from operating activities: Net Income (loss) $648,100 $(22,043) $(5,737) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,417 3,789 3,465 Inventory write-down 742 20,437 15,154 Non-recurring compensation 3,655 - - charge Equity in income of investees (9,094) (10,856) (15,475) Gain on investments (1,049,130) (15,823) - Changes in assets and liabilities: Accounts receivable ( 6,915) 6,773 1,111 Inventory (25,254) (989) (17,994) Related party 37 (1,815) - receivables Other assets (99) 1,622 3 Accounts payable 19,087 (27,668) 16,948 Accrued liabilities 92 (2,446) 3,187 Deferred income 399,168 25,466 6,238 taxes Income tax payable 10,157 - - Long-term obligation 1,517 - - ---------- --------- ---------- Net cash provided by (used in) (3,520) (23,553) 6,900 operating activities ---------- --------- ---------- Cash provided by (used in) investing activities: Purchase of property and (2,816) (2,609) (2,408) equipment Proceeds from sale of securities of United 21,481 31,662 (17,631) Semiconductor Corporation Proceeds from sale of 48,911 - - securities of Broadcom Purchase of securities of - (3,098) - United Silicon, Inc. Purchase of other (28,696) (1,000) (1,000) investments ---------- --------- ---------- Net cash provided by (used in) 38,880 24,955 (21,039) investing activities ---------- --------- ---------- Cash flows from financing activities: Net proceeds from the 4,727 1,938 3,101 issuance of common stock Principal payments on lease (1,439) (1,468) (1,929) obligation Repurchase of common stock (12,468) - - Restricted cash 2,371 1,337 (1,391) ---------- --------- ---------- Net cash provided by (used in) (6,809) 1,807 financing activities (219) ---------- --------- ---------- Net increase (decrease) in cash 28,551 3,209 (14,358) and cash equivalents Cash and cash equivalents at 6,219 3,010 17,368 beginning of the period ---------- --------- ---------- Cash and cash equivalents at $34,770 $6,219 $3,010 end of the period ========== ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (refunded) for $355 $(17,736) $(17,783) income taxes ========== ========= ========== Cash paid for interest $99 $214 $393 ========== ========= ========== SCHEDULE OF NONCASH FINANCING ACTIVITIES: Property and equipment $1,648 $- $828 leases ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 ALLIANCE SEMICONDUCTOR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Alliance Semiconductor Corporation (the "Company" or "Alliance"), a Delaware corporation, designs, develops and markets high performance memory products and memory intensive logic products. The Company sells its products to the desktop and portable computing, networking, telecommunications, instrumentation and consumer markets. The semiconductor industry is highly cyclical and has been subject to significant rapid technological changes at various times that have been characterized by diminished product demand, production overcapacity, product shortages due to production undercapacity and accelerated erosion of selling prices. The average selling price that the Company is able to command for its products is highly dependent on industry-wide production capacity and demand, and as a consequence the Company could experience rapid erosion in product pricing (such as that occurred with SRAM and DRAM pricing during fiscal year 1999, 1998 and 1997), which is not within the control of the Company and which could have an adverse material effect on the Company's results of operations. The Company is unable to predict future prices for its products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries, including Alliance Venture Management, LLC, Alliance Ventures, LP I, II and III (See Note 6). All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. BASIS OF PRESENTATION For purposes of presentation, the Company has indicated its fiscal years as ending on March 31, whereas the Company's fiscal year actually ends on the Saturday nearest the end of March. The fiscal year ended March 31, 2000 contained 52 weeks while the fiscal years ended March 31, 1999 and March 31, 1998 contained 53 weeks and 52 weeks, respectively. Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal year 2000 presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on deposit and highly liquid money market instruments with banks and financial institutions. The Company considers all highly liquid debt investments with maturity from the date of purchase of three months or less to be cash equivalents. RESTRICTED CASH Restricted cash, in the form of certificates of deposit, support stand-by letters of credit, which in turn are used to secure customs duties and other purchase commitments. SHORT TERM INVESTMENTS The Company accounts for its short term investments in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2000, all short-term investment securities were designated as available-for-sale in accordance with SFAS 115. Available-for-sale securities are carried at fair value, using available market information with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the balance sheet. F-7 INVENTORIES Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on the estimated net realizable value. The Company also evaluates its open purchase order commitments on an on-going basis and accrues for any expected loss if appropriate. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated economic useful lives of the assets, which range from three to seven years. Upon disposal, the cost of the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the result of operations. LONG-LIVED ASSETS Long-lived assets held by the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of carrying amounts to future net cash flows an asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount to which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset. REVENUE RECOGNITION Revenue from product sales, including sales to distributors, is recognized upon shipment, net of accruals for estimated sales returns and allowances. RESEARCH AND DEVELOPMENT COSTS Costs incurred in the research and development of semiconductor devices are expensed as incurred, including the cost of prototype wafers and new production mask sets. INCOME TAXES The Company accounts for its income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of the assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. CONCENTRATION OF RISKS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short and long term investments and accounts receivable. Cash is deposited with one major bank in the United States while cash equivalents are deposited with two major financial institutions in the United States. The Company attempts to limit its exposure to these investments by placing such investments with several financial institutions and performs periodic evaluations of these institutions. Short and long term investments are subject to declines in market as well as risk associated with the underlying investment. The Company evaluates its investments from time to time in terms of credit risk since a substantial portion of its assets are now in the form of investments, not all of which are liquid, and may enter into full or partial hedging strategies involving financial derivative instruments to minimize market risk. During fiscal year 2000, the Company entered into a number of "cashless collar" and "covered call" option transactions to partially hedge its holdings in Broadcom Corporation. The Company may enter into other similar transactions in the future. F-8 The Company sells its products to original equipment manufacturers and distributors throughout the world. The Company performs ongoing credit evaluations of its customers and, on occasion, may require letters of credit from its non-US customers. The following table summarizes the revenues from customers, all of which were third parties, in excess of 10% of total net revenues, for fiscal year 2000, 1999 and 1998, respectively:
Year ended March 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Customer A 10% - - Customer B 7% 15% 2% Customer C - - 18% Customer D 6% 13% -
At March 31, 2000 Customer A accounted for 8% of accounts receivable, net. The Company conducts the majority of its business in U.S. dollars and foreign currency translation gains and losses have not been material in any one year. International sales accounted for approximately $53.0 million, $24.0 million, and $48.5 million of net revenues for the years ended March 31, 2000, March 31, 1999 and March 31, 1998, respectively. STOCK-BASED COMPENSATION The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees." The Company's policy is to grant options with an exercise price equal to the fair market value of the Company's stock on the date of grant. Accordingly, no compensation expense has been recognized in the Company's statements of operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Refer to Note 10. NET INCOME (LOSS) PER SHARE Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the proceeds obtained upon exercise of stock options. Following is a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations for the periods presented below:
Year Ended March 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net income/(loss) available to $648,100 $(22,043) $(5,737) common shareholders ======== ======== ======== Weighed average common shares 41,829 41,378 39,493 outstanding (basic) Effect of dilutive options 1,163 - - -------- -------- -------- Weighed average common shares 42,992 41,378 39,493 outstanding (diluted) ======== ======== ======== Net income/(loss) per share: Basic $15.49 $(0.53) $(0.15) ======== ======== ======== Diluted $15.07 $(0.53) $(0.15) ======== ======== ========
Due to the Company's net loss from continuing operations in 1999 and 1998, a calculation of EPS assuming dilution is not required for those years. At March 31, 1999 there were 2,741,298 options outstanding to purchase common stock at a weighted average price of $5.37 per share and at March 31, 1998, there were 3,675,431 options outstanding to purchase common stock at a weighted average price of $5.81 per share. The outstanding options at March 31, 1999 and 1998 were excluded from the diluted loss per share computations because their effect would be anti-dilutive. F-9 COMPREHENSIVE INCOME In 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. Total accumulated comprehensive income for fiscal year 2000 was $804.6 million compared to total accumulated comprehensive losses of $27.5 million and $18.6 million for fiscal years 1999 and 1998 respectively. The components of accumulated comprehensive income (loss) are shown in the consolidated statements of shareholders' equity. SEGMENT REPORTING In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The Company operates in one reportable segment, memory products. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Upon adoption of SFAS No. 133, the Company will be required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gain or loss as transition adjustments to be reported in net income or other comprehensive income, as appropriate, and presented in a manner similar to the cumulative effect of a change in accounting principle. The Company believes the adoption of this statement will not have a significant effect on the results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company has complied with SAB 101 for all periods presented. In March 2000, The Financial Accounting Standards Board ("FASB") issued FASB interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation an interpretation of APB Opinion No. 25". This interpretation has provisions that are effective on staggered dates, some of which began after December 15,1998 and others that become effective after June 30, 2000. The adoption of this interpretation is not expected to have a material impact on the financial statements. NOTE 2. BALANCE SHEET COMPONENTS SHORT-TERM INVESTMENTS Short-term investments include the following available-for-sale securities at March 31, 2000 (in thousands):
March 31, 2000 ------------------------- Number of Market Shares Value ------------ ----------- UMC 141,650 $548,752 Chartered Semiconductor 2,141 201,789 Broadcom Corporation 488 62,831 Vitesse Semiconductor 852 69,928 ----------- Total $883,300 ===========
F-10 LONG-TERM INVESTMENTS At March 31, 2000, the Company's long term investments were as follows (in thousands):
March 31, 2000 ----------------------- Number of $ Shares ------------ --------- UMC 141,650 $505,478 Alliance Ventures 26,646 --------- Total $532,124 =========
ACCOUNTS RECEIVABLE
March 31, ----------------------- 2000 1999 ----------- ----------- (in thousands) Accounts receivable: Trade receivables $16,812 $11,470 Less allowance for (954) (2,527) doubtful accounts and sales related reserves ----------- ----------- $15,858 $8,943 =========== ===========
INVENTORIES
March 31, ----------------------- 2000 1999 ----------- ----------- (in thousands) Inventory: Work in process $20,737 $5,119 Finished goods 16,702 7,808 ----------- ----------- $37,439 $12,927 =========== ===========
PROPERTY AND EQUIPMENT
March 31, ----------------------- 2000 1999 ----------- ----------- (in thousands) Engineering and test $13,756 $12,258 equipment Computers and software 9,474 9,011 Furniture and office 1,599 778 equipment Leasehold improvements 1,299 467 Land 288 288 ----------- ----------- 26,416 22,802 Less: Accumulated (16,426) (12,859) depreciation and amortization ----------- ----------- $9,990 $9,943 =========== ===========
Depreciation and amortization expense for fiscal years 2000, 1999 and 1998 were $4.4 million, $3.8 million and $3.5 million, respectively. Property and equipment includes $2.5 million and $4.7 million of assets under capital leases at March 31, 2000 and 1999, respectively. Accumulated depreciation of assets under capital leases totaled $0.7 million and $3.5 million at March 31, 2000 and 1999, respectively. ACCUMULATED OTHER COMPREHENSIVE INCOME Components of accumulated other comprehensive income at March 31, 2000 were as follows:
Unrealized Tax Effect Net Gain Unrealized Gain ---------- ----------- ------------- UMC $43,274 $(17,613) $ 25,661 Chartered 150,194 (61,129) 89,065 Semiconductor Broadcom 39,490 (16,072) 23,418 Corporation ---------- ----------- ------------- $232,958 $(94,814) $138,144 ========== =========== =============
F-11 NOTE 3. INVESTMENT IN CHARTERED SEMICONDUCTOR MANUFACTURING LTD. ("CHARTERED") In February and April 1995, the Company purchased shares of Chartered Semiconductor ("Chartered") for approximately $51.6 million and entered into a manufacturing agreement whereby Chartered agreed to provide a minimum number of wafers from its 8-inch wafer fabrication facility known as "Fab2", if Alliance so chooses. In October 1999, Chartered successfully completed an initial public offering in Singapore and the United States. At March 31, 2000, the Company owned approximately 21.4 million ordinary shares or approximately 2.14 million American Depository Shares or "ADSs." These shares were subject to a six-month "lock-up", or no trade period, which expired in April 2000. In May 2000, Chartered completed a secondary public offering, which Alliance decided not to participate in and as a result, the Company's shares are now subject to an additional three-month "lock-up" which expires in August 2000. In June 2000, the underwriter of the secondary offering released the Company from the lock-up, and the Company started selling some of its shares. The Company does not own a material percentage of the equity of Chartered. If the Company sells more that 50% of its original holdings in Chartered, the Company will start to lose a proportionate share of its wafer production capacity rights, which could materially affect its ability to conduct its business. Additionally, because of the potential loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered, there can be no assurance that the Company can realize its value on its investment in Chartered. Prior to the fiscal third quarter of fiscal year 2000, the Company recorded its investment in Chartered as a long-term investment using the cost method of accounting. The Company now records its investment as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $89.1 million, which is net of deferred tax of approximately $61.1 million, as part of accumulated other comprehensive income in the stockholder's equity section of the balance sheet. NOTE 4. INVESTMENT IN UNITED MICROELECTRONICS CORPORATION ("UMC") In July 1995, the Company entered into an agreement with United Microelectronics Corporation ("UMC") and S3 Incorporated ("S3") to form a separate Taiwanese company, United Semiconductor Corporation ("USC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between September 1995 and July 1997 the Company invested approximately $70.4 million in USC in exchange for 190 million shares or 19.0% of the outstanding shares and 25% of the total wafer capacity. In April 1998, the Company sold 35 million shares of USC to an affiliate of UMC and received approximately US$31.7 million. In connection with the sale, the Company had the right to receive an additional NTD 665 million upon the occurrence of certain potential future events, which included the sale or transfer of USC shares by USC in an arms length transaction, or by a public offering of USC stock, or by the sale of all or substantially all of the assets of USC. In March 2000, Alliance received approximately NTD 665 million (US$21.5 million) as a result of the merger between USC and UMC, described below. Subsequent to the April 1998 USC stock sale, the Company owned approximately 15.5% of the outstanding shares of USC. In October 1998, USC issued 46 million shares to the Company by way of a dividend distribution. Additionally, USC also made a stock distribution to its employees thereby reducing the Company's ownership in USC to 14.8% of the outstanding shares. Prior to the merger with UMC, the Company, as part of its investment in USC, was entitled to 25% of the output capacity of the wafer fabrication facility operated by USC as well as a seat on the board of directors of USC. As a result of the capacity rights, the board seat, and certain contractual rights, Alliance had participated in both strategic and operating decisions of USC on a routine basis, had rights of approval with respect to major business decisions and concluded that it had significant influence on financial and operating decisions of USC. Accordingly, the Company accounted for its investment in USC using the equity method with a ninety-day lag in reporting the Company's share of results for the entity. In fiscal years 2000, 1999 and 1998 the Company reported its proportionate share of equity income of USC of $9.5 million, $10.9 million, and $15.5 million, net of tax, respectively. In October 1995, the Company entered into an agreement with UMC and other parties to form a separate Taiwanese company, United Silicon Inc. ("USIC"), for the purpose of building and managing an 8-inch semiconductor manufacturing facility in Taiwan. Between January 1996 and July 1998, the Company invested F-12 approximately $16.8 million and owned approximately 3.2% of the outstanding shares of USIC and had the right to purchase approximately 3.7% of the manufacturing capacity of the facility. The Company accounted for its investment in USIC using the cost method of accounting prior to the merger with UMC in January 2000. In June 1999, UMC, a publicly traded company in Taiwan, announced plans to merge four semiconductor wafer foundry units, USC, USIC, United Integrated Circuit Corporation and UTEK Semiconductor Corporation, into UMC and subsequently completed the merger in January 2000. Through its representation on USC's board, the Company had the right to choose whether to consent to the merger and concluded it to be in the Company's best interest to do so. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 14.8% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3.2% ownership of USIC. At March 31, 2000 Alliance Semiconductor owned approximately 283.3 million shares, or approximately 3.2% of UMC, and maintained its 25% and 3.7% wafer capacity allocation rights in the former USC and USIC foundries, respectively. As a result of the merger in January 2000, the Company no longer recorded its proportionate share of equity income in USC, as the Company no longer has an ability to exercise significant influence over UMC's operations. The investment in UMC is accounted for as a cost method investment. During the fiscal fourth quarter of 2000, the Company recognized a $908 million pre-tax, non-operating gain as a result of the merger. The gain was computed based on the share price of UMC at the date of the merger (i.e. NTD 112, or US$ 3.5685), as well as the approximately $21.5 million additional gain related to the sale of the USC shares in April 1998. The Company has accrued approximately $3.0 million for the Taiwan securities transaction tax in connection with the shares received by the Company. This transaction tax will be paid, on a per share basis, when the securities are sold. According to Taiwanese laws and regulations, 50% of the 283.3 million Alliance's UMC shares are subject to a six-month "lock-up" or no trade period. This lock-up period expires in July 2000. Of the remaining 50%, or 141.6 million shares, approximately 28.3 million shares will become eligible for sale two years from the closing date of the transaction (i.e. January 2002), with approximately 28.3 million shares available-for-sale every six months thereafter, during years three and four (i.e.2002-2004). In May 2000, the Company received an additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger the Company accounts for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which becomes unrestricted within twelve months as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company has recorded an unrealized gain of approximately $25.7 million, which is net of deferred tax of $17.6 million, as part of accumulated other comprehensive income in the stockholders' equity section of the balance sheet with respect to the short term portion of the investments. As the portion of the investment in UMC which is restricted beyond twelve months (approximately 50% of the Company's holdings at March 31, 2000) is accounted for as a cost method investment and is presented as a long-term investment. As this long-term portion becomes current over time, the investment will be transferred to short-term investments and will be accounted for as an available-for-sale marketable security in accordance with SFAS 115. The long-term portion of the investments become unrestricted securities between 2002 and 2004. Given the market risk for securities, when these shares are ultimately sold, it is possible that additional gain or loss will be reported. Note 5. INVESTMENT IN MAVERICK NETWORKS, INC. / BROADCOM CORPORATION In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for imbedded memory in a internet router semiconductor that Maverick was designing. Because the Company was also interested in eventually entering the internet router semiconductor market, the Company entered into an agreement with Maverick which called for the Company to provide memory technology, access to the Company's wafer production rights, and cash to Maverick, in exchange for certain rights to Maverick's technology and stock in Maverick. On May 31, 1999, Maverick completed a transaction with Broadcom Corporation, resulting in the Company selling its 39% ownership interest in Maverick in exchange for 538,961 shares of Broadcom's Class B common stock. Based on Broadcom's closing share price on the date of sale, the Company recorded a pre-tax, non-operating gain in the first quarter of fiscal 2000 of approximately $51.6 million based on the closing share price of Broadcom at the date of the merger. During fiscal 2000, F-13 the Company sold 275,600 shares of Broadcom stock and realized an additional pre-tax, non-operating gain of approximately $23.7 million. In February 2000, Broadcom Corporation announced a two for one stock split. The Company records its investment in Broadcom as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned approximately 487,522 shares of Broadcom and recorded an additional unrealized gain of approximately $23.4 million, which is net of deferred tax of approximately $16.1 million, as part of accumulated other comprehensive income in the stockholders equity section of the balance sheet. Note 6. ALLIANCE VENTURE MANAGEMENT, LLC In October 1999, the Company formed Alliance Venture Management, LLC ("Alliance Venture Management"), a California limited liability corporation, to manage and act as the general partner in the investment funds the Company intended to form. Alliance Venture Management does not directly invest in the investment funds with the Company, but is entitled to a management fee out of the net profits of the investment funds. This management company structure was created to provide incentives to the individuals who participate in the management of the investment funds, by allowing them limited participation in the profits of the various investment funds, through the management fees paid by the investment funds. In November 1999, the Company formed Alliance Ventures I, LP ("Alliance Venture I") and Alliance Ventures II ("Alliance Venture II"), both California limited partnerships. The Company, as the sole limited partner, owns 100% of the shares of each partnership. Alliance Venture Management acts as the general partner of these partnerships and receives a management fee of 15% of the profits from these partnerships for its managerial efforts. In February 2000, the Company formed Alliance Ventures III ("Alliance Venture III"), a California limited partnership. The Company, as the sole limited partner, owns 100% of the shares of this partnership. Alliance Venture Management acts as the general partner of this partnership and receives a management fee of 16% of the profits from this partnership for its managerial efforts. Several of the Company's senior management hold a majority of the units of Alliance Venture Management. After Alliance Ventures I, was formed, the Company contributed all its then current investments, except Chartered, UMC and Broadcom, to Alliance Ventures I to allow Alliance Venture Management to manage these investments. As of March 31, 2000, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.3 million in 10 companies, and Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $4.4 million in 8 companies, with a total fund allocation of $15 million. As of March 31, 2000, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $2 million in one company, with a total fund allocation of $100 million. Several of these investments are accounted for as the equity method due to the Company's ability to exercise its influence on the operations of investees resulting primarily from ownership interest and/or board representation. The total equity in the net losses of the equity investees of these venture funds was $368,000 for the year ended March 31, 2000. Note 7. INVESTMENT IN OROLOGIC CORPORATION / VITESSE SEMICONDUCTOR CORPORATION In August 1999, the Company made an investment in Orologic Corporation ("Orologic"), a fabless semiconductor company that develops high performance system on a chip solutions. In November 1999, the Company transferred its interest in Orologic to Alliance Ventures I, to allow it to be managed by Alliance Venture Management. See Note 6. Subsequently, in March 2000, Vitesse Semiconductor Corporation ("Vitesse") acquired Orologic. In connection with this merger, Alliance Ventures I received 852,447 shares of Vitesse for its equity interest in Orologic. As a result of the merger, the Company recognized approximately $69 million pre-tax, non-operating gain, in its fiscal fourth quarter ending March 31, 2000, based on the closing share price of Vitesse of $96.25 on March 31, 2000, the closing date of the merger. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company owned 852,447 shares of Vitesse. On May 12, 2000, Alliance Ventures I made a distribution of the Vitesse stock that had been acquired by Alliance Ventures I in exchange for its sale of one million shares of Orologic as follows: F-14
Shares of Vitesse ----------------- Alliance 632,876 11.21% shares to be held in escrow for 95,417 Alliance Alliance Venture Management 124,154 ----------------- Total shares resulting from sale of 852,447 1,000,000 Orologic shares =================
Alliance Ventures Management then immediately distributed the Vitesse shares to its unit holders. NOTE 8. LONG TERM OBLIGATIONS, LEASES AND COMMITMENTS OPERATING LEASES The Company leases its headquarters facility under an operating lease that expires in June 2006. Under the terms of the lease, the Company is required to pay property taxes, insurance and maintenance costs. In addition, the Company also leases sales and design center offices under operating leases, which expire between 2000 and 2007. Future minimum fiscal rental payments under non-cancelable leases are as follows:
Fiscal (in Year thousands) - ----------- ---------- 2001 $1,601 2002 1,598 2003 1,604 2004 1,636 2005 1,696 Thereafter 2,160 ---------- Total $10,295 payments ==========
Rent expense for fiscal 2000, 1999, and 1998 was $1,386,000, $635,000, and $484,000, respectively. CAPITAL LEASES At March 31, 2000, equipment under capital leases amounted to approximately $2.5 million compared to $4.7 million at March 31, 1999. The original lease terms range from three to five years. The following is a schedule of future minimum fiscal lease payments under capital leases:
Fiscal Year (in thousands) - ------------------------- ---------- 2001 $1,129 2002 864 2003 327 ---------- Total payments minimum 2,320 lease payments Amount representing (318) interest ---------- 2,002 Less current portion (905) ---------- Long-term capital lease $1,097 obligations ==========
LETTERS OF CREDIT At March 31, 2000, approximately $2.8 million in standby letters of credit were outstanding and expire through March 30, 2001, secured by restricted cash. F-15 NOTE 9. PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for income taxes is comprised of the following:
March 31, ------------------------------- 2000 1999 1998 -------- --------- ---------- (in thousands) Current: Federal $14,340 $- $(20,173) State 228 - - -------- --------- ---------- 14,568 - (20,173) -------- --------- ---------- Deferred: Federal $340,351 $8,397 8,752 State 55,429 - - -------- --------- ---------- 395,780 8,397 8,752 -------- --------- ---------- Total $410,348 $8,397 $(11,421) provision (benefit) ======== ========= ==========
In addition to the provision (benefit) for taxes noted above, deferred taxes of $ $6.4 million, and $8.3 million for the years ended March 31, 1999 and 1998, respectively, are recorded as part of the equity in income of USC. Deferred tax assets (liabilities) comprise the following:
March 31, ------------------ 2000 1999 ------- --------- (in thousands) Inventory reserves $1,982 $5,267 Accrued expenses and 4,198 3,226 reserves NOL carry forward - 8,531 Other - 791 ------- --------- Gross deferred tax 6,180 17,815 assets Investment in USC - (14,723) Investment in UMC (398,851) - Investment in Broadcom (25,127) - Investment in Chartered (61,129) - Investment in Orologic (27,952) - Other (1,827) - ------- --------- Gross deferred tax (514,886) (14,723) liabilities ------- --------- Deferred tax asset - (17,815) valuation allowance ------- --------- $(508,706) $(14,723) ======= =========
The provision (benefit) for income taxes differs from the amount obtained by applying the U.S. federal statutory rate to income before income taxes as follows:
Year Ended March 31, ----------------------------------- 2000 1999 1998 ---------- ---------- ----------- (in thousands, except percentages) Federal statutory rate 35% 35% 35% Tax at federal $367,274 $(8,531) $(11,421) statutory rate State taxes, net of 59,813 - - federal benefit Change in valuation (17,815) 8,397 - allowance Current year losses and timing differences - 8,531 - with no tax benefit recognized Other, net 1,076 - - ---------- ---------- ----------- Total $410,348 $8,397 $(11,421) ========== ========== ===========
Due to the uncertainty of the realization of the deferred tax assets, the Company provided a full valuation allowance on the deferred tax assets at March 31, 1999. In the first quarter of fiscal 2000, when the Company recognized a gain of $51.6 million related to the sale of Maverick Networks to Broadcom Corporation, the Company released the entire $17.8 million valuation allowance and recorded the tax benefit as an offset to income during fiscal 2000. The tax benefit associated with the previous exercises of non-qualified stock options and disqualifying dispositions of incentive stock options reduced taxes currently payable by $3.5 million in fiscal year 2000 and $0 in fiscal years 1999 and 1998. F-16 Note 10. STOCK OPTION PLANS 1992 STOCK OPTION PLAN In April 1992, the Company adopted the 1992 Stock Option Plan (the "Plan") and reserved 5,625,000 shares of Common Stock for issuance to employees and consultants of the Company. The Board of Directors may terminate the Plan at any time at its discretion. On September 30, 1993, the number of shares of Common Stock reserved for issuance under the Plan was increased to 7,875,000 and on September 14, 1995, the number of shares reserved for issuance under the Plan was increased to 9,000,000. On August 31, 1999, the number of shares reserved for issuance under the Plan was increased by 2,000,000 to 11,000,000. The Option Plan, which has a term of ten years, provides for incentive as well as nonqualified stock options. Incentive stock options may not be granted at less than 100 percent of the estimated fair value, as determined by the Board of Directors, of the Company's Common Stock at the date of grant and the option term may not exceed 10 years. For holders of more than 10 percent of the total combined voting power of all classes of the Company's stock, options may not be granted at less than 110 percent of the estimated fair value of the Common Stock at the date of grant and the option term may not exceed five years. DIRECTORS' STOCK OPTION PLAN On September 30, 1993, the Company adopted its 1993 Directors' Stock Option Plan ("Directors' Plan"), under which 900,000 shares of Common Stock have been reserved for issuance. The Directors' Plan provides for the automatic grant to each non-employee director of the Company (but excluding persons on the Company's Board of Directors in November 1993) of an option to purchase 22,500 shares of Common Stock on the date of such director's election to the Company's Board of Directors. Thereafter, such director will receive an automatic annual grant of an option to purchase 11,250 shares of Common Stock on the date of each annual meeting of the Company's stockholders at which such director is re-elected. The maximum number of shares that may be issued to any one director under this plan is 90,000. Such options will vest ratably over four years from their respective dates of grant. The following table summarizes grant and stock option activity under the Plan and the Directors' Plan for fiscal years 2000, 1999 and 1998:
Options Options Outstanding ------------ -------------------------- Available Weighted for Grant Shares Average Prices ------------ ---------- --------------- Balance at 2,210,796 4,191,289 $3.87 March 31, 1997 Options (1,588,504) 1,588,504 8.18 granted Options 736,197 (736,197) 6.77 canceled Options - (1,368,165) 2.12 exercised ------------ ---------- --------------- Balance at 1,358,489 3,675,431 $5.81 March 31, 1998 Options (1,405,150) 1,405,150 3.52 granted Options 1,352,324 (1,352,324) 7.23 canceled Options - (986,959) 1.56 exercised ------------ ---------- --------------- Balance at 1,305,663 2,741,298 $5.37 March 31, 1999 Options 2,000,000 - - Authorized Options (1,150,950) 1,150,950 $11.91 granted Options 925,374 (925,374) $5.49 canceled Options - (677,717) $5.85 exercised ------------ ---------- --------------- Balance at 3,080,087 2,289,157 $8.44 March 31, 2000 ============ ========== ===============
As of March 31, 2000, options to purchase approximately 350,037 shares of Common stock were exercisable. Options granted vest over a period of four to five years. The weighted average estimated fair value at the date of grant, as defined by SFAS 123, for options granted in fiscal 2000, 1999, and 1998 was $8.57, $2.44 and $4.90 per option, respectively. The estimated grant date fair value disclosed above was calculated using the Black-Scholes model. This 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 subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. Significant option groups outstanding at March 31, 2000, and related weighted average exercise price and contractual life information are as follows: F-17
Outstanding and Exercisable by Price Range Number Weighted Weighted Number Weighted Range of Outstanding Average Average Vested and Average Exercise As of Remaining Exercise Exercisable Exercise Prices March 31, Contractual Price As of March Price 2000 Life 31, 2000 - ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 296,900 4.46 $2.31 27,540 $2.31 $2.31 $2.44 - 609,775 4.57 $3.81 165,675 $3.75 $5.50 $5.56 - 277,482 2.83 $7.19 96,922 $7.12 $7.38 $7.44 - 255,100 4.03 $8.80 58,700 $7.95 $11.13 $11.19 - 350,000 5.42 $11.19 - - $11.19 $11.25- 231,000 5.41 $11.95 - - $12.06 $12.13 - 268,900 5.79 $20.05 1,200 $12.44 $25.75 - ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 2,289,157 4.64 $8.44 350,037 $5.30 $25.75 ============= ============ ============ ========== ============= =========
The following assumptions are included in the estimated grant date fair value calculations for stock options:
2000 1999 1998 --------- ---------- ------------ Expected life 5.00 5.00 5.00 years years years Risk-free 6.7% 5.7% 6.0% interest rate Volatility 86% 88.0% 65.0% Dividend 0.0% 0.0% 0.0% yield
EMPLOYEE STOCK PURCHASE PLAN In September 1996, the Company and its shareholders approved an Employee Stock Purchase Plan ("ESPP"), which allows eligible employees of the Company and its designated subsidiaries to purchase shares of Common Stock through payroll deductions. The ESPP consists of a series of 12-month offering periods composed of two consecutive 6-month purchase periods. The purchase price per share is 85% of the fair market value of the Common Stock, at the date of commencement of the offering period, or at the last day of the respective 6-month purchase period, whichever is lower. Purchases are limited to 10% of an eligible employee's compensation, subject to a maximum annual employee contribution and limited to a $25,000 fair market value. Of the 750,000 shares of Common Stock authorized under the ESPP, 119,765, 171,676, and 96,922 shares were issued during fiscal 2000, 1999, and 1998, respectively. Compensation costs (included in pro forma net income (loss) and pro forma net income (loss) per share amounts) for the grant date fair value, as defined by SFAS 123, of the purchase rights granted under the ESPP, were calculated using the Black-Scholes model. The following weighted average assumptions are included in the estimated grant date fair value calculations for rights to purchase stock under the ESPP;
2000 1999 1998 --------- ----------- ----------- Expected life 6 months 6 months 6 months Risk-free 6.4% 4.9% 5.4% interest rate Volatility 78.0% 88.0% 65.0% Dividend 0.0% 0.0% 0.0% yield
The weighted average estimated grant date fair value, as defined by SFAS 123, or rights to purchase Common Stock under the ESPP granted in fiscal 2000, 1999 and 1998 was $2.24, $2.55 and $3.04 per share, respectively. PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME (LOSS) PER SHARE Had the Company recorded compensation expense based on the estimated grant date fair value, as defined by SFAS 123, for awards granted under the Plan, the Directors' Plan and its ESPP, the Company's pro forma net income (loss) and pro forma net income (loss) per share for the years ended March 31, 2000, 1999 and 1998, would have been as follows (in thousands, except per share data):
March 31, ------------------------------- 2000 1999 1998 --------- --------- --------- Pro forma income $646,905 $(23,231) $(8,153) (loss): Pro forma net loss per share: Basic $15.47 $(0.56) $(0.21) Diluted $15.05 $(0.56) $(0.21)
F-18 NOTE 11. 401(K) SALARY SAVINGS PLAN Effective May 1992, the Company adopted the Salary Savings Plan (the "Savings Plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"), whereby eligible employees may contribute up to 15% of their earnings, not to exceed amounts allowed under the Code. Effective April 1999, the Company agreed to match up to 50% of the first 6% of the employee contribution to a maximum of two thousand dollars annually per employee. The Company's matching contribution vests over five years. In fiscal year 2000 the Company contributed approximately $131,000. There were no contributions made in fiscal 1999 and 1998. NOTE 12. LEGAL MATTERS In March 1996, a putative class action lawsuit was filed against the Company and certain of its officers and directors and others in the United States District Court for the Northern District of California, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. The complaint alleged that the Company, N.D. Reddy and C.N. Reddy also had liability under Section 20(a) of the Exchange Act. The complaint, brought by an individual who claimed to have purchased 100 shares of the Company's common stock on November 2, 1995, was putatively brought on behalf of a class of persons who purchased the Company's common stock between July 11, 1995 and December 29, 1995. In April 1997, the Court dismissed the complaint, with leave to file an amended complaint. In June 1997, plaintiff filed an amended complaint against the Company and certain of its officers and directors alleging violations of Sections 10(b) and 20(a) of the Exchange Act. In July 1997, The Company moved to dismiss the amended complaint. In March 1998, the court ruled in defendants' favor as to all claims but one, and dismissed all but one claim with prejudice. In April 1998, defendants requested reconsideration of the ruling as to the one claim not dismissed. In June 1998, the parties stipulated to dismiss the remaining claim without prejudice, on the condition that in the event the dismissal with prejudice of the other claims is affirmed in its entirety, such remaining claim shall be deemed dismissed with prejudice. In June 1998, the court entered judgment dismissing the case pursuant to the parties' stipulation. Plaintiffs have appealed the court's ruling dismissing the claims and the parties have filed appeal briefs. The Company intends to continue to defend vigorously against any claims asserted against it, and believes it has meritorious defenses. Due to the inherent uncertainty of litigation, the Company is not able to reasonably estimate the potential losses, if any, that may be incurred in relation to this litigation. In December 1996, Alliance Semiconductor International Corporation ("ASIC"), a wholly owned subsidiary of the Company, was served with a complaint filed in Federal Court alleging that ASIC had infringed two patents owned by AMD related to flash memory devices, and seeking injunctive relief and damages. In March 1997, the Company was added as a defendant. In April 1996, the Court allowed AMD to expand its claims to include several new flash products which had been recently announced by the Company. In January and February 2000, both parties filed for motions for summary judgment. Each defendant has denied the allegations of the complaint and asserted a counterclaim for declaration that each of the AMD patents is invalid and not infringed by such defendant. A trial date is currently set for September 2000. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately US$170 million, in a case filed in 1985 captioned Prabhakara Chowdary Balla and TritTek Research Ltd. v. Fitch Research Corporation, et al., British Columbia Supreme Court No. 85-2805 (Victoria Registry). The Company, which had previously not participated in the case, believes that it never was properly served with process in this action, and that the Canadian court lacks jurisdiction over the Company in this matter. In addition to jurisdictional and procedural arguments, the Company also believes it may have grounds to argue that the claims against the Company should be deemed discharged by the Company's bankruptcy in 1991. In February 1999, the court set aside the default judgment against the Company. In April 1999, the plaintiffs were granted leave by the Court to appeal this judgment. The appeal brief and reply briefs have been filed and the parties are awaiting oral arguments before the Court in June 2000. NOTE 13. ANTIDUMPING PROCEEDING (TAIWAN-MANUFACTURED SRAMS AND DRAMS) In February 1997, Micron Technology, Inc. filed an antidumping petition with the United States International Trade Commission ("ITC") and United States Department of Commerce ("DOC"), alleging that SRAMs fabricated F-19 in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing SRAMs was materially injured or threatened with material injury by reason of imports of SRAMs fabricated in Taiwan. After a final affirmative DOC determination of dumping and a final affirmative ITC determination of injury, DOC issued an antidumping duty order in April 1998. Under that order, the Company's imports into the United States on or after approximately April 16,1998 of SRAMs fabricated in Taiwan are subject to a cash deposit in the amount of 50.15% (the "Antidumping Margin") of the entered value of such SRAMs. (The Company posted a bond in the amount of 59.06% (the preliminary margin) with respect to its importation, between approximately October 1997 and April 1998, of SRAMs fabricated in Taiwan.) In May 1998, the Company and others filed an appeal in the United States Court of International Trade (the "CIT"), challenging the determination by the ITC that imports of Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. On June 30, 1999 the CIT issued a decision remanding the ITC's affirmative material injury determination to the ITC for reconsideration. The ITC's remand determination reaffirmed its original determination. The CIT considered the remand determination and remanded it back to the ITC for further reconsideration. On June 12, 2000, in its second remand determination the ITC voted negative on injury, thereby reversing its original determination that Taiwan-fabricated SRAMs were causing material injury to the U.S. industry. The second remand determination will be transmitted to the CIT on June 26, 2000 for consideration. The decision of the CIT can be further appealed to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal. Until a final judgment is entered in the appeal, no final duties will be assessed on the Company's entries of SRAMs from Taiwan covered by the DOC antidumping duty order. If the appeal is successful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is unsuccessful, the Company's entries of Taiwan-fabricated SRAMs from October 1, 1997 through March 31, 2000 will be liquidated at the deposit rate in effect at the time of entry. On subsequent entries of Taiwan-fabricated SRAMs, the Company will continue to make cash deposits in the amount of 50.15% of the entered value. In April 2001, the Company will have an opportunity to request a review of its sales of Taiwan-fabricated SRAMs from April 1, 2000 through March 31, 2001 (the "Review Period"). If it does so, the amount of antidumping duties, if any, owed on imports from April 2000 through March 2001 will remain undetermined until the conclusion of the review in early 2002. If the DOC found, based upon analysis of the Company's sales during the Review Period, that antidumping duties either should not be imposed or should be imposed at a lower rate than the Antidumping Margin, the difference between the cash deposits made by the Company, and the deposits that would have been made had the lower rate (or no rate, as the case may be) been in effect, would be returned to the Company, plus interest. If, on the other hand, the DOC found that higher margins were appropriate, the Company would have to pay difference between the cash deposits paid by the Company and the deposits that would have been made had the higher rate been in effect. At March 31, 2000, the Company had posted a bond secured by a letter of credit in the amount of approximately $1.7 million and made cash deposits in the amount of $1.7 million relating to the Company's importation of Taiwan-manufactured SRAMs. In October 1998, Micron Technology, Inc. filed an antidumping petition with the DOC and the ITC, alleging that DRAMs fabricated in Taiwan were being sold in the United States at less than fair value, and that the United States industry producing DRAMs was materially injured or threatened with material injury by reason of imports of DRAMs fabricated in Taiwan. The petition requested the United States government to impose antidumping duties on imports into the United States of DRAMs fabricated in Taiwan. In December 1998, the ITC preliminarily determined that there was a reasonable indication that the imports of the products under investigation were injuring the United States industry. In May 1999 the DOC issued a preliminary affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after May 28, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 16.65% (the preliminary "all others" rate) of the entered value of such DRAMs, an antidumping margin calculated by weight-averaging the antidumping margins of individually investigated respondent companies. The Company posted a bond to cover deposits on such entries. In October 1999 the DOC issued a final affirmative determination of dumping. Under that determination, the Company's imports into the United States on or after October 19, 1999 of DRAMs fabricated in Taiwan were subject to an antidumping duty deposit in the amount of 21.35%, (the final "all-others" rate). However, on December 8, 1999, the ITC issued a final negative determination of injury. Consequently, the investigation was terminated, the suspension of liquidation lifted, and the bond posted in September 1999 released. In January 2000, Micron filed an appeal in the CIT challenging the determination by the ITC that imports of Taiwan-fabricated DRAMs were not causing material injury to the U.S. industry. On March 21, 2000 the Appeal of the ITC decision was dismissed by the CIT. NOTE 14. RELATED PARTY TRANSACTIONS On May 18, 1998, the Company provided loans to two of its officers and a director aggregating $1,735,000. The officer loans were used for the payment of taxes resulting from the gain on the exercise of non-qualified stock options. The loan to a director was used for the exercise of stock options. Under these loans, both principal and F-20 accrued interest were due on December 31, 1999, with accrued interest at rates ranging from 5.50% to 5.58% per annum. The loan to the director was paid at December 31, 1999. The officer loans were extended to December 31, 2000. As of March 31, 2000, $1,615,000 was outstanding under these loans with accrued interest of $163,000. In fiscal year 2000, the Company made wafer purchases from USC of approximately $15.1 million prior to the merger with UMC in January 2000. After the completion of the merger in January 2000, the Company purchased $1.5 million of wafers from UMC. In fiscal year 1999, the Company made wafer purchases $8.8 million, from USC. NOTE 15. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one reportable segment, memory products. The memory products segment includes; Static Random Access Memories ("SRAMs"), Dynamic Random Access Memories ("DRAMs"), and Flash Memories ("Flash"). The following illustrates revenues by geographic locations. Revenues are attributed to countries based on the customer's location.
Year Ended March 31, ------------------------------- 2000 1999 1998 -------- --------- ---------- (in thousands) United States $36,088 $23,770 $68,985 Taiwan 11,310 6,061 24,966 Asia (except 16,462 9,076 11,262 Taiwan) Europe 25,293 8,567 12,240 Rest of world - 309 947 -------- --------- ---------- Total $89,153 $47,783 $118,400 ======== ========= ==========
International net revenues in fiscal 2000 increased by 121% over fiscal 1999. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest increase in international net revenues was to customers in Europe, which increased approximately 195% over fiscal year 1999. The increase was due to an overall increase in product demand and higher average selling prices, in the respective areas. International revenues declined 51% from fiscal 1998 to fiscal 1999. The largest decrease in international net revenues was to customers in Taiwan, which decreased 76%. This decrease was due to an overall decrease in product demand and lower selling prices in the respective areas. NOTE 16. SUBSEQUENT EVENTS (UNAUDITED) In June 2000, PMC-Sierra, Inc. ("PMC"), announced that it agreed to acquire Malleable Technologies, Inc. ("Malleable"). According to the terms of the proposed acquisition, PMC will exchange 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC does not already own. In connection with the proposed merger, Alliance Ventures I will receive approximately 79,000 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company will report a gain based on the closing share price of PMC on the date of the merger. Based on the closing share price of PMC on June 14, 2000, the estimated pretax gain from this transaction is approximately $11 million. There is no assurance that this acquisition will be completed or that the realized gain amount will be equal or exceed the reported gain amount on the closing date of the merger. F-21 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Alliance Semiconductor Corporation: Our audits of the consolidated financial statements referred to in our report dated April 25, 2000, appearing in this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(2)(I) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California April 25, 2000 F-22
ALLIANCE SEMICONDUCTOR CORPORATION SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Balance Description beginning at end of period Additions Reductions period ------------ ------------ ------------ ------------ Year ended March 31, 2000 Allowance for doubtful $2,527 $6,209 $(7,782) $954 accounts and sales-related reserves Inventory related reserves for excess and obsolescence; and $15,701 $5,862 $(13,293) $8,270 lower of cost or market issues Year ended March 31, 1999 Allowance for doubtful $2,010 $3,193 $(2,676) $2,527 accounts and sales-related reserves Inventory related reserves for excess and obsolescence; and $14,967 $20,437 $(19,703) $15,701 lower of cost or market issues Year ended March 31, 1998 Allowance for doubtful $650 $7,512 $(6,152) $2,010 accounts and sales-related reserves Inventory related reserves for excess and obsolescence; and $40,732 $15,154 $(40,919) $14,967 lower of cost or market issues
F-23 Financial Statements of United Semiconductor Corporation for the Fiscal Year Ended December 31, 1998 and December 31, 1997. F-24 UNITED SEMICONDUCTOR CORPORATION FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 2/F No. 11 Innovation Rd., 1 Science-Based Industrial Park Hsinchu, Taiwan, Republic of China Tel:(03) 578-0205 Fax:(03) 577-7985 January 22, 1999 (99)B.L36P4065 To the Board of Directors of United Semiconductor Corporation We have examined the accompanying balance sheets of United Semiconductor Corporation as of December 31, 1998 and 1997, and the related statements of income, of changes in stockholders' equity and of cash flows for the years then ended. Our examinations were made in accordance with the "Rules Governing the Certification of Financial Statements by Certified Public Accountants" and generally accepted auditing standards in the United States and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the financial statements examined by us present fairly the financial position of United Semiconductor Corporation as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles consistently applied. /S/ PRICEWATERHOUSECOOPERS ~1~
UNITED SEMICONDUCTOR CORPORATION -------------------------------- BALANCE SHEET ------------- DECEMBER 31, ------------ (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS) 1998 1997 ----------- ----------- ASSETS Current Assets Cash and cash equivalents (Note 4(1)) $ 7,516,907 $ 5,469,227 Marketable securities (Note 4(2)) 3,138,393 3,190,746 Notes receivable -- third parties 189 -- -- related parties (Note 5) 8,352 781 Accounts receivable third parties (Note 4(3)) 778,399 937,320 related parties (Note 5) 436,937 939,664 Other receivables 165,146 88,905 Inventories (Note 4(4)) 665,344 511,486 Prepaid expenses 7,803 17,669 Other current assets (Note 4(12)) 93,353 230,381 ----------- ----------- 12,810,823 11,386,179 ----------- ----------- Long-Term Investments (Note 4(5)) Long-term investment 105,759 -- Prepaid long-term investment 250,400 -- ----------- ----------- 356,159 -- ----------- ----------- Property, Plant and Equipment (Notes 4(6) and 6) Cost Machinery and equipment 18,591,271 10,169,495 Transportation equipment 3,206 3,206 Furniture and fixtures 217,742 130,771 Leasehold improvements 10,966 10,966 Other equipment 40,974 14,270 ----------- ----------- 18,864,159 10,328,708 Acculmulated depreciation (4,452,290) (1,944,961) Construction in progress and prepayments 967,065 2,460,306 ----------- ----------- 15,378,934 10,844,053 Tangible Asset ----------- ----------- Other intangible assets 813,455 1,037,500 ----------- ----------- Other Assets Deposit -- out 1,475 30,979 Preferred expense 134,044 54,027 Preferred income tax assets (Note 4(12)) 238,121 103,102 Other assets 2,231 -- ----------- ----------- 375,871 188,108 ----------- ----------- TOTAL ASSETS $29,735,242 $23,455,840 =========== =========== 1998 1997 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term loans (Note 4(7)) $ 781,944 $ 1,911,632 Notes payable (Note 5) -- 125,209 Accounts payable -- third parties 461,646 513,371 -- related parties (Note 5) 23,634 21,485 Accrued expenses (Notes 5) 811,301 578,013 Other payables 1,213,782 359,172 Current portion of long-term loans (Note 4(8)) 1,571,458 656,744 Other current liabilities 6,607 1,268 ----------- ----------- 4,870,372 4,166,894 ----------- ----------- Long-term Liabilities Long-term loans (Note 4(8)) 7,041,589 5,190,525 ----------- ----------- Other Liabilities Accrued pension liabilities 24,958 11,619 ----------- ----------- Total Liabilities 11,936,919 9,369,038 ----------- ----------- Stockholders' Equity Common stock (Note 4(10)) 13,367,809 10,000,000 Capital reserve generated from the gain on disposal of fixed assets 40 40 Retained earnings (Note 4(11)) -- Legal reserve 408,676 -- -- Unappropriated earnings 4,022,045 4,086,762 Cumulative translation adjustment (247) -- ----------- ----------- Total stockholders' equity 17,798,323 14,086,802 ----------- ----------- Commitments and Contingent Liabilities (Note 7) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,735,242 $23,455,840 =========== =========== The accompanying notes are an integral part of these financial statements.
~2~ UNITED SEMICONDUCTOR CORPORATION STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS EXCEPT EARNINGS PER SHARE DATA)
1998 1999 ------------ ------------ Operating Revenues Sales revenues $ 12,614,679 $ 10,003,022 Sales returns (186,848) (21,216) Sales allowance (634,954) (302,184) ------------ ------------ Net sales 11,792,877 9,679,622 Other operating revenues 183,553 81,542 ------------ ------------ Net operating revenues 11,976,430 9,761,164 ------------ ------------ Operating Cost Cost of goods sold (6,748,200) (5,278,405) Other operating cost (129,181) (38,604) ------------ ------------ (6,877,381) (5,317,009) ------------ ------------ Gross Profit 5,099,049 4,444,155 ------------ ------------ Operating Expenses Selling expenses (218,789) (88,841) Administrative expenses (214,364) (265,943) Research and development expenses (701,179) (443,866) ------------ ------------ (1,134,332) (798,650) ------------ ------------ Operating Income 3,964,717 3,645,505 ------------ ------------ Non-operating Income Interest income 368,695 264,153 Dividends revenue 28,010 21,420 Gain on disposal of investment 41,516 16,956 Foreign exchange gain -- 397,616 Gain on reverse of allowance on inventory loss 59,540 -- Other income 5,370 6,853 ------------ ------------ 503,131 706,998 ------------ ------------ Non-operating Expenses Interest expense (464,199) (354,973) Foreign exchange loss (71,071) -- Provision for loss on obsolescence of inventories -- (50,562) Financial expense (10,919) (391) Other loss (103,307) (419) ------------ ------------ (649,496) (406,345) ------------ ------------ Income before income tax 3,818,352 3,946,158 Income tax (expense) benefit (Note 4(12)) (69,803) 84,057 ------------ ------------ Net income $ 3,748,549 $ 4,030,215 ============ ============ Earnings per share (Note 4(13)) Net income $ 2.80 $ 3.01 ============ ============ The accompanying notes are an integral part of these financial statements.
~3~ UNITED SEMICONDUCTOR CORPORATION -------------------------------- STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY -------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, -------------------------------- (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
Retained Earnings ----------------- Unappropriated Common Stock Capital Reserve Legal Reserve Earnings ------------ --------------- ------------- -------- Balance at January 1, 1997 $ 10,000,000 $ -- $ -- $ 56,587 Net income for 1997 -- -- -- 4,030,215 Transfer of the gain on disposal of fixed assets to capital reserve -- 40 -- (40) ------------ ---- -------- ----------- Balance at December 31,1997 10,000,000 40 -- 4,086,762 Appropriation of 1997 earnings: Appropriation for legal reserve -- -- 408,676 (408,676) Capitalization of employees' bonus 367,809 -- -- (367,809) Directors' and supervisors' remuneration -- -- -- (36,781) Stock dividends 3,000,000 -- -- (3,000,000) Net income for 1998 -- -- -- 3,748,549 Accumulative translation adjustment -- -- -- -- ------------ ---- -------- ----------- Balance at December 31, 1998 $13,367,809 $ 40 $408,676 $ 4,022,045 ============ ==== ======== ===========
Cumulative Translation Adjustment from Long- Total Stock- Term Investments holders' Equity ---------------- --------------- Balance at January 1, 1997 $ -- $10,056,587 Net income for 1997 -- 4,030,215 Transfer of the gain on disposal of fixed assets to capital reserve -- -- ---- ----------- Balance at December 31,1997 -- 14,086,802 Appropriation of 1997 earnings: Appropriation for legal reserve -- -- Capitalization of employees' bonus -- -- Directors' and supervisors' remuneration -- (36,781) Stock dividends -- -- Net income for 1998 -- 3,748,549 Accumulative translation adjustment (247) (247) ----- ----------- Balance at December 31, 1998 $(247) $17,798,323 ===== =========== The accompanying notes are an integral part of these financial statements.
~4~ UNITED SEMICONDUCTOR CORPORATION STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1998 1999 ----------- ----------- Operating activities: Net income $ 3,748,549 $ 4,030,215 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 2,510,951 1,591,371 Amortization 363,314 320,071 (Reverse of) Provision for loss on obsolescence of inventories (47,943) 38,403 Loss (gain) on disposal of fixed assets 15 (40) Fixed assets transferred to expenses 4,759 26,516 Changes in asset and liability accounts: Accounts and notes receivable 653,888 (1,026,445) Other receivables (76,241) (24,017) Inventories (105,915) (64,203) Prepaid expenses 9,866 (5,673) Other current assets 137,028 (208,429) Deferred income tax assets (135,019) 116,684 Other assets (2,231) -- Accounts and notes payable (174,785) 213,748 Accrued expenses and other payable 233,288 283,571 Other current liabilities (908) 5,911 Accrued pension liabilities 13,339 11,619 ----------- ----------- Net cash provided by operating activities 7,131,955 5,309,302 ----------- ----------- Investing activities: Acquisition of fixed assets (6,280,177) (4,644,743) Proceeds from disposal of fixed assets -- 9,180 Decrease (increase) in marketable securities 52,353 (2,987,926) Increase in long-term investment (356,406) -- Increase in deferred expense and intangible assets (128,858) (25,882) Decrease (increase) in deposit-out 29,504 (915) ----------- ----------- Net cash used in investing activities (6,683,584) (7,650,286) ----------- -----------
~5~ UNITED SEMICONDUCTOR CORPORATION STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS)
1998 1999 ----------- ----------- Financing activities: (Decrease) increase in short-term loans (1,129,688) 1,750,112 Proceeds from long-term loans 2,765,778 1,517,771 Appropriation of directors' and supervisors' remuneration (36,781) -- ----------- ----------- Net cash provided by financing activities 1,599,309 3,267,883 ----------- ----------- Net increase in cash and cash equivalents 2,047,680 926,899 Cash and cash equivalents at the beginning of year 5,469,227 4,542,328 ----------- ----------- Cash and cash equivalents at the end of year $ 7,516,907 $ 5,469,227 =========== =========== Supplemental disclosures of cash flow information Cash paid for interest (excluding interest capitalized) $ 444,233 $ 345,781 =========== =========== Cash paid for income tax $ 1,744 $ 51,501 =========== =========== Investing activities partially paid by cash Acquisition of fixed assets $ 7,154,510 $ 3,445,946 Add: payable at the beginning of year 352,925 1,551,722 Less: payable at the end of year (1,213,782) (352,925) Fixed assets exchange (13,476) -- ----------- ----------- Cash paid $ 6,280,177 $ 4,644,743 =========== =========== The accompanying notes are an integral part of these financial statements.
~6~ UNITED SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (EXPRESSED IN NEW TAIWAN THOUSAND DOLLARS) 1. HISTORY AND ORGANIZATION United Semiconductor Corporation was incorporated as a company limited by shares on October 6, 1995 and commenced its operations in June, 1996. As of December 31, 1998, the paid-in capital is $13,367,809. The Company's major business activities are as follows: a. Semiconductor and semiconductor device foundry; b. Providing the mask tooling, package, burn-in, and testing services for the above-mentioned products; and c. Research and development for the technology of wafer fabrication. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Translation of foreign currency transactions The accounts of the Company are maintained in New Taiwan dollars. Transactions denominated in foreign currencies are translated into New Taiwan dollars at the rates of exchange prevailing on the transaction dates. Receivables, other monetary assets and liabilities denominated in foreign currencies are translated into New Taiwan dollars at the rates of exchange prevailing at the balance sheet date. Exchange gains or losses are included in the current year's results. Cash equivalents Cash equivalents are short-term, highly liquid investments, which are readily convertible to known amounts of cash and with maturity dates that do not present significant risk of changes in value because of changes in interest rates. Marketable securities Marketable securities are recorded at cost when acquired. The carrying amount of the marketable securities portfolio is stated at the lower of its aggregate cost or market value at the balance sheet date. The market value for listed equity securities or close-ended funds are determined by the average closing prices occurred during the last month of the fiscal year. The market value for open-ended funds are determined by their equity per unit at balance sheet date. ~7~ Inventories Inventories, except raw materials stated at actual, are stated at standard cost which is adjusted to actual cost based on weighted average method at month end. Inventories are valued at the lower of cost or market value at the year end. An allowance for loss on obsolescence and decline in market value is provided when necessary. Long-term investments A. If the investee company is listed and the Company owns less than 20% of the outstanding shares and has no significant influence on operational decisions of the listed company, such investment is accounted for by the lower of cost or market value method. The unrealized loss resulting from the decline in market value of such investment is deducted from stockholders' equity. The Company's investment in a company which is not listed is accounted for under the cost method. B. Investment income or loss from investments in both listed and unlisted companies is accounted for under equity method provided that the Company owns over 20% of the outstanding shares or has significant influence on operational decisions of the listed and unlisted companies. C. For long-term investments in which the Company owns more than 50% of the subsidiary, consolidated financial statements are prepared, if the total assets and the operating income of the subsidiary are less than 10% of the respective nonconsolidated total assets and income of the Company, the subsidiary's financial statements are not consolidated and instead are accounted for using the equity method. Irrespective of the above test, when the total combined assets or operating income of all such nonconsolidated subsidiaries constitute more than 30% of the Company's nonconsolidated total assets or income, then each individual subsidiary with total assets or operating income greater than 3% of the Company's respective nonconsolidated total assets and income is included in the consolidation. D. In evaluation of overseas long-term investment, the cumulative translation adjustment derived form the investee's foreign currency financial statements is treated as adjusted item of the Company's stockholders' equity account. Property, plant and equipment A. Property, plant and equipment are stated at cost. Interest incurred on loans used to finance the construction of property and plant is capitalized and depreciated accordingly. ~8~ B. Depreciation is provided on the straight-line method using the assets' economic service lives. When the economic service lives are completed, fixed assets which are still in use are depreciated based on the residual value. The service lives of the fixed assets are five to ten years. C. Maintenance and repairs are charged to expenses as incurred. Significant renewals and improvements are treated as capital expenditures and are depreciated accordingly. Intangible assets A. Technology knowhow was provided by a major shareholder as part of paid-in capital. The asset is amortized over five years on the straight-line method starting from the date of operation. B. Royalties are stated at cost and amortized on a straight-line basis over the contract period. Deferred charges Deferred charges are stated at cost and amortized on a straight-line basis over the following years: software - 3 years; organization cost - 5 years. Retirement plan A. The Company has a non-contributory and funded defined benefit retirement plan covering all its regular employees. B. The net pension cost is computed based on an actuarial valuation in accordance with the provision of FASB No. 18 of the R.O.C., which requires consideration of cost components such as service cost, interest cost, expected return on plan assets and amortization of net obligation at transition. Income tax Income tax is provided based on accounting income after adjusting for permanent differences. The provision for income tax includes deferred tax resulting from items reported in different periods for tax and financial reporting purposes and from investment tax credits. A valuation allowance is provided for deferred tax asset to the extent that it is more likely than not that the tax benefits will not be realized. Deferred tax assets or liabilities are further classified into current or noncurrent items and are presented in the financial statements as net balance. Over or under provision of prior years' income tax liabilities are included in the current year's income tax expense. 3. EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES None. 4. CONTENTS OF SIGNIFICANT ACCOUNTS ~9~ (1) CASH AND CASH EQUIVALENTS December 31 --------------------------- 1998 1997 ---------- ---------- Cash: Cash on hand $ 2,355 $ 1,817 Demand accounts 387,694 58,655 Checking accounts 169,402 16,607 Time deposits 6,054,016 5,342,348 ---------- ---------- 6,613,467 5,419,427 Cash equivalents: Bonds with repurchase agreement 903,440 49,800 ---------- ---------- $7,516,907 $5,469,227 ========== ========== (2) MARKETABLE SECURITIES December 31 --------------------------- 1998 1997 ---------- ---------- Mutual funds $ 199,040 $ 251,393 Listed equity securities stocks 2,939,353 2,939,353 ---------- ---------- $3,138,393 $3,190,746 ========== ========== (3) ACCOUNTS RECEIVABLE - NET December 31 ------------------------ 1998 1997 --------- --------- Accounts receivable -- third parties $ 863,417 $ 959,159 Less: Allowance for doubtful accounts (20,982) (21,839) Allowance for sales returns and discounts (64,036) -- --------- --------- $ 778,399 $ 937,320 ========= ========= (4) INVENTORIES December 31 ------------------------ 1997 1998 --------- --------- Raw materials, supplies and spare parts $ 88,653 $ 226,426 Work in process 445,414 315,274 Finished goods 171,737 58,189 --------- --------- 705,804 599,889 Less: Allowance for loss on obsolescence (40,460) (88,403) --------- --------- $ 665,344 $ 511,486 ========= ========= ~10~ (5) LONG-TERM INVESTMENT
December 31, -------------------------------------------------- 1998 1997 ------------------------ ------------------------ Percentage Percentage Investee Company Amount of ownership Amount of ownership ---------------- ---------- ------------ ---------- ------------ Investment accounted for under equity method: UMC-USA $106,006 20% $ -- -- Cumulative translation adjustment (247) -- -------- -------- Subtotal 105,759 -- -------- -------- Prepaid long-term investment: Industrial Bank of Taiwan 250,000 -- SBIP Administration Recycle Co. 400 -- -------- -------- Subtotal 250,400 -- -------- -------- Grand total $356,159 $ -- ======== ========
(6) PROPERTY, PLANT AND EQUIPMENT
December 31, 1998 ------------------------------------------------------------ Accumulated Cost depreciation Book value ------------ ------------ ------------ Machinery and equipment $ 18,591,271 $ (4,387,198) $ 14,204,073 Transportation equipment 3,206 (1,122) 2,084 Furniture and fixtures 217,742 (53,978) 163,764 Leasehold improvements 10,966 (4,142) 6,824 Other equipment 40,974 (5,850) 35,124 Construction in progress and prepayments 967,065 -- 967,065 ------------ ------------ ------------ $ 19,831,224 $ (4,452,290) $ 15,378,934 ============ ============ ============ December 31, 1997 ------------------------------------------------------------ Accumulated Cost depreciation Book value ------------ ------------ ------------ Machinery and equipment $ 10,169,495 $ (1,915,540) $ 8,253,955 Transportation equipment 3,206 (587) 2,619 Furniture and fixtures 130,771 (24,341) 106,430 Leasehold improvements 10,966 (2,315) 8,651 Other equipment 14,270 (2,178) 12,092 Construction in progress and prepayments 2,460,306 -- 2,460,306 ------------ ------------ ------------ $ 12,789,014 $ (1,944,961) $ 10,844,053 ============ ============ ============
Interest expense amounting to $118,745 and $24,321 were capitalized in 1998 and 1997, respectively. ~11~ (7) SHORT-TERM LOANS December 31 --------------------------------- 1998 1997 ------------- ------------- Unsecured loans $ 781,944 $ 1,911,632 ============= ============= Annual interest rates 0.73% - 8.22% 1.25% - 7.66% ============= ============= (8) LONG-TERM LOANS December 31 ------------------------------------- 1998 1997 ------------- ------------- Long-term loans $ 8,613,047 $ 5,847,269 Less: Current portion (1,571,458) (656,744) ------------- ------------- $ 7,041,589 $ 5,190,525 ============= ============= Annual interest rates 1.25% - 7.60% 1.31% - 7.20% ============= ============= (9) RETIREMENT PLAN A. All of the regular employees of the Company are covered by the pension plan. Under the plan, the Company contributes an amount equal to 2% of total wages on a monthly basis to the pension fund deposited in the Central Trust of China. Pension benefits are generally based on service years (two points per year for service years 15 years and below and one point per year for service years over 15 years). Each employee is limited up to 45 points. During 1998 and 1997, the Company recognized pension cost amounting to $22,262 and $17,793, respectively. The balances of the Company's employees' retirement fund in Central Trust of China was $18,068 and $9,270 at December 31, 1998 and 1997, respectively. B. Based on actuarial assumptions for the years of 1998 and 1997, both the discount rate and expected rate of return on plan asset are 6.25% and 6.5%, respectively and the rates of compensation increase are both 8%. The unrecognized net obligation at transition is amortized equally over 15 years. The funded status of pension plan is listed as follows: ~12~ December 31 ---------------------- 1998 1997 -------- -------- Vested benefit obligation $ -- $ -- Non-vested benefit obligation (11,417) (4,947) -------- -------- Accumulated benefit obligation (11,417) (4,947) Effect on projected salary increase (57,082) (25,388) -------- -------- Projected benefit obligation (68,499) (30,335) Market-related value of plan assets 18,068 8,638 -------- -------- Projected benefit obligation exceeds plan asset (50,431) (21,697) Unrecognized net obligation at transition 260 281 Unrecognized pension gain or loss 26,647 11,360 -------- -------- Accrued pension liability $(23,524) $(10,056) ======== ======== (10) COMMON STOCK A. As of December 31, 1998, the Company's authorized capital was $23,000,000, representing 2,300,000 thousand shares, with par value of NT$10. The total issued and outstanding capital at December 31, 1998 and 1997 were $13,367,809 and $10,000,000, respectively. B. Based on the resolution of the shareholders' meeting on May 26, 1998, the Company issued new shares of 336,781 thousand shares from the capitalization of retained earnings of $3,000,000 and employees' bonus of $367,809. The Company has completed the amendment procedures for registration. (11) RETAINED EARNINGS A. According to the Company's Articles of Incorporation, current year's earnings, if any, shall be distributed in the following order: (1) paying all taxes and dues; (2) covering prior years' operating losses, if any; (3) setting aside 10% of the remaining amount, after deducting (1) and (2), as legal reserve; (4) allocating not over 10% of the par value of common stocks as interest of capital to common stockholders; (5) allocating 1% of the remaining amount, after deducting (1), (2), (3) and (4) above from the current year's earnings, as directors' and supervisor's renumeration; (6) allocating not below 10% of the remaining amount, after deducting (1), (2), (3) and (4) above from the current year's earnings, as employees' bonus; and ~13~ (7) distributing the remaining amount in accordance with the resolution of the board of directors and stockholders. (12) INCOME TAX A. Income tax receivable at December 31, 1998 and 1997 was derived as follows: 1998 1997 -------- -------- Income tax expense (benefit) $ 69,803 $(84,057) Net effect of the change in deferred income tax assets and liabilities (54,187) 89,634 Adjustment of prior year's income tax expense (3,101) -- Withholding income tax (34,994) (51,259) Tax on interest which is subject to separate withholding income tax (1,744) (242) -------- -------- Income tax receivable (shown in other current assets) $(24,223) $(45,924) ======== ======== B. Deferred income tax assets and liabilities as of December 31, 1998 and 1997 were as follows December 31 --------------------------- 1998 1997 ----------- ----------- Deferred income tax assets -- current $ 43,335 $ 228,270 Deferred income tax liabilities -- current (4,271) -- ----------- ----------- 39,064 228,270 ----------- ----------- Deferred income tax assets -- noncurrent 1,526,536 1,262,960 Deferred income tax liabilities -- noncurrent (470,012) (611,435) Valuation allowance for deferred income tax assets -- noncurrent (818,403) (548,423) ----------- ----------- 238,121 103,102 ----------- ----------- $ 277,185 $ 331,372 =========== =========== C. Components of deferred income tax assets and liabilities as of December 31, 1998 and 1997 were as follows:
December 31, 1998 December 31, 1997 ------------------------------ ------------------------------ Amount Tax Effect Amount Tax Effect ----------- ----------- ----------- ----------- Current items: Temporary differences Unrealized foreign exchange gain $ 195,322 $ 39,064 $ 1,141,350 $ 228,270 ----------- ----------- ----------- ----------- Non-current items Temporary differences Depreciation (2,350,062) (470,012) (3,057,175) (611,435) Amortization of technology knowhow, etc. 135,180 27,036 956,290 191,258 Investment tax credits -- 1,499,500 -- 1,071,702 Valuation allowance for deferred income tax assets -- (818,403) -- (548,423) ----------- ----------- ----------- ----------- $(2,214,882) 238,121 $(2,100,885) 103,102 =========== ----------- =========== ----------- $ 277,185 $ 331,372 =========== ===========
~14~ D. The Company's income tax return for 1996 has been assessed and approved by the Tax Authority. E. Pursuant to the "Statute For The Establishment and Administration of Science-Based Industrial Park", the Company was granted several periods of tax holidays with respect to income derived from approved investments. The tax holidays will be expired on December, 2001. F. As of December 31, 1998, the unused investment tax credits amounting to $1,499,500 resulting from the acquisition of equipment and expenditures on research and development will expire on December 31, 2002. G. As of December 31, 1998, the Company's deductible credit account balance for shareholders' income tax is $36,733. The ending balance of unappropriated earnings amounting to $4,022,045, of which $3,748,549 came from the year of 1998 and $273,496 came from and before the years of 1997. The estimated ratio of deductible tax credit for the appropriation of 1998's earnings is 0.33%. (13) EARNINGS PER SHARE 1998 1997 ----------- ----------- Net income $ 3,748,549 $ 4,030,215 =========== =========== Weighted average outstanding common stock (Expressed in thousand shares) 1,336,781 1,000,000 =========== =========== Retroactively adjusted weighted average outstanding common stock (Expressed in thousand shares) 1,336,781 1,336,781 =========== =========== Earnings per share (Expressed in New Taiwan dollars) $ 2.80 $ 4.03 =========== =========== Retroactively adjusted weighted average earnings per share $ 2.80 $ 3.01 =========== =========== 5. RELATED PARTY TRANSACTION (1) Names and Relationships of Related Parties Name of the related parties The relationship with the Company --------------------------- --------------------------------- United Microelectronics Co., Ltd. (UMC) The major investor of the Company United Integrated Circuits Corporation Common board chairman United Silicon Incorporated Common board chairman Utek Semiconductor Inc. Common board chairman AMIC Technology, Incorporated The affiliate of UMC Faraday Technology Corporation Common major investor NOVATEK Microelectronics Corp. Common major investor Integrated Technology Express Common major investor MediaTek Incorporation Common major investor Industrial Bank of Taiwan The Company is the promoter Chiao Tung Bank The Company's chairman is a board member of the Bank S3 Inc. A director of the Company S3 International Ltd. 100% investee of S3 Inc. ALLIANCE Semiconductor Corp. (Alliance) A director of the Company UMC-USA The investee of the Company ~15~ (2) Significant Related Party Transactions a. Sales 1998 1997 ------------------------- ------------------------- Percentage Percentage Amount of net sales Amount of net sales ---------- ------------ ---------- ------------ United Microelectronics Co., Ltd. $1,562,443 13% $2,503,897 26% United Integrated Circuit Co., Ltd. 229,583 2% 302,866 3% S3 International Ltd. 1,456,778 12% -- -- Alliance 271,453 2% -- -- Others 108,098 1% 425,071 4% ---------- ---------- ---------- ---------- $3,628,355 30% $3,231,834 33% ========== ========== ========== ========== The above sales are dealt with in the ordinary course of business similar to those with other companies. The actual collection period is appoximately two months. b. Purchases 1998 1997 --------------------- -------------------- Percentage Percentage of net of net Amount purchases Amount purchases -------- --------- -------- --------- United Microelectronics Co., Ltd. $ 69,942 3% $ 15,912 2% United Silicon Incorporated 17,115 1% -- -- United Integrated Circuit Co., Ltd. 19,060 1% -- -- -------- -------- -------- -------- $106,117 5% $ 15,912 2% ======== ======== ======== ======== The above purchases are dealt with in the ordinary course of business similar to those with other companies and are payable after two months from the date of transaction entries. c. Notes receivable 1998 1997 ------------------- ------------------- Percentage Percentage of notes of notes Amount receivable Amount receivable ------ ---------- ------ ---------- United Microelectronics Co., Ltd. $ -- -- $ 781 100% AMIC Technology Incorporated 6,736 79% -- -- Faraday Technology Corporation 812 10% -- -- Integrated Technology Express 804 9% -- -- ------ ------ ------ ------ 8,352 98% $ 781 100% ====== ====== ====== ====== ~16~ d. Accounts receivable
1998 1997 ----------------------------- ------------------------------ Percentage Percentage of accounts of accounts Amount receivable Amount receivable -------- ---------- --------- ---------- United Microelectronics Co., Ltd. $ 303,987 22% $ 218,633 11% United Integrated Circuits Co., Ltd. -- -- 317,533 17% S3 International Ltd. 140,624 10% 263,252 14% Others 79,157 6% 148,453 8% --------- --------- --------- --------- 523,768 38% 947,871 50% Less: Allowance for doubtful accounts (4,541) -- (8,207) -- Allowance for sales returns and discounts (82,290) (6)% -- -- --------- --------- --------- --------- $ 436,937 32% $ 939,664 50% ========= ========= ========= =========
e. Notes payable 1998 1997 ---------------- ------------------- Percentage Percentage of notes of notes Amount payable Amount payable ------ ------- ------ ------- United Microelectronics Co., Ltd. $ -- -- $25,992 21% ====== == ======= ======= f. Accounts payable 1998 1997 ------------------- ------------------- Percentage Percentage of accounts of accounts Amount payable Amount payable ------ ------- ------ ------- United Microelectronics Co., Ltd. $20,776 4% $ 9,428 2% United Integrated Circuit Co., Ltd. 1,281 -- 12,057 2% United Silicon Incorporated 1,577 1% -- -- ------- ------- ------- ------- $23,634 5% $21,485 4% ======= ======= ======= ======= ~17~ g. Accrued expenses 1998 1997 -------------------- -------------------- Percentage Percentage of accrued of accrued Amount expenses Amount expenses -------- -------- -------- -------- United Microelectronics Co., Ltd. $190,761 24% $ 77,387 13% Others 197 -- -- -- -------- -------- -------- -------- $190,958 24% $ 77,387 13% ======== ======== ======== ======== h. Property transaction 1998: None. 1997: The Company sold one set of machinery and equipment to United Integrated Circuit Co., Ltd. for $9,180. The gain on the transaction was $40. i. Financing transaction -- Long-term loan
1998 ------------------------------------------------------------------------------------- The Highest Balance ---------------------- Chiao-Tung Bank Time Amount Ending Balance Interest Rate Interest Expense Paid ---- ------ -------------- ------------- --------------------- February 1998 $ 720,144 $ 576,112 6.575% ~ 6.975% $ 44,824 ========= ========= ======== 1997 ------------------------------------------------------------------------------------- The Highest Balance ---------------------- Chiao-Tung Bank Time Amount Ending Balance Interest Rate Interest Expense Paid ---- ------ -------------- ------------- --------------------- December 1997 $ 720,144 $ 720,144 6.575% $ 40,409 ========= ========= ========
j. Other transactions
Related Parties Item 1998 1997 --------------- ---- ---- ---- United Microelectronics Co., Ltd. Rental $ 201,211 $ 199,329 " Fab service charge 87,696 64,954 " Research & design expense 168,420 76,992 " Technology developing expense 145,911 -- " Management allocation fee 69,915 -- --------- --------- 673,153 341,275 UMC-USA Commission 137,272 -- --------- --------- $ 810,425 $ 341,275 ========= =========
~18~ 6. ASSETS PLEDGED AS COLLATERAL
December 31 ------------------------------- 1998 1997 Subject of collateral ------------ ----------- --------------------- Machinery and equipment $ 12,575,024 $ 6,272,029 Long-term loan Deferred assets-software 53,690 -- Long-term loan Time deposits 2,231 2,111 Guaranty for Customs Duties ------------ ----------- $ 12,630,945 $ 6,274,140 ============ ===========
7. COMMITMENTS AND CONTINGENT LIABILITIES a. The Company's unused letters of credit for import of machinery were approximately USD25,510 thousand dollars, JPY3,516,992 thousand dollars, and DEMl20 thousand dollars at December 31, 1998. b. The Company has signed several contracts for the purchase of equipment amounting to USD1,204,098 thousand dollars, TPY91,153,936 thousand dollars, and DEM703 thousand dollars. As of December 31, 1998, the amount of unrecorded outstanding obligations under these contracts are USD1,101,281 thousand dollars, JPY77,117,921 thousand dollars, and DEM120 thousand dollars. c. On September 24, 1997, the Department of Commerce (DOC) of the United States of America (USA) made a preliminary determination that Static Random Access Memory (SRAM) manufactured in Taiwan are being sold at less than fair market value, i.e. dumped prices. In March, 1998, the DOC issued its final determination, setting the duty rate at 41.75% for "all others" not named as direct participants in the investigation (such as customers who used the Company to fabricate SRAM). Management believes that this final ruling of the case will not have a material adverse effect on the Company's financial position because the volume of SRAM products exported by the Company to the USA is not significant. ~19~ d. On December 7, 1998, the International Trade Commission (ITC) of the USA issued a statement to the DOC that there was a reasonable indication that the U.S. industry is suffering a material injury as a result of Dynamic Random Access Memory (DRAM), which are manufactured in Taiwan and being sold at less than fair market value in the USA. Based on the precedent set in the SRAM investigation described above, the Company expects that foundry customers who were not participants in the investigation will also be subject to the "all other" rate with respect to DRAM. Management believes that the final outcome of the investigation will not have a material adverse effect to the Company's financial position because the Company's volume of export sales of DRAM to the USA is not significant. e. A number of third parties hold patents in the area of semiconductor processing, and some have notified the Company demanding that the Company obtain a license for various semiconductor fabrication techniques and circuit designs. The third parties involved include Texas Instruments, EMI, Intel, Chou H. Li, NEC, and Sanyo. Management has indicated a willingness to obtain licenses wherever required and necessary to continue its business. 8. COMPARATIVE FIGURES RECLASSIFICATION Certain accounts in the 1997 financial statements have been reclassified to conform with the presentation adopted for the 1998 financial statements. ~20~ EX-10.30 2 0002.txt ALLIANCE VENTURE MANAGEMENT - AGREEMENT LIMITED LIABILITY COMPANY OPERATING AGREEMENT THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT ("Agreement"), is entered into as of October 15, 1999, by and among the persons listed on Exhibit A hereto, as members ("Members") of Alliance Venture Management, LLC, a California limited liability company ("Company" or "LLC"). WHEREAS, the LLC proposes to act as the general partner of Alliance Ventures I, L.P. and Alliance Ventures II, L.P. and as such to receive a carried interest in the profits of these limited partnerships; and WHEREAS, the members desire to provide for series of units to be known as Common Units, Series A units and Series B units for the purpose of allocating the carried interest in Alliance Ventures I, L.P. and Alliance Ventures II, L.P. THE PARTIES AGREE AS FOLLOWS: 1. FORMATION OF LIMITED LIABILITY COMPANY 1.1 FORMATION The Members have formed the LLC under the laws of the State of California pursuant to the Beverly-Killea Limited Liability Company Act ("Act") by causing articles of organization ("Articles of Organization") for the Company to be filed in the Office of the Secretary of State of California, and by this Agreement intend to establish rules and regulations governing its ownership and control. 1.2 NAME AND PRINCIPAL PLACE OF BUSINESS Unless and until amended in accordance with this Agreement and the Act, the name of the LLC will be "Alliance Venture Management, LLC" The principal place of business of the LLC shall be Santa Clara, California, or such other place or places as the Managers from time to time determine. 1.3 REGISTERED OFFICE AND AGENT FOR SERVICE OF PROCESS The Company shall maintain a registered office and agent for service of process as required by Section 17061 of the Act. The registered office shall be 2575 Augustine Drive, Santa Clara, California, and the agent for service of process shall be Bradley Perkins, or such other place and person as the Managers may designate. 1.4 AGREEMENT For and in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members executing this Agreement hereby agree to the terms and conditions of this Agreement, as it may from time to time be amended. 1.5 BUSINESS The purpose of the LLC is to engage in any lawful act or activity for which a limited liability company may be organized under the Act. The LLC shall serve as the general partner of the Partnership, subject to the terms and conditions of the agreement of limited partnership of the Partnership. 1.6 DEFINITIONS Terms not otherwise defined in this Agreement shall have the meanings set forth in Section 15. 1.7 TERM The term of the Company shall commence upon the later to occur of: 1.7.1the filing of Articles of Organization for the Company in the office of the Secretary of State of California; or 1.7.2the execution of this Company Agreement by at least two Members and, unless the term of the LLC is otherwise extended or sooner terminated pursuant to the provisions of this Agreement, shall continue until ten years after the commencement of such term. Such term may be amended by amendment of this Agreement. 2. MEMBERSHIP; UNITS 2.1 MEMBERS The Initial Members of the LLC shall be and include each of the persons whose names are set forth on Exhibit A hereto as of the date of this Agreement. Exhibit A shall be amended by the Managers as appropriate to reflect the admission of additional Members or the acquisition by existing Members of additional Units in the LLC. 2.2 REPRESENTATIONS AND WARRANTIES Each Member hereby represents and warrants to the LLC and each of the other Members as follows: 2.2.1PURCHASE ENTIRELY FOR OWN ACCOUNT The Member is acquiring his interest in the LLC for the Member's own account for investment purposes only and not with a view to or for the resale, distribution, subdivision or fractionalization thereof and has no contract, understanding, undertaking, agreement, or arrangement of any kind with any Person to sell, transfer or pledge to any Person his interest or any part thereof nor does such Member have any plans to enter into any such agreement; 2.2.2INVESTMENT EXPERIENCE By reason of his business or financial experience, the Member has the capacity to protect his own interests in connection with the transactions contemplated hereunder, is able to bear the risks of an investment in the LLC, and at the present time could afford a complete loss of such investment; 2.2.3DISCLOSURE OF INFORMATION The Member is aware of the LLC's business affairs and financial condition and has acquired sufficient information about the LLC to reach an informed and knowledgeable decision to acquire an interest in the LLC; 2.2.4FEDERAL AND STATE SECURITIES LAWS The Member acknowledges that the interests in the LLC have not been registered under the Securities Act of 1933 or any state securities laws, inasmuch as they are being acquired in a transaction not involving a public offering, and under such laws, may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements. In this connection, the Member represents that it or he is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933. 2.3 LLC UNITS Ownership of the LLC shall be divided into and represented by units of the LLC ("Units"). The LLC shall be authorized to issue three classes of units, Common Units, Series A Units and Series B Units. The total number of Units the LLC is authorized to issue shall be 3,000,000, of which 1,000,000 shall be Common Units, 1,000,000 shall be Series A Units and 1,000,000 shall be Series B Units. 2.4 VOTING RIGHTS OF LLC UNITS Each Common Unit shall be entitled to one vote per Unit, each Series A Unit shall be entitled to 10 votes per Unit, and each Series B Unit shall be entitled to 10 votes per Unit. 2.5 ADDITIONAL MEMBERS, ISSUANCE OF ADDITIONAL UNITS Additional Persons may be issued Units and admitted to the LLC as Members upon compliance with the provisions of this Agreement and upon such terms and conditions as the Managers may determine, provided that: 2.5.1no new class of Units or interests having rights or preferences senior to those of the existing Units may be issued without the approval of Members holding a majority of each class of such outstanding subordinate Units; and 2.5.2the Managers may not issue more than the total number of authorized Units, without the approval of the Members. Existing Members may be issued additional Units, upon compliance with the provisions of this Agreement and upon such terms and conditions as the Managers may determine, provided that no new class of Units or interests having rights or preferences senior to those of the existing Units may be issued without the approval of Members holding a majority of each class of outstanding subordinate Units, nor may the Managers issue more than the total number of authorized Units of the LLC without the approval of the Members. 2.6 ADMISSION OF SUBSTITUTE MEMBERS Notwithstanding any other provision of this Agreement, no Assignee of Units of the LLC (including without limitation Permitted Transferees under Section 12.4 and purchasers pursuant to Section 12.5.6) shall be admitted as a Substitute Member and admitted to all the rights of the Member who assigned the Units, without the approval of the Managers. If so admitted, the Substitute Member shall have all the rights and powers and will be subject to all the restrictions and liabilities of the Member who originally assigned the Units. The admission of a Substitute Member shall not release any Member who previously assigned the Units from liability to the LLC that may have existed before such substitution. Consents required hereunder may be given in advance of any transfer by any writing signed by a Member. 2.7 RESIGNATION OR WITHDRAWAL OF A MEMBER Except as specifically provided below, and subject to the provisions for transfer contained in Section 12, no Member may resign, retire or withdraw from membership in the LLC or withdraw his interest in the capital of the LLC. 2.8 DISSOCIATION OF A MEMBER The Bankruptcy, death or Dissolution of a Member will: 2.8.1cause such Member to be dissociated from the LLC (a "Dissociated Member"); 2.8.2terminate the continued membership of such Member in the LLC; and 2.8.3cause a dissolution and winding-up of the LLC pursuant to Section 14 hereof except as expressly provided therein. Except as set forth above or expressly provided elsewhere in this Agreement, the death, withdrawal, resignation, expulsion, Bankruptcy or dissolution of a Member shall not cause a dissolution of the LLC. 2.9 RIGHTS OF DISSOCIATING In the event any Member becomes a "Dissociated Member": 2.9.1if the dissociation causes a dissolution and winding up of the LLC under Section 14, the Dissociated Member or its or his legal representative shall be entitled to participate in the winding up of the LLC to the same extent as any other Member; and 2.9.2if the dissociation does not cause a dissolution and winding up of the LLC under Section 14, the Dissociated Member or his or its legal representative shall be treated as an Assignee unless admitted to the LLC as a Substitute Member pursuant to Section 2.7. 2.10 RIGHTS OF MEMBERS TO BIND LLC Except as expressly provided herein no Member shall have the right to bind the LLC. 3. CONTRIBUTIONS TO CAPITAL 3.1 INITIAL CONTRIBUTIONS Each Member has contributed cash or property having an agreed-upon Initial Carrying Value as set forth on Exhibit A hereto, which Exhibit A shall be revised to reflect any additional contributions made in accordance with Section 3.3. 3.2 ISSUANCE OF UNITS In exchange for the Initial Contribution of the Members, the Members shall be issued that number and class of Units set forth opposite their names on Exhibit A. 3.3 ADDITIONAL CONTRIBUTIONS Except as set forth in Section 2.5 above, no Member shall be permitted or required to make any additional contribution to the capital of the LLC without the consent of the Managers and the Members. 3.4 INTEREST No Member shall be entitled to any interest with respect to its or his contributions to or share of the capital of the LLC. 4. ACTION BY MEMBERS 4.1 MEETINGS OF MEMBERS All meetings of the Members for the election of Managers shall be held in the City of Santa Clara, State of California, at such place as may be fixed from time to time by the Managers, or at such other place within the State of California as shall be designated from time to time by the Managers and stated in the notice of the meeting. Meetings of Members for any other purpose may be held at such time and place, within or without the State of California, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Members may participate in a meeting of the members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 4.2 ANNUAL MEETINGS 4.2.1Annual meetings of Members, commencing with the year 1999, shall be held on such date and at such time as shall be designated from time to time by the Managers and stated in the notice of the meeting, at which they shall elect a board of Managers, and transact such other business as may properly be brought before the meeting. 4.2.2Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each Member entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. 4.3 SPECIAL MEETINGS 4.3.1Special meetings of the Members, for any purpose or purposes, may be called by the Managers and shall be called at the request in writing of any Member. Such request shall state the purpose or purposes of the proposed meeting. 4.3.2A special meeting of the Members for the election of a new Board of Managers may be called by any Member entitled to vote thereon, within 90 days after the date on which such Member has acquired Units of the LLC. 4.3.3Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, to each Member entitled to vote at such meeting. 4.3.4Business transacted at any special meeting of Members shall be limited to the purposes stated in the notice. 4.4 MEMBERSHIP LIST The Person who has charge of the Unit Register of the LLC shall prepare and make, at least ten days before every meeting of Members, a complete list of the Members entitled to vote at the meeting, arranged in alphabetical order, showing the address of each Member and the number of Units registered in the name of each Member. The list may be examined by any Member, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days before the meeting. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Member who is present. 4.5 QUORUM 4.5.1The holders of a majority of the Units issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the Members for the transaction of business except as otherwise provided by statute. If, however, a quorum is not present or represented at any meeting of the Members, the Members entitled to vote thereat, present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. Upon resumption of an adjourned meeting, any business may be transacted that might have been transacted before the meeting was adjourned. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member entitled to vote at the meeting. 4.5.2Except as otherwise provided herein, when a quorum is present at any meeting, the vote of the Members holding a majority of the Units present in person or by proxy shall decide any question brought before the meeting, except that the Board of Managers shall be elected as if the LLC were a California corporation and the Members were shareholders voting for the election of a board of directors and except to the extent that the express provision of the statutes, the Articles of Organization, or this Agreement require a different vote. 4.6 VOTING RIGHTS Each Member shall at every meeting of the Members be entitled to one vote in person or by proxy for each Unit, but no proxy shall be voted after three years from its date, unless the proxy expressly provides for a longer period. Members entitled to vote shall vote as a single class. Neither the assigning Member nor an Assignee of Units shall have any right to a vote with respect to any assigned Units. No Member who has assigned all of its or his Units (collectively, "Former Members") shall have any right to vote on any matter. A Member who has assigned some, but not all, of its or his Units shall be treated as a Member and entitled to a vote on all matters to the extent of its or his retained Units. No Assignee of Units shall have the right to consent, approve or vote on any matters unless such Assignee has become a Substitute Member pursuant to Section 2.6. 4.7 ACTION WITHOUT MEETING Any action required to be taken at any annual or special meeting of Members, or any action which may be taken at any annual or special meeting of Members, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by Members holding outstanding Units having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Units entitled to vote thereon were present and voted. Accordingly, except to the extent expressly provided otherwise in this Agreement, any action or item requiring the approval of the Members, the consent of the Members, the affirmative vote of the Members or the like, shall in the absence of an annual or special meeting of the Members, require the approval, consent, vote or the like of those Members that hold at least a majority in number of the outstanding Units that are held by all Members at such time. Prompt notice of the taking of any action without a meeting by less than unanimous written consent shall be given to those Members who have not consented in writing. 5. MANAGEMENT AND RESTRICTIONS 5.1 MANAGEMENT BY MANAGERS Except for situations in which the approval of the Members is required by statute or this Agreement, the LLC shall be managed and controlled by the Managers acting as a Board of Managers. The Board of Managers may exercise all powers of the LLC and do all such lawful acts and things as are not by statute, the Articles of Organization or this Agreement, directed or required to be exercised or done by the Members. It is intended that the powers and authority of the Board of Managers shall be substantially the same as the powers and authority of a board of directors of a corporation formed under the laws of the State of California. Notwithstanding the above, the Managers may not authorize any investment by the Partnerships in any entity in which Alliance Venture Management has an equity interest, and may not permit to be done any of the following without the approval of the Members: 5.1.1Any act or thing that the Act or this Agreement requires to be approved, consented to or authorized by the Members; 5.1.2Voluntarily cause the dissolution of the LLC; 5.1.3Compromise the liability of any Member for capital contributions or for excessive distributions pursuant to Section 11.5; or 5.1.4Sell all or a significant part of the LLC assets, or engage in any material recapitalization or merger. 5.2 NUMBER; VACANCIES The Members shall determine, at each annual meeting and at any special meeting called for the purpose of electing Managers, the number of Managers. Initially there shall be three Managers. Except for the initial Managers, the Managers shall be elected by the Members. Managers shall hold office until the next meeting, whether annual or special at which Managers are elected and such duly elected Managers are qualified. Managers may but need not be Members. The Members hereby elect N. Damodar Reddy, C.N. Reddy and V.R. Ranganath as the initial Managers. Vacancies and newly created Managerships resulting from any increase in the authorized number of Managers may be filled by a majority of the Managers then in office, though less than a quorum, or by a sole remaining Manager, and the Managers so chosen shall hold office until the next election of Managers and until their successors are duly elected and qualified, unless sooner displaced. If there are no Managers in office, then each Member shall serve as a Manager until the next election of Managers hereunder. 5.3 MEETINGS OF MANAGERS The Board of Managers of the LLC may hold meetings, both regular and special, either within or without the State of California. Regular meetings of the Board of Managers may be held without notice at times and places determined by the Board. Special meetings shall be called by any Manager. Members of the Board of Managers, or any committee designated by the Board of Managers may participate in a meeting of the Board of Managers or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. At all meetings of the Board of Managers, a majority of the Managers shall constitute a quorum for the transaction of business. Notwithstanding the presence at a meeting of a quorum, all actions of the Board of Managers shall require the approval of a majority of all Managers, except as may be otherwise specifically provided by statute or this Agreement. If a quorum is not present at any meeting of the Board of Managers, the Managers present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 5.4 ACTION WITHOUT MEETING Any action required or permitted to be taken at any meeting of the Board of Managers or of any committee thereof may be taken without a meeting, if all members of the Board of Managers or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Managers or committee. 5.5 COMMITTEES The Board of Managers may designate one or more committees, each committee to consist of one or more of the Managers. The Board may designate one or more Managers as alternate members of any committee, who may replace any absent or disqualified Manager at any meeting of the committee. Upon disqualification of a Manager of a committee, the Manager or Managers thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Manager to act at the meeting in the place of any such absent or disqualified Manager. Any such committee, to the extent provided in the resolution of the Board of Managers, shall have and may exercise all the powers and authority of the Board of Managers in the management of the business and affairs of the LLC; but no such committee shall have the power or authority to amend the Articles of Organization, adopt an agreement of merger or consolidation, recommend to the Members the sale, lease or exchange of all or substantially all of the LLC's property and assets, recommend to the Members dissolution of the LLC or revocation of a dissolution, take any action requiring a vote of 2/3 of the Managers or amend this Agreement; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a distribution or to authorize the issuance of Units. Such committee or committees shall have such name or names as may be determined from time to time by the Board of Managers. Each committee shall keep regular minutes of its meetings and report the same to the Board of Managers when required. 5.6 REMOVAL OF MANAGERS Any Manager or the entire Board of Managers may be removed, with or without cause, by the holders of a majority of Units entitled to vote at an election of Managers. 5.7 COMPENSATION OF MANAGERS The Managers may be paid their expenses, if any, of attendance at each meeting of the Board of Managers and may be paid a fixed sum for attendance at each meeting of the Board of Managers or a stated salary as Manager. No such payment shall preclude any Manager from serving the LLC in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 5.8 AMENDMENT OF ARTICLES OF ORGANIZATION OR AGREEMENT The Managers shall have the duty and authority to amend the Articles of Organization or this Agreement as and to the extent necessary to reflect any and all changes or corrections necessary or appropriate as a result of any action taken by the Members or Managers in accordance with the terms of this Agreement. 6. NOTICES 6.1 NOTICES Whenever notice is required to be given to any Member by the Act, the Articles of Organization or this Agreement, it shall be given in writing, by mail, addressed to such Member at his address as it appears on the records of the LLC with postage thereon prepaid, and shall be deemed given when it is deposited in the United States mail. Notice to Members may also be given by telegram or facsimile. 6.2 WAIVER OF NOTICE A Member may waive notice, provided that the waiver is in writing signed by the Member whether before or after the notice is required to be given. 7. OFFICERS 7.1 OFFICERS The Managers may create such offices and elect such officers as they deem appropriate. Any number of offices may be held by the same person. The duties of such officers shall be established from time to time by the Managers. Initially, N. Damodar Reddy is appointed Chairman of the Board of Managers, V.R. Ranganath is appointed President, and Bradley Perkins is appointed Secretary, until their resignation or replacement by the Managers. 8. UNIT CERTIFICATES 8.1 CERTIFICATES Every Member of the LLC shall be entitled to have a certificate, signed by two officers, certifying the class and number of Units owned by it or him. 8.2 REPLACEMENT CERTIFICATES The Managers may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the LLC alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificates of stock to be lost, stolen or destroyed. When authorizing issuance of a new certificate or certificates, the Managers may, in their discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as they shall require and/or to give the LLC a bond in such sum as they may direct as indemnity against any claim that may be made against the LLC with respect to the certificates alleged to have been lost, stolen or destroyed. 8.3 TRANSFERS Upon surrender to the LLC of a certificate for Units duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the LLC, provided that the transfer is in compliance with the terms of this Agreement, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 8.4 UNIT REGISTER In order that the LLC may determine the Members entitled to notice of or to consent, approve or vote on any matter, or the Members or Assignees entitled to receive payment of any distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Managers shall fix, in advance, a record date, which shall not be more than 60 nor less than ten days before the date of such action or event. 8.5 RIGHTS OF REGISTERED OWNER The LLC shall be entitled to recognize the exclusive right of a person registered on its books as the owner of Units to receive dividends and vote, and to hold liable for calls and assessments a person registered the LLC shall not be bound to recognize any equitable or other claim to or interest in such Units on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of California. 8.6 LEGENDS Each certificate prepared by the LLC shall bear such legends as the Managers determine to be necessary to comply with applicable securities laws or to preserve the enforceability of any agreement, including this Agreement, to which the LLC may be a party. 9. ACCOUNTING AND RECORDS 9.1 FINANCIAL AND TAX REPORTING The LLC shall prepare its financial statements in accordance with generally accepted accounting principles as from time to time in effect and shall prepare its income tax information returns using such methods of accounting and tax year as the Managers deem necessary or appropriate under the Code and Treasury Regulations. 9.2 SUPERVISION; INSPECTION OF BOOKS Proper and complete books of account and records of the business of the LLC (including those books and records identified in Section 18-305 of the Act) shall be kept under the supervision of the Managers at the LLC's principal office and at such other place as designated by the Managers. The Managers shall give notice to each Member of any change in the location of the books and records. The books and records shall be open to inspection, audit and copying by any Member, or his designated representative, upon reasonable notice at any time during business hours for any purpose reasonably related to the Member's interest in the LLC. Any information so obtained or copied shall be kept and maintained in strictest confidence except as required by law. 9.3 RELIANCE ON RECORDS AND BOOKS OF ACCOUNT Any Member or Manager shall be fully protected in relying in good faith upon the records and books of account of the LLC and upon such information, opinions, reports or statements presented to the LLC by its Managers, any of its Members, officers, employees or committees, or by any other person, as to matters the Managers or Members reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the LLC, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the LLC or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid. 9.4 ANNUAL REPORTS The annual financial statements of the LLC shall be audited and reported on as of the end of each Fiscal Year by a firm of independent certified public accountants selected by the Managers, provided that the Managers may waive the requirement of an audit at any time and for any reason. A copy of the annual report shall be transmitted to the Members within 90 days after the end of each Fiscal Year. 9.5 TAX RETURNS The Managers shall, within 90 days after the end of each Fiscal Year, file a Federal income tax information return and transmit to each Member a schedule showing such Member's distributive share of the LLC's income, deductions and credits, and all other information necessary for such Members to timely file their Federal income tax returns. The Managers similarly shall file, and provide information to the Members regarding, all appropriate state and local income tax returns. 9.6 TAX MATTERS PARTNER V.R. Ranganath shall serve as the "Tax Matters Partner" (within the meaning of Code Section 6231) until a successor is designated by the Managers. 10. ALLOCATIONS 10.1 ALLOCATION OF NET INCOME OR NET LOSS For each Accounting Period, Net Income or Net Loss of the LLC, or items thereof, other than Net Income attributed to or resulting from the Carried Interests from Alliance Ventures I and Alliance Ventures II, shall be allocated to the Members in proportion to their ownership of outstanding Common Units. Any Net Income or Net Loss attributed to or resulting from the Carried Interest from Alliance Ventures I shall be allocated to the Members in proportion to their ownership of outstanding Series A Units. Any Net Income or Net Loss attributed to or resulting from the Carried Interest from Alliance Ventures II shall be allocated to the Members in proportion to their ownership of outstanding Series B Units. 10.2 OTHER ALLOCATIONS; QUALIFIED INCOME OFFSET; PROPHYLACTIC OFFSET MINIMUM-GAIN CHARGEBACK Notwithstanding the provisions of Section 10.1, the following special allocations shall be made in the following order set forth below. Terms appearing in quotes in this Section 10.2 are as defined in Treasury Regulations Section 1.704-2, and that regulation shall govern determinations required by the rules set forth in this Section 10.2. 10.2.1 All "nonrecourse deductions" shall be allocated among the holders of Common Units in proportion to their ownership of outstanding Common Units from time to time during such period. 10.2.2 All "partner nonrecourse deductions" shall be specially allocated to the Members who bear the economic risk of loss with respect to the "partner nonrecourse debt" to which such "partner nonrecourse deductions" are attributable. 10.2.3 Except as otherwise provided in Treasury Regulations Section 1.704-2(f), if there is a net decrease in "partnership minimum gain" during any Fiscal Year, each Member shall be specially allocated items of LLC income and gain for such Fiscal Year (and, if necessary, future Fiscal Years) in an amount equal to such Member's share of the net decrease. This Section 10.2.3 is intended to comply with the minimum gain chargeback requirements of Treasury Regulations Section 1.704-2 and shall be interpreted accordingly. 10.2.4 Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), if there is a net decrease in "partner nonrecourse debt minimum gain" attributable to a "partner nonrecourse debt" during any Fiscal Year, each Member who has a share of such "partner nonrecourse debt minimum gain" shall be specially allocated items of LLC income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to that share. This Section 10.2.4 is intended to comply with the minimum gain chargeback requirements of Treasury Regulations Section 1.704-2 and shall be interpreted accordingly. 10.2.5 If a Member's capital account has an Unadjusted Excess Negative Balance at the end of any Fiscal Year, the Member will be reallocated items of LLC income and gain for such Fiscal Year (and, if necessary, future Fiscal Years) in the amount necessary to eliminate such Unadjusted Excess Negative Balance as quickly as possible. 10.2.6 If a Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (d)(6), items of LLC income and gain shall be specially allocated to the Member to eliminate any Excess Negative Balance in such Member's Capital Account (determined after application of Section 10.2.5) created thereby as quickly as possible. This Section 10.2.6 is intended to constitute a "qualified income offset" within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted accordingly. 10.2.7 A Member shall not be allocated any item of LLC loss or deduction to the extent the allocation would cause the Member's capital account to have an Excess Negative Balance. 10.2.8 The allocations set forth in the preceding provisions of this Section 10.2 (hereinafter, the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset with other Regulatory Allocation or with special allocations of other items of LLC income, gain, loss or deduction pursuant to this Section 10.2(h). Therefore, notwithstanding any other provision of this Agreement (other than the provisions governing the Regulatory Allocations) the Board of Managers shall make such offsetting special allocations of LLC income, gain, loss or deduction in whatever manner it determines appropriate, to the end that each Member's Capital Account balance should equal the balance the Member would have had if the Regulatory Allocations were not part of this Agreement and all LLC items were allocated pursuant to Section 10.1. In exercising its discretion under this Section 10.2.8, the Board of Managers shall take into account future Regulatory Allocations under Sections 10.2.3 and 10.2.4 above that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 10.2.1 and 10.2.2 above. 10.2.9 For purposes of this Section 10.2, "Excess Negative Balance" shall mean the excess of the negative balance in a Member's Capital Account (computed with any adjustments which are required by Treasury Regulations Section 1.704-1(b)(2)(ii)(d)) over the amount the Member is obligated to restore to the LLC (computed under the principles of Treasury Regulations Section 1.704-1(b)(2)(ii)(c)) inclusive of any addition to such restoration obligation pursuant to application of the provisions of Treasury Regulations Section 1.704-2 or any successor provisions thereto. 10.2.10 For purposes of this Section 10.2, "Unadjusted Excess Negative Balance" shall have the same meaning as Excess Negative Balance, except that the Unadjusted Excess Negative Balance of a Member shall be computed without effecting the reductions to such Member's Capital Account described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d). 10.3 SPECIAL TAX PROVISIONS 10.3.1 PARTNERSHIP STATUS The Members expect and intend that the LLC shall be treated as a partnership for all federal income tax purposes and each Member and the Managers agree that they: 10.3.1.1 will not on any federal, state, local or other tax return take a position, and shall not otherwise assert a position, inconsistent with such expectation and intent; or 10.3.1.2 do any act or thing that could cause the LLC to be treated as other than a partnership for federal income tax purposes. 10.3.2 TAX ALLOCATIONS Except as otherwise provided in this Section 10 or required by the Code and Treasury Regulations, items of income, gain, loss or deduction recognized for income tax purposes shall be allocated in the same manner that the corresponding items entering into the calculation of Net Income and Net Loss are allocated pursuant to this Agreement. 10.3.3 SECTION 704(C) ADJUSTMENTS In accordance with Code Section 704(c) and the Treasury Regulations thereunder, items of income, gain, loss and deduction with respect to an asset, if any, contributed to the capital of the LLC shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the LLC for federal income tax purposes and its fair market value upon contribution to the LLC. 10.3.4 If the Carrying Value of any asset is adjusted pursuant to the terms of this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset to the LLC for federal income tax purposes and its Carrying Value in the same manner as under Code Section 704(c) and the Regulations thereunder. 10.3.5 SECTION 754 ELECTION A Section 754 election may be made for the LLC at the sole discretion of the Managers. In the event of an adjustment to the adjusted tax basis of any LLC asset under Code Section 734(b) or Code Section 743(b) pursuant to a Section 754 election, subsequent allocations of tax items shall reflect such adjustment consistent with the Treasury Regulations promulgated under Sections 704, 734 and 743 of the Code. 10.3.6 ALLOCATIONS UPON TRANSFERS OF LLC INTERESTS If during an Accounting Period, a Member ("Transferring Member") transfers Units to another person, items of Net Income and Net Loss, together with corresponding tax items, that otherwise would have been allocated to the Transferring Member with regard to such Accounting Period shall be allocated between the Transferring Member and the transferee in accordance with their respective Units during the Accounting Period using any method permitted by Section 706 of the Code and selected by the Board of Managers. 11. DISTRIBUTIONS 11.1 DISTRIBUTIONS TO PREFERRED AND COMMON UNITS The holders of the outstanding Series A Units shall receive all distributions from the LLC resulting from the Carried Interest from Alliance Ventures I and the holders of the outstanding Series B Units shall receive all distributions from the LLC resulting from the Carried Interest from Alliance Ventures II and the holders of the outstanding Common Units shall receive all other distributions from the LLC. 11.2 ALLOCATION OF DISTRIBUTIONS AMONG HOLDERS OF UNITS All distributions by the LLC to holders of Series A Units, Series B Units and Common Units shall be made in proportion to the holders' ownership of such outstanding Units at the time of the distribution. 11.3 MANDATORY TAX DISTRIBUTIONS In order to permit holders of Units to pay taxes on their allocable share of the taxable income of the LLC, the Managers shall cause the LLC to distribute, not later than February 28 of each year, to each holder of a Unit an amount equal to the excess, if any, of: 11.3.1 the product of the aggregate net taxable income of the LLC determined on a cumulative basis for all Accounting Periods that has been allocated to such holder (and any predecessor holder) computed without regard to any basis adjustments under Section 743(b) of the Code of such Unit multiplied by 0.45; over 11.3.2 all amounts previously distributed to such holder and any predecessor holder; the decimal fraction in these Sections 11.3.1 and 11.3.2 shall be adjusted to the extent necessary (as determined in good faith by the Managers from time to time) to reflect any change in the higher of the maximum rate of tax imposed on individual taxpayers resident in California under the Code or the laws of the State of California and the maximum rate of tax imposed on corporate taxpayers doing business in California under the Code or the laws of the State of California. Any distributions made with respect to Series A Units and Series B Units pursuant to this Section 11.3 shall reduce on a dollar-for-dollar basis the distributions required or permitted to be made with respect to such Units pursuant to any other provision of this Agreement. 11.4 DISCRETIONARY DISTRIBUTIONS In addition to the distributions provided for in Sections 11.1, 11.2 and 11.3, at any time that there are no Series A Units and Series B Units outstanding, the Managers may, in their sole discretion, make additional distributions to the holders of outstanding Common Units in such amounts and at such times as they shall from time to time determine. 11.5 RESTRICTION ON DISTRIBUTIONS AND WITHDRAWALS 11.5.1 The LLC shall not make any distribution to the holders of Units unless immediately after giving effect to the distribution, all liabilities of the LLC, other than liabilities to Members on account of their interest in the LLC and liabilities as to which recourse of creditors is limited to specified property of the LLC, do not exceed the fair value of the LLC assets, provided that the fair value of any property that is subject to a liability as to which recourse of creditors is so limited shall be included in the LLC assets only to the extent that the fair value of the property exceeds such liability. 11.5.2 Except as otherwise required by law no holder of Units shall be liable to the LLC for the amount of a distribution received provided that, at the time of the distribution, such holder of Units did not know that the distribution was in violation of Section 11.5.1. A Member which receives a distribution in violation of Section 11.5.1, and which knows at the time of the distribution that the distribution violated such condition, shall be liable to the LLC for the amount of the distribution. 11.6 NO OTHER WITHDRAWALS Except as otherwise expressly provided for in this Agreement no withdrawals or distributions shall be required or permitted. 12. TRANSFER OF MEMBERSHIP 12.1 TRANSFER Any Member or Assignee may Transfer any portion of its or his Units only if: 12.1.1 the transferor shall have complied with the Right of First Refusal imposed by Section 12.5 hereof; 12.1.2 the Assignee shall have agreed in writing to assume all of the obligations of the assignor with respect to the Units assigned (including the obligations imposed hereunder as a condition to any transfer); and 12.1.3 the Managers in their sole discretion have consented to such Transfer and shall have concluded (which conclusion may be based upon an opinion of counsel satisfactory to them) that such assignment or disposition will not: 12.1.3.1 result in a violation of the Securities Act of 1933 as amended, or any other applicable statute of any jurisdiction; 12.1.3.2 result in a termination of the LLC for Federal or state income tax purposes or result in (or materially increase the risk of) the LLC being treated as a publicly traded partnership or otherwise taxable as a corporation for Federal income tax purposes; or 12.1.3.3 result in a violation of any law, rule or regulation by the Member, the Assignee, the LLC or the other Members. For purposes of this Section 12.1 the phrase "publicly traded partnership" shall have the meaning set forth in Section 7704(b) and 469(k) of the Code. 12.2 TRANSFER VOID Any purported Transfer of Units in contravention of this Section 12 shall be void and of no effect to, on or against the LLC, any Member, any creditor of the LLC or any claimant against the LLC. 12.3 RIGHTS OF ASSIGNEES The Assignee of Units has no right to vote or to participate in the management of the business and affairs of the LLC or to become a Member. The Assignee is only entitled to receive distributions and to be allocated the Net Income and Net Loss (and items thereof) attributable to the Units transferred to the Assignee. 12.4 ADMISSION OF PERMITTED TRANSFEREES Notwithstanding Section 12.5 below, the Units of any Member shall be transferable free from any Right of First Refusal if: 12.4.1 the transfer occurs by reason of or incident to the death, or divorce, of the transferor Member; 12.4.2 the transferee is a Permitted Transferee, and such Permitted Transferee agrees in writing to be bound by the terms and conditions of this Agreement as fully as if it were an original signatory hereto. A "Permitted Transferee" is any member of such Member's immediate family including, in the case of the divorce of a Member from his or her spouse, such spouse. A Permitted Transferee will be admitted as a Substitute Member only in accordance with Section 2.5 hereof. Units transferred pursuant to the death of a Member shall be subject to the provisions of Section 2.9 (relating to Dissociated Members) whether or not transferred to a Permitted Transferee. 12.5 RIGHT OF FIRST REFUSAL 12.5.1 GRANT The LLC is hereby granted the right of first refusal ("First Refusal Right"), exercisable in connection with any proposed Transfer of Units. 12.5.2 NOTICE OF INTENDED DISPOSITION In the event a Member desires to accept a bona-fide third-party offer for the Transfer of any or all of the Member's Units (Units subject to such offer to be hereinafter called "Target Units"), such Member shall promptly: 12.5.2.1 deliver to the LLC written notice ("Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror; and 12.5.2.2 Provide satisfactory proof that the disposition of the Target Units to such third-party offeror would not be in contravention of the provisions set forth in Section 12.1. 12.5.3 EXERCISE OF RIGHT The LLC (or its assignees) shall, for a period of 25 days following receipt of the Disposition Notice, have the right to repurchase all, but not less than all, of the Target Units specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice ("Exercise Notice") to the transferor Member before the end of the 25-day exercise period. 12.5.4 VALUATION If the purchase price specified in the Disposition Notice is payable in property other than cash or evidences of indebtedness, the LLC (or its assignees) may pay the purchase price in cash equal to the value of such property. If the Member and the LLC (or its assignees) cannot agree on such cash value within ten (10) days after the LLC's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Member and the LLC (or its assignees) or, if they cannot agree on an appraiser within 20 days after the LLC's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Member and the LLC. The closing shall then be held on the later of: 12.4.4.1 the fifth business day following delivery of the Exercise Notice; or 12.4.4.2 the fifth business day after such cash valuation shall have been made. 12.5.5 EXERCISE OF RIGHTS If the right of the LLC is exercised with respect to all the Target Units specified in the Disposition Notice, then the LLC, its assignees and/or the Members (as the case may be) shall effect the purchase of the Target Units, including payment of the purchase price, on the same payment terms specified in the Disposition Notice; and the selling Member shall deliver to the LLC the certificates representing the Target Units to be repurchased, each certificate to be properly endorsed for transfer. The closing shall then be held on the later of: 12.5.5.1 sixty (60) days following delivery of the Disposition Notice; or 12.5.5.2 the fifth business day after any necessary valuation shall have been made. 12.5.6 NON-EXERCISE OF RIGHT In the event the LLC or its assignees do not exercise their purchase rights in accordance with this Section 12.5, the selling Member shall have a period of 30 days thereafter in which to sell or otherwise dispose of the Target Units to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Section 12.1. If the Member does not effect such sale or disposition of the Target Units within the specified 30-day period, the LLC's First Refusal Right shall continue to apply to any subsequent disposition of the Target Units by Member. 12.5.7 RECAPITALIZATION/MERGER 12.5.7.1 In the event of any Unit stock split, recapitalization or other transaction affecting the LLC's outstanding Units without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Units shall be immediately subject to the LLC's First Refusal Right hereunder, but only to the extent the Units are at the time covered by such right. 12.5.7.2 In the event of: 12.5.7.2.1 a merger or consolidation in which the LLC is not the surviving entity; 12.5.7.2.2 a sale, transfer or other disposition of all or substantially all of the LLC's assets; 12.5.7.2.3 a reverse merger in which the LLC is the surviving entity but in which the LLC's outstanding voting securities are transferred in whole or in part to a person or persons other than those who held such securities immediately before the merger; or 12.5.7.2.4 any transaction effected primarily to change the State in which the LLC is organized, or to create a holding company structure, the LLC's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Units in consummation of the transaction, but only to the extent the Purchased Units are at the time covered by such right. 12.6 MARITAL DISSOLUTION OR LEGAL SEPARATION 12.6.1 GRANT In connection with the dissolution of the marriage or the legal separation of any Member, the LLC shall have the right ("Special Purchase Right"), exercisable at any time during the 30-day period following the LLC's receipt of the required Dissolution Notice under Section 12.6.2, to purchase from the Member's spouse, in accordance with the provisions of Section 12.6.3 any or all Units which are or would otherwise be awarded to such spouse incident to the dissolution of marriage or legal separation in settlement of any community property or other marital property rights such spouse may have or obtain in the Units. The Special Purchase Right shall not apply to any Units retained by the Member. 12.6.2 NOTICE OF DECREE OR AGREEMENT Each Member shall promptly provide the LLC with written notice ("Dissolution Notice") of: 12.6.2.1 the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee's spouse in connection with their marital dissolution or legal separation; or 12.6.2.2 the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee's spouse which provides for the award to the spouse of Units in settlement of any community property or other marital property rights such spouse may have in such Units. 12.6.3 EXERCISE OF SPECIAL PURCHASE RIGHT The Special Purchase Right shall be exercisable by delivery of written notice ("Purchase Notice") to the Member and the Member's spouse within 30 days after the LLC's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of the Units to be purchased by the LLC, the date such purchase is to be effected (such date to be not less than five business days, nor more than 10 business days, after the date of the Purchase Notice), and the amount which the LLC proposes to pay for such Units. If the Member's Spouse does not agree to the amount proposed to be paid by the LLC, then the price to be paid shall be the fair market value of the Units determined as set forth in the remainder of this Section and the purchase shall occur ten business days following the completion of such valuation, provided that if the fair market value is greater than 110% of the purchase price set forth in the Purchase Notice, the LLC shall have the right to withdraw such Notice. The fair market value of the Units shall be the value agreed to by the Member's Spouse or its or his legal representative and the LLC. If such person and the LLC are unable to agree to a value, within 10 days after the notice of election to purchase the Units has been given, the fair market value shall be established by an appraiser of recognized standing selected by the Member's Spouse or his or its legal representative and the LLC, or, if they cannot agree on an appraiser within 20 days after the expiration of the aforementioned ten-day period, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of the fair market value. The cost of determining the fair market value shall be paid by the LLC. 13. INDEMNIFICATION AND LIMITATION OF LIABILITY 13.1 INDEMNIFICATION 13.1.1 To the fullest extent permitted by the Act and by law, the Managers, Members, the partners, members or shareholders of any Member, if such Member is organized as a partnership, limited liability company or corporation, respectively, and the partners, shareholders, controlling persons, officers, Managers and employees of any of the foregoing (herein referred to as "Indemnitees") shall, in accordance with this Section 13.1 be indemnified and held harmless by the LLC from and against any and all loss, claims, damages, liabilities joint and several, expenses, judgments, fines, settlements and other amounts arising from any and all claims (including reasonable legal expenses), demands, actions, suits or proceedings (civil, criminal, administrative or investigative) in which they may be involved, as a party or otherwise, by reason of their management of, or involvement in, the affairs of the LLC, or rendering of advice or consultation with respect thereto, or which relate to the LLC, its properties, business or affairs, if such Indemnitee acted in good faith and in a manner such Indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC, and with respect to any criminal proceeding, had no reasonable cause to believe the conduct of such Indemnitee was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC or that the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful (unless there has been a final adjudication in the proceeding that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the LLC; or that the Indemnitee did have reasonable cause to believe that the Indemnitee's conduct was unlawful). 13.1.2 The LLC may also indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the LLC to procure a judgment in its favor by reason of the fact that such Person is or was an officer, employee or agent of the LLC, against expenses actually or reasonably incurred by such Person in connection with the defense or settlement of such action, if such Person acted in good faith and in a manner such Person reasonably believed to be in, or not opposed to, the best interests of the LLC, except that indemnification shall be made in respect of any claim, issue or matter as to which such Person shall have been adjudged to be liable for misconduct in the performance of the Person's duty to the LLC only to the extent that the court in which such action or suit was brought, or another court of appropriate jurisdiction, determines upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. To the extent that the Person has been successful on the merits or otherwise in defense of any proceedings referred to herein, or in defense of any claim, issue or matter therein, the Person shall be indemnified by the LLC against expenses actually and reasonably incurred by the Person in connection therewith. Notwithstanding the foregoing, no Person shall be entitled to indemnification hereunder for any conduct arising from the gross negligence or willful misconduct or reckless disregard in the performance of the Person's duties under this Agreement. 13.1.3 Expenses (including attorneys' fees) incurred in defending any proceeding under Sections 13.1.1 or 13.1.2 may be paid by the LLC in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the Indemnitee or Person to repay such amount if it shall ultimately be determined that the Indemnitee or Person is not entitled to be indemnified by the LLC as authorized hereunder. 13.1.4 The indemnification provided by this Section 13.1 shall not be deemed to be exclusive of any other rights to which any Person may be entitled under any agreement, or as a matter of law, or otherwise, both as to action in a Person's official capacity and to action in another capacity. 13.1.5 The Managers shall have power to purchase and maintain insurance on behalf of the LLC, the Managers, officers, employees or agents of the LLC and any other Indemnitees at the expense of the LLC, against any liability asserted against or incurred by them in any such capacity whether or not the LLC would have the power to indemnify such Persons against such liability under the provisions of this Agreement. 13.2 LIMITATION OF LIABILITY Notwithstanding anything to the contrary herein contained, the debts, obligations and liabilities of the LLC shall be solely the debts, obligations and liabilities of the LLC; and no Manager or Member shall be obligated personally for any such debt, obligation or liability of the LLC solely by reason of being a Manager or Member of the LLC. 14. TERMINATION 14.1 TERMINATION The LLC shall be dissolved, its assets disposed of and its affairs wound up upon the first to occur of the following: 14.1.1 the expiration of its stated term; 14.1.2 the affirmative vote of Members holding 80% of the Units entitled to vote thereon; 14.1.3 the death, Bankruptcy or Dissolution of a Member ("Dissolution Event"), unless the holders of Units representing a majority of votes (determined pursuant to Section 2.4) continues the business of the LLC within 90 days following the occurrence of any such event, pursuant to Section 14.2 below; or 14.1.4 the entry of a decree of judicial dissolution under the Act. 14.2 CONTINUANCE OF THE LLC Notwithstanding the foregoing provisions of Section 14.1, upon the occurrence of a Dissolution Event, if there are at least two remaining Members, the holders of Units representing a majority of votes (determined pursuant to Section 2.4) may avoid dissolution of the LLC and elect within 90 days after a Dissolution Event to continue the business of the LLC on the same terms as this Agreement. Expenses incurred in the continuance of the LLC shall be deemed expenses of the LLC. 14.3 AUTHORITY TO WIND UP The Managers shall have all necessary power and authority required to marshal the assets of the LLC, to pay its creditors, to distribute assets and otherwise wind up the business and affairs of the LLC. In particular, the Managers shall have the authority to continue to conduct the business and affairs of the LLC insofar as such continued operation remains consistent, in the judgment of the Managers, with the orderly winding up of the LLC. 14.4 WINDING UP AND CERTIFICATE OF CANCELLATION The winding up of the LLC shall be completed when all debts, liabilities and obligations of the LLC have been paid and discharged or reasonably adequate provision therefor has been made, and all of the remaining property and assets of the LLC have been distributed to the Members. Upon the completion of winding up of the LLC, a Certificate of Cancellation shall be filed with the Office of the Secretary of State of California. 14.5 DISTRIBUTION OF ASSETS Upon dissolution and winding up of the LLC, the affairs of the LLC shall be wound up and the LLC liquidated by the Managers. Pursuant to such liquidation the assets of the LLC shall be sold unless the Members shall consent to a distribution in kind of the assets. If the Members do not consent to a distribution in kind but the Managers determine that an immediate sale would be financially inadvisable, they may defer sale of the LLC assets for a reasonable time. If any assets are distributed in kind, then they shall be distributed on the basis of the fair market value thereof as determined by appraisal, and shall be deemed to have been sold at such fair market value for purposes of the allocations under Section 10. Unless the Members otherwise agree, if any assets are to be distributed in kind, they shall be distributed to the Members, as tenants-in-common, in undivided interests in proportion to distributions to which the Members are entitled under this Section 14.5. The assets of the LLC, whether cash or in kind shall be distributed as follows in accordance with the Act: 14.5.1 to creditors of the LLC in the order of priority provided by law; and 14.5.2 the Members and Assignees in accordance with the positive balances in their Capital Accounts, after adjustment for allocations of income and loss realized during the year of dissolution, and except as specifically provided in Sections 3 and 11, no Member or Assignee shall have any obligation at any time to repay or restore to the LLC all or any part of any distribution made to it from the LLC in accordance with this Sections 14.5 or 11 or to make any additional contribution of capital to the LLC. The distributions in this Section 14.5 shall be made when dissolution occurs, or, if later, within 90 days following the event triggering the dissolution. The LLC shall terminate when all of its assets have been sold and/or distributed and all of its affairs have been wound up. 14.5 TERMINATION OF A MEMBER'S ASSOCIATION WITH THE LLC Should a Member no longer have an association with the LLC (as defined herein), the LLC shall have the right, but not the obligation, to repurchase all shares of the LLC owned by the Member, upon demand and at the price originally paid by the Member for those shares. An "association with the LLC" shall be defined as being an employee or consultant of the LLC, the Partnerships, or Alliance Semiconductor Corporation (including its subsidiaries, and parent, if any). 15. DEFINITIONS The following terms shall have the meanings set forth for purposes of this Agreement: 15.1 ACCOUNTING PERIOD shall mean for each Fiscal Year the period beginning on the 1st of January and ending on the 31st of December; provided however, that the first Accounting Period shall commence on the date of formation of the LLC and shall end on December 31, 1999; and provided, further, that a new Accounting Period shall commence on any date on which an Additional or Substituted Member is admitted to the LLC or a Member ceases to be a Member for any reason. 15.2 ACT shall have the meaning set forth in Section 1.1. 15.3 ADDITIONAL MEMBER shall mean a Member admitted as a Member after the date this Agreement becomes effective. 15.4 CAPITAL ACCOUNT shall mean, with respect to any Member, a separate account maintained by the LLC with respect to such Member in accordance with the following provisions: 15.4.1 The Capital Account of each Member shall be increased by: 15.5.1.1 the amount of money and the fair market value of any property contributed to the LLC by such Member (net of any liabilities secured by such property that the LLC is considered to assume or hold subject to for purposes of Section 752 of the Code), 15.5.1.2 such Member's share of Net Income (or items thereof) and other items of LLC income and gain allocated to it pursuant to this Agreement, and 15.5.1.3 the amount of liabilities of the LLC assumed by such Member or (to the extent not taken into account under Section 15.5.1.2 above) and any other amounts required by Treasury Regulation Section 1.704-1(b), provided that the Board of Managers determines that such increase is consistent with the economic arrangement among the Members as expressed in this Agreement; and 15.4.2 shall be decreased by: 15.4.2.1 the amount of money and the agreed fair market value of any property distributed by the LLC to such Member pursuant to the provisions of this Agreement (net of any liabilities secured by such property that such Member is considered to assume or hold subject to for purposes of Section 752 of the Code), 15.4.2.2 such Member's share of Net Loss (or items thereof) and other items of LLC loss and deduction allocated to it pursuant to this Agreement, and 15.4.2.3 the amount of liabilities of such Member assumed by the LLC (to the extent not taken into account under 15.4.2.1 above) and any other amounts required by Treasury Regulation Section 1.704-1(b), provided that the Board of Managers determines that such decrease is consistent with the economic arrangement among the Members as expressed in this Agreement. 15.5 AGREEMENT shall mean this LLC Agreement as the same shall be amended from time to time. 15.6 ARTICLES OF ORGANIZATION shall have the meaning set forth in Section 1.1. 15.7 ASSIGNEE shall mean a transferee or a Permitted Transferee of a Units who has not been admitted as a Substitute Member. 15.8 BOARD OF MANAGERS shall have the meaning set forth in Section 5.1. 15.9 BANKRUPTCY shall mean with respect to any Person that a petition shall have been filed by or against such Person as a "debtor" and the adjudication of such Person as a bankrupt under the provisions of the bankruptcy laws of the United States of America shall have commenced, or that such Person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such Person. 15.10 CAPITAL CONTRIBUTION of a Member shall mean that amount of capital actually contributed by the Member to the LLC pursuant to Section 3 hereof. 15.11 CARRIED INTEREST FROM ALLIANCE VENTURES I, L.P. shall mean the LLC's right to receive (as general partner of Alliance Ventures I, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of the Alliance Ventures I, L.P. Partnership Agreement. 15.12 CARRIED INTEREST FROM ALLIANCE VENTURES II, L.P. shall mean the LLC's right to receive (as general partner of Alliance Ventures II, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of Alliance Ventures II, L.P. Partnership Agreement. 15.13 CARRYING VALUE means, with respect to any LLC asset, the asset's adjusted basis for federal income tax purposes, except as follows: 15.13.1 The initial Carrying Value of any asset contributed by a Member to the LLC shall be the agreed-upon fair market value of the asset upon contribution, as determined by the contributing Member and the LLC. The initial Carrying Values of the assets contributed to the LLC as Capital Contributions are set forth on Exhibit A hereto. 15.13.2 In the discretion of the Board of Managers, the Carrying Values of all LLC assets may be adjusted to equal their respective fair market values, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such assets had been sold for their respective fair market values as of the following times: 15.13.2.1 the acquisition of an additional interest in the LLC by any new or existing Member in exchange for more than a de minimis capital contribution; and 15.13.2.2 the distribution by the LLC to a Member of more than a de minimis amount of LLC assets, unless all Members receive simultaneous distributions of either undivided interests in the distributed property or identical LLC assets in proportion to their interests in the LLC. 15.13.3 The Carrying Values of all LLC assets shall be adjusted to equal their respective fair market values, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such assets had been sold for their respective fair market values as of the following times: 15.13.3.1 the date the LLC is liquidated within the meaning of Treasury Regulation Section 1.704-1 (b)(2)(ii)(g); and 15.13.3.2 the termination of the LLC pursuant to the provisions of this Agreement. 15.13.4 The Carrying Values of LLC assets shall be increased or decreased to the extent required under Treasury Regulation Section 1.704-1(b)(2)(iv)(m) in the event that the adjusted tax basis of LLC assets is adjusted pursuant to Code Sections 732, 734 or 743. 15.13.5 The Carrying Value of a LLC Asset that is distributed (whether in liquidation of the LLC or otherwise) to one or more Members shall be adjusted to equal its fair market value, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such asset had been sold for such fair market value. 15.13.6 The Carrying Value of a LLC asset shall be adjusted by the depreciation, amortization or other cost recovery deductions, if any, taken into account by the LLC with respect to such asset in computing Net Income or Net Loss. 15.14 CODE shall mean the Internal Revenue Code of 1986, as amended. 15.15 DISSOCIATED MEMBER shall have the meaning given that term in Section 2.9. 15.16 DISSOLUTION of a Member that is not a natural person shall mean that such Member has terminated its existence, whether partnership or corporate, wound up its affairs and dissolved; provided, however, that a change in the membership of any Member that is a general partnership shall not constitute "Dissolution" hereunder, whether or not the Member is deemed technically dissolved for partnership law purposes, so long as the business of the Member is continued. 15.17 DISSOLUTION EVENT shall mean the death or dissolution of a Member, the occurrence of which terminates the Member's continued membership in the LLC and results in the dissolution of the LLC under the Act unless the holders of Units representing a majority of votes (determined pursuant to Section 2.4) agree otherwise pursuant to Section 14.2. 15.16 FISCAL YEAR shall mean the period from January 1 to December 31 of each year, or as otherwise required by law. 15.17 INCOMPETENCY of a person shall mean that such person shall have been judged incompetent or insane by a decree of a court or administrative tribunal of appropriate jurisdiction. 15.18 INITIAL CONTRIBUTION shall have the meaning set forth in Section 3.1. 15.19 MARKETABLE SECURITY shall refer to a security that is (a) registered under the Securities Act, (b) traded on a national securities exchange or over-the-counter, (c) currently the subject of an issuer-filed Securities Act registration statement, (d) a direct obligation of, or an obligation guaranteed as to principal and interest by, the United States, a certificate of deposit maturing within one year or less issued by an institution insured by the Federal Deposit insurance Corporation, or a similar security, or (e) transferable pursuant to SEC Rule 144. 15.20 MEMBERS shall mean all Members of the LLC, including Substitute Members, and Additional Members, but does not include Assignees. 15.21 NET INCOME OR NET LOSS shall mean the net book income or loss of the LLC for any relevant period. The net book income or loss of the LLC shall be computed in accordance with Federal income tax principles under the method of accounting elected by the LLC for Federal income tax purposes, and as otherwise adjusted by: 15.21.1 including as income or deductions, as appropriate, any tax-exempt income and related expenses that are neither properly included in the computation of taxable income nor capitalized for Federal income tax purposes; 15.21.2 including as a deduction when paid or incurred (depending on the LLC's method of accounting) any amounts utilized to organize the LLC or to promote the sale of (or to sell) an interest in the LLC, except that amounts for which an election is properly made by the LLC under Section 709(b) of the Code shall be accounted for as provided therein; 15.21.3 including as a deduction any losses incurred by the LLC in connection with the sale or exchange of property notwithstanding that such losses may be disallowed to the LLC for Federal income tax purposes under the related party rules of the Code (including Code Sections 267(a)(1) or 707(b)); 15.21.4 calculating the gain or loss on disposition of LLC assets and the depreciation, amortization or other cost- recovery deductions, if any, with respect to LLC assets by reference to their Carrying Value rather than their adjusted tax basis; and 15.21.5 excluding as an item of income, gain, loss or deduction any items allocated pursuant to Section 10.2 of this Agreement. 15.22 PARTNERSHIPS shall mean Alliance Ventures I, L.P., a California limited partnership and Alliance Ventures II, L.P., a California limited partnership. 15.23 PERMITTED TRANSFER shall have the meaning set forth in Section 12.4 hereof. 15.24 PERSON shall mean a natural person, partnership (whether general or limited and whether domestic or foreign), LLC, foreign limited liability company, trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or representative capacity. 15.25 SUBSTITUTE MEMBER shall mean an Assignee who has been admitted to all the rights of membership pursuant to this Agreement. 15.26 TRANSFER shall mean any transfer, sale, encumbrance, mortgage, assignment or other disposition. 15.27 TREASURY REGULATIONS shall mean regulations issued pursuant to the Code. 15.28 UNIT REGISTER shall have the meaning set forth in Section 8.4. 16. MISCELLANEOUS 16.1 AMENDMENT This Agreement may be amended only with the consent of the Members; provided however, that no amendment that adversely affects the rights of one class of Units in a manner different than that of another class of Units shall be effective against any holder of such adversely affected Units who has not consented thereto. 16.2 POWER OF ATTORNEY By signing this Agreement, each Member designates and appoints the Managers as its or his true and lawful attorney, in his name, place and stead, to make, execute, sign and file such instruments, documents or certificates which may from time to time be required by the laws of the United States of America and the State of California and any political subdivision thereof or any other state or political subdivision in which the LLC shall do business to carry out the purposes of this Agreement, except where such action requires the express approval of the Members hereunder. Such attorney is not hereby granted any authority on behalf of the undersigned Members to amend this Agreement except that as attorney for each of the undersigned Members, the Managers shall have the authority to amend this Agreement and the LLC's Articles of Organization as may be required to give effect to the transactions below following any necessary approvals or consents of the Members: 16.2.1 extensions of the term of the LLC; 16.2.2 admissions of additional Members; 16.2.3 transfer of a Member's Units; 16.2.4 withdrawals or distributions; and 16.2.5 contributions of additional capital. The Managers shall provide to the Members copies of all documents executed pursuant to the power of attorney contained in this Section 16.2. 16.3 WITHHOLDING TAXES 16.3.1 The LLC shall at all times be entitled to make payments with respect to any Member or Assignee in amounts required to discharge any obligation of the LLC to withhold or make payments to any governmental authority with respect to any federal, state, local or other jurisdictional tax liability of such Member or Assignee arising as a result of such Member or Assignee's interest in the LLC. To the extent each such payment satisfies an obligation of the LLC to withhold with respect to any distribution to a Member or Assignee on which the LLC did not withhold or with respect to any Member's or Assignee's allocable share of the income of the LLC, each such payment shall be deemed to be a loan by the LLC to such Member or Assignee (which loan shall be deemed to be immediately due and payable) and shall not be deemed a distribution to such Member or Assignee. The amount of such payments made with respect to such Member or Assignee, plus interest, on each such amount from the date of each such payment until such amount is repaid to the LLC at an interest rate per annum equal to the prime rate, from time to time in effect, of the Bank of California, San Francisco, California, shall be repaid to the LLC by: 16.3.1.1 deduction from any cash distributions made to such Member or Assignee pursuant to this Agreement; 16.3.1.2 deduction from any non-cash distributions made to such Member or Assignee; or 16.3.1.3 earlier payment by such Member or Assignee to the LLC, in each case as determined by the Managers in their sole discretion. The Managers may, in their discretion, defer making distributions to any Member or Assignee owing amounts to the LLC pursuant to this Section 16.3 until such amounts are paid to the LLC and shall in addition exercise any other rights of a creditor with respect to such amounts. 16.3.2 Each Member or Assignee agrees to indemnify and hold harmless the LLC and the Managers and each of the Members, from and against any liability for taxes, interest or penalties that may be asserted by reason of the failure to deduct and withhold tax on amounts distributable or allocable to said Member or Assignee. Any amount payable as indemnity hereunder by a Member or Assignee shall be paid promptly to the LLC upon request for such payment from the Managers, and if not so paid, the Managers and the LLC shall be entitled to claim against and deduct all such amounts from the Capital Account of, or from any distribution due to, the affected Member or Assignee. 16.4 FURTHER ASSURANCES The parties agree to execute and deliver any further instruments or documents and perform any additional acts that are or may become necessary to effectuate and carry on the LLC created by this Agreement. 16.5 BINDING EFFECT Subject to the restrictions on transfer set forth in Section 12, this Agreement shall be binding on and inures to the benefit of the Members and their respective transferees, successors, assigns and legal representatives. 16.6 GOVERNING LAW This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 16.7 ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties with respect to the subject matter herein. 16.8 ARBITRATION Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Santa Clara or San Mateo County, California in accordance with the rules then obtaining, of the American Arbitration Association regarding commercial arbitration. Judgment upon the award rendered may be entered into any court having jurisdiction thereof. The losing party shall bear the costs and expenses of such arbitration. 16.9 COUNTERPARTS This Agreement may be executed in one or more counterparts with the same force and effect as if each of the signatories had executed the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date first above written. Members: By: /s/ N.Damodar Reddy By: /s/ C.N. Reddy ---------------------------- --------------------------- signature signature N. Damodar Reddy C.N. Reddy - --------------------------------- ------------------------------- printed name printed name By: /s/ V.R. Ranganath By: /s/ Bradley Perkins ---------------------------- --------------------------- signature signature V.R. Ranganath Bradley Perkins - --------------------------------- ------------------------------- printed name printed name By: /s/ David Eichler ---------------------------- signature David Eichler - --------------------------------- printed name Alliance Semiconductor Corporation By: /s/ N.Damodar Reddy ---------------------------- signature of authorized representative N. Damodar Reddy - --------------------------------- printed name President and CEO - --------------------------------- title Exhibit A Members and Unit Holdings
Member Number of Units Initial Carrying Value - ------------------------------------------------------------------------------- Alliance Semiconductor 10,000 Common Units $2,500.00 Corporation N. Damodar Reddy 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 C.N. Reddy 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 V.R. Ranganath 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 Bradley Perkins 632 Series A Units $158.00 1000 Series B Units $250.00 David Eichler 421 Series A Units $105.25 764 Series B Units $191.00
EX-10.31 3 0003.txt ALLIANCE VENTURE MANAGEMENT - AMENDED AGREEMENT AMENDED LIMITED LIABILITY COMPANY OPERATING AGREEMENT THIS AMENDED LIMITED LIABILITY COMPANY OPERATING AGREEMENT ("Agreement"), is entered into as of February 28, 2000, by and among the persons listed on Exhibit A hereto, as members ("Members") of Alliance Venture Management, LLC, a California limited liability company ("Company" or "LLC"). WHEREAS, the LLC acts as the general partner of Alliance Ventures I, L.P. and Alliance Ventures II, L.P. and as such receives a carried interest in the profits of these limited partnerships under an agreement between the parties dated October 15, 1999 ("Prior Agreement"); WHEREAS, the LLC proposes to additionally act as the general partner of Alliance Ventures III, L.P. and as such to receive a carried interest in the profits of that limited partnership; WHEREAS, the Members previously provided in the Prior Agreement, for series of units to be known as Common Units, Series A units and Series B units for the purpose of allocating the carried interest in Alliance Ventures I, L.P. and Alliance Ventures II, L.P.; WHEREAS, the Members desire to additionally provide for series of units to be known as Series C units for the purpose of allocating the carried interest in Alliance Ventures III, L.P.; and WHEREAS, the members hereby amend the Prior Agreement by adopting this Agreement, which shall replace the Prior Agreement in its entirety. THE PARTIES AGREE AS FOLLOWS: 1. FORMATION OF LIMITED LIABILITY COMPANY 1.1 FORMATION The Members have formed the LLC under the laws of the State of California pursuant to the Beverly-Killea Limited Liability Company Act ("Act") by causing articles of organization ("Articles of Organization") for the Company to be filed in the Office of the Secretary of State of California, and by this Agreement intend to establish rules and regulations governing its ownership and control. 1.2 NAME AND PRINCIPAL PLACE OF BUSINESS Unless and until amended in accordance with this Agreement and the Act, the name of the LLC will be "Alliance Venture Management, LLC" The principal place of business of the LLC shall be Santa Clara, California, or such other place or places as the Managers from time to time determine. 1.3 REGISTERED OFFICE AND AGENT FOR SERVICE OF PROCESS The Company shall maintain a registered office and agent for service of process as required by Section 17061 of the Act. The registered office shall be 2575 Augustine Drive, Santa Clara, California, and the agent for service of process shall be Bradley Perkins, or such other place and person as the Managers may designate. 1.4 AGREEMENT For and in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members executing this Agreement hereby agree to the terms and conditions of this Agreement, as it may from time to time be amended. 1.5 BUSINESS The purpose of the LLC is to engage in any lawful act or activity for which a limited liability company may be organized under the Act. The LLC shall serve as the general partner of the Partnership, subject to the terms and conditions of the agreement of limited partnership of the Partnership. 1.6 DEFINITIONS Terms not otherwise defined in this Agreement shall have the meanings set forth in Section 15. 1.7 TERM The term of the Company shall commence upon the later to occur of: 1.7.1 the filing of Articles of Organization for the Company in the office of the Secretary of State of California; or 1.7.2 the execution of this Company Agreement by at least two Members and, unless the term of the LLC is otherwise extended or sooner terminated pursuant to the provisions of this Agreement, shall continue until ten years after the commencement of such term. Such term may be amended by amendment of this Agreement. 2. MEMBERSHIP; UNITS 2.1 MEMBERS The Initial Members of the LLC shall be and include each of the persons whose names are set forth on Exhibit A hereto as of the date of this Agreement. Exhibit A shall be amended by the Managers as appropriate to reflect the admission of additional Members or the acquisition by existing Members of additional Units in the LLC. 2.2 REPRESENTATIONS AND WARRANTIES Each Member hereby represents and warrants to the LLC and each of the other Members as follows: 2.2.1PURCHASE ENTIRELY FOR OWN ACCOUNT The Member is acquiring his interest in the LLC for the Member's own account for investment purposes only and not with a view to or for the resale, distribution, subdivision or fractionalization thereof and has no contract, understanding, undertaking, agreement, or arrangement of any kind with any Person to sell, transfer or pledge to any Person his interest or any part thereof nor does such Member have any plans to enter into any such agreement; 2.2.2 INVESTMENT EXPERIENCE By reason of his business or financial experience, the Member has the capacity to protect his own interests in connection with the transactions contemplated hereunder, is able to bear the risks of an investment in the LLC, and at the present time could afford a complete loss of such investment; 2.2.3 DISCLOSURE OF INFORMATION The Member is aware of the LLC's business affairs and financial condition and has acquired sufficient information about the LLC to reach an informed and knowledgeable decision to acquire an interest in the LLC; 2.2.4 FEDERAL AND STATE SECURITIES LAWS The Member acknowledges that the interests in the LLC have not been registered under the Securities Act of 1933 or any state securities laws, inasmuch as they are being acquired in a transaction not involving a public offering, and under such laws, may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements. In this connection, the Member represents that it or he is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act of 1933. 2.3 LLC UNITS Ownership of the LLC shall be divided into and represented by units of the LLC ("Units"). The LLC shall be authorized to issue four classes of units, Common Units, Series A Units, Series B Units and Series C Units. The total number of Units the LLC is authorized to issue shall be 4,000,000, of which 1,000,000 shall be Common Units, 1,000,000 shall be Series A Units, 1,000,000 shall be Series B Units and 1,000,000 shall be Series C Units. 2.4 VOTING RIGHTS OF LLC UNITS Each Common Unit shall be entitled to one vote per Unit, each Series A Unit shall be entitled to 10 votes per Unit, each Series B Unit shall be entitled to 10 votes per Unit, and each Series C Unit shall be entitled to 10 votes per Unit. 2.5 ADDITIONAL MEMBERS, ISSUANCE OF ADDITIONAL UNITS Additional Persons may be issued Units and admitted to the LLC as Members upon compliance with the provisions of this Agreement and upon such terms and conditions as the Managers may determine, provided that: 2.5.1 no new class of Units or interests having rights or preferences senior to those of the existing Units may be issued without the approval of Members holding a majority of each class of such outstanding subordinate Units; and 2.5.2 the Managers may not issue more than the total number of authorized Units, without the approval of the Members. Existing Members may be issued additional Units, upon compliance with the provisions of this Agreement and upon such terms and conditions as the Managers may determine, provided that no new class of Units or interests having rights or preferences senior to those of the existing Units may be issued without the approval of Members holding a majority of each class of outstanding subordinate Units, nor may the Managers issue more than the total number of authorized Units of the LLC without the approval of the Members. 2.6 ADMISSION OF SUBSTITUTE MEMBERS Notwithstanding any other provision of this Agreement, no Assignee of Units of the LLC (including without limitation Permitted Transferees under Section 12.4 and purchasers pursuant to Section 12.5.6) shall be admitted as a Substitute Member and admitted to all the rights of the Member who assigned the Units, without the approval of the Managers. If so admitted, the Substitute Member shall have all the rights and powers and will be subject to all the restrictions and liabilities of the Member who originally assigned the Units. The admission of a Substitute Member shall not release any Member who previously assigned the Units from liability to the LLC that may have existed before such substitution. Consents required hereunder may be given in advance of any transfer by any writing signed by a Member. 2.7 RESIGNATION OR WITHDRAWAL OF A MEMBER Except as specifically provided below, and subject to the provisions for transfer contained in Section 12, no Member may resign, retire or withdraw from membership in the LLC or withdraw his interest in the capital of the LLC. 2.8 DISSOCIATION OF A MEMBER The Bankruptcy, death or Dissolution of a Member will: 2.8.1 cause such Member to be dissociated from the LLC (a "Dissociated Member"); 2.8.2 terminate the continued membership of such Member in the LLC; and 2.8.3 cause a dissolution and winding-up of the LLC pursuant to Section 14 hereof except as expressly provided therein. Except as set forth above or expressly provided elsewhere in this Agreement, the death, withdrawal, resignation, expulsion, Bankruptcy or dissolution of a Member shall not cause a dissolution of the LLC. 2.9 RIGHTS OF DISSOCIATING In the event any Member becomes a "Dissociated Member": 2.9.1 if the dissociation causes a dissolution and winding up of the LLC under Section 14, the Dissociated Member or its or his legal representative shall be entitled to participate in the winding up of the LLC to the same extent as any other Member; and 2.9.2 if the dissociation does not cause a dissolution and winding up of the LLC under Section 14, the Dissociated Member or his or its legal representative shall be treated as an Assignee unless admitted to the LLC as a Substitute Member pursuant to Section 2.7. 2.10 RIGHTS OF MEMBERS TO BIND LLC Except as expressly provided herein no Member shall have the right to bind the LLC. 3. CONTRIBUTIONS TO CAPITAL 3.1 INITIAL CONTRIBUTIONS Each Member has contributed cash or property having an agreed-upon Initial Carrying Value as set forth on Exhibit A hereto, which Exhibit A shall be revised to reflect any additional contributions made in accordance with Section 3.3. 3.2 ISSUANCE OF UNITS In exchange for the Initial Contribution of the Members, the Members shall be issued that number and class of Units set forth opposite their names on Exhibit A. 3.3 ADDITIONAL CONTRIBUTIONS Except as set forth in Section 2.5 above, no Member shall be permitted or required to make any additional contribution to the capital of the LLC without the consent of the Managers and the Members. 3.4 INTEREST No Member shall be entitled to any interest with respect to its or his contributions to or share of the capital of the LLC. 4. ACTION BY MEMBERS 4.1 MEETINGS OF MEMBERS All meetings of the Members for the election of Managers shall be held in the City of Santa Clara, State of California, at such place as may be fixed from time to time by the Managers, or at such other place within the State of California as shall be designated from time to time by the Managers and stated in the notice of the meeting. Meetings of Members for any other purpose may be held at such time and place, within or without the State of California, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Members may participate in a meeting of the members by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 4.2 ANNUAL MEETINGS 4.2.1 Annual meetings of Members, ommencing with the year 1999, shall be held on such date and at such time as shall be designated from time to time by the Managers and stated in the notice of the meeting, at which they shall elect a board of Managers, and transact such other business as may properly be brought before the meeting. 4.2.2 Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each Member entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. 4.3 SPECIAL MEETINGS 4.3.1 Special meetings of the Members, for any purpose or purposes, may be called by the Managers and shall be called at the request in writing of any Member. Such request shall state the purpose or purposes of the proposed meeting. 4.3.2 A special meeting of the Members for the election of a new Board of Managers may be called by any Member entitled to vote thereon, within 90 days after the date on which such Member has acquired Units of the LLC. 4.3.3 Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, to each Member entitled to vote at such meeting. 4.3.4 Business transacted at any special meeting of Members shall be limited to the purposes stated in the notice. 4.4 MEMBERSHIP LIST The Person who has charge of the Unit Register of the LLC shall prepare and make, at least ten days before every meeting of Members, a complete list of the Members entitled to vote at the meeting, arranged in alphabetical order, showing the address of each Member and the number of Units registered in the name of each Member. The list may be examined by any Member, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days before the meeting. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Member who is present. 4.5 QUORUM 4.5.1 The holders of a majority of the Units issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the Members for the transaction of business except as otherwise provided by statute. If, however, a quorum is not present or represented at any meeting of the Members, the Members entitled to vote thereat, present in person or represented by proxy, may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. Upon resumption of an adjourned meeting, any business may be transacted that might have been transacted before the meeting was adjourned. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member entitled to vote at the meeting. 4.5.2 Except as otherwise provided herein, when a quorum is present at any meeting, the vote of the Members holding a majority of the Units present in person or by proxy shall decide any question brought before the meeting, except that the Board of Managers shall be elected as if the LLC were a California corporation and the Members were shareholders voting for the election of a board of directors and except to the extent that the express provision of the statutes, the Articles of Organization, or this Agreement require a different vote. 4.6 VOTING RIGHTS Each Member shall at every meeting of the Members be entitled to one vote in person or by proxy for each Unit, but no proxy shall be voted after three years from its date, unless the proxy expressly provides for a longer period. Members entitled to vote shall vote as a single class. Neither the assigning Member nor an Assignee of Units shall have any right to a vote with respect to any assigned Units. No Member who has assigned all of its or his Units (collectively, "Former Members") shall have any right to vote on any matter. A Member who has assigned some, but not all, of its or his Units shall be treated as a Member and entitled to a vote on all matters to the extent of its or his retained Units. No Assignee of Units shall have the right to consent, approve or vote on any matters unless such Assignee has become a Substitute Member pursuant to Section 2.6. 4.7 ACTION WITHOUT MEETING Any action required to be taken at any annual or special meeting of Members, or any action which may be taken at any annual or special meeting of Members, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by Members holding outstanding Units having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Units entitled to vote thereon were present and voted. Accordingly, except to the extent expressly provided otherwise in this Agreement, any action or item requiring the approval of the Members, the consent of the Members, the affirmative vote of the Members or the like, shall in the absence of an annual or special meeting of the Members, require the approval, consent, vote or the like of those Members that hold at least a majority in number of the outstanding Units that are held by all Members at such time. Prompt notice of the taking of any action without a meeting by less than unanimous written consent shall be given to those Members who have not consented in writing. 5. MANAGEMENT AND RESTRICTIONS 5.1 MANAGEMENT BY MANAGERS Except for situations in which the approval of the Members is required by statute or this Agreement, the LLC shall be managed and controlled by the Managers acting as a Board of Managers. The Board of Managers may exercise all powers of the LLC and do all such lawful acts and things as are not by statute, the Articles of Organization or this Agreement, directed or required to be exercised or done by the Members. It is intended that the powers and authority of the Board of Managers shall be substantially the same as the powers and authority of a board of directors of a corporation formed under the laws of the State of California. Notwithstanding the above, the Managers may not authorize any investment by the Partnerships in any entity in which Alliance Venture Management has an equity interest, and may not permit to be done any of the following without the approval of the Members: 5.1.1 Any act or thing that the Act or this Agreement requires to be approved, consented to or authorized by the Members; 5.1.2 Voluntarily cause the dissolution of the LLC; 5.1.3 Compromise the liability of any Member for capital contributions or for excessive distributions pursuant to Section 11.5; or 5.1.4 Sell all or a significant part of the LLC assets, or engage in any material recapitalization or merger. 5.2 NUMBER; VACANCIES The Members shall determine, at each annual meeting and at any special meeting called for the purpose of electing Managers, the number of Managers. Initially there shall be three Managers. Except for the initial Managers, the Managers shall be elected by the Members. Managers shall hold office until the next meeting, whether annual or special at which Managers are elected and such duly elected Managers are qualified. Managers may but need not be Members. The Members hereby elect N. Damodar Reddy, C.N. Reddy and V.R. Ranganath as the initial Managers. Vacancies and newly created Managerships resulting from any increase in the authorized number of Managers may be filled by a majority of the Managers then in office, though less than a quorum, or by a sole remaining Manager, and the Managers so chosen shall hold office until the next election of Managers and until their successors are duly elected and qualified, unless sooner displaced. If there are no Managers in office, then each Member shall serve as a Manager until the next election of Managers hereunder. 5.3 MEETINGS OF MANAGERS The Board of Managers of the LLC may hold meetings, both regular and special, either within or without the State of California. Regular meetings of the Board of Managers may be held without notice at times and places determined by the Board. Special meetings shall be called by any Manager. Members of the Board of Managers, or any committee designated by the Board of Managers may participate in a meeting of the Board of Managers or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. At all meetings of the Board of Managers, a majority of the Managers shall constitute a quorum for the transaction of business. Notwithstanding the presence at a meeting of a quorum, all actions of the Board of Managers shall require the approval of a majority of all Managers, except as may be otherwise specifically provided by statute or this Agreement. If a quorum is not present at any meeting of the Board of Managers, the Managers present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 5.4 ACTION WITHOUT MEETING Any action required or permitted to be taken at any meeting of the Board of Managers or of any committee thereof may be taken without a meeting, if all members of the Board of Managers or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Managers or committee. 5.5 COMMITTEES The Board of Managers may designate one or more committees, each committee to consist of one or more of the Managers. The Board may designate one or more Managers as alternate members of any committee, who may replace any absent or disqualified Manager at any meeting of the committee. Upon disqualification of a Manager of a committee, the Manager or Managers thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Manager to act at the meeting in the place of any such absent or disqualified Manager. Any such committee, to the extent provided in the resolution of the Board of Managers, shall have and may exercise all the powers and authority of the Board of Managers in the management of the business and affairs of the LLC; but no such committee shall have the power or authority to amend the Articles of Organization, adopt an agreement of merger or consolidation, recommend to the Members the sale, lease or exchange of all or substantially all of the LLC's property and assets, recommend to the Members dissolution of the LLC or revocation of a dissolution, take any action requiring a vote of 2/3 of the Managers or amend this Agreement; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a distribution or to authorize the issuance of Units. Such committee or committees shall have such name or names as may be determined from time to time by the Board of Managers. Each committee shall keep regular minutes of its meetings and report the same to the Board of Managers when required. 5.6 REMOVAL OF MANAGERS Any Manager or the entire Board of Managers may be removed, with or without cause, by the holders of a majority of Units entitled to vote at an election of Managers. 5.7 COMPENSATION OF MANAGERS The Managers may be paid their expenses, if any, of attendance at each meeting of the Board of Managers and may be paid a fixed sum for attendance at each meeting of the Board of Managers or a stated salary as Manager. No such payment shall preclude any Manager from serving the LLC in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 5.8 AMENDMENT OF ARTICLES OF ORGANIZATION OR AGREEMENT The Managers shall have the duty and authority to amend the Articles of Organization or this Agreement as and to the extent necessary to reflect any and all changes or corrections necessary or appropriate as a result of any action taken by the Members or Managers in accordance with the terms of this Agreement. 6. NOTICES 6.1 NOTICES Whenever notice is required to be given to any Member by the Act, the Articles of Organization or this Agreement, it shall be given in writing, by mail, addressed to such Member at his address as it appears on the records of the LLC with postage thereon prepaid, and shall be deemed given when it is deposited in the United States mail. Notice to Members may also be given by telegram or facsimile. 6.2 WAIVER OF NOTICE A Member may waive notice, provided that the waiver is in writing signed by the Member whether before or after the notice is required to be given. 7. OFFICERS 7.1 OFFICERS The Managers may create such offices and elect such officers as they deem appropriate. Any number of offices may be held by the same person. The duties of such officers shall be established from time to time by the Managers. Initially, N. Damodar Reddy is appointed Chairman of the Board of Managers, V.R. Ranganath is appointed President, and Bradley Perkins is appointed Secretary, until their resignation or replacement by the Managers. 8. UNIT CERTIFICATES 8.1 CERTIFICATES Every Member of the LLC shall be entitled to have a certificate, signed by two officers, certifying the class and number of Units owned by it or him. 8.2 REPLACEMENT CERTIFICATES The Managers may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the LLC alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificates of stock to be lost, stolen or destroyed. When authorizing issuance of a new certificate or certificates, the Managers may, in their discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as they shall require and/or to give the LLC a bond in such sum as they may direct as indemnity against any claim that may be made against the LLC with respect to the certificates alleged to have been lost, stolen or destroyed. 8.3 TRANSFERS Upon surrender to the LLC of a certificate for Units duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the LLC, provided that the transfer is in compliance with the terms of this Agreement, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 8.4 UNIT REGISTER In order that the LLC may determine the Members entitled to notice of or to consent, approve or vote on any matter, or the Members or Assignees entitled to receive payment of any distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Managers shall fix, in advance, a record date, which shall not be more than 60 nor less than ten days before the date of such action or event. 8.5 RIGHTS OF REGISTERED OWNER The LLC shall be entitled to recognize the exclusive right of a person registered on its books as the owner of Units to receive dividends and vote, and to hold liable for calls and assessments a person registered the LLC shall not be bound to recognize any equitable or other claim to or interest in such Units on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of California. 8.6 LEGENDS Each certificate prepared by the LLC shall bear such legends as the Managers determine to be necessary to comply with applicable securities laws or to preserve the enforceability of any agreement, including this Agreement, to which the LLC may be a party. 9. ACCOUNTING AND RECORDS 9.1 FINANCIAL AND TAX REPORTING The LLC shall prepare its financial statements in accordance with generally accepted accounting principles as from time to time in effect and shall prepare its income tax information returns using such methods of accounting and tax year as the Managers deem necessary or appropriate under the Code and Treasury Regulations. 9.2 SUPERVISION; INSPECTION OF BOOKS Proper and complete books of account and records of the business of the LLC (including those books and records identified in Section 18-305 of the Act) shall be kept under the supervision of the Managers at the LLC's principal office and at such other place as designated by the Managers. The Managers shall give notice to each Member of any change in the location of the books and records. The books and records shall be open to inspection, audit and copying by any Member, or his designated representative, upon reasonable notice at any time during business hours for any purpose reasonably related to the Member's interest in the LLC. Any information so obtained or copied shall be kept and maintained in strictest confidence except as required by law. 9.3 RELIANCE ON RECORDS AND BOOKS OF ACCOUNT Any Member or Manager shall be fully protected in relying in good faith upon the records and books of account of the LLC and upon such information, opinions, reports or statements presented to the LLC by its Managers, any of its Members, officers, employees or committees, or by any other person, as to matters the Managers or Members reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the LLC, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the LLC or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid. 9.4 ANNUAL REPORTS The annual financial statements of the LLC shall be audited and reported on as of the end of each Fiscal Year by a firm of independent certified public accountants selected by the Managers, provided that the Managers may waive the requirement of an audit at any time and for any reason. A copy of the annual report shall be transmitted to the Members within 90 days after the end of each Fiscal Year. 9.5 TAX RETURNS The Managers shall, within 90 days after the end of each Fiscal Year, file a Federal income tax information return and transmit to each Member a schedule showing such Member's distributive share of the LLC's income, deductions and credits, and all other information necessary for such Members to timely file their Federal income tax returns. The Managers similarly shall file, and provide information to the Members regarding, all appropriate state and local income tax returns. 9.6 TAX MATTERS PARTNER V.R. Ranganath shall serve as the "Tax Matters Partner" (within the meaning of Code Section 6231) until a successor is designated by the Managers. 10. ALLOCATIONS 10.1 ALLOCATION OF NET INCOME OR NET LOSS For each Accounting Period, Net Income or Net Loss of the LLC, or items thereof, other than Net Income attributed to or resulting from the Carried Interests from Alliance Ventures I and Alliance Ventures II, shall be allocated to the Members in proportion to their ownership of outstanding Common Units. Any Net Income or Net Loss attributed to or resulting from the Carried Interest from Alliance Ventures I shall be allocated to the Members in proportion to their ownership of outstanding Series A Units. Any Net Income or Net Loss attributed to or resulting from the Carried Interest from Alliance Ventures II shall be allocated to the Members in proportion to their ownership of outstanding Series B Units. Any Net Income or Net Loss attributed to or resulting from the Carried Interest from Alliance Ventures III shall be allocated to the Members in proportion to their ownership of outstanding Series C Units. 10.2 OTHER ALLOCATIONS; QUALIFIED INCOME OFFSET; PROPHYLACTIC OFFSET MINIMUM-GAIN CHARGEBACK Notwithstanding the provisions of Section 10.1, the following special allocations shall be made in the following order set forth below. Terms appearing in quotes in this Section 10.2 are as defined in Treasury Regulations Section 1.704-2, and that regulation shall govern determinations required by the rules set forth in this Section 10.2. 10.2.1 All "nonrecourse deductions" shall be allocated among the holders of Common Units in proportion to their ownership of outstanding Common Units from time to time during such period. 10.2.2 All "partner nonrecourse deductions" shall be specially allocated to the Members who bear the economic risk of loss with respect to the "partner nonrecourse debt" to which such "partner nonrecourse deductions" are attributable. 10.2.3 Except as otherwise provided in Treasury Regulations Section 1.704-2(f), if there is a net decrease in "partnership minimum gain" during any Fiscal Year, each Member shall be specially allocated items of LLC income and gain for such Fiscal Year (and, if necessary, future Fiscal Years) in an amount equal to such Member's share of the net decrease. This Section 10.2.3 is intended to comply with the minimum gain chargeback requirements of Treasury Regulations Section 1.704-2 and shall be interpreted accordingly. 10.2.4 Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), if there is a net decrease in "partner nonrecourse debt minimum gain" attributable to a "partner nonrecourse debt" during any Fiscal Year, each Member who has a share of such "partner nonrecourse debt minimum gain" shall be specially allocated items of LLC income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to that share. This Section 10.2.4 is intended to comply with the minimum gain chargeback requirements of Treasury Regulations Section 1.704-2 and shall be interpreted accordingly. 10.2.5 If a Member's capital account has an Unadjusted Excess Negative Balance at the end of any Fiscal Year, the Member will be reallocated items of LLC income and gain for such Fiscal Year (and, if necessary, future Fiscal Years) in the amount necessary to eliminate such Unadjusted Excess Negative Balance as quickly as possible. 10.2.6 If a Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4) through (d)(6), items of LLC income and gain shall be specially allocated to the Member to eliminate any Excess Negative Balance in such Member's Capital Account (determined after application of Section 10.2.5) created thereby as quickly as possible. This Section 10.2.6 is intended to constitute a "qualified income offset" within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted accordingly. 10.2.7 A Member shall not be allocated any item of LLC loss or deduction to the extent the allocation would cause the Member's capital account to have an Excess Negative Balance. 10.2.8 The allocations set forth in the preceding provisions of this Section 10.2 (hereinafter, the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset with other Regulatory Allocation or with special allocations of other items of LLC income, gain, loss or deduction pursuant to this Section 10.2(h). Therefore, notwithstanding any other provision of this Agreement (other than the provisions governing the Regulatory Allocations) the Board of Managers shall make such offsetting special allocations of LLC income, gain, loss or deduction in whatever manner it determines appropriate, to the end that each Member's Capital Account balance should equal the balance the Member would have had if the Regulatory Allocations were not part of this Agreement and all LLC items were allocated pursuant to Section 10.1. In exercising its discretion under this Section 10.2.8, the Board of Managers shall take into account future Regulatory Allocations under Sections 10.2.3 and 10.2.4 above that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 10.2.1 and 10.2.2 above. 10.2.9 For purposes of this Section 10.2, "Excess Negative Balance" shall mean the excess of the negative balance in a Member's Capital Account (computed with any adjustments which are required by Treasury Regulations Section 1.704-1(b)(2)(ii)(d)) over the amount the Member is obligated to restore to the LLC (computed under the principles of Treasury Regulations Section 1.704-1(b)(2)(ii)(c)) inclusive of any addition to such restoration obligation pursuant to application of the provisions of Treasury Regulations Section 1.704-2 or any successor provisions thereto. 10.2.10 For purposes of this Section 10.2, "Unadjusted Excess Negative Balance" shall have the same meaning as Excess Negative Balance, except that the Unadjusted Excess Negative Balance of a Member shall be computed without effecting the reductions to such Member's Capital Account described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d). 10.3 SPECIAL TAX PROVISIONS 10.3.1 PARTNERSHIP STATUS The Members expect and intend that the LLC shall be treated as a partnership for all federal income tax purposes and each Member and the Managers agree that they: 10.3.1.1 will not on any federal, state, local or other tax return take a position, and shall not otherwise assert a position, inconsistent with such expectation and intent; or 10.3.1.2 do any act or thing that could cause the LLC to be treated as other than a partnership for federal income tax purposes. 10.3.2 TAX ALLOCATIONS Except as otherwise provided in this Section 10 or required by the Code and Treasury Regulations, items of income, gain, loss or deduction recognized for income tax purposes shall be allocated in the same manner that the corresponding items entering into the calculation of Net Income and Net Loss are allocated pursuant to this Agreement. 10.3.3 SECTION 704(C) ADJUSTMENTS In accordance with Code Section 704(c) and the Treasury Regulations thereunder, items of income, gain, loss and deduction with respect to an asset, if any, contributed to the capital of the LLC shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the LLC for federal income tax purposes and its fair market value upon contribution to the LLC. 10.3.4 If the Carrying Value of any asset is adjusted pursuant to the terms of this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset to the LLC for federal income tax purposes and its Carrying Value in the same manner as under Code Section 704(c) and the Regulations thereunder. 10.3.5 SECTION 754 ELECTION A Section 754 election may be made for the LLC at the sole discretion of the Managers. In the event of an adjustment to the adjusted tax basis of any LLC asset under Code Section 734(b) or Code Section 743(b) pursuant to a Section 754 election, subsequent allocations of tax items shall reflect such adjustment consistent with the Treasury Regulations promulgated under Sections 704, 734 and 743 of the Code. 10.3.6 ALLOCATIONS UPON TRANSFERS OF LLC INTERESTS If during an Accounting Period, a Member ("Transferring Member") transfers Units to another person, items of Net Income and Net Loss, together with corresponding tax items, that otherwise would have been allocated to the Transferring Member with regard to such Accounting Period shall be allocated between the Transferring Member and the transferee in accordance with their respective Units during the Accounting Period using any method permitted by Section 706 of the Code and selected by the Board of Managers. 11. DISTRIBUTIONS 11.1 DISTRIBUTIONS TO PREFERRED AND COMMON UNITS The holders of the outstanding Series A Units shall receive all distributions from the LLC resulting from the Carried Interest from Alliance Ventures I, the holders of the outstanding Series B Units shall receive all distributions from the LLC resulting from the Carried Interest from Alliance Ventures II, the holders of the outstanding Series C Units shall receive all distributions from the LLC resulting from the Carried Interest from Alliance Ventures III, and the holders of the outstanding Common Units shall receive all other distributions from the LLC. 11.2 ALLOCATION OF DISTRIBUTIONS AMONG HOLDERS OF UNITS All distributions by the LLC to holders of Series A Units, Series B Units, Series C Units and Common Units shall be made in proportion to the holders' ownership of such outstanding Units at the time of the distribution. 11.3 MANDATORY TAX DISTRIBUTIONS In order to permit holders of Units to pay taxes on their allocable share of the taxable income of the LLC, the Managers shall cause the LLC to distribute, not later than February 28 of each year, to each holder of a Unit an amount equal to the excess, if any, of: 11.3.1 the product of the aggregate net taxable income of the LLC determined on a cumulative basis for all Accounting Periods that has been allocated to such holder (and any predecessor holder) computed without regard to any basis adjustments under Section 743(b) of the Code of such Unit multiplied by 0.45; over 11.3.2 all amounts previously distributed to such holder and any predecessor holder; the decimal fraction in these Sections 11.3.1 and 11.3.2 shall be adjusted to the extent necessary (as determined in good faith by the Managers from time to time) to reflect any change in the higher of the maximum rate of tax imposed on individual taxpayers resident in California under the Code or the laws of the State of California and the maximum rate of tax imposed on corporate taxpayers doing business in California under the Code or the laws of the State of California. Any distributions made with respect to Series A Units, Series B Units and Series C Units pursuant to this Section 11.3 shall reduce on a dollar-for-dollar basis the distributions required or permitted to be made with respect to such Units pursuant to any other provision of this Agreement. 11.4 DISCRETIONARY DISTRIBUTIONS In addition to the distributions provided for in Sections 11.1, 11.2 and 11.3, at any time that there are no Series A Units, Series B Units and Series C Units outstanding, the Managers may, in their sole discretion, make additional distributions to the holders of outstanding Common Units in such amounts and at such times as they shall from time to time determine. 11.5 RESTRICTION ON DISTRIBUTIONS AND WITHDRAWALS 11.5.1 The LLC shall not make any distribution to the holders of Units unless immediately after giving effect to the distribution, all liabilities of the LLC, other than liabilities to Members on account of their interest in the LLC and liabilities as to which recourse of creditors is limited to specified property of the LLC, do not exceed the fair value of the LLC assets, provided that the fair value of any property that is subject to a liability as to which recourse of creditors is so limited shall be included in the LLC assets only to the extent that the fair value of the property exceeds such liability. 11.5.2 Except as otherwise required by law no holder of Units shall be liable to the LLC for the amount of a distribution received provided that, at the time of the distribution, such holder of Units did not know that the distribution was in violation of Section 11.5.1. A Member which receives a distribution in violation of Section 11.5.1, and which knows at the time of the distribution that the distribution violated such condition, shall be liable to the LLC for the amount of the distribution. 11.6 NO OTHER WITHDRAWALS Except as otherwise expressly provided for in this Agreement no withdrawals or distributions shall be required or permitted. 12. TRANSFER OF MEMBERSHIP 12.1 TRANSFER Any Member or Assignee may Transfer any portion of its or his Units only if: 12.1.1 the transferor shall have complied with the Right of First Refusal imposed by Section 12.5 hereof; 12.1.2 the Assignee shall have agreed in writing to assume all of the obligations of the assignor with respect to the Units assigned (including the obligations imposed hereunder as a condition to any transfer); and 12.1.3 the Managers in their sole discretion have consented to such Transfer and shall have concluded (which conclusion may be based upon an opinion of counsel satisfactory to them) that such assignment or disposition will not: 12.1.3.1 result in a violation of the Securities Act of 1933 as amended, or any other applicable statute of any jurisdiction; 12.1.3.2 result in a termination of the LLC for Federal or state income tax purposes or result in (or materially increase the risk of) the LLC being treated as a publicly traded partnership or otherwise taxable as a corporation for Federal income tax purposes; or 12.1.3.3 result in a violation of any law, rule or regulation by the Member, the Assignee, the LLC or the other Members. For purposes of this Section 12.1 the phrase "publicly traded partnership" shall have the meaning set forth in Section 7704(b) and 469(k) of the Code. 12.2 TRANSFER VOID Any purported Transfer of Units in contravention of this Section 12 shall be void and of no effect to, on or against the LLC, any Member, any creditor of the LLC or any claimant against the LLC. 12.3 RIGHTS OF ASSIGNEES The Assignee of Units has no right to vote or to participate in the management of the business and affairs of the LLC or to become a Member. The Assignee is only entitled to receive distributions and to be allocated the Net Income and Net Loss (and items thereof) attributable to the Units transferred to the Assignee. 12.4 ADMISSION OF PERMITTED TRANSFEREES Notwithstanding Section 12.5 below, the Units of any Member shall be transferable free from any Right of First Refusal if: 12.4.1 the transfer occurs by reason of or incident to the death, or divorce, of the transferor Member; 12.4.2 the transferee is a Permitted Transferee, and such Permitted Transferee agrees in writing to be bound by the terms and conditions of this Agreement as fully as if it were an original signatory hereto. A "Permitted Transferee" is any member of such Member's immediate family including, in the case of the divorce of a Member from his or her spouse, such spouse. A Permitted Transferee will be admitted as a Substitute Member only in accordance with Section 2.5 hereof. Units transferred pursuant to the death of a Member shall be subject to the provisions of Section 2.9 (relating to Dissociated Members) whether or not transferred to a Permitted Transferee. 12.5 RIGHT OF FIRST REFUSAL 12.5.1 GRANT The LLC is hereby granted the right of first refusal ("First Refusal Right"), exercisable in connection with any proposed Transfer of Units. 12.5.2 NOTICE OF INTENDED DISPOSITION In the event a Member desires to accept a bona-fide third-party offer for the Transfer of any or all of the Member's Units (Units subject to such offer to be hereinafter called "Target Units"), such Member shall promptly: 12.5.2.1 deliver to the LLC written notice ("Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror; and 12.5.2.2 Provide satisfactory proof that the disposition of the Target Units to such third-party offeror would not be in contravention of the provisions set forth in Section 12.1. 12.5.3 EXERCISE OF RIGHT The LLC (or its assignees) shall, for a period of 25 days following receipt of the Disposition Notice, have the right to repurchase all, but not less than all, of the Target Units specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice ("Exercise Notice") to the transferor Member before the end of the 25-day exercise period. 12.5.4 VALUATION If the purchase price specified in the Disposition Notice is payable in property other than cash or evidences of indebtedness, the LLC (or its assignees) may pay the purchase price in cash equal to the value of such property. If the Member and the LLC (or its assignees) cannot agree on such cash value within ten (10) days after the LLC's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Member and the LLC (or its assignees) or, if they cannot agree on an appraiser within 20 days after the LLC's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Member and the LLC. The closing shall then be held on the later of: 12.4.4.1 the fifth business day following delivery of the Exercise Notice; or 12.4.4.2 the fifth business day after such cash valuation shall have been made. 12.5.5 EXERCISE OF RIGHTS If the right of the LLC is exercised with respect to all the Target Units specified in the Disposition Notice, then the LLC, its assignees and/or the Members (as the case may be) shall effect the purchase of the Target Units, including payment of the purchase price, on the same payment terms specified in the Disposition Notice; and the selling Member shall deliver to the LLC the certificates representing the Target Units to be repurchased, each certificate to be properly endorsed for transfer. The closing shall then be held on the later of: 12.5.5.1 sixty (60) days following delivery of the Disposition Notice; or 12.5.5.2 the fifth business day after any necessary valuation shall have been made. 12.5.6 NON-EXERCISE OF RIGHT In the event the LLC or its assignees do not exercise their purchase rights in accordance with this Section 12.5, the selling Member shall have a period of 30 days thereafter in which to sell or otherwise dispose of the Target Units to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Section 12.1. If the Member does not effect such sale or disposition of the Target Units within the specified 30-day period, the LLC's First Refusal Right shall continue to apply to any subsequent disposition of the Target Units by Member. 12.5.7 RECAPITALIZATION/MERGER 12.5.7.1 In the event of any Unit stock split, recapitalization or other transaction affecting the LLC's outstanding Units without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Units shall be immediately subject to the LLC's First Refusal Right hereunder, but only to the extent the Units are at the time covered by such right. 12.5.7.2 In the event of: 12.5.7.2.1 a merger or consolidation in which the LLC is not the surviving entity; 12.5.7.2.2 a sale, transfer or other disposition of all or substantially all of the LLC's assets; 12.5.7.2.3 a reverse merger in which the LLC is the surviving entity but in which the LLC's outstanding voting securities are transferred in whole or in part to a person or persons other than those who held such securities immediately before the merger; or 12.5.7.2.4 any transaction effected primarily to change the State in which the LLC is organized, or to create a holding company structure, the LLC's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Units in consummation of the transaction, but only to the extent the Purchased Units are at the time covered by such right. 12.6 MARITAL DISSOLUTION OR LEGAL SEPARATION 12.6.1 GRANT In connection with the dissolution of the marriage or the legal separation of any Member, the LLC shall have the right ("Special Purchase Right"), exercisable at any time during the 30-day period following the LLC's receipt of the required Dissolution Notice under Section 12.6.2, to purchase from the Member's spouse, in accordance with the provisions of Section 12.6.3 any or all Units which are or would otherwise be awarded to such spouse incident to the dissolution of marriage or legal separation in settlement of any community property or other marital property rights such spouse may have or obtain in the Units. The Special Purchase Right shall not apply to any Units retained by the Member. 12.6.2 NOTICE OF DECREE OR AGREEMENT Each Member shall promptly provide the LLC with written notice ("Dissolution Notice") of: 12.6.2.1 the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee's spouse in connection with their marital dissolution or legal separation; or 12.6.2.2 the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee's spouse which provides for the award to the spouse of Units in settlement of any community property or other marital property rights such spouse may have in such Units. 12.6.3 EXERCISE OF SPECIAL PURCHASE RIGHT The Special Purchase Right shall be exercisable by delivery of written notice ("Purchase Notice") to the Member and the Member's spouse within 30 days after the LLC's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of the Units to be purchased by the LLC, the date such purchase is to be effected (such date to be not less than five business days, nor more than 10 business days, after the date of the Purchase Notice), and the amount which the LLC proposes to pay for such Units. If the Member's Spouse does not agree to the amount proposed to be paid by the LLC, then the price to be paid shall be the fair market value of the Units determined as set forth in the remainder of this Section and the purchase shall occur ten business days following the completion of such valuation, provided that if the fair market value is greater than 110% of the purchase price set forth in the Purchase Notice, the LLC shall have the right to withdraw such Notice. The fair market value of the Units shall be the value agreed to by the Member's Spouse or its or his legal representative and the LLC. If such person and the LLC are unable to agree to a value, within 10 days after the notice of election to purchase the Units has been given, the fair market value shall be established by an appraiser of recognized standing selected by the Member's Spouse or his or its legal representative and the LLC, or, if they cannot agree on an appraiser within 20 days after the expiration of the aforementioned ten-day period, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of the fair market value. The cost of determining the fair market value shall be paid by the LLC. 13. INDEMNIFICATION AND LIMITATION OF LIABILITY 13.1 INDEMNIFICATION 13.1.1 To the fullest extent permitted by the Act and by law, the Managers, Members, the partners, members or shareholders of any Member, if such Member is organized as a partnership, limited liability company or corporation, respectively, and the partners, shareholders, controlling persons, officers, Managers and employees of any of the foregoing (herein referred to as "Indemnitees") shall, in accordance with this Section 13.1 be indemnified and held harmless by the LLC from and against any and all loss, claims, damages, liabilities joint and several, expenses, judgments, fines, settlements and other amounts arising from any and all claims (including reasonable legal expenses), demands, actions, suits or proceedings (civil, criminal, administrative or investigative) in which they may be involved, as a party or otherwise, by reason of their management of, or involvement in, the affairs of the LLC, or rendering of advice or consultation with respect thereto, or which relate to the LLC, its properties, business or affairs, if such Indemnitee acted in good faith and in a manner such Indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC, and with respect to any criminal proceeding, had no reasonable cause to believe the conduct of such Indemnitee was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in, or not opposed to, the best interests of the LLC or that the Indemnitee had reasonable cause to believe that the Indemnitee's conduct was unlawful (unless there has been a final adjudication in the proceeding that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the LLC; or that the Indemnitee did have reasonable cause to believe that the Indemnitee's conduct was unlawful). 13.1.2 The LLC may also indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the LLC to procure a judgment in its favor by reason of the fact that such Person is or was an officer, employee or agent of the LLC, against expenses actually or reasonably incurred by such Person in connection with the defense or settlement of such action, if such Person acted in good faith and in a manner such Person reasonably believed to be in, or not opposed to, the best interests of the LLC, except that indemnification shall be made in respect of any claim, issue or matter as to which such Person shall have been adjudged to be liable for misconduct in the performance of the Person's duty to the LLC only to the extent that the court in which such action or suit was brought, or another court of appropriate jurisdiction, determines upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. To the extent that the Person has been successful on the merits or otherwise in defense of any proceedings referred to herein, or in defense of any claim, issue or matter therein, the Person shall be indemnified by the LLC against expenses actually and reasonably incurred by the Person in connection therewith. Notwithstanding the foregoing, no Person shall be entitled to indemnification hereunder for any conduct arising from the gross negligence or willful misconduct or reckless disregard in the performance of the Person's duties under this Agreement. 13.1.3 Expenses (including attorneys' fees) incurred in defending any proceeding under Sections 13.1.1 or 13.1.2 may be paid by the LLC in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the Indemnitee or Person to repay such amount if it shall ultimately be determined that the Indemnitee or Person is not entitled to be indemnified by the LLC as authorized hereunder. 13.1.4 The indemnification provided by this Section 13.1 shall not be deemed to be exclusive of any other rights to which any Person may be entitled under any agreement, or as a matter of law, or otherwise, both as to action in a Person's official capacity and to action in another capacity. 13.1.5 The Managers shall have power to purchase and maintain insurance on behalf of the LLC, the Managers, officers, employees or agents of the LLC and any other Indemnitees at the expense of the LLC, against any liability asserted against or incurred by them in any such capacity whether or not the LLC would have the power to indemnify such Persons against such liability under the provisions of this Agreement. 13.2 LIMITATION OF LIABILITY Notwithstanding anything to the contrary herein contained, the debts, obligations and liabilities of the LLC shall be solely the debts, obligations and liabilities of the LLC; and no Manager or Member shall be obligated personally for any such debt, obligation or liability of the LLC solely by reason of being a Manager or Member of the LLC. 14. TERMINATION 14.1 TERMINATION The LLC shall be dissolved, its assets disposed of and its affairs wound up upon the first to occur of the following: 14.1.1 the expiration of its stated term; 14.1.2 the affirmative vote of Members holding 80% of the Units entitled to vote thereon; 14.1.3 the death, Bankruptcy or Dissolution of a Member ("Dissolution Event"), unless the holders of Units representing a majority of votes (determined pursuant to Section 2.4) continues the business of the LLC within 90 days following the occurrence of any such event, pursuant to Section 14.2 below; or 14.1.4 the entry of a decree of judicial dissolution under the Act. 14.2 CONTINUANCE OF THE LLC Notwithstanding the foregoing provisions of Section 14.1, upon the occurrence of a Dissolution Event, if there are at least two remaining Members, the holders of Units representing a majority of votes (determined pursuant to Section 2.4) may avoid dissolution of the LLC and elect within 90 days after a Dissolution Event to continue the business of the LLC on the same terms as this Agreement. Expenses incurred in the continuance of the LLC shall be deemed expenses of the LLC. 14.3 AUTHORITY TO WIND UP The Managers shall have all necessary power and authority required to marshal the assets of the LLC, to pay its creditors, to distribute assets and otherwise wind up the business and affairs of the LLC. In particular, the Managers shall have the authority to continue to conduct the business and affairs of the LLC insofar as such continued operation remains consistent, in the judgment of the Managers, with the orderly winding up of the LLC. 14.4 WINDING UP AND CERTIFICATE OF CANCELLATION The winding up of the LLC shall be completed when all debts, liabilities and obligations of the LLC have been paid and discharged or reasonably adequate provision therefor has been made, and all of the remaining property and assets of the LLC have been distributed to the Members. Upon the completion of winding up of the LLC, a Certificate of Cancellation shall be filed with the Office of the Secretary of State of California. 14.5 DISTRIBUTION OF ASSETS Upon dissolution and winding up of the LLC, the affairs of the LLC shall be wound up and the LLC liquidated by the Managers. Pursuant to such liquidation the assets of the LLC shall be sold unless the Members shall consent to a distribution in kind of the assets. If the Members do not consent to a distribution in kind but the Managers determine that an immediate sale would be financially inadvisable, they may defer sale of the LLC assets for a reasonable time. If any assets are distributed in kind, then they shall be distributed on the basis of the fair market value thereof as determined by appraisal, and shall be deemed to have been sold at such fair market value for purposes of the allocations under Section 10. Unless the Members otherwise agree, if any assets are to be distributed in kind, they shall be distributed to the Members, as tenants-in-common, in undivided interests in proportion to distributions to which the Members are entitled under this Section 14.5. The assets of the LLC, whether cash or in kind shall be distributed as follows in accordance with the Act: 14.5.1 to creditors of the LLC in the order of priority provided by law; and 14.5.2 the Members and Assignees in accordance with the positive balances in their Capital Accounts, after adjustment for allocations of income and loss realized during the year of dissolution, and except as specifically provided in Sections 3 and 11, no Member or Assignee shall have any obligation at any time to repay or restore to the LLC all or any part of any distribution made to it from the LLC in accordance with this Sections 14.5 or 11 or to make any additional contribution of capital to the LLC. The distributions in this Section 14.5 shall be made when dissolution occurs, or, if later, within 90 days following the event triggering the dissolution. The LLC shall terminate when all of its assets have been sold and/or distributed and all of its affairs have been wound up. 14.5 TERMINATION OF A MEMBER'S ASSOCIATION WITH THE LLC Should a Member no longer have an association with the LLC (as defined herein), the LLC shall have the right, but not the obligation, to repurchase all shares of the LLC owned by the Member, upon demand and at the price originally paid by the Member for those shares. An "association with the LLC" shall be defined as being an employee or consultant of the LLC, the Partnerships, or Alliance Semiconductor Corporation (including its subsidiaries, and parent, if any). 15. DEFINITIONS The following terms shall have the meanings set forth for purposes of this Agreement: 15.1 ACCOUNTING PERIOD shall mean for each Fiscal Year the period beginning on the 1st of January and ending on the 31st of December; provided however, that the first Accounting Period shall commence on the date of formation of the LLC and shall end on December 31, 1999; and provided, further, that a new Accounting Period shall commence on any date on which an Additional or Substituted Member is admitted to the LLC or a Member ceases to be a Member for any reason. 15.2 ACT shall have the meaning set forth in Section 1.1. 15.3 ADDITIONAL MEMBER shall mean a Member admitted as a Member after the date this Agreement becomes effective. 15.4 CAPITAL ACCOUNT shall mean, with respect to any Member, a separate account maintained by the LLC with respect to such Member in accordance with the following provisions: 15.4.1 The Capital Account of each Member shall be increased by: 15.5.1.1 the amount of money and the fair market value of any property contributed to the LLC by such Member (net of any liabilities secured by such property that the LLC is considered to assume or hold subject to for purposes of Section 752 of the Code), 15.5.1.2 such Member's share of Net Income (or items thereof) and other items of LLC income and gain allocated to it pursuant to this Agreement, and 15.5.1.3 the amount of liabilities of the LLC assumed by such Member or (to the extent not taken into account under Section 15.5.1.2 above) and any other amounts required by Treasury Regulation Section 1.704-1(b), provided that the Board of Managers determines that such increase is consistent with the economic arrangement among the Members as expressed in this Agreement; and 15.4.2 shall be decreased by: 15.4.2.1 the amount of money and the agreed fair market value of any property distributed by the LLC to such Member pursuant to the provisions of this Agreement (net of any liabilities secured by such property that such Member is considered to assume or hold subject to for purposes of Section 752 of the Code), 15.4.2.2 such Member's share of Net Loss (or items thereof) and other items of LLC loss and deduction allocated to it pursuant to this Agreement, and 15.4.2.3 the amount of liabilities of such Member assumed by the LLC (to the extent not taken into account under 15.4.2.1 above) and any other amounts required by Treasury Regulation Section 1.704-1(b), provided that the Board of Managers determines that such decrease is consistent with the economic arrangement among the Members as expressed in this Agreement. 15.5 AGREEMENT shall mean this LLC Agreement as the same shall be amended from time to time. 15.6 ARTICLES OF ORGANIZATION shall have the meaning set forth in Section 1.1. 15.7 ASSIGNEE shall mean a transferee or a Permitted Transferee of a Units who has not been admitted as a Substitute Member. 15.8 BOARD OF MANAGERS shall have the meaning set forth in Section 5.1. 15.9 BANKRUPTCY shall mean with respect to any Person that a petition shall have been filed by or against such Person as a "debtor" and the adjudication of such Person as a bankrupt under the provisions of the bankruptcy laws of the United States of America shall have commenced, or that such Person shall have made an assignment for the benefit of its creditors generally or a receiver shall have been appointed for substantially all of the property and assets of such Person. 15.10 CAPITAL CONTRIBUTION of a Member shall mean that amount of capital actually contributed by the Member to the LLC pursuant to Section 3 hereof. 15.11 CARRIED INTEREST FROM ALLIANCE VENTURES I, L.P. shall mean the LLC's right to receive (as general partner of Alliance Ventures I, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of the Alliance Ventures I, L.P. Partnership Agreement. 15.12 CARRIED INTEREST FROM ALLIANCE VENTURES II, L.P. shall mean the LLC's right to receive (as general partner of Alliance Ventures II, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of Alliance Ventures II, L.P. Partnership Agreement. 15.13 CARRYING VALUE means, with respect to any LLC asset, the asset's adjusted basis for federal income tax purposes, except as follows: 15.13.1 The initial Carrying Value of any asset contributed by a Member to the LLC shall be the agreed-upon fair market value of the asset upon contribution, as determined by the contributing Member and the LLC. The initial Carrying Values of the assets contributed to the LLC as Capital Contributions are set forth on Exhibit A hereto. 15.13.2 In the discretion of the Board of Managers, the Carrying Values of all LLC assets may be adjusted to equal their respective fair market values, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such assets had been sold for their respective fair market values as of the following times: 15.13.2.1 the acquisition of an additional interest in the LLC by any new or existing Member in exchange for more than a de minimis capital contribution; and 15.13.2.2 the distribution by the LLC to a Member of more than a de minimis amount of LLC assets, unless all Members receive simultaneous distributions of either undivided interests in the distributed property or identical LLC assets in proportion to their interests in the LLC. 15.13.3 The Carrying Values of all LLC assets shall be adjusted to equal their respective fair market values, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such assets had been sold for their respective fair market values as of the following times: 15.13.3.1 the date the LLC is liquidated within the meaning of Treasury Regulation Section 1.704-1 (b)(2)(ii)(g); and 15.13.3.2 the termination of the LLC pursuant to the provisions of this Agreement. 15.13.4 The Carrying Values of LLC assets shall be increased or decreased to the extent required under Treasury Regulation Section 1.704-1(b)(2)(iv)(m) in the event that the adjusted tax basis of LLC assets is adjusted pursuant to Code Sections 732, 734 or 743. 15.13.5 The Carrying Value of a LLC Asset that is distributed (whether in liquidation of the LLC or otherwise) to one or more Members shall be adjusted to equal its fair market value, as determined by the Board of Managers, and the resulting unrecognized gain or loss allocated to the Capital Accounts of the Members as though such asset had been sold for such fair market value. 15.13.6 The Carrying Value of a LLC asset shall be adjusted by the depreciation, amortization or other cost recovery deductions, if any, taken into account by the LLC with respect to such asset in computing Net Income or Net Loss. 15.14 CODE shall mean the Internal Revenue Code of 1986, as amended. 15.15 DISSOCIATED MEMBER shall have the meaning given that term in Section 2.9. 15.16 DISSOLUTION of a Member that is not a natural person shall mean that such Member has terminated its existence, whether partnership or corporate, wound up its affairs and dissolved; provided, however, that a change in the membership of any Member that is a general partnership shall not constitute "Dissolution" hereunder, whether or not the Member is deemed technically dissolved for partnership law purposes, so long as the business of the Member is continued. 15.17 DISSOLUTION EVENT shall mean the death or dissolution of a Member, the occurrence of which terminates the Member's continued membership in the LLC and results in the dissolution of the LLC under the Act unless the holders of Units representing a majority of votes (determined pursuant to Section 2.4) agree otherwise pursuant to Section 14.2. 15.16 FISCAL YEAR shall mean the period from January 1 to December 31 of each year, or as otherwise required by law. 15.17 INCOMPETENCY of a person shall mean that such person shall have been judged incompetent or insane by a decree of a court or administrative tribunal of appropriate jurisdiction. 15.18 INITIAL CONTRIBUTION shall have the meaning set forth in Section 3.1. 15.19 MARKETABLE SECURITY shall refer to a security that is (a) registered under the Securities Act, (b) traded on a national securities exchange or over-the-counter, (c) currently the subject of an issuer-filed Securities Act registration statement, (d) a direct obligation of, or an obligation guaranteed as to principal and interest by, the United States, a certificate of deposit maturing within one year or less issued by an institution insured by the Federal Deposit insurance Corporation, or a similar security, or (e) transferable pursuant to SEC Rule 144. 15.20 MEMBERS shall mean all Members of the LLC, including Substitute Members, and Additional Members, but does not include Assignees. 15.21 NET INCOME OR NET LOSS shall mean the net book income or loss of the LLC for any relevant period. The net book income or loss of the LLC shall be computed in accordance with Federal income tax principles under the method of accounting elected by the LLC for Federal income tax purposes, and as otherwise adjusted by: 15.21.1 including as income or deductions, as appropriate, any tax-exempt income and related expenses that are neither properly included in the computation of taxable income nor capitalized for Federal income tax purposes; 15.21.2 including as a deduction when paid or incurred (depending on the LLC's method of accounting) any amounts utilized to organize the LLC or to promote the sale of (or to sell) an interest in the LLC, except that amounts for which an election is properly made by the LLC under Section 709(b) of the Code shall be accounted for as provided therein; 15.21.3 including as a deduction any losses incurred by the LLC in connection with the sale or exchange of property notwithstanding that such losses may be disallowed to the LLC for Federal income tax purposes under the related party rules of the Code (including Code Sections 267(a)(1) or 707(b)); 15.21.4 calculating the gain or loss on disposition of LLC assets and the depreciation, amortization or other cost- recovery deductions, if any, with respect to LLC assets by reference to their Carrying Value rather than their adjusted tax basis; and 15.21.5 excluding as an item of income, gain, loss or deduction any items allocated pursuant to Section 10.2 of this Agreement. 15.22 PARTNERSHIPS shall mean Alliance Ventures I, L.P., a California limited partnership and Alliance Ventures II, L.P., a California limited partnership. 15.23 PERMITTED TRANSFER shall have the meaning set forth in Section 12.4 hereof. 15.24 PERSON shall mean a natural person, partnership (whether general or limited and whether domestic or foreign), LLC, foreign limited liability company, trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or representative capacity. 15.25 SUBSTITUTE MEMBER shall mean an Assignee who has been admitted to all the rights of membership pursuant to this Agreement. 15.26 TRANSFER shall mean any transfer, sale, encumbrance, mortgage, assignment or other disposition. 15.27 TREASURY REGULATIONS shall mean regulations issued pursuant to the Code. 15.28 UNIT REGISTER shall have the meaning set forth in Section 8.4. 16. MISCELLANEOUS 16.1 AMENDMENT This Agreement may be amended only with the consent of the Members; provided however, that no amendment that adversely affects the rights of one class of Units in a manner different than that of another class of Units shall be effective against any holder of such adversely affected Units who has not consented thereto. 16.2 POWER OF ATTORNEY By signing this Agreement, each Member designates and appoints the Managers as its or his true and lawful attorney, in his name, place and stead, to make, execute, sign and file such instruments, documents or certificates which may from time to time be required by the laws of the United States of America and the State of California and any political subdivision thereof or any other state or political subdivision in which the LLC shall do business to carry out the purposes of this Agreement, except where such action requires the express approval of the Members hereunder. Such attorney is not hereby granted any authority on behalf of the undersigned Members to amend this Agreement except that as attorney for each of the undersigned Members, the Managers shall have the authority to amend this Agreement and the LLC's Articles of Organization as may be required to give effect to the transactions below following any necessary approvals or consents of the Members: 16.2.1 extensions of the term of the LLC; 16.2.2 admissions of additional Members; 16.2.3 transfer of a Member's Units; 16.2.4 withdrawals or distributions; and 16.2.5 contributions of additional capital. The Managers shall provide to the Members copies of all documents executed pursuant to the power of attorney contained in this Section 16.2. 16.3 WITHHOLDING TAXES 16.3.1 The LLC shall at all times be entitled to make payments with respect to any Member or Assignee in amounts required to discharge any obligation of the LLC to withhold or make payments to any governmental authority with respect to any federal, state, local or other jurisdictional tax liability of such Member or Assignee arising as a result of such Member or Assignee's interest in the LLC. To the extent each such payment satisfies an obligation of the LLC to withhold with respect to any distribution to a Member or Assignee on which the LLC did not withhold or with respect to any Member's or Assignee's allocable share of the income of the LLC, each such payment shall be deemed to be a loan by the LLC to such Member or Assignee (which loan shall be deemed to be immediately due and payable) and shall not be deemed a distribution to such Member or Assignee. The amount of such payments made with respect to such Member or Assignee, plus interest, on each such amount from the date of each such payment until such amount is repaid to the LLC at an interest rate per annum equal to the prime rate, from time to time in effect, of the Bank of California, San Francisco, California, shall be repaid to the LLC by: 16.3.1.1 deduction from any cash distributions made to such Member or Assignee pursuant to this Agreement; 16.3.1.2 deduction from any non-cash distributions made to such Member or Assignee; or 16.3.1.3 earlier payment by such Member or Assignee to the LLC, in each case as determined by the Managers in their sole discretion. The Managers may, in their discretion, defer making distributions to any Member or Assignee owing amounts to the LLC pursuant to this Section 16.3 until such amounts are paid to the LLC and shall in addition exercise any other rights of a creditor with respect to such amounts. 16.3.2 Each Member or Assignee agrees to indemnify and hold harmless the LLC and the Managers and each of the Members, from and against any liability for taxes, interest or penalties that may be asserted by reason of the failure to deduct and withhold tax on amounts distributable or allocable to said Member or Assignee. Any amount payable as indemnity hereunder by a Member or Assignee shall be paid promptly to the LLC upon request for such payment from the Managers, and if not so paid, the Managers and the LLC shall be entitled to claim against and deduct all such amounts from the Capital Account of, or from any distribution due to, the affected Member or Assignee. 16.4 FURTHER ASSURANCES The parties agree to execute and deliver any further instruments or documents and perform any additional acts that are or may become necessary to effectuate and carry on the LLC created by this Agreement. 16.5 BINDING EFFECT Subject to the restrictions on transfer set forth in Section 12, this Agreement shall be binding on and inures to the benefit of the Members and their respective transferees, successors, assigns and legal representatives. 16.6 GOVERNING LAW This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 16.7 ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties with respect to the subject matter herein. 16.8 ARBITRATION Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Santa Clara or San Mateo County, California in accordance with the rules then obtaining, of the American Arbitration Association regarding commercial arbitration. Judgment upon the award rendered may be entered into any court having jurisdiction thereof. The losing party shall bear the costs and expenses of such arbitration. 16.9 COUNTERPARTS This Agreement may be executed in one or more counterparts with the same force and effect as if each of the signatories had executed the same instrument. 16.10 AMENDMENT OF PRIOR AGREEMENT By executing this Agreement, the parties intend to replace the Prior Agreement dated October 15, 1999 with this Agreement, on the Effective Date of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date first above written. Members: By: /s/ N.Damodar Reddy By: /s/ C.N. Reddy ---------------------------- --------------------------- signature signature N. Damodar Reddy C.N. Reddy - --------------------------------- ------------------------------- printed name printed name By: /s/ V.R. Ranganath By: /s/ Shastri Divakaruni ---------------------------- --------------------------- signature signature V.R. Ranganath Shastri Divakaruni - --------------------------------- ------------------------------- printed name printed name By: /s/ Bradley Perkins By: /s/ David Eichler ---------------------------- --------------------------- signature signature Bradley Perkins David Eichler - --------------------------------- ------------------------------- printed name printed name Alliance Semiconductor Corporation By: /s/ N.Damodar Reddy ---------------------------- signature of authorized representative N. Damodar Reddy - --------------------------------- printed name President and CEO - --------------------------------- title Exhibit A Members and Unit Holdings
Member Number of Units Initial Carrying Value - ------------------------------------------------------------------------------- Alliance Semiconductor 10,000 Common Units $2,500.00 Corporation N. Damodar Reddy 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 8,000 Series C Units $2,000.00 C.N. Reddy 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 8,000 Series C Units $2,000.00 V.R. Ranganath 10,000 Series A Units $2,500.00 10,000 Series B Units $2,500.00 9,333 Series C Units $2,333.25 Shastri Divakaruni 2,941 Series B Units $735.25 6,000 Series C Units $1,500.00 Bradley Perkins 632 Series A Units $158.00 1000 Series B Units $250.00 933 Series C Units $233.25 David Eichler 421 Series A Units $105.25 764 Series B Units $191.00 600 Series C Units $150.00
EX-10.32 4 0004.txt ALLIANCE VENTURES I, LP - PARTNERSHIP AGREEMENT AGREEMENT OF LIMITED PARTNERSHIP THIS AGREEMENT of limited partnership ("Agreement") is dated as of November 12, 1999 among Alliance Venture Management, LLC, a California limited liability company ("General Partner"), Alliance Semiconductor Corporation, a Delaware corporation ("Alliance") and the limited partners ("Limited Partners") listed in Schedule I attached hereto (General Partner and the Limited Partners being herein collectively called the "Partners"). Capitalized terms not otherwise defined shall have the meanings ascribed to such terms in Section 2.1. THE PARTIES AGREE AS FOLLOWS: 1. GENERAL PROVISIONS 1.1 FORMATION The Partners hereby agree to form a limited partnership ("Partnership") pursuant to and in accordance with the California Revised Uniform Limited Partnership Act ("California Partnership Act"). 1.2 NAME The name of the Partnership will be "Alliance Ventures I, L.P." or such other name or names as the General Partner may from time to time designate. 1.3 PURPOSE The Partnership is organized for the object and purpose of making venture capital investments in private companies, managing and supervising such investments and engaging in such activities incidental or ancillary thereto as the General Partner deems necessary or advisable, provided, however, that the Partnership shall not engage in any activity that for United States income tax purposes would constitute a United States trade or business. 1.4 PLACE OF BUSINESS The Partnership will maintain an office and principal place of business in Santa Clara, California or at such other place or places as the General Partner may from time to time designate. 2. DEFINITIONS; DETERMINATIONS; CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS 2.1 DEFINITIONS For purposes of this Agreement the following capitalized terms shall have the meanings set forth below: 2.1.1ADDITIONAL LIMITED PARTNERS has the meaning set forth in Section 6.5. 2.1.2 ALLIANCE FUND means any of Alliance Ventures I, L.P., Alliance Ventures II, L.P. and each private venture capital equity fund hereafter sponsored by the General Partner, and the ALLIANCE FUNDS means all of such funds, collectively. 2.1.3 APPLICABLE LAW means ERISA or any federal or state law applicable to public pension plans or any regulation, case law or administrative ruling relating thereto. 2.1.4 BASIS of any security means the basis of such security as determined in accordance with the Code less the amount of any write-down pursuant to Section 2.1.39.3 of the definition of Realized Investment Loss (as the case may be) and as further adjusted to reflect the effects of any transaction described in Section 2.2.1. 2.1.5 CALIFORNIA PARTNERSHIP ACT has the meaning set forth in Section 1.1. 2.1.6 CAPITAL ACCOUNT has the meaning set forth in Section 2.4. 2.1.7 CAPITAL CALL NOTICE has the meaning set forth in Section 2.3.1. 2.1.8 CAPITAL CONTRIBUTION of any Partner means the amount received by the Partnership from such Partner pursuant to its Commitment. 2.1.9 CARRIED INTEREST means the General Partner's 15% interest in the Partnership's Net Profits from Portfolio Investments and Net Loss from Portfolio Investments allocated to the General Partner pursuant to Sections 2.4.3.2 and 2.4.4.2. 2.1.10 CODE means the Internal Revenue Code of 1986, as in effect on the date hereof and, at the discretion of the General Partner, including any such amendment thereto which does not change the economic terms hereof. 2.1.11 COMMITMENT with respect to each Partner means the aggregate amount of cash agreed to be contributed as capital to the Partnership by such Partner as specified in Schedule I attached hereto as the same may be modified from time to time under the terms of this Agreement. 2.1.12 CURRENT INCOME means all interest and dividend income (including original issue discount and payment of in-kind income) from investments (other than Short-Term Investments). 2.1.13 DEFAULTING PARTNER has the meaning set forth in Section 6.10. 2.1.14 EFFECTIVE DATE means November 12, 1999. 2.1.15 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.1.16 EXCESS LOSSES has the meaning given such term in Section 2.4.5. 2.1.17 FAIR VALUE CAPITAL ACCOUNTS means the Partners' Capital Accounts computed in accordance with Section 2.3, but treating each security owned by the Partnership as if, on the date as of which such computation is being made, such security had been sold at its "value" (determined in accordance with Section 9) and any resulting gain or loss had been allocated to the Partners' Capital Accounts in accordance with Section 2.4. 2.1.18 INDEMNIFYING PARTNER has the meaning set forth in Section 6.7. 2.1.19 LIMITED PARTNERS means the Persons listed in Schedule I hereto in their capacity as limited partners of the Partnership (including each Person admitted to the Partnership in accordance with Section 6.5) and each Additional Limited Partner who is admitted to the Partnership as a substitute limited partner pursuant to Section 6.2, so long as each such Person continues to be a limited partner of the Partnership hereunder. 2.1.20 MANAGEMENT AGENT means Alliance Venture Management, LLC or any other party (which may be the General Partner or a partner or affiliate thereof) selected by the General Partner to act as agent of the Partnership with respect to managing the affairs of the Partnership. 2.1.21 MANAGEMENT FEE has the meaning set forth in Section 4.2. 2.1.22 NMS means the National Association of Securities Dealers Automated Quotation System, National Market System. 2.1.23 NET LOSS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period over (y) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period. 2.1.24 NET PROFITS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period over (y) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period. 2.1.25 OPINION OF LIMITED PARTNER'S COUNSEL means a written opinion of any counsel selected by a Limited Partner which counsel and opinion shall be reasonably acceptable in form and substance to the General Partner in its sole discretion. 2.1.26 OPINION OF THE PARTNERSHIP'S COUNSEL means an opinion of counsel selected by the General Partner and reasonably acceptable (by reason of experience in the area of law involved) to the Limited Partner affected by such opinion or, if more than one Limited Partner is affected by such opinion, Limited Partner(s) holding one-third of the Limited Partner Interests so affected. 2.1.27 ORGANIZATIONAL EXPENSES means the reasonable expenses (including, without limitation, travel, printing, legal and accounting fees and expenses) incurred in connection with the organization and funding of the Partnership and the General Partner. 2.1.28 PARTNER INTEREST means a Partner's total ownership and interest in the Partnership based upon such Partner's aggregate Capital Contributions relative to the Capital Contributions of all Partners. 2.1.29 PARTNERSHIP EXPENSES means Partnership Expenses Allocable to Portfolio Investments and Partnership Expenses Not Allocable to Portfolio Investments. 2.1.30 PARTNERSHIP EXPENSES ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses directly relating to any Portfolio Investment (to the extent not borne or reimbursed by a Portfolio Company), including, but not limited to: 2.1.30.1 all costs and expenses attributable to acquiring, holding, monitoring and disposing of the Partnership's investments (including, but not limited to, registration expenses and brokerage, finders', custodial and other fees); 2.1.30.2 legal, accounting, auditing and other fees and expenses directly relating to specific Portfolio Investments (including, but not limited to, expenses associated with negotiating, consummating, monitoring and disposing of the Partnership's investments); and 2.1.30.3 extraordinary expenses of the Partnership directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements), but not including the Management Fee, Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.31 PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses relating to the Partnership's activities and business other than Partnership Expenses Allocable to Portfolio Investments, including, but not limited to: 2.1.31.1 legal, accounting, auditing and other fees and expenses (including, but not limited to, expenses associated with the preparation of Partnership financial statements, tax returns and forms K-1); 2.1.31.2 extraordinary expenses of the Partnership not directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements); and 2.1.31.3 the Management Fee, but not including Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.32 PAYOUT with respect to each Limited Partner (other than a Defaulting Partner) means the time when such Limited Partner has received cumulative distributions from the Partnership (regardless of the source or character thereof) in an amount equal to its aggregate Capital Contributions. If a distribution of cash or securities causes the Partnership to reach and exceed Payout, the portion of the amount distributed which was necessary to reach Payout will be deemed to have been distributed before Payout, and any remaining amount will be deemed to have been distributed after Payout. 2.1.33 PERSON means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 2.1.34 PORTFOLIO COMPANY means any company in which the Partnership has an investment (excluding for such purposes Holdback Securities or a Short-Term Investment). 2.1.35 PORTFOLIO COMPANY FEES means: 2.1.35.1 all compensation (whether in cash or securities) directly or indirectly received by the General Partner, any of its managers, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but excluding any amount received by a manager of the General Partner) acting, directly or indirectly, on behalf of the Partnership from any Portfolio Company, whether as director fees, management fees, consultant fees or investment banking fees; and 2.1.35.2 all breakup fees, litigation proceeds or commitment fees received by the General Partner or any of its managers from transactions not consummated by the Partnership (in each case, net of all amounts necessary to reimburse the General Partner, each of its managers, the Management Agent and any employee or agent of the Management Agent for all costs and expenses incurred by any of them in connection with consummated or unconsummated transactions or in connection with generating any such fees and not previously reimbursed), but not including any amount received by the General Partner, any of its managers, members, employees or agents from Portfolio Companies as reimbursement for out-of-pocket expenses directly related to such Portfolio Companies. 2.1.36 PORTFOLIO INVESTMENTS means any investments held by the Partnership other than Short-Term Investments. 2.1.37 PRIME RATE means, on any date, a variable rate per annum equal to the rate of interest published, from time to time by the Wall Street Journal as the "prime rate" at large U.S. money center banks. 2.1.38 REALIZED INVESTMENT GAIN means: 2.1.38.1 the excess, if any, of the proceeds from the sale, redemption or other disposition of any Portfolio Investments over the Basis of such Portfolio Investments; and 2.1.38.2 the excess, if any, of the value (as determined pursuant to Section 8) of any Portfolio Investments distributed to the Partners over the Basis of such Portfolio Investments. 2.1.39 REALIZED INVESTMENT LOSS means: 2.1.39.1 the deficiency, if any, of the proceeds from the sale, redemption or other disposition of Portfolio Investments as compared to the Basis of such Portfolio Investments; 2.1.39.2 the deficiency, if any, of the value (as determined pursuant to Section 9) of any Portfolio Investments distributed to the Partners as compared to the Basis of such Portfolio Investments; and 2.1.39.3 the amount, as determined by the General Partner, by which Portfolio Investments have permanently declined in value as compared to the Basis of such Portfolio Investments. 2.1.40 SECURITIES ACT means the Securities Act of 1933, as amended. 2.1.41 SHORT-TERM INVESTMENT INCOME means the income earned on Short-Term Investments, including any gains and net of any losses from dispositions of Short-Term Investments and also net of any costs and expenses directly attributable thereto. 2.1.42 SHORT-TERM INVESTMENTS means commercial paper, governmental obligations, money market instruments, certificates of deposit and other similar obligations and securities, in each case having a maturity of one year or less at the time of purchase by the Partnership. 2.1.43 TAX DISTRIBUTIONS means distributions made to the General Partner with respect to a fiscal year equal to the amount by which the General Partner's cumulative estimated tax liabilities for the fiscal year and all prior fiscal years exceeds the aggregate amount of distributions made to the General Partner: 2.1.43.1 with respect to all prior fiscal years; and 2.1.43.2 with respect to the current fiscal year under Section 3.2.1. For this purpose, the General Partner's cumulative estimated tax liabilities means the product of the aggregate amount by which the Net Profits from Portfolio Investments included in the Carried Interest exceeds the Net Losses from Portfolio Investments included in the Carried Interest, times the highest marginal federal, state and local tax rates applicable to any of the General Partner's members and former members. 2.1.44 TAX EXEMPT PARTNER means any Limited Partner which is exempt from income taxation under ss.501(a) of the Code. 2.1.45 UBTI means unrelated business taxable income as defined in ss.512 and ss.514 of the Code. 2.2 DETERMINATIONS 2.2.1 An "exchange of securities" will be treated as a sale if under generally accepted accounting principles the Partnership realizes gain or loss on such exchange, in which case the Basis of the securities received in the exchange will be adjusted to take cognizance of the gain or loss from such exchange. 2.2.2Any determination to be made based upon a specified proportion of the "Limited Partner Interests" shall be based upon the Limited Partners' Capital Contributions (less amounts returned pursuant to Section 2.3.2), excluding, for purposes of any Applicable Section (as such term is defined in Section 6.9 below) and any vote, approval or consent to the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law for which an election was made under Section 6.9, that portion of each Limited Partner's Capital Account which represents each such Limited Partner's Excess Interest (as such term is defined in Section 6.9); provided that for purposes of this Section 2.2.2 and except as set forth in Section 12.1, interests held by a Defaulting Partner shall be disregarded. 2.3 CAPITAL CONTRIBUTION COMMITMENT 2.3.1 Each Partner agrees to make cash contributions (pro rata based upon the Partners' respective Commitments) to the capital of the Partnership in the aggregate amount equal to its Commitment by contributing installments in cash as follows: 50% of its Commitment on the Effective Date and thereafter, upon at least 30 days notice ("Capital Call Notice"). Each Capital Contribution will be made by delivery of a check made payable to the Partnership or by means of a wire transfer of funds to an account designated by the General Partner. 2.3.2 The General Partner may cause the Partnership to return to the Partners all or any portion of any Capital Contribution to the Partnership which is not invested in a Portfolio Company or used to pay Partnership Expenses (including Management Fees) or Organizational Expenses. Each such return of Capital Contributions shall be made pro rata among all Partners in the same proportion as the Partners made such Capital Contributions and, so long as such Capital Contributions are returned to the Partners on or before the 120th day following the date such Capital Contributions were due (as set forth in the Capital Call Notice pursuant to which such Capital Contributions were made by the Partners to the Partnership), such returned Capital Contributions may be called again by the General Partner according to the provisions of this Section 2.3 as if such returned Capital Contributions had not been previously called. 2.4 CAPITAL ACCOUNTS A capital account ("Capital Account") will be established for each Partner on the books of the Partnership and will be adjusted as follows: 2.4.1 CAPITAL CONTRIBUTIONS A Partner's Capital Contribution will be credited to its Capital Account when received by the Partnership; 2.4.2 SHORT-TERM INVESTMENT INCOME Except as otherwise provided in 2.4.5 below, Short-Term Investment Income earned in each quarterly period will be credited to, and Short-Term Investment Loss for each quarterly period shall be debited against, the Capital Accounts of the Partners pro rata according to their respective Partner Interests; 2.4.3 NET PROFITS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Profits from Portfolio Investments, such Net Profits from Portfolio Investments shall be credited: 2.4.3.1 85% to the Capital Accounts of the Partners pro rata according to their respective Partner Interests; and 2.4.3.2 15% to the Capital Account of the General Partner; 2.4.4 NET LOSS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Loss from Portfolio Investments, such Net Loss from Portfolio Investments shall be debited: 2.4.4.1 85% against the Capital Accounts of all Partners pro rata according to their respective Partner Interests; and 2.4.4.2 15% against the Capital Account of the General Partner; 2.4.5 SPECIAL GENERAL PARTNER ALLOCATIONS Notwithstanding anything in this Section 2.4, if at any time the General Partner's Capital Account is reduced to zero, 100% of Net Loss from Portfolio Investments, Organizational Expenses and Partnership Expenses Not Allocable to Portfolio Investments ("Excess Losses") will be debited against the Capital Accounts of the Limited Partners pro rata according to their respective Partner Interests. With respect to each quarterly period thereafter 100% of Short-Term Investment Income and Net Profits from Portfolio Investments will be credited to the Capital Accounts of the Limited Partners in proportion to their respective Partner Interests, until the Excess Losses have been recouped (i.e., an amount has been allocated 100% to the Limited Partners equal to the amount of the Excess Losses), at which time the allocations of Short-Term Investment Income and Net Profits from Portfolio Investments set forth in 2.4.2 and 2.4.3 above, respectively, will be reinstated; 2.4.6 PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS Partnership Expenses Not Allocable to Portfolio Investments will be debited against the Capital Accounts of Partners pro rata according to their respective Partner Interests. If Limited Partners are admitted subsequent to the formation of the Partnership pursuant to Section 6.5, the allocation of Organization Expenses and Partnership Expenses Not Allocable to Portfolio Investments will be adjusted as if the subsequently admitted Limited Partners had been admitted at the time of formation, except that the amount of interest described in Section 6.5 will be credited to and, upon payment thereof to the Management Agent, debited from the Capital Accounts of such Additional Limited Partners; 2.4.7 ORGANIZATIONAL EXPENSES Organizational expenses will be debited against the Capital Account of Alliance; 2.4.8 DISTRIBUTIONS DEBITED AGAINST CAPITAL ACCOUNT Any amount distributed to a Partner will be debited against such Partner's Capital Account. The General Partner normally will adjust the Partnership's Capital Accounts at the end of each quarterly period, but may adjust them more often if a new Partner is admitted to the Partnership or circumstances otherwise make it advisable in the General Partner's judgment; 2.4.9DISTRIBUTIONS IN KIND If any securities are to be distributed in kind to the Partners as provided in Section 3, such securities will first be written up or down to their value (as determined pursuant to Section 8 as of the date of such distribution), thus creating Realized Investment Gain or Realized Investment Loss (if any) , which shall be allocated in accordance with Section 2.4 to the Capital Accounts of the Partners, and upon the distribution of such securities to such Limited Partners, the value of such securities shall be debited, in accordance with Section 2.4, to the Capital Accounts of the Partners. 3. DISTRIBUTIONS 3.1 DISTRIBUTION POLICY The General Partner may in its sole discretion make distributions of cash or securities at any time and from time to time; provided, however, that no securities will be distributed in kind to the Partners until the earlier to occur of: 3.1.1such time as such securities may be sold by or for the account of any Partner pursuant to Rule 144 promulgated under the Securities Act, or any successor rule; or 3.1.2the final distribution of the assets of the Partnership to the Partners pursuant to Section 7.4. 3.2 CASH DISTRIBUTION At any time when Payout is not achieved, all distributions of cash shall be made to the Partners pro rata according to their Partner Interests, except that the General Partner shall also be entitled to receive Tax Distributions. At any time when Payout is achieved, all distributions of cash shall be made to the Partners in the following priority: 3.2.1First, 100% of each distribution shall be made to the General Partner until the General Partner has received distributions pursuant to this Section 3.2.1, or as Tax Distributions, in aggregate amount equal to 15% of Net Profits from Portfolio Investments for the period from the Effective Date to the date of such distribution; and 3.2.2Second, after the required distribution pursuant to 3.2.1 above, each distribution will be made to all Partners pro rata according to their respective Capital Accounts; provided that the amount distributed to the General Partner (other than Tax Distributions) shall in no event cause the General Partner's Capital Account to be reduced below zero and that any amount which is not distributed to the General Partner because of this provision shall be distributed to the Limited Partners pro rata according to their respective Partner Interests. 3.3 DISTRIBUTIONS IN KIND 3.3.1Subject to the terms of Sections 3.3.2 and 7.4, all distributions of securities shall be made as follows: 3.3.1.1 First, such securities will be distributed to the Partners pro rata according to their Partner Interests until an amount of such securities has been distributed to the Partners as has an aggregate value, as determined pursuant to Section 8, equal to the Partnership's Basis (as determined in accordance with the Code and as adjusted to reflect the effects of any transaction described in 2.2.2.1) in the total amount of such property to be distributed to the Partners pursuant to this Section 3.3.1.1 and 3.3.1.2 below, plus all Management Fees paid by the Partnership (to the extent not previously reimbursed); 3.3.1.2 Second, such securities will be distributed to Alliance until an amount of such securities has been distributed to Alliance as has an aggregate value equal to the Organizational Expenses paid by Alliance (to the extent not previously reimbursed); and 3.3.1.3 Third, such securities will be distributed 85% to the Partners pro rata according to their Partner Interests and, subject to 3.3.2 below, and 15% to the General Partner. 3.3.2At any time when Payout is not achieved, unless otherwise agreed by the General Partner, the Partnership shall not deliver to the General Partner, but rather will hold for the benefit of the General Partner and as security for the obligations of the General Partner pursuant to Section 7.3.3, all property otherwise to be distributed pursuant to 3.3.1.2 above ("Holdback Securities"); provided that at such time as Payout is achieved, the Partnership will immediately deliver all Holdback Securities to the General Partner. Notwithstanding the foregoing, for all purposes of this Agreement, such Holdback Securities will be deemed to have been distributed to the General Partner. Accordingly, e.g., the Capital Account of the General Partner will be reduced by the value of the Holdback Securities upon such distribution, such Holdback Securities will be the property of the General Partner and not of the Partnership, and there will be no adjustment to any Capital Account of any Partner on account of any change in the value of Holdback Securities subsequent to such distribution (unless and to the extent all or any portion of such Holdback Securities are contributed to the Partnership pursuant to Section 7.3.3). At the election of the General Partner, the Partnership will sell or exchange all or any portion of the Holdback Securities as requested by the General Partner; provided that such sale or exchange is with an unaffiliated third party and that the proceeds of such sale or exchange (net of any expenses of such sale, if the proceeds thereof are in cash) will be delivered to and held by the Partnership until Payout is achieved; and provided, further, that such proceeds will be paid to the General Partner promptly after Payout is achieved. 4. MANAGEMENT AGENT, MANAGEMENT FEE AND ORGANIZATIONAL EXPENSES 4.1 MANAGEMENT AGENT The General Partner may cause the Partnership to appoint a Management Agent to manage the affairs of the Partnership. The General Partner shall have the duty to manage the affairs of the Partnership during any period when there is no Management Agent, and shall be entitled to receive the Management Fee payable with respect to any period during which it so manages (as well as the amounts described in 4.2.5 and 4.2.6 below) . The appointment of the Management Agent shall not in any way relieve the General Partner of its responsibilities and authority vested pursuant to Section 5.1. The General Partner or the Management Agent shall pay: 4.1.1all ordinary overhead and administrative expenses of the Partnership (including salaries and related benefits, rent, travel, entertainment and equipment expenses but excluding any Partnership Expenses and any Organizational Expenses reimbursable under Section 4.3) incurred by the General Partner, the Management Agent or any of their respective managers, members, agents, employees or stockholders (to the extent not borne or reimbursed by a Portfolio Company) in connection with: 4.1.1.1 identifying and investigating investment opportunities for the Partnership 4.1.1.2 monitoring the Partnership's investments; and 4.1.1.3 providing Portfolio Company reports and information to the Limited Partners; and 4.1.2Organizational Expenses to the extent not reimbursed under Section 4.3. 4.2 MANAGEMENT FEE 4.2.1GENERAL Subject to Section 4.1, during each consecutive twelve-month or lesser period from and after the Effective Date (each such twelve-month period, a "Management Fee Year"), the Partnership will pay the Management Agent in advance, commencing with a payment on the Effective Date for the period from the Effective Date up to and including December 31, 1999, and thereafter on a quarterly basis on January 1, April 1, July 1 and October 1 of each year until final distribution of the Partnership's assets pursuant to Section 7.4 below (or as otherwise provided in Section 4.2.5 below), a fee as calculated below ("Management Fee"), as compensation for managing the affairs of the Partnership. 4.2.2CALCULATION OF MANAGEMENT FEE The Management Fee shall be 1.00% of the aggregate Commitments per year for the term of the Agreement, calculated in each year including the Commitments of any Limited Partners admitted pursuant to Section 6.5 as if made on the Effective Date. In addition, if in connection with admission of any Additional Limited Partner, any portion of the Management Fee is paid later than as specified in Section 4.2.1 above, the Management Fee will be adjusted to include, in respect of any such delayed amount, interest, from the date as of which such delayed amount was specified for payment through the date of actual payment thereof, at a rate equal to the Prime Rate plus two percentage points per annum. 4.2.3PARTIAL YEAR The Management Fee in any partial year will be pro-rated on a daily basis according to the actual number of days in such period. 4.2.4PORTFOLIO COMPANY FEES Portfolio Company Fees received by the General Partner, any of its general partners, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but not by any amounts received by a manager of the General Partner), shall be deducted from the management fees paid by the Alliance Funds; provided that, with respect to Portfolio Company Fees comprised of stock or rights convertible into or exercisable or exchangeable for stock, so long as the recipient thereof executes and delivers to the General Partner an agreement to hold such property or the proceeds thereof for the benefit of the Management Agent, such property will not be deemed to be received, for purposes of the foregoing, and therefore will not be deducted, until such time as, and only to the extent that, the recipient thereof realizes cash proceeds with respect to such property, whether upon the sale or other transfer of such property or as distributions with respect thereto; and provided, further, that any such Portfolio Company Fees held as of the ninth anniversary of the Effective Date and not previously deemed received pursuant to this sentence will be deemed to have been received as of such date. 4.2.5EARLY TERMINATION In the event of an early termination of the Partnership pursuant to Section 7.2, the Management Fee (computed pursuant to Section 4.2.2 above) will be payable to the Management Agent through the date six months after the final distribution in connection therewith. 4.2.6ORGANIZATIONAL EXPENSES Alliance will pay the organizational expenses and set-up expenses of the Alliance Funds. The Alliance Funds will pay expenses directly related to the consummation of an investment whether or not consummated, the legal, custodial, and accounting expenses, and certain other related expenses of the Alliance Funds. The General Partner will pay expenses incurred in connection with investigating investment opportunities and monitoring investments, and will provide for normal operating overhead, including without limitation salaries, office space, and travel expenses for all personnel of the General Manager. 4.2.7NO LIABILITY TO PARTNERSHIP OR PARTNERS Neither the Management Agent nor any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (nor any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the Management Agent, or on behalf of the Management Agent, with respect to the Partnership or for any action taken, or omitted to be taken, by the Management Agent, or any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (or any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates), so long as such person: 4.2.7.1 acted in good faith 4.2.7.2 acted in a manner reasonably believed to be in the best interests of the Partnership; and 4.2.7.3 was neither grossly negligent nor engaged in willful malfeasance. 5. GENERAL PARTNER 5.1 MANAGEMENT AUTHORITY 5.1.1The management of the Partnership will be vested exclusively in the General Partner, and the General Partner will have full control over the business and affairs of the Partnership. The General Partner will have the power on behalf and in the name of the Partnership to carry out any and all of the objects and purposes of the Partnership and to perform all acts and enter into and perform all contracts and other undertakings which, in its sole discretion, it deems necessary or advisable or incidental thereto, including the power to acquire or dispose of any security (including marketable securities). 5.1.2All matters concerning: 5.1.2.1 the allocation of Short-Term Investment Income, Current Income, Realized Investment Gain, Realized Investment Loss, Partnership Expenses, Partnership Expenses Allocable to Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments, Organizational Expenses, Carried Interest and the distribution of net proceeds and the return of capital among the Partners, including the taxes thereon; 5.1.2.2 accounting procedures and determinations, estimates of the amount of Management Fees payable by any Defaulting Partner or Regulated Partner; and 5.1.2.3 other determinations not specifically and expressly provided for by the terms of this Agreement, shall be determined by the General Partner in accordance with its reasonable interpretation of the provisions of this Agreement, whose determination shall be final and conclusive as to all the Partners. 5.2 LIMITATION ON INVESTMENTs The General Partner will not invest (including guarantees of a Portfolio Company's or its subsidiary's obligations) more than 20% of the Partnership's aggregate Commitments in any one Portfolio Company without the prior written consent of Limited Partners holding 80% of the Limited Partner Interests. 5.3 UBTI The General Partner shall use its reasonable efforts to ensure that it does not knowingly engage in a transaction which will cause any Tax Exempt Partner to recognize UBTI as a result of its investment in the Partnership. 5.4 PERMITTED CO-INVESTMENTS BY CERTAIN LIMITED PARTNERS, THE GENERAL PARTNER AND RELATED PARTIES; DIRECTOR SHARES 5.4.1The General Partner will not purchase securities in Portfolio Companies. Nothing in this Agreement will restrict the General Partner from permitting certain Limited Partners (and not necessarily all Limited Partners), managers and members of the General Partner and employees and stockholders of the Management Agent (collectively, the "Co-investors" and each individually a "Co-investor") to invest in Portfolio Companies; provided that: 5.4.1.1 in the case of each such investment by one or more Co-investors in a Portfolio Company (a "Co-investment"), each of the Co-investors purchases, contemporaneously with the purchase by the Partnership, securities issued by such Portfolio Company which are of the same class as purchased by the Partnership (and if the Partnership purchases more than one class of securities issued by such Portfolio Company, each of such Co-investors purchases an amount of each such class in the same proportions as purchased at such time by the Partnership) at a price and on other terms which are the same as, or less favorable to the Co-investors than, the price and terms at or on which the Partnership is then purchasing securities of such Portfolio Company; provided that in no event will a Co-investor be obligated, solely on account of having made a Co-investment in a Portfolio Company, to purchase additional securities of such Portfolio Company, whether or not the Partnership subsequently does so; and 5.4.1.2 the aggregate amounts invested by any managers and members of the General Partner in any Portfolio Company will not exceed 10% of the aggregate amount invested by the Partnership in such Portfolio Company at such time. 5.4.2Subject to Section 5.4.1 above, nothing in this Agreement will restrict managers, members, employees and agents of the General Partner and the Management Agent from acquiring shares of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, in connection with serving on the boards of directors of, or in similar capacities for, such companies. In no event will the receipt by any manager of the General Partner of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, be deemed to be Portfolio Company Fees. 5.5 NO TRANSFER OF GENERAL PARTNERSHIP INTEREST; NO WITHDRAWAL OR LOANS The General Partner will not sell, assign, pledge, mortgage or otherwise dispose of its General Partner interest in the Partnership and will not borrow or withdraw any amount from the Partnership. 5.6 NO LIABILITY TO LIMITED PARTNERS Neither the General Partner nor any manager, member, employee, agent or affiliate of the General Partner (nor any of their respective shareholders, partners, directors, officers, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the General Partner, or on behalf of the General Partner, with respect to the Partnership or for any action taken, or omitted to be taken, by the General Partner, or any manager, member, employee, agent or affiliate of the General Partner (or any of their respective shareholders, partners, directors, officers, employees, agents or affiliates), so long as such person: 5.6.1acted in good faith; 5.6.2acted in a manner reasonably believed to be in the best interests of the Partnership; and 5.6.3was neither grossly negligent nor engaged in willful malfeasance. 5.7 INDEMNIFICATION OF GENERAL PARTNER AND OTHERS The Partnership will indemnify the General Partner, each of its managers and members and their respective partners, employees, agents and affiliates, including without limitation the Management Agent and the partners, stockholders and employees of the Management Agent, against any losses, liabilities, damages or expenses (including amounts paid for reasonable attorneys fees, judgments and settlements in connection with any threatened, pending or completed action, suit or proceeding but excluding the amounts described in Section 4.1 as payable by the General Partner or the Management Agent) to which any of such persons may become subject in connection with the Partnership or in connection with any involvement with a Portfolio Company (including serving as an officer, director, consultant or employee of any Portfolio Company) directly or indirectly on behalf of the Partnership but, in each case, only to the extent that such person: 5.7.1acted in good faith 5.7.2acted in what such person believed to be in the best interests of the Partnership or the Portfolio Company (as the case may be); and 5.7.3was neither grossly negligent nor engaged in willful malfeasance. The Partnership may, in the sole judgment of the General Partner, pay the expenses of any Person indemnifiable under this Section 5.7 in advance of the final disposition of any proceeding, so long as: 5.7.4the General Partner has a good faith belief such expenses are indemnifiable; and 5.7.5the General Partner receives a written agreement by such Person to repay the full amount advanced if there is a final determination that such Person did not satisfy the standards set forth in Sections 5.7.1 through 5.7.3 immediately above or that such Person is not otherwise entitled to indemnification as provided herein. 5.8 FORMATION OF NEW FUND OR BUSINESS ENDEAVOR No Limited Partner will, on account of entering into this Agreement or on account of its status as a Limited Partner of the Partnership, have any interest in the business endeavors of the other Partners other than its interest in the Partnership, and no Partner is, on account of entering into this Agreement or on account of its status as a Partner of the Partnership, restricted from entering into any future business activity, including with any other Partner; provided that the General Partner may not hereafter close the formation of a fund to invest primarily in equity securities until the time at which at least 75% of the Partners' aggregate Commitments have been invested, committed, reserved for follow-on investment, otherwise allocated for investment or used, or reserved to be used, to pay Partnership Expenses, Management Fees or Organizational Expenses. 5.9 INTEREST AS A LIMITED PARTNER To the extent that the General Partner acquires the interest of a Defaulting Partner or a Regulated Partner or any other Limited Partner, the General Partner will be deemed to be a Limited Partner with respect to such interest for all purposes of this Agreement. 6. LIMITED PARTNERS 6.1 LIMITED LIABILITY The Limited Partners will not be personally liable for any obligations of the Partnership and will have no obligation to make contributions to the Partnership in excess of their respective Commitments specified in Schedule I attached hereto, except to the extent set forth in the California Partnership Act; provided that a Limited Partner shall be required to return the portion of any distribution made to it in error (i.e., a distribution inconsistent with the terms of this Agreement). The Limited Partners will take no part in the control, direction or operation of the affairs of the Partnership and will have no power to bind the Partnership. 6.2 TRANSFER OF LIMITED PARTNERSHIP INTEREST A Limited Partner may not sell, assign, transfer, pledge, mortgage or otherwise dispose of all or any of its interest in the Partnership (including any transfer or assignment of all or any part of its interest to a person who becomes an assignee of a beneficial interest in the Partnership even though not becoming a substitute Limited Partner) unless the General Partner has consented to such transfer or assignment in writing. For purposes of this Section 6.2, a change in any trustee or fiduciary of a Limited Partner will not be deemed to be an assignment or transfer of a limited partnership interest pursuant to this Agreement, provided any such replacement trustee or fiduciary is also a fiduciary as defined under applicable state law and provided that income and loss allocable to the Limited Partner of the Partnership will continue to be included in the same filings under the same employee identification number with the Internal Revenue Service. Accordingly, such a change in a trustee or fiduciary may be made without the prior written consent of the General Partner, provided that the Limited Partner agrees to provide prompt written notice of such change to the General Partner. The voting rights of any Limited Partner's interest shall automatically terminate upon any transfer of such interest to a trust, heir, beneficiary, guardian or conservator or upon any other transfer if the transferor no longer retains control over such voting rights and the General Partner has not consented pursuant to Section 6.2(b) to such transferee becoming a substitute Limited Partner. No consent of any other Limited Partner will be required as a condition precedent to any such transfer or substitution. As a condition to any transfer of a Limited Partnership interest (including a transfer not requiring the consent of the General Partner), the transferor and the transferee shall provide such legal opinions and documentation as the General Partner shall reasonably request; provided that if the transfer is to be made from a Limited Partner to a co-trustee or trustee as contemplated above, an officer's certificate in form reasonably satisfactory to the General Partner shall be delivered by the Limited Partner to the General Partner in lieu of such legal opinions and other documentation. 6.2.1Notwithstanding anything to the contrary contained in this Section 6.2 or Section 6.10, a transferee or assignee will not become a substitute Limited Partner without the consent of the General Partner, in its sole discretion, and without executing and delivering to the General Partner a copy of this Agreement or amendment hereto in form and substance satisfactory to the General Partner in its sole discretion. Any substitute Limited Partner admitted to the Partnership with the consent of the General Partner will succeed to all rights and be subject to all the obligations of the transferring or assigning Limited Partner with respect to the interest to which such Limited Partner was substituted. 6.2.2The transferor and transferee of any Limited Partner's interest shall be jointly and severally obligated to reimburse the General Partner and the Partnership for all reasonable expenses (including reasonable attorneys' fees and expenses) of any transfer or proposed transfer of a Limited Partner's interest, whether or not consummated. 6.2.3The transferee of any Limited Partner interest shall be treated as having made all of the Capital Contributions made by, and received all of the distributions received by, the transferor of such interest. 6.2.4Anything in this Agreement to the contrary notwithstanding, no Partnership interest shall be subdivided for sale or assignment (including any assignment of a profits and loss interest) if such subdivision results in the creation of any Partnership interest (or interest in the Partnership's profits and losses) which would have had an initial offering price smaller than the minimum amount prescribed in Internal Revenue Service rules or Treasury regulations setting forth a private-placement safe harbor under the publicly traded partnership provisions of the Code. 6.3 NO WITHDRAWAL Subject to the provisions of Sections 6.2, and 6.10, no Limited Partner may withdraw as a Partner of the Partnership, nor may a Limited Partner be required to withdraw, nor may a Limited Partner borrow or withdraw any portion of its Capital Account from the Partnership. 6.4 NO TERMINATION The substitution, death, insanity, dissolution (whether voluntary or involuntary) or bankruptcy of a Limited Partner will not affect the existence of the Partnership, and the Partnership will continue for the term of this Agreement until its existence is terminated as provided herein. 6.5 SUBSEQUENT LIMITED PARTNERS The General Partner may accept additional Limited Partners ("Additional Limited Partners") up to and including the three month anniversary of the Effective Date; provided that the aggregate Commitments do not at any time exceed $25,000,000. Each Additional Limited Partner will be treated as having been a party to this Agreement as of the date hereof for all purposes (including allocation of Management Fees, Organizational Expenses, income, profits and loss); provided that each such Additional Limited Partner shall contribute to the Partnership, on the date of its admission to the Partnership, an amount of its Commitment equal to its portion of all Capital Contributions made by the other Partners to the Partnership prior to such admission date, plus interest from the date of such earlier Capital Contributions to the date of such Additional Limited Partner's admission to the Partnership at a rate equal to the greater of: 6.5.110% per annum: or 6.5.2the Prime Rate plus two percentage points per annum. For purposes of this Section 6.5, a Limited Partner that increases its Commitment shall be treated as an Additional Limited Partner with respect to the amount by which its Commitment increased. Upon the admittance of an Additional Limited Partner or the increase in a Limited Partner's Commitment, the General Partner may modify Schedule I attached hereto to reflect such admittance or increase. 6.6 NO ERISA ENTITIES Investment in the Alliance Funds is not open to institutions, pension plans and other funds subject to ERISA. 6.7 INDEMNIFICATION AND REIMBURSEMENT FOR PAYMENTS ON BEHALF OF A PARTNER 6.7.1If the Partnership is obligated to pay any amount to a governmental agency or to any other person (or otherwise makes a payment) because of a Partner's status or otherwise specifically attributable to a Partner (including, without limitation, federal withholding taxes with respect to foreign partners, state personal property taxes, state unincorporated business taxes, etc.), then such Partner ("Indemnifying Partner") shall indemnify the Partnership in full for the entire amount paid (including, without limitation, any interest, penalties and expenses associated with such payment). At the option of the General Partner, the amount to be indemnified may be charged against the Capital Account of the Indemnifying Partner and, at the option of the General Partner, either: 6.7.1.1 promptly upon notification of an obligation to indemnify the Partnership, the Indemnifying Partner shall make a cash payment to the Partnership equal to the full amount to be indemnified (and the amount paid shall be added to the Indemnifying Partner's Capital Account but shall not be deemed a Capital Contribution hereunder); or 6.7.1.2 the Partnership shall reduce subsequent distributions which would otherwise be made to the Indemnifying Partner until the Partnership has recovered the amount to be indemnified (provided that the amount of such reduction shall be deemed to have been distributed for all purposes of this Agreement, but such deemed distribution shall not further reduce the Indemnifying Partner's Capital Account). 6.7.2A Partner's obligation to make contributions to the Partnership under this Section 6.7 shall survive the termination, dissolution, liquidation and winding up of the Partnership and, for purposes of this Section 6.7, the Partnership shall be treated as continuing in existence. The Partnership may pursue and enforce all rights and remedies it may have against each Partner under this Section 6.7, including instituting a lawsuit to collect such contribution with interest calculated at a rate equal to the Prime Rate plus six percentage points per annum (but not in excess of the highest rate per annum permitted by law). 6.8 SECTION 754 ELECTION Upon the written request of Limited Partners holding a majority of the Limited Partner Interests, the General Partner may, in the General Partner's sole discretion, make an election provided for in ss.754 of the Code, if then permitted by applicable law. 6.9 BANK HOLDING COMPANY ACT OF 1956 With respect to any matter requiring the vote, approval or consent of Limited Partners under this Agreement, each of the Limited Partners subject to the provisions of the Bank Holding Company Act of 1956, as amended, may irrevocably elect in writing to the General Partner to terminate their rights hereunder or under applicable law (to the extent waivable) to vote, approve or consent to: 6.9.1counsel for Partnership (as contemplated in the definition of "Opinion of the Partnership's Counsel") and any and all of the matters referred to in Sections 6.8, 7.2, 8.3 and 12.1 ("Applicable Sections") of the Agreement; and 6.9.2the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law, with respect to such Limited Partner's interest (or any transferee thereof) in the Partnership in excess of five percent (an "Excess Interest"). Upon the receipt by the General Partner of such irrevocable written election, each such Limited Partner so electing may not (with respect to their Excess Interest) vote on, approve of or consent to its rights under applicable law on the matters contained in the Applicable Sections referred to in such election and such election will be binding upon any successor to such Excess Interest or any portion thereof. 6.10 LIMITED PARTNER'S DEFAULT ON COMMITMENT If any Limited Partner (a "Defaulting Partner") fails to make full payment of any portion of its Commitment when due and such failure is not cured within ten business days after receipt by such Limited Partner of written notice from the General Partner with respect to such failure to pay, the General Partner may in its discretion undertake any one or more of the following steps: 6.10.1 The General Partner may assist the Defaulting Partner in finding a buyer for the Defaulting Partner's Partnership interest, provided that the General Partner will have no obligation to contact any particular Limited Partner or other person with regard to such sale. 6.10.2 The Partnership may pursue and enforce all rights and remedies the Partnership may have against such Defaulting Partner with respect thereto, including a lawsuit to collect the overdue portion of the Commitment and any other amounts due the Partnership or General Partner hereunder, with interest at a rate equal to the Prime Rate plus six percentage points (but not in excess of the highest rate per annum permitted by law). 6.10.3 The General Partner may offer the Defaulting Partner's interest to the Partners (other than any Defaulting Partners) pro rata in accordance with their Commitments on the terms set forth below. If any Partner does not elect to purchase the entire interest offered to it, the remaining interest allocable to the Partners will be re-offered pro rata to the Partners who have purchased the entire interest offered to them until either all of such interest is acquired or no Partner wishes to make a further investment. At the closing of such purchase (on a date and at a place designated by the General Partner), each purchasing Partner shall: 6.10.3.1 deliver a non-interest bearing, non-recourse (except to the extent of the Partnership interest purchased and the proceeds therefrom) ten-year promissory note (in a form approved by the General Partner) payable to the Defaulting Partner in an amount equal to the portion of the Defaulting Partner's Capital Account being purchased by such Partner; and 6.10.3.2 assume the portion of the Defaulting Partner's obligation to make both defaulted and further Capital Contributions pursuant to its Commitment which is equal to the portion of the Defaulting Partner's interest being purchased by such Partner. The General Partner will handle the mechanics of making the offers set forth herein and will in its discretion impose reasonable time limits for acceptance. 6.10.4 If the entire Defaulting Partner's interest is not purchased in the manner set forth in Section 6.10.3 above, the General Partner in its sole discretion may offer the remaining interest either: 6.10.4.1 to a third party or parties on the same terms as originally offered to the Partners pursuant to Section 6.10.3 above (in which case such third party or parties will, as a condition of purchasing such interest, become a party to this Agreement); or 6.10.4.2 to the Partners in the manner provided in Section 6.10.3 above, but with no requirement to assume the Defaulting Partner's obligation to make further capital contributions pursuant to its Commitment, in which case the Defaulting Partner's Commitment shall be deemed reduced (effective on the date of the default) to the amount actually paid in and the aggregate Commitments of the Partnership shall be reduced by the amount of such Defaulting Partner's remaining contributions to be made pursuant to its Commitment. 6.10.5 In addition to, or instead of, the other remedies and undertakings available to the General Partner pursuant to this Section 6.10, the General Partner may, in its sole discretion, reduce (effective on the date of the default, after giving effect to the ten day cure period) any portion of such Defaulting Partner's Commitment (which has not been assumed by another Partner) to the amount of the Capital Contributions (which have not been purchased by another Partner) made by such Defaulting Partner (net of distributions pursuant to Section 3.2.2) and the aggregate Commitments of the Partnership shall be commensurately reduced. 6.10.6 Notwithstanding anything contained herein to the contrary, from and after any date on which a Defaulting Partner's Commitment is reduced pursuant to Section 6.10.5 above: 6.10.6.1 such Defaulting Partner will have no right to receive any distributions, except for distributions made upon the Partnership's liquidation; 6.10.6.2 such Defaulting Partner's Capital Account will not be credited with any Net Profits from Portfolio Investments or Short-Term Investment Income which shall instead be allocated to the Partners (other that any Defaulting Partners) in accordance with Sections 2.4.2 or 2.4.3, as appropriate (and as adjusted to treat the Defaulting Partner's Capital Contribution as equal to zero); 6.10.6.3 until such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.3.1 such Defaulting Partner's Capital Account shall continue to be debited in accordance with Section 2.4.4 for such Defaulting Partner's share of Net Loss from Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments and Organizational Expenses as if there had been no reduction in such Defaulting Partner's Commitment or Capital Contributions; and 6.10.6.3.2 the Management Fee payable by the Partners shall be calculated as if there had been no reduction in such Defaulting Partner's Commitment; and 6.10.6.4 once such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.4.1 such Defaulting Partner's Commitment shall be reduced to zero for all purposes of the Agreement, including the calculation of the Partnership's aggregate Commitments and determination of the Management Fee: and 6.10.6.4.2 such Defaulting Partner shall be liable each quarter to the General Partner or Management Agent for an amount equal to its portion of the Management Fee for such quarter as if there had been no reduction in such Defaulting Partner's Commitment. 6.10.7 No consent of any Limited Partner shall be required as a condition precedent to any transfer, assignment or other disposition of a Defaulting Partner's interest pursuant to this Section 6.10. 7. DURATION AND TERMINATION 7.1 DURATION The Partnership will terminate on the tenth anniversary of the Effective Date, except that, with the consent of Limited Partners holding a majority of the Limited Partner Interests, the term of the Partnership may be extended by the General Partner for additional one-year periods (but not for more than a total of two additional years). 7.2 EARLY TERMINATION Limited Partners holding 80% of the Limited Partner Interests may terminate the Partnership at any time. 7.3 TERMINATION AND LIQUIDATION OF PARTNERSHIP INTEREST Upon termination, the Partnership will be liquidated in an orderly manner. The General Partner will be the liquidator to wind up the affairs of the Partnership pursuant to this Agreement. 7.4 FINAL ALLOCATION AND DISTRIBUTION Upon termination of the Partnership (whether or not an early termination), the General Partner will make a final allocation of all kinds of income, loss and expense in accordance with Section 2 hereof and the Partnership's liabilities and obligations to its creditors shall be paid or adequately provided for prior to any distributions to the Partners. After payment or provision for payment of all debts of the Partnership, the remaining assets, if any, will be distributed among the Partners in accordance with the respective Capital Account balances (after giving effect to Section 2.4). 8. VALUATION OF PARTNERSHIP ASSETS 8.1 NORMAL VALUATION For purposes of this Agreement, the value of any security as of any date (or in the event such date is a holiday or other day which is not a business day, as of the next preceding business day) will be determined as follows: 8.1.1a security which is listed on a recognized securities exchange or the NMS will be valued at its last sales price or, if no sale occurred on such date, at the last "bid" price thereon; 8.1.2a security which is traded over-the-counter (other than on the NMS) will be valued at the most recent "bid" price; and 8.1.3all other securities will be valued on such date by the General Partner at fair market value in such manner as it may reasonably determine. 8.2 RESTRICTIONS ON TRANSFER OR BLOCKAGE Any security which is held under a representation that it has been acquired for investment and not with a view to public sale or distribution, or which is held subject to any other restriction, or where the size of the Partnership's holdings compared to the trading volume would affect its marketability, will be valued at such discount from the value determined under Section 8.1 above as the General Partner deems necessary to reflect properly the marketability of such security. 8.3 OBJECTION TO VALUATION Prior to acting upon its final valuation of any security pursuant to Sections 8.1.3 or 8.2, the General Partner shall provide the Limited Partners with notice of the General Partner's valuation of such security. If within 15 days after delivery of such notice Limited Partners holding a majority of the Limited Partner Interests deliver written notice to the General Partner objecting to the valuation of such security, then the General Partner will (at the Partnership's expense) cause an independent securities expert mutually acceptable to the General Partner and Limited Partners holding a majority of the Limited Partner Interests to review such valuation, and such expert's determination will be binding on the parties. 8.4 WRITE-DOWN TO VALUE Any securities which have permanently declined in value as determined by the General Partner will be written down to their value pursuant to the provisions of this Section 8 as of the date of such determination. 9. BOOKS OF ACCOUNTS; MEETINGS 9.1 BOOKS The Partnership will maintain complete and accurate books of account of the Partnership's affairs at the Partnership's principal office, which books will be open to inspection by any Partner (or its authorized representative) at any time during ordinary business hours. 9.2 FISCAL YEAR The fiscal year of the Partnership will be the calendar year, unless otherwise determined by the General Partner. 9.3 REPORTS The General Partner will furnish the Limited Partners: 9.3.1within 45 days after the end of each fiscal quarter, unaudited financial statements for such quarter and a report disclosing in summary form the status of all Portfolio Companies, and 9.3.2within 90 days after the end of each fiscal year, unaudited financial statements for such year, valuations of the Partnership's investments as of the end of such year (including a statement of each Partner's closing Capital Account and Fair Value Capital Account balances), and the Partnership's tax return and the Limited Partners' respective forms K-1 for such year. 9.4 TAX ALLOCATION 9.4.1The income, gains, losses, deductions and credits of the Partnership will be allocated for federal, state and local income tax purposes among the Partners so as to reflect as nearly as possible the allocation of such income, gains, losses, deductions and credits among the Partners for computing their Capital Accounts. Notwithstanding the preceding sentence, if the basis for federal income tax purposes of any property held by the Partnership differs from the basis of such property on the Partnership's books, any gain or loss arising from such property shall be allocated among the Partners so as to take into account the difference between the tax basis and the book basis of such property in any manner authorized by the Treasury Regulations under Section 704(c) of the Code and selected by the General Partner. 9.4.2If any Partner is treated for income tax purposes as realizing ordinary income because of receipt of its Partnership interest (whether under ss.83 of the Code or any similar provisions of any law, rule or regulation or any other applicable law, rule, regulation or doctrine) and the Partnership is entitled to any offsetting deduction, the Partnership's deduction will be allocated among the Partners in such manner as to, as nearly an possible, offset such ordinary income realized by such Partner. 9.4.3Notwithstanding any other provision of this Agreement, if a Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation ss.1.704-1(b)(2)(ii)(d)(4), (5) or (6) which gives rise to a negative capital account (or which would give rise to a negative capital account when added to expected adjustments, allocations or distributions of the same type), such Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible; provided that the Partnership's subsequent income, gains, losses, deductions and credits will be allocated among the Partners so as to achieve as nearly as possible the results that would have been achieved if this Section 9.4.3 had not been in this Agreement, except that no such allocation shall be made which would violate the provisions or purposes of Treasury Regulation ss.1.704-1(b). 9.5 ANNUAL MEETING Commencing in 1998, the General Partner will hold an annual general informational meeting for the Limited Partners. The General Partner will give all Limited Partners at least 30 days notice of each annual meeting. 9.6 TAX MATTERS PARTNER The General Partner is designated the "Tax Matters Partner" (as defined in Code ss.6231). 10. CERTIFICATE OF LIMITED PARTNERSHIP; POWER OF ATTORNEY 10.1 CERTIFICATE OF PARTNERSHIP A certificate of Limited Partnership within the meaning of the California Partnership Act ("Certificate") will be prepared following the execution and delivery of this Agreement. The General Partner will cause the Certificate to be filed and recorded in the office of the Secretary of State of the State of California and, to the extent required by local law, in the appropriate place in each state in which the Partnership may hereafter establish a place of business, but the Partnership will not be obligated to provide the Limited Partners with a copy of any amendment to or restatement of the Certificate. The General Partner will also cause to be filed, recorded and published such statements, notices, certificates or other instruments required by any provision of any applicable law which governs the formation of the Partnership or the conduct of its business from time to time. 10.2 POWER OF ATTORNEY Each of the undersigned does hereby constitute and appoint V.R. Ranganath (so long as Mr. Ranganath is a member of the General Partner), and each person who hereafter becomes a manager of the General Partner with full power to act without the others, as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, acknowledge and deliver or file: 10.2.1 the Certificate; 10.2.2 any amendment to or cancellation of the Certificate 10.2.3 all instruments, documents and certificates which may from time to time be required by any law to effectuate, implement and continue the valid and subsisting existence of the Partnership 10.2.4 all instruments, documents and certificates which may be required to effectuate the dissolution and termination of the Partnership; and 10.2.5 in the case of a Defaulting Partner any bills of sale or other appropriate transfer documents necessary to effectuate transfers of such Defaulting Partner's interest pursuant to Section 6.10 above. The powers of attorney granted herein will be deemed to be coupled with an interest, will be irrevocable and will survive the death, incompetence, disability or dissolution of a Limited Partner. Without limiting the foregoing, the powers of attorney granted herein will not be deemed to constitute a written consent of any Limited Partner for purposes of Section 12.1. 11. RELATIONSHIP BETWEEN THE ALLINACE FUNDS AND THE PARTNERSHIP 11.1 The General Partner presently intends that the guidelines set forth in this Section 11 generally will control Co-investments and other dealings between any other Alliance Fund and the Partnership. 11.2 The Partnership will not purchase from or sell to another Alliance Fund, except with the prior approval of Limited Partners holding a majority of Limited Partner Interests. 11.3 The General Partner will decide whether the Partnership will invest in a company which meets the investment criteria of the Partnership and another Alliance Fund (as determined by the General Partner in good faith) but in which neither the Partnership nor such other Alliance Fund has previously invested. The extent to which the Partnership participates in an investment in such company (relative to the amount, if any, to be invested by another Alliance Fund) will be determined also by the General Partner in its sole discretion. 11.4 The Partnership will invest in a company in which an Alliance Fund has previously invested only upon approval of the General Partner. 12. MISCELLANEOUS 12.1 AMENDMENTS This Agreement may be amended by the General Partner in any manner that does not adversely affect the rights of any Limited Partner and the General Partner shall furnish notice of any such amendment to the Limited Partners. This Agreement may also be amended by action taken by both: 12.1.1 the General Partner; and 12.1.2 the Limited Partners owning a majority in interest of the Capital Accounts of all the Limited Partners at the time of the amendment, provided that such amendment does not discriminate among the Limited Partners. 12.2 NOTICES All notices provided for under this Agreement shall be in writing and shall be sufficient if sent by first-class mail to the address set forth in the schedule in the files of the Partnership as of the date of such notice for the party to whom such notice is to be given. 12.3 BINDING EFFECT OF AGREEMENT This Agreement, including Section 10.2 hereof, shall be binding on the successors, assigns and the legal representatives of each of the Partners. 12.4 COUNTERPARTS This Agreement may be executed in more than one counterpart with the same effect as if the Partners executing the several counterparts had all executed one document. 12.5 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the principles of conflicts of law thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date first above written. GENERAL PARTNER: LIMITED PARTNER: Alliance Venture Management, LLC Alliance Semiconductor Corporation By: /s/ V.R. Ranganath By: /s/ N.Damodar Reddy ---------------------------- --------------------------- signature of authorized signature of authorized representative representative V.R. Ranganath N. Damodar Reddy - --------------------------------- ------------------------------- printed name printed name President President and CEO - --------------------------------- ------------------------------- title title SCHEDULE I LIMITED PARTNERS
Limited Partner Capital Contribution Commitment - ---------------------------------------------------------------------------- Alliance Semiconductor Corporation $20,000,000.00
EX-10.33 5 0005.txt ALLIANCE VENTURES II, LP - PARTNERSHIP AGREEMENT AGREEMENT OF LIMITED PARTNERSHIP THIS AGREEMENT of limited partnership ("Agreement") is dated as of November 12, 1999 among Alliance Venture Management, LLC, a California limited liability company ("General Partner"), Alliance Semiconductor Corporation, a Delaware corporation ("Alliance") and the limited partners ("Limited Partners") listed in Schedule I attached hereto (General Partner and the Limited Partners being herein collectively called the "Partners"). Capitalized terms not otherwise defined shall have the meanings ascribed to such terms in Section 2.1. THE PARTIES AGREE AS FOLLOWS: 1. GENERAL PROVISIONS 1.1 FORMATION The Partners hereby agree to form a limited partnership ("Partnership") pursuant to and in accordance with the California Revised Uniform Limited Partnership Act ("California Partnership Act"). 1.2 NAME The name of the Partnership will be "Alliance Ventures II, L.P." or such other name or names as the General Partner may from time to time designate. 1.3 PURPOSE The Partnership is organized for the object and purpose of making venture capital investments in private companies, managing and supervising such investments and engaging in such activities incidental or ancillary thereto as the General Partner deems necessary or advisable, provided, however, that the Partnership shall not engage in any activity that for United States income tax purposes would constitute a United States trade or business. 1.4 PLACE OF BUSINESS The Partnership will maintain an office and principal place of business in Santa Clara, California or at such other place or places as the General Partner may from time to time designate. 2. DEFINITIONS; DETERMINATIONS; CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS 2.1 DEFINITIONS For purposes of this Agreement the following capitalized terms shall have the meanings set forth below: 2.1.1ADDITIONAL LIMITED PARTNERS has the meaning set forth in Section 6.5. 2.1.2ALLIANCE FUND means any of Alliance Ventures I, L.P., Alliance Ventures II, L.P. and each private venture capital equity fund hereafter sponsored by the General Partner, and the ALLIANCE FUNDS means all of such funds, collectively. 2.1.3APPLICABLE LAW means ERISA or any federal or state law applicable to public pension plans or any regulation, case law or administrative ruling relating thereto. 2.1.4BASIS of any security means the basis of such security as determined in accordance with the Code less the amount of any write-down pursuant to Section 2.1.39.3 of the definition of Realized Investment Loss (as the case may be) and as further adjusted to reflect the effects of any transaction described in Section 2.2.1. 2.1.5CALIFORNIA PARTNERSHIP ACT has the meaning set forth in Section 1.1. 2.1.6CAPITAL ACCOUNT has the meaning set forth in Section 2.4. 2.1.7CAPITAL CALL NOTICE has the meaning set forth in Section 2.3.1. 2.1.8CAPITAL CONTRIBUTION of any Partner means the amount received by the Partnership from such Partner pursuant to its Commitment. 2.1.9CARRIED INTEREST means the General Partner's 15% interest in the Partnership's Net Profits from Portfolio Investments and Net Loss from Portfolio Investments allocated to the General Partner pursuant to Sections 2.4.3.2 and 2.4.4.2. 2.1.10 CODE means the Internal Revenue Code of 1986, as in effect on the date hereof and, at the discretion of the General Partner, including any such amendment thereto which does not change the economic terms hereof. 2.1.11 COMMITMENT with respect to each Partner means the aggregate amount of cash agreed to be contributed as capital to the Partnership by such Partner as specified in Schedule I attached hereto as the same may be modified from time to time under the terms of this Agreement. 2.1.12 CURRENT INCOME means all interest and dividend income (including original issue discount and payment of in-kind income) from investments (other than Short-Term Investments). 2.1.13 DEFAULTING PARTNER has the meaning set forth in Section 6.10. 2.1.14 EFFECTIVE DATE means November 12, 1999. 2.1.15 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.1.16 EXCESS LOSSES has the meaning given such term in Section 2.4.5. 2.1.17 FAIR VALUE CAPITAL ACCOUNTS means the Partners' Capital Accounts computed in accordance with Section 2.3, but treating each security owned by the Partnership as if, on the date as of which such computation is being made, such security had been sold at its "value" (determined in accordance with Section 9) and any resulting gain or loss had been allocated to the Partners' Capital Accounts in accordance with Section 2.4. 2.1.18 INDEMNIFYING PARTNER has the meaning set forth in Section 6.7. 2.1.19 LIMITED PARTNERS means the Persons listed in Schedule I hereto in their capacity as limited partners of the Partnership (including each Person admitted to the Partnership in accordance with Section 6.5) and each Additional Limited Partner who is admitted to the Partnership as a substitute limited partner pursuant to Section 6.2, so long as each such Person continues to be a limited partner of the Partnership hereunder. 2.1.20 MANAGEMENT AGENT means Alliance Venture Management, LLC or any other party (which may be the General Partner or a partner or affiliate thereof) selected by the General Partner to act as agent of the Partnership with respect to managing the affairs of the Partnership. 2.1.21 MANAGEMENT FEE has the meaning set forth in Section 4.2. 2.1.22 NMS means the National Association of Securities Dealers Automated Quotation System, National Market System. 2.1.23 NET LOSS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period over (y) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period. 2.1.24 NET PROFITS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period over (y) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period. 2.1.25 OPINION OF LIMITED PARTNER'S COUNSEL means a written opinion of any counsel selected by a Limited Partner which counsel and opinion shall be reasonably acceptable in form and substance to the General Partner in its sole discretion. 2.1.26 OPINION OF THE PARTNERSHIP'S COUNSEL means an opinion of counsel selected by the General Partner and reasonably acceptable (by reason of experience in the area of law involved) to the Limited Partner affected by such opinion or, if more than one Limited Partner is affected by such opinion, Limited Partner(s) holding one-third of the Limited Partner Interests so affected. 2.1.27 ORGANIZATIONAL EXPENSES means the reasonable expenses (including, without limitation, travel, printing, legal and accounting fees and expenses) incurred in connection with the organization and funding of the Partnership and the General Partner. 2.1.28 PARTNER INTEREST means a Partner's total ownership and interest in the Partnership based upon such Partner's aggregate Capital Contributions relative to the Capital Contributions of all Partners. 2.1.29 PARTNERSHIP EXPENSES means Partnership Expenses Allocable to Portfolio Investments and Partnership Expenses Not Allocable to Portfolio Investments. 2.1.30 PARTNERSHIP EXPENSES ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses directly relating to any Portfolio Investment (to the extent not borne or reimbursed by a Portfolio Company) , including, but not limited to: 2.1.30.1 all costs and expenses attributable to acquiring, holding, monitoring and disposing of the Partnership's investments (including, but not limited to, registration expenses and brokerage, finders', custodial and other fees); 2.1.30.2 legal, accounting, auditing and other fees and expenses directly relating to specific Portfolio Investments (including, but not limited to, expenses associated with negotiating, consummating, monitoring and disposing of the Partnership's investments); and 2.1.30.3 extraordinary expenses of the Partnership directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements), but not including the Management Fee, Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.31 PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses relating to the Partnership's activities and business other than Partnership Expenses Allocable to Portfolio Investments, including, but not limited to: 2.1.31.1 legal, accounting, auditing and other fees and expenses (including, but not limited to, expenses associated with the preparation of Partnership financial statements, tax returns and forms K-1); 2.1.31.2 extraordinary expenses of the Partnership not directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements); and 2.1.31.3 the Management Fee, but not including Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.32 PAYOUT with respect to each Limited Partner (other than a Defaulting Partner) means the time when such Limited Partner has received cumulative distributions from the Partnership (regardless of the source or character thereof) in an amount equal to its aggregate Capital Contributions. If a distribution of cash or securities causes the Partnership to reach and exceed Payout, the portion of the amount distributed which was necessary to reach Payout will be deemed to have been distributed before Payout, and any remaining amount will be deemed to have been distributed after Payout. 2.1.33 PERSON means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 2.1.34 PORTFOLIO COMPANY means any company in which the Partnership has an investment (excluding for such purposes Holdback Securities or a Short-Term Investment). 2.1.35 PORTFOLIO COMPANY FEES means: 2.1.35.1 all compensation (whether in cash or securities) directly or indirectly received by the General Partner, any of its managers, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but excluding any amount received by a manager of the General Partner) acting, directly or indirectly, on behalf of the Partnership from any Portfolio Company, whether as director fees, management fees, consultant fees or investment banking fees; and 2.1.35.2 all breakup fees, litigation proceeds or commitment fees received by the General Partner or any of its managers from transactions not consummated by the Partnership (in each case, net of all amounts necessary to reimburse the General Partner, each of its managers, the Management Agent and any employee or agent of the Management Agent for all costs and expenses incurred by any of them in connection with consummated or unconsummated transactions or in connection with generating any such fees and not previously reimbursed), but not including any amount received by the General Partner, any of its managers, members, employees or agents from Portfolio Companies as reimbursement for out-of-pocket expenses directly related to such Portfolio Companies. 2.1.36 PORTFOLIO INVESTMENTS means any investments held by the Partnership other than Short-Term Investments. 2.1.37 PRIME RATE means, on any date, a variable rate per annum equal to the rate of interest published, from time to time by the Wall Street Journal as the "prime rate" at large U.S. money center banks. 2.1.38 REALIZED INVESTMENT GAIN means: 2.1.38.1 the excess, if any, of the proceeds from the sale, redemption or other disposition of any Portfolio Investments over the Basis of such Portfolio Investments; and 2.1.38.2 the excess, if any, of the value (as determined pursuant to Section 8) of any Portfolio Investments distributed to the Partners over the Basis of such Portfolio Investments. 2.1.39 REALIZED INVESTMENT LOSS means: 2.1.39.1 the deficiency, if any, of the proceeds from the sale, redemption or other disposition of Portfolio Investments as compared to the Basis of such Portfolio Investments; 2.1.39.2 the deficiency, if any, of the value (as determined pursuant to Section 9) of any Portfolio Investments distributed to the Partners as compared to the Basis of such Portfolio Investments; and 2.1.39.3 the amount, as determined by the General Partner, by which Portfolio Investments have permanently declined in value as compared to the Basis of such Portfolio Investments. 2.1.40 SECURITIES ACT means the Securities Act of 1933, as amended. 2.1.41 SHORT-TERM INVESTMENT INCOME means the income earned on Short-Term Investments, including any gains and net of any losses from dispositions of Short-Term Investments and also net of any costs and expenses directly attributable thereto. 2.1.42 SHORT-TERM INVESTMENTS means commercial paper, governmental obligations, money market instruments, certificates of deposit and other similar obligations and securities, in each case having a maturity of one year or less at the time of purchase by the Partnership. 2.1.43 TAX DISTRIBUTIONS means distributions made to the General Partner with respect to a fiscal year equal to the amount by which the General Partner's cumulative estimated tax liabilities for the fiscal year and all prior fiscal years exceeds the aggregate amount of distributions made to the General Partner: 2.1.43.1 with respect to all prior fiscal years; and 2.1.43.2 with respect to the current fiscal year under Section 3.2.1. For this purpose, the General Partner's cumulative estimated tax liabilities means the product of the aggregate amount by which the Net Profits from Portfolio Investments included in the Carried Interest exceeds the Net Losses from Portfolio Investments included in the Carried Interest, times the highest marginal federal, state and local tax rates applicable to any of the General Partner's members and former members. 2.1.44 TAX EXEMPT PARTNER means any Limited Partner which is exempt from income taxation under ss.501(a) of the Code. 2.1.45 UBTI means unrelated business taxable income as defined in ss.512 and ss.514 of the Code. 2.2 DETERMINATIONS 2.2.1An "exchange of securities" will be treated as a sale if under generally accepted accounting principles the Partnership realizes gain or loss on such exchange, in which case the Basis of the securities received in the exchange will be adjusted to take cognizance of the gain or loss from such exchange. 2.2.2Any determination to be made based upon a specified proportion of the "Limited Partner Interests" shall be based upon the Limited Partners' Capital Contributions (less amounts returned pursuant to Section 2.3.2), excluding, for purposes of any Applicable Section (as such term is defined in Section 6.9 below) and any vote, approval or consent to the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law for which an election was made under Section 6.9, that portion of each Limited Partner's Capital Account which represents each such Limited Partner's Excess Interest (as such term is defined in Section 6.9); provided that for purposes of this Section 2.2.2 and except as set forth in Section 12.1, interests held by a Defaulting Partner shall be disregarded. 2.3 CAPITAL CONTRIBUTION COMMITMENT 2.3.1Each Partner agrees to make cash contributions (pro rata based upon the Partners' respective Commitments) to the capital of the Partnership in the aggregate amount equal to its Commitment by contributing installments in cash as follows: 50% of its Commitment on the Effective Date and thereafter, upon at least 30 days notice ("Capital Call Notice"). Each Capital Contribution will be made by delivery of a check made payable to the Partnership or by means of a wire transfer of funds to an account designated by the General Partner. 2.3.2The General Partner may cause the Partnership to return to the Partners all or any portion of any Capital Contribution to the Partnership which is not invested in a Portfolio Company or used to pay Partnership Expenses (including Management Fees) or Organizational Expenses. Each such return of Capital Contributions shall be made pro rata among all Partners in the same proportion as the Partners made such Capital Contributions and, so long as such Capital Contributions are returned to the Partners on or before the 120th day following the date such Capital Contributions were due (as set forth in the Capital Call Notice pursuant to which such Capital Contributions were made by the Partners to the Partnership), such returned Capital Contributions may be called again by the General Partner according to the provisions of this Section 2.3 as if such returned Capital Contributions had not been previously called. 2.4 CAPITAL ACCOUNTS A capital account ("Capital Account") will be established for each Partner on the books of the Partnership and will be adjusted as follows: 2.4.1CAPITAL CONTRIBUTIONS A Partner's Capital Contribution will be credited to its Capital Account when received by the Partnership; 2.4.2SHORT-TERM INVESTMENT INCOME Except as otherwise provided in 2.4.5 below, Short-Term Investment Income earned in each quarterly period will be credited to, and Short-Term Investment Loss for each quarterly period shall be debited against, the Capital Accounts of the Partners pro rata according to their respective Partner Interests; 2.4.3NET PROFITS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Profits from Portfolio Investments, such Net Profits from Portfolio Investments shall be credited: 2.4.3.1 85% to the Capital Accounts of the Partners pro rata according to their respective Partner Interests; and 2.4.3.2 15% to the Capital Account of the General Partner; 2.4.4NET LOSS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Loss from Portfolio Investments, such Net Loss from Portfolio Investments shall be debited: 2.4.4.1 85% against the Capital Accounts of all Partners pro rata according to their respective Partner Interests; and 2.4.4.2 15% against the Capital Account of the General Partner; 2.4.5SPECIAL GENERAL PARTNER ALLOCATIONS Notwithstanding anything in this Section 2.4, if at any time the General Partner's Capital Account is reduced to zero, 100% of Net Loss from Portfolio Investments, Organizational Expenses and Partnership Expenses Not Allocable to Portfolio Investments ("Excess Losses") will be debited against the Capital Accounts of the Limited Partners pro rata according to their respective Partner Interests. With respect to each quarterly period thereafter 100% of Short-Term Investment Income and Net Profits from Portfolio Investments will be credited to the Capital Accounts of the Limited Partners in proportion to their respective Partner Interests, until the Excess Losses have been recouped (i.e., an amount has been allocated 100% to the Limited Partners equal to the amount of the Excess Losses), at which time the allocations of Short-Term Investment Income and Net Profits from Portfolio Investments set forth in 2.4.2 and 2.4.3 above, respectively, will be reinstated; 2.4.6PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS Partnership Expenses Not Allocable to Portfolio Investments will be debited against the Capital Accounts of Partners pro rata according to their respective Partner Interests. If Limited Partners are admitted subsequent to the formation of the Partnership pursuant to Section 6.5, the allocation of Organization Expenses and Partnership Expenses Not Allocable to Portfolio Investments will be adjusted as if the subsequently admitted Limited Partners had been admitted at the time of formation, except that the amount of interest described in Section 6.5 will be credited to and, upon payment thereof to the Management Agent, debited from the Capital Accounts of such Additional Limited Partners; 2.4.7ORGANIZATIONAL EXPENSES Organizational expenses will be debited against the Capital Account of Alliance; 2.4.8DISTRIBUTIONS DEBITED AGAINST CAPITAL ACCOUNT Any amount distributed to a Partner will be debited against such Partner's Capital Account. The General Partner normally will adjust the Partnership's Capital Accounts at the end of each quarterly period, but may adjust them more often if a new Partner is admitted to the Partnership or circumstances otherwise make it advisable in the General Partner's judgment; 2.4.9DISTRIBUTIONS IN KIND If any securities are to be distributed in kind to the Partners as provided in Section 3, such securities will first be written up or down to their value (as determined pursuant to Section 8 as of the date of such distribution), thus creating Realized Investment Gain or Realized Investment Loss (if any) , which shall be allocated in accordance with Section 2.4 to the Capital Accounts of the Partners, and upon the distribution of such securities to such Limited Partners, the value of such securities shall be debited, in accordance with Section 2.4, to the Capital Accounts of the Partners. 3. DISTRIBUTIONS 3.1 DISTRIBUTION POLICY The General Partner may in its sole discretion make distributions of cash or securities at any time and from time to time; provided, however, that no securities will be distributed in kind to the Partners until the earlier to occur of: 3.1.1such time as such securities may be sold by or for the account of any Partner pursuant to Rule 144 promulgated under the Securities Act, or any successor rule; or 3.1.2the final distribution of the assets of the Partnership to the Partners pursuant to Section 7.4. 3.2 CASH DISTRIBUTION At any time when Payout is not achieved, all distributions of cash shall be made to the Partners pro rata according to their Partner Interests, except that the General Partner shall also be entitled to receive Tax Distributions. At any time when Payout is achieved, all distributions of cash shall be made to the Partners in the following priority: 3.2.1First, 100% of each distribution shall be made to the General Partner until the General Partner has received distributions pursuant to this Section 3.2.1, or as Tax Distributions, in aggregate amount equal to 15% of Net Profits from Portfolio Investments for the period from the Effective Date to the date of such distribution; and 3.2.2Second, after the required distribution pursuant to 3.2.1 above, each distribution will be made to all Partners pro rata according to their respective Capital Accounts; provided that the amount distributed to the General Partner (other than Tax Distributions) shall in no event cause the General Partner's Capital Account to be reduced below zero and that any amount which is not distributed to the General Partner because of this provision shall be distributed to the Limited Partners pro rata according to their respective Partner Interests. 3.3 DISTRIBUTIONS IN KIND 3.3.1Subject to the terms of Sections 3.3.2 and 7.4, all distributions of securities shall be made as follows: 3.3.1.1 First, such securities will be distributed to the Partners pro rata according to their Partner Interests until an amount of such securities has been distributed to the Partners as has an aggregate value, as determined pursuant to Section 8, equal to the Partnership's Basis (as determined in accordance with the Code and as adjusted to reflect the effects of any transaction described in 2.2.2.1) in the total amount of such property to be distributed to the Partners pursuant to this Section 3.3.1.1 and 3.3.1.2 below, plus all Management Fees paid by the Partnership (to the extent not previously reimbursed); 3.3.1.2 Second, such securities will be distributed to Alliance until an amount of such securities has been distributed to Alliance as has an aggregate value equal to the Organizational Expenses paid by Alliance (to the extent not previously reimbursed); and 3.3.1.3 Third, such securities will be distributed 85% to the Partners pro rata according to their Partner Interests and, subject to 3.3.2 below, and 15% to the General Partner. 3.3.2At any time when Payout is not achieved, unless otherwise agreed by the General Partner, the Partnership shall not deliver to the General Partner, but rather will hold for the benefit of the General Partner and as security for the obligations of the General Partner pursuant to Section 7.3.3, all property otherwise to be distributed pursuant to 3.3.1.2 above ("Holdback Securities"); provided that at such time as Payout is achieved, the Partnership will immediately deliver all Holdback Securities to the General Partner. Notwithstanding the foregoing, for all purposes of this Agreement, such Holdback Securities will be deemed to have been distributed to the General Partner. Accordingly, e.g., the Capital Account of the General Partner will be reduced by the value of the Holdback Securities upon such distribution, such Holdback Securities will be the property of the General Partner and not of the Partnership, and there will be no adjustment to any Capital Account of any Partner on account of any change in the value of Holdback Securities subsequent to such distribution (unless and to the extent all or any portion of such Holdback Securities are contributed to the Partnership pursuant to Section 7.3.3). At the election of the General Partner, the Partnership will sell or exchange all or any portion of the Holdback Securities as requested by the General Partner; provided that such sale or exchange is with an unaffiliated third party and that the proceeds of such sale or exchange (net of any expenses of such sale, if the proceeds thereof are in cash) will be delivered to and held by the Partnership until Payout is achieved; and provided, further, that such proceeds will be paid to the General Partner promptly after Payout is achieved. 4. MANAGEMENT AGENT, MANAGEMENT FEE AND ORGANIZATIONAL EXPENSES 4.1 MANAGEMENT AGENT The General Partner may cause the Partnership to appoint a Management Agent to manage the affairs of the Partnership. The General Partner shall have the duty to manage the affairs of the Partnership during any period when there is no Management Agent, and shall be entitled to receive the Management Fee payable with respect to any period during which it so manages (as well as the amounts described in 4.2.5 and 4.2.6 below) . The appointment of the Management Agent shall not in any way relieve the General Partner of its responsibilities and authority vested pursuant to Section 5.1. The General Partner or the Management Agent shall pay: 4.1.1all ordinary overhead and administrative expenses of the Partnership (including salaries and related benefits, rent, travel, entertainment and equipment expenses but excluding any Partnership Expenses and any Organizational Expenses reimbursable under Section 4.3) incurred by the General Partner, the Management Agent or any of their respective managers, members, agents, employees or stockholders (to the extent not borne or reimbursed by a Portfolio Company) in connection with: 4.1.1.1 identifying and investigating investment opportunities for the Partnership 4.1.1.2 monitoring the Partnership's investments; and 4.1.1.3 providing Portfolio Company reports and information to the Limited Partners; and 4.1.2Organizational Expenses to the extent not reimbursed under Section 4.3. 4.2 MANAGEMENT FEE 4.2.1GENERAL Subject to Section 4.1, during each consecutive twelve-month or lesser period from and after the Effective Date (each such twelve-month period, a "Management Fee Year"), the Partnership will pay the Management Agent in advance, commencing with a payment on the Effective Date for the period from the Effective Date up to and including December 31, 1999, and thereafter on a quarterly basis on January 1, April 1, July 1 and October 1 of each year until final distribution of the Partnership's assets pursuant to Section 7.4 below (or as otherwise provided in Section 4.2.5 below), a fee as calculated below ("Management Fee"), as compensation for managing the affairs of the Partnership. 4.2.2CALCULATION OF MANAGEMENT FEE The Management Fee shall be 1.00% of the aggregate Commitments per year for the term of the Agreement, calculated in each year including the Commitments of any Limited Partners admitted pursuant to Section 6.5 as if made on the Effective Date. In addition, if in connection with admission of any Additional Limited Partner, any portion of the Management Fee is paid later than as specified in Section 4.2.1 above, the Management Fee will be adjusted to include, in respect of any such delayed amount, interest, from the date as of which such delayed amount was specified for payment through the date of actual payment thereof, at a rate equal to the Prime Rate plus two percentage points per annum. 4.2.3PARTIAL YEAR The Management Fee in any partial year will be pro-rated on a daily basis according to the actual number of days in such period. 4.2.4PORTFOLIO COMPANY FEES Portfolio Company Fees received by the General Partner, any of its general partners, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but not by any amounts received by a manager of the General Partner), shall be deducted from the management fees paid by the Alliance Funds; provided that, with respect to Portfolio Company Fees comprised of stock or rights convertible into or exercisable or exchangeable for stock, so long as the recipient thereof executes and delivers to the General Partner an agreement to hold such property or the proceeds thereof for the benefit of the Management Agent, such property will not be deemed to be received, for purposes of the foregoing, and therefore will not be deducted, until such time as, and only to the extent that, the recipient thereof realizes cash proceeds with respect to such property, whether upon the sale or other transfer of such property or as distributions with respect thereto; and provided, further, that any such Portfolio Company Fees held as of the ninth anniversary of the Effective Date and not previously deemed received pursuant to this sentence will be deemed to have been received as of such date. 4.2.5EARLY TERMINATION In the event of an early termination of the Partnership pursuant to Section 7.2, the Management Fee (computed pursuant to Section 4.2.2 above) will be payable to the Management Agent through the date six months after the final distribution in connection therewith. 4.2.6ORGANIZATIONAL EXPENSES Alliance will pay the organizational expenses and set-up expenses of the Alliance Funds. The Alliance Funds will pay expenses directly related to the consummation of an investment whether or not consummated, the legal, custodial, and accounting expenses, and certain other related expenses of the Alliance Funds. The General Partner will pay expenses incurred in connection with investigating investment opportunities and monitoring investments, and will provide for normal operating overhead, including without limitation salaries, office space, and travel expenses for all personnel of the General Manager. 4.2.7NO LIABILITY TO PARTNERSHIP OR PARTNERS Neither the Management Agent nor any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (nor any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the Management Agent, or on behalf of the Management Agent, with respect to the Partnership or for any action taken, or omitted to be taken, by the Management Agent, or any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (or any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates), so long as such person: 4.2.7.1 acted in good faith 4.2.7.2 acted in a manner reasonably believed to be in the best interests of the Partnership; and 4.2.7.3 was neither grossly negligent nor engaged in willful malfeasance. 5. GENERAL PARTNER 5.1 MANAGEMENT AUTHORITY 5.1.1The management of the Partnership will be vested exclusively in the General Partner, and the General Partner will have full control over the business and affairs of the Partnership. The General Partner will have the power on behalf and in the name of the Partnership to carry out any and all of the objects and purposes of the Partnership and to perform all acts and enter into and perform all contracts and other undertakings which, in its sole discretion, it deems necessary or advisable or incidental thereto, including the power to acquire or dispose of any security (including marketable securities). 5.1.2All matters concerning: 5.1.2.1 the allocation of Short-Term Investment Income, Current Income, Realized Investment Gain, Realized Investment Loss, Partnership Expenses, Partnership Expenses Allocable to Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments, Organizational Expenses, Carried Interest and the distribution of net proceeds and the return of capital among the Partners, including the taxes thereon; 5.1.2.2 accounting procedures and determinations, estimates of the amount of Management Fees payable by any Defaulting Partner or Regulated Partner; and 5.1.2.3 other determinations not specifically and expressly provided for by the terms of this Agreement, shall be determined by the General Partner in accordance with its reasonable interpretation of the provisions of this Agreement, whose determination shall be final and conclusive as to all the Partners. 5.2 LIMITATION ON INVESTMENTs The General Partner will not invest (including guarantees of a Portfolio Company's or its subsidiary's obligations) more than 20% of the Partnership's aggregate Commitments in any one Portfolio Company without the prior written consent of Limited Partners holding 80% of the Limited Partner Interests. 5.3 UBTI The General Partner shall use its reasonable efforts to ensure that it does not knowingly engage in a transaction which will cause any Tax Exempt Partner to recognize UBTI as a result of its investment in the Partnership. 5.4 PERMITTED CO-INVESTMENTS BY CERTAIN LIMITED PARTNERS, THE GENERAL PARTNER AND RELATED PARTIES; DIRECTOR SHARES 5.4.1The General Partner will not purchase securities in Portfolio Companies. Nothing in this Agreement will restrict the General Partner from permitting certain Limited Partners (and not necessarily all Limited Partners), managers and members of the General Partner and employees and stockholders of the Management Agent (collectively, the "Co-investors" and each individually a "Co-investor") to invest in Portfolio Companies; provided that: 5.4.1.1 in the case of each such investment by one or more Co-investors in a Portfolio Company (a "Co-investment"), each of the Co-investors purchases, contemporaneously with the purchase by the Partnership, securities issued by such Portfolio Company which are of the same class as purchased by the Partnership (and if the Partnership purchases more than one class of securities issued by such Portfolio Company, each of such Co-investors purchases an amount of each such class in the same proportions as purchased at such time by the Partnership) at a price and on other terms which are the same as, or less favorable to the Co-investors than, the price and terms at or on which the Partnership is then purchasing securities of such Portfolio Company; provided that in no event will a Co-investor be obligated, solely on account of having made a Co-investment in a Portfolio Company, to purchase additional securities of such Portfolio Company, whether or not the Partnership subsequently does so; and 5.4.1.2 the aggregate amounts invested by any managers and members of the General Partner in any Portfolio Company will not exceed 10% of the aggregate amount invested by the Partnership in such Portfolio Company at such time. 5.4.2Subject to Section 5.4.1 above, nothing in this Agreement will restrict managers, members, employees and agents of the General Partner and the Management Agent from acquiring shares of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, in connection with serving on the boards of directors of, or in similar capacities for, such companies. In no event will the receipt by any manager of the General Partner of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, be deemed to be Portfolio Company Fees. 5.5 NO TRANSFER OF GENERAL PARTNERSHIP INTEREST; NO WITHDRAWAL OR LOANS The General Partner will not sell, assign, pledge, mortgage or otherwise dispose of its General Partner interest in the Partnership and will not borrow or withdraw any amount from the Partnership. 5.6 NO LIABILITY TO LIMITED PARTNERS Neither the General Partner nor any manager, member, employee, agent or affiliate of the General Partner (nor any of their respective shareholders, partners, directors, officers, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the General Partner, or on behalf of the General Partner, with respect to the Partnership or for any action taken, or omitted to be taken, by the General Partner, or any manager, member, employee, agent or affiliate of the General Partner (or any of their respective shareholders, partners, directors, officers, employees, agents or affiliates), so long as such person: 5.6.1acted in good faith; 5.6.2acted in a manner reasonably believed to be in the best interests of the Partnership; and 5.6.3was neither grossly negligent nor engaged in willful malfeasance. 5.7 INDEMNIFICATION OF GENERAL PARTNER AND OTHERS The Partnership will indemnify the General Partner, each of its managers and members and their respective partners, employees, agents and affiliates, including without limitation the Management Agent and the partners, stockholders and employees of the Management Agent, against any losses, liabilities, damages or expenses (including amounts paid for reasonable attorneys fees, judgments and settlements in connection with any threatened, pending or completed action, suit or proceeding but excluding the amounts described in Section 4.1 as payable by the General Partner or the Management Agent) to which any of such persons may become subject in connection with the Partnership or in connection with any involvement with a Portfolio Company (including serving as an officer, director, consultant or employee of any Portfolio Company) directly or indirectly on behalf of the Partnership but, in each case, only to the extent that such person: 5.7.1acted in good faith 5.7.2acted in what such person believed to be in the best interests of the Partnership or the Portfolio Company (as the case may be); and 5.7.3was neither grossly negligent nor engaged in willful malfeasance. The Partnership may, in the sole judgment of the General Partner, pay the expenses of any Person indemnifiable under this Section 5.7 in advance of the final disposition of any proceeding, so long as: 5.7.4the General Partner has a good faith belief such expenses are indemnifiable; and 5.7.5the General Partner receives a written agreement by such Person to repay the full amount advanced if there is a final determination that such Person did not satisfy the standards set forth in Sections 5.7.1 through 5.7.3 immediately above or that such Person is not otherwise entitled to indemnification as provided herein. 5.8 FORMATION OF NEW FUND OR BUSINESS ENDEAVOR No Limited Partner will, on account of entering into this Agreement or on account of its status as a Limited Partner of the Partnership, have any interest in the business endeavors of the other Partners other than its interest in the Partnership, and no Partner is, on account of entering into this Agreement or on account of its status as a Partner of the Partnership, restricted from entering into any future business activity, including with any other Partner; provided that the General Partner may not hereafter close the formation of a fund to invest primarily in equity securities until the time at which at least 75% of the Partners' aggregate Commitments have been invested, committed, reserved for follow-on investment, otherwise allocated for investment or used, or reserved to be used, to pay Partnership Expenses, Management Fees or Organizational Expenses. 5.9 INTEREST AS A LIMITED PARTNER To the extent that the General Partner acquires the interest of a Defaulting Partner or a Regulated Partner or any other Limited Partner, the General Partner will be deemed to be a Limited Partner with respect to such interest for all purposes of this Agreement. 6. LIMITED PARTNERS 6.1 LIMITED LIABILITY The Limited Partners will not be personally liable for any obligations of the Partnership and will have no obligation to make contributions to the Partnership in excess of their respective Commitments specified in Schedule I attached hereto, except to the extent set forth in the California Partnership Act; provided that a Limited Partner shall be required to return the portion of any distribution made to it in error (i.e., a distribution inconsistent with the terms of this Agreement). The Limited Partners will take no part in the control, direction or operation of the affairs of the Partnership and will have no power to bind the Partnership. 6.2 TRANSFER OF LIMITED PARTNERSHIP INTEREST A Limited Partner may not sell, assign, transfer, pledge, mortgage or otherwise dispose of all or any of its interest in the Partnership (including any transfer or assignment of all or any part of its interest to a person who becomes an assignee of a beneficial interest in the Partnership even though not becoming a substitute Limited Partner) unless the General Partner has consented to such transfer or assignment in writing. For purposes of this Section 6.2, a change in any trustee or fiduciary of a Limited Partner will not be deemed to be an assignment or transfer of a limited partnership interest pursuant to this Agreement, provided any such replacement trustee or fiduciary is also a fiduciary as defined under applicable state law and provided that income and loss allocable to the Limited Partner of the Partnership will continue to be included in the same filings under the same employee identification number with the Internal Revenue Service. Accordingly, such a change in a trustee or fiduciary may be made without the prior written consent of the General Partner, provided that the Limited Partner agrees to provide prompt written notice of such change to the General Partner. The voting rights of any Limited Partner's interest shall automatically terminate upon any transfer of such interest to a trust, heir, beneficiary, guardian or conservator or upon any other transfer if the transferor no longer retains control over such voting rights and the General Partner has not consented pursuant to Section 6.2(b) to such transferee becoming a substitute Limited Partner. No consent of any other Limited Partner will be required as a condition precedent to any such transfer or substitution. As a condition to any transfer of a Limited Partnership interest (including a transfer not requiring the consent of the General Partner), the transferor and the transferee shall provide such legal opinions and documentation as the General Partner shall reasonably request; provided that if the transfer is to be made from a Limited Partner to a co-trustee or trustee as contemplated above, an officer's certificate in form reasonably satisfactory to the General Partner shall be delivered by the Limited Partner to the General Partner in lieu of such legal opinions and other documentation. 6.2.1Notwithstanding anything to the contrary contained in this Section 6.2 or Section 6.10, a transferee or assignee will not become a substitute Limited Partner without the consent of the General Partner, in its sole discretion, and without executing and delivering to the General Partner a copy of this Agreement or amendment hereto in form and substance satisfactory to the General Partner in its sole discretion. Any substitute Limited Partner admitted to the Partnership with the consent of the General Partner will succeed to all rights and be subject to all the obligations of the transferring or assigning Limited Partner with respect to the interest to which such Limited Partner was substituted. 6.2.2The transferor and transferee of any Limited Partner's interest shall be jointly and severally obligated to reimburse the General Partner and the Partnership for all reasonable expenses (including reasonable attorneys' fees and expenses) of any transfer or proposed transfer of a Limited Partner's interest, whether or not consummated. 6.2.3The transferee of any Limited Partner interest shall be treated as having made all of the Capital Contributions made by, and received all of the distributions received by, the transferor of such interest. 6.2.4Anything in this Agreement to the contrary notwithstanding, no Partnership interest shall be subdivided for sale or assignment (including any assignment of a profits and loss interest) if such subdivision results in the creation of any Partnership interest (or interest in the Partnership's profits and losses) which would have had an initial offering price smaller than the minimum amount prescribed in Internal Revenue Service rules or Treasury regulations setting forth a private-placement safe harbor under the publicly traded partnership provisions of the Code. 6.3 NO WITHDRAWAL Subject to the provisions of Sections 6.2, and 6.10, no Limited Partner may withdraw as a Partner of the Partnership, nor may a Limited Partner be required to withdraw, nor may a Limited Partner borrow or withdraw any portion of its Capital Account from the Partnership. 6.4 NO TERMINATION The substitution, death, insanity, dissolution (whether voluntary or involuntary) or bankruptcy of a Limited Partner will not affect the existence of the Partnership, and the Partnership will continue for the term of this Agreement until its existence is terminated as provided herein. 6.5 SUBSEQUENT LIMITED PARTNERS The General Partner may accept additional Limited Partners ("Additional Limited Partners") up to and including the three month anniversary of the Effective Date; provided that the aggregate Commitments do not at any time exceed $25,000,000. Each Additional Limited Partner will be treated as having been a party to this Agreement as of the date hereof for all purposes (including allocation of Management Fees, Organizational Expenses, income, profits and loss); provided that each such Additional Limited Partner shall contribute to the Partnership, on the date of its admission to the Partnership, an amount of its Commitment equal to its portion of all Capital Contributions made by the other Partners to the Partnership prior to such admission date, plus interest from the date of such earlier Capital Contributions to the date of such Additional Limited Partner's admission to the Partnership at a rate equal to the greater of: 6.5.110% per annum: or 6.5.2the Prime Rate plus two percentage points per annum. For purposes of this Section 6.5, a Limited Partner that increases its Commitment shall be treated as an Additional Limited Partner with respect to the amount by which its Commitment increased. Upon the admittance of an Additional Limited Partner or the increase in a Limited Partner's Commitment, the General Partner may modify Schedule I attached hereto to reflect such admittance or increase. 6.6 NO ERISA ENTITIES Investment in the Alliance Funds is not open to institutions, pension plans and other funds subject to ERISA. 6.7 INDEMNIFICATION AND REIMBURSEMENT FOR PAYMENTS ON BEHALF OF A PARTNER 6.7.1If the Partnership is obligated to pay any amount to a governmental agency or to any other person (or otherwise makes a payment) because of a Partner's status or otherwise specifically attributable to a Partner (including, without limitation, federal withholding taxes with respect to foreign partners, state personal property taxes, state unincorporated business taxes, etc.), then such Partner ("Indemnifying Partner") shall indemnify the Partnership in full for the entire amount paid (including, without limitation, any interest, penalties and expenses associated with such payment). At the option of the General Partner, the amount to be indemnified may be charged against the Capital Account of the Indemnifying Partner and, at the option of the General Partner, either: 6.7.1.1 promptly upon notification of an obligation to indemnify the Partnership, the Indemnifying Partner shall make a cash payment to the Partnership equal to the full amount to be indemnified (and the amount paid shall be added to the Indemnifying Partner's Capital Account but shall not be deemed a Capital Contribution hereunder); or 6.7.1.2 the Partnership shall reduce subsequent distributions which would otherwise be made to the Indemnifying Partner until the Partnership has recovered the amount to be indemnified (provided that the amount of such reduction shall be deemed to have been distributed for all purposes of this Agreement, but such deemed distribution shall not further reduce the Indemnifying Partner's Capital Account). 6.7.2A Partner's obligation to make contributions to the Partnership under this Section 6.7 shall survive the termination, dissolution, liquidation and winding up of the Partnership and, for purposes of this Section 6.7, the Partnership shall be treated as continuing in existence. The Partnership may pursue and enforce all rights and remedies it may have against each Partner under this Section 6.7, including instituting a lawsuit to collect such contribution with interest calculated at a rate equal to the Prime Rate plus six percentage points per annum (but not in excess of the highest rate per annum permitted by law). 6.8 SECTION 754 ELECTION Upon the written request of Limited Partners holding a majority of the Limited Partner Interests, the General Partner may, in the General Partner's sole discretion, make an election provided for in ss.754 of the Code, if then permitted by applicable law. 6.9 BANK HOLDING COMPANY ACT OF 1956 With respect to any matter requiring the vote, approval or consent of Limited Partners under this Agreement, each of the Limited Partners subject to the provisions of the Bank Holding Company Act of 1956, as amended, may irrevocably elect in writing to the General Partner to terminate their rights hereunder or under applicable law (to the extent waivable) to vote, approve or consent to: 6.9.1counsel for Partnership (as contemplated in the definition of "Opinion of the Partnership's Counsel") and any and all of the matters referred to in Sections 6.8, 7.2, 8.3 and 12.1 ("Applicable Sections") of the Agreement; and 6.9.2the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law, with respect to such Limited Partner's interest (or any transferee thereof) in the Partnership in excess of five percent (an "Excess Interest"). Upon the receipt by the General Partner of such irrevocable written election, each such Limited Partner so electing may not (with respect to their Excess Interest) vote on, approve of or consent to its rights under applicable law on the matters contained in the Applicable Sections referred to in such election and such election will be binding upon any successor to such Excess Interest or any portion thereof. 6.10 LIMITED PARTNER'S DEFAULT ON COMMITMENT If any Limited Partner (a "Defaulting Partner") fails to make full payment of any portion of its Commitment when due and such failure is not cured within ten business days after receipt by such Limited Partner of written notice from the General Partner with respect to such failure to pay, the General Partner may in its discretion undertake any one or more of the following steps: 6.10.1 The General Partner may assist the Defaulting Partner in finding a buyer for the Defaulting Partner's Partnership interest, provided that the General Partner will have no obligation to contact any particular Limited Partner or other person with regard to such sale. 6.10.2 The Partnership may pursue and enforce all rights and remedies the Partnership may have against such Defaulting Partner with respect thereto, including a lawsuit to collect the overdue portion of the Commitment and any other amounts due the Partnership or General Partner hereunder, with interest at a rate equal to the Prime Rate plus six percentage points (but not in excess of the highest rate per annum permitted by law). 6.10.3 The General Partner may offer the Defaulting Partner's interest to the Partners (other than any Defaulting Partners) pro rata in accordance with their Commitments on the terms set forth below. If any Partner does not elect to purchase the entire interest offered to it, the remaining interest allocable to the Partners will be re-offered pro rata to the Partners who have purchased the entire interest offered to them until either all of such interest is acquired or no Partner wishes to make a further investment. At the closing of such purchase (on a date and at a place designated by the General Partner), each purchasing Partner shall: 6.10.3.1 deliver a non-interest bearing, non-recourse (except to the extent of the Partnership interest purchased and the proceeds therefrom) ten-year promissory note (in a form approved by the General Partner) payable to the Defaulting Partner in an amount equal to the portion of the Defaulting Partner's Capital Account being purchased by such Partner; and 6.10.3.2 assume the portion of the Defaulting Partner's obligation to make both defaulted and further Capital Contributions pursuant to its Commitment which is equal to the portion of the Defaulting Partner's interest being purchased by such Partner. The General Partner will handle the mechanics of making the offers set forth herein and will in its discretion impose reasonable time limits for acceptance. 6.10.4 If the entire Defaulting Partner's interest is not purchased in the manner set forth in Section 6.10.3 above, the General Partner in its sole discretion may offer the remaining interest either: 6.10.4.1 to a third party or parties on the same terms as originally offered to the Partners pursuant to Section 6.10.3 above (in which case such third party or parties will, as a condition of purchasing such interest, become a party to this Agreement); or 6.10.4.2 to the Partners in the manner provided in Section 6.10.3 above, but with no requirement to assume the Defaulting Partner's obligation to make further capital contributions pursuant to its Commitment, in which case the Defaulting Partner's Commitment shall be deemed reduced (effective on the date of the default) to the amount actually paid in and the aggregate Commitments of the Partnership shall be reduced by the amount of such Defaulting Partner's remaining contributions to be made pursuant to its Commitment. 6.10.5 In addition to, or instead of, the other remedies and undertakings available to the General Partner pursuant to this Section 6.10, the General Partner may, in its sole discretion, reduce (effective on the date of the default, after giving effect to the ten day cure period) any portion of such Defaulting Partner's Commitment (which has not been assumed by another Partner) to the amount of the Capital Contributions (which have not been purchased by another Partner) made by such Defaulting Partner (net of distributions pursuant to Section 3.2.2) and the aggregate Commitments of the Partnership shall be commensurately reduced. 6.10.6 Notwithstanding anything contained herein to the contrary, from and after any date on which a Defaulting Partner's Commitment is reduced pursuant to Section 6.10.5 above: 6.10.6.1 such Defaulting Partner will have no right to receive any distributions, except for distributions made upon the Partnership's liquidation; 6.10.6.2 such Defaulting Partner's Capital Account will not be credited with any Net Profits from Portfolio Investments or Short-Term Investment Income which shall instead be allocated to the Partners (other that any Defaulting Partners) in accordance with Sections 2.4.2 or 2.4.3, as appropriate (and as adjusted to treat the Defaulting Partner's Capital Contribution as equal to zero); 6.10.6.3 until such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.3.1 such Defaulting Partner's Capital Account shall continue to be debited in accordance with Section 2.4.4 for such Defaulting Partner's share of Net Loss from Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments and Organizational Expenses as if there had been no reduction in such Defaulting Partner's Commitment or Capital Contributions; and 6.10.6.3.2 the Management Fee payable by the Partners shall be calculated as if there had been no reduction in such Defaulting Partner's Commitment; and 6.10.6.4 once such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.4.1 such Defaulting Partner's Commitment shall be reduced to zero for all purposes of the Agreement, including the calculation of the Partnership's aggregate Commitments and determination of the Management Fee: and 6.10.6.4.2 such Defaulting Partner shall be liable each quarter to the General Partner or Management Agent for an amount equal to its portion of the Management Fee for such quarter as if there had been no reduction in such Defaulting Partner's Commitment. 6.10.7 No consent of any Limited Partner shall be required as a condition precedent to any transfer, assignment or other disposition of a Defaulting Partner's interest pursuant to this Section 6.10. 7. DURATION AND TERMINATION 7.1 DURATION The Partnership will terminate on the tenth anniversary of the Effective Date, except that, with the consent of Limited Partners holding a majority of the Limited Partner Interests, the term of the Partnership may be extended by the General Partner for additional one-year periods (but not for more than a total of two additional years). 7.2 EARLY TERMINATION Limited Partners holding 80% of the Limited Partner Interests may terminate the Partnership at any time. 7.3 TERMINATION AND LIQUIDATION OF PARTNERSHIP INTEREST Upon termination, the Partnership will be liquidated in an orderly manner. The General Partner will be the liquidator to wind up the affairs of the Partnership pursuant to this Agreement. 7.4 FINAL ALLOCATION AND DISTRIBUTION Upon termination of the Partnership (whether or not an early termination), the General Partner will make a final allocation of all kinds of income, loss and expense in accordance with Section 2 hereof and the Partnership's liabilities and obligations to its creditors shall be paid or adequately provided for prior to any distributions to the Partners. After payment or provision for payment of all debts of the Partnership, the remaining assets, if any, will be distributed among the Partners in accordance with the respective Capital Account balances (after giving effect to Section 2.4). 8. VALUATION OF PARTNERSHIP ASSETS 8.1 NORMAL VALUATION For purposes of this Agreement, the value of any security as of any date (or in the event such date is a holiday or other day which is not a business day, as of the next preceding business day) will be determined as follows: 8.1.1a security which is listed on a recognized securities exchange or the NMS will be valued at its last sales price or, if no sale occurred on such date, at the last "bid" price thereon; 8.1.2a security which is traded over-the-counter (other than on the NMS) will be valued at the most recent "bid" price; and 8.1.3all other securities will be valued on such date by the General Partner at fair market value in such manner as it may reasonably determine. 8.2 RESTRICTIONS ON TRANSFER OR BLOCKAGE Any security which is held under a representation that it has been acquired for investment and not with a view to public sale or distribution, or which is held subject to any other restriction, or where the size of the Partnership's holdings compared to the trading volume would affect its marketability, will be valued at such discount from the value determined under Section 8.1 above as the General Partner deems necessary to reflect properly the marketability of such security. 8.3 OBJECTION TO VALUATION Prior to acting upon its final valuation of any security pursuant to Sections 8.1.3 or 8.2, the General Partner shall provide the Limited Partners with notice of the General Partner's valuation of such security. If within 15 days after delivery of such notice Limited Partners holding a majority of the Limited Partner Interests deliver written notice to the General Partner objecting to the valuation of such security, then the General Partner will (at the Partnership's expense) cause an independent securities expert mutually acceptable to the General Partner and Limited Partners holding a majority of the Limited Partner Interests to review such valuation, and such expert's determination will be binding on the parties. 8.4 WRITE-DOWN TO VALUE Any securities which have permanently declined in value as determined by the General Partner will be written down to their value pursuant to the provisions of this Section 8 as of the date of such determination. 9. BOOKS OF ACCOUNTS; MEETINGS 9.1 BOOKS The Partnership will maintain complete and accurate books of account of the Partnership's affairs at the Partnership's principal office, which books will be open to inspection by any Partner (or its authorized representative) at any time during ordinary business hours. 9.2 FISCAL YEAR The fiscal year of the Partnership will be the calendar year, unless otherwise determined by the General Partner. 9.3 REPORTS The General Partner will furnish the Limited Partners: 9.3.1within 45 days after the end of each fiscal quarter, unaudited financial statements for such quarter and a report disclosing in summary form the status of all Portfolio Companies, and 9.3.2within 90 days after the end of each fiscal year, unaudited financial statements for such year, valuations of the Partnership's investments as of the end of such year (including a statement of each Partner's closing Capital Account and Fair Value Capital Account balances), and the Partnership's tax return and the Limited Partners' respective forms K-1 for such year. 9.4 TAX ALLOCATION 9.4.1The income, gains, losses, deductions and credits of the Partnership will be allocated for federal, state and local income tax purposes among the Partners so as to reflect as nearly as possible the allocation of such income, gains, losses, deductions and credits among the Partners for computing their Capital Accounts. Notwithstanding the preceding sentence, if the basis for federal income tax purposes of any property held by the Partnership differs from the basis of such property on the Partnership's books, any gain or loss arising from such property shall be allocated among the Partners so as to take into account the difference between the tax basis and the book basis of such property in any manner authorized by the Treasury Regulations under Section 704(c) of the Code and selected by the General Partner. 9.4.2If any Partner is treated for income tax purposes as realizing ordinary income because of receipt of its Partnership interest (whether under ss.83 of the Code or any similar provisions of any law, rule or regulation or any other applicable law, rule, regulation or doctrine) and the Partnership is entitled to any offsetting deduction, the Partnership's deduction will be allocated among the Partners in such manner as to, as nearly an possible, offset such ordinary income realized by such Partner. 9.4.3Notwithstanding any other provision of this Agreement, if a Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation ss.1.704-1(b)(2)(ii)(d)(4), (5) or (6) which gives rise to a negative capital account (or which would give rise to a negative capital account when added to expected adjustments, allocations or distributions of the same type), such Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible; provided that the Partnership's subsequent income, gains, losses, deductions and credits will be allocated among the Partners so as to achieve as nearly as possible the results that would have been achieved if this Section 9.4.3 had not been in this Agreement, except that no such allocation shall be made which would violate the provisions or purposes of Treasury Regulation ss.1.704-1(b). 9.5 ANNUAL MEETING Commencing in 1998, the General Partner will hold an annual general informational meeting for the Limited Partners. The General Partner will give all Limited Partners at least 30 days notice of each annual meeting. 9.6 TAX MATTERS PARTNER The General Partner is designated the "Tax Matters Partner" (as defined in Code ss.6231). 10. CERTIFICATE OF LIMITED PARTNERSHIP; POWER OF ATTORNEY 10.1 CERTIFICATE OF PARTNERSHIP A certificate of Limited Partnership within the meaning of the California Partnership Act ("Certificate") will be prepared following the execution and delivery of this Agreement. The General Partner will cause the Certificate to be filed and recorded in the office of the Secretary of State of the State of California and, to the extent required by local law, in the appropriate place in each state in which the Partnership may hereafter establish a place of business, but the Partnership will not be obligated to provide the Limited Partners with a copy of any amendment to or restatement of the Certificate. The General Partner will also cause to be filed, recorded and published such statements, notices, certificates or other instruments required by any provision of any applicable law which governs the formation of the Partnership or the conduct of its business from time to time. 10.2 POWER OF ATTORNEY Each of the undersigned does hereby constitute and appoint V.R. Ranganath (so long as Mr. Ranganath is a member of the General Partner), and each person who hereafter becomes a manager of the General Partner with full power to act without the others, as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, acknowledge and deliver or file: 10.2.1 the Certificate; 10.2.2 any amendment to or cancellation of the Certificate 10.2.3 all instruments, documents and certificates which may from time to time be required by any law to effectuate, implement and continue the valid and subsisting existence of the Partnership 10.2.4 all instruments, documents and certificates which may be required to effectuate the dissolution and termination of the Partnership; and 10.2.5 in the case of a Defaulting Partner any bills of sale or other appropriate transfer documents necessary to effectuate transfers of such Defaulting Partner's interest pursuant to Section 6.10 above. The powers of attorney granted herein will be deemed to be coupled with an interest, will be irrevocable and will survive the death, incompetence, disability or dissolution of a Limited Partner. Without limiting the foregoing, the powers of attorney granted herein will not be deemed to constitute a written consent of any Limited Partner for purposes of Section 12.1. 11. RELATIONSHIP BETWEEN THE ALLINACE FUNDS AND THE PARTNERSHIP 11.1 The General Partner presently intends that the guidelines set forth in this Section 11 generally will control Co-investments and other dealings between any other Alliance Fund and the Partnership. 11.2 The Partnership will not purchase from or sell to another Alliance Fund, except with the prior approval of Limited Partners holding a majority of Limited Partner Interests. 11.3 The General Partner will decide whether the Partnership will invest in a company which meets the investment criteria of the Partnership and another Alliance Fund (as determined by the General Partner in good faith) but in which neither the Partnership nor such other Alliance Fund has previously invested. The extent to which the Partnership participates in an investment in such company (relative to the amount, if any, to be invested by another Alliance Fund) will be determined also by the General Partner in its sole discretion. 11.4 The Partnership will invest in a company in which an Alliance Fund has previously invested only upon approval of the General Partner. 12. MISCELLANEOUS 12.1 AMENDMENTS This Agreement may be amended by the General Partner in any manner that does not adversely affect the rights of any Limited Partner and the General Partner shall furnish notice of any such amendment to the Limited Partners. This Agreement may also be amended by action taken by both: 12.1.1 the General Partner; and 12.1.2 the Limited Partners owning a majority in interest of the Capital Accounts of all the Limited Partners at the time of the amendment, provided that such amendment does not discriminate among the Limited Partners. 12.2 NOTICES All notices provided for under this Agreement shall be in writing and shall be sufficient if sent by first-class mail to the address set forth in the schedule in the files of the Partnership as of the date of such notice for the party to whom such notice is to be given. 12.3 BINDING EFFECT OF AGREEMENT This Agreement, including Section 10.2 hereof, shall be binding on the successors, assigns and the legal representatives of each of the Partners. 12.4 COUNTERPARTS This Agreement may be executed in more than one counterpart with the same effect as if the Partners executing the several counterparts had all executed one document. 12.5 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the principles of conflicts of law thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date first above written. GENERAL PARTNER: LIMITED PARTNER: Alliance Venture Management, LLC Alliance Semiconductor Corporation By: /s/ V.R. Ranganath By: /s/ N.Damodar Reddy ---------------------------- --------------------------- signature of authorized signature of authorized representative representative V.R. Ranganath N. Damodar Reddy - --------------------------------- ------------------------------- printed name printed name President President and CEO - --------------------------------- ------------------------------- title title SCHEDULE I LIMITED PARTNERS
Limited Partner Capital Contribution Commitment - ---------------------------------------------------------------------------- Alliance Semiconductor Corporation $15,000,000.00
EX-10.34 6 0006.txt ALLIANCE VENTURES III, LP - PARTNERSHIP AGREEMENT AGREEMENT OF LIMITED PARTNERSHIP THIS AGREEMENT of limited partnership ("Agreement") is dated as of February 28, 2000 among Alliance Venture Management, LLC, a California limited liability company ("General Partner"), Alliance Semiconductor Corporation, a Delaware corporation ("Alliance") and the limited partners ("Limited Partners") listed in Schedule I attached hereto (General Partner and the Limited Partners being herein collectively called the "Partners"). Capitalized terms not otherwise defined shall have the meanings ascribed to such terms in Section 2.1. THE PARTIES AGREE AS FOLLOWS: 1. GENERAL PROVISIONS 1.1 FORMATION The Partners hereby agree to form a limited partnership ("Partnership") pursuant to and in accordance with the California Revised Uniform Limited Partnership Act ("California Partnership Act"). 1.2 NAME The name of the Partnership will be "Alliance Ventures III, L.P." or such other name or names as the General Partner may from time to time designate. 1.3 PURPOSE The Partnership is organized for the object and purpose of making venture capital investments in private companies, managing and supervising such investments and engaging in such activities incidental or ancillary thereto as the General Partner deems necessary or advisable, provided, however, that the Partnership shall not engage in any activity that for United States income tax purposes would constitute a United States trade or business. 1.4 PLACE OF BUSINESS The Partnership will maintain an office and principal place of business in Santa Clara, California or at such other place or places as the General Partner may from time to time designate. 2. DEFINITIONS; DETERMINATIONS; CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS 2.1 DEFINITIONS For purposes of this Agreement the following capitalized terms shall have the meanings set forth below: 2.1.1ADDITIONAL LIMITED PARTNERS has the meaning set forth in Section 6.5. 2.1.2ALLIANCE FUND means any of Alliance Ventures I, L.P., Alliance Ventures II, L.P., Alliance Ventures III, L.P. and each private venture capital equity fund hereafter sponsored by the General Partner, and the ALLIANCE FUNDS means all of such funds, collectively. 2.1.3APPLICABLE LAW means ERISA or any federal or state law applicable to public pension plans or any regulation, case law or administrative ruling relating thereto. 2.1.4BASIS of any security means the basis of such security as determined in accordance with the Code less the amount of any write-down pursuant to Section 2.1.39.3 of the definition of Realized Investment Loss (as the case may be) and as further adjusted to reflect the effects of any transaction described in Section 2.2.1. 2.1.5CALIFORNIA PARTNERSHIP ACT has the meaning set forth in Section 1.1. 2.1.6CAPITAL ACCOUNT has the meaning set forth in Section 2.4. 2.1.7CAPITAL CALL NOTICE has the meaning set forth in Section 2.3.1. 2.1.8CAPITAL CONTRIBUTION of any Partner means the amount received by the Partnership from such Partner pursuant to its Commitment. 2.1.9CARRIED INTEREST means the General Partner's 16% interest in the Partnership's Net Profits from Portfolio Investments and Net Loss from Portfolio Investments allocated to the General Partner pursuant to Sections 2.4.3.2 and 2.4.4.2. 2.1.10 CODE means the Internal Revenue Code of 1986, as in effect on the date hereof and, at the discretion of the General Partner, including any such amendment thereto which does not change the economic terms hereof. 2.1.11 COMMITMENT with respect to each Partner means the aggregate amount of cash agreed to be contributed as capital to the Partnership by such Partner as specified in Schedule I attached hereto as the same may be modified from time to time under the terms of this Agreement. 2.1.12 CURRENT INCOME means all interest and dividend income (including original issue discount and payment of in-kind income) from investments (other than Short-Term Investments). 2.1.13 DEFAULTING PARTNER has the meaning set forth in Section 6.10. 2.1.14 EFFECTIVE DATE means November 12, 1999. 2.1.15 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.1.16 EXCESS LOSSES has the meaning given such term in Section 2.4.5. 2.1.17 FAIR VALUE CAPITAL ACCOUNTS means the Partners' Capital Accounts computed in accordance with Section 2.3, but treating each security owned by the Partnership as if, on the date as of which such computation is being made, such security had been sold at its "value" (determined in accordance with Section 9) and any resulting gain or loss had been allocated to the Partners' Capital Accounts in accordance with Section 2.4. 2.1.18 INDEMNIFYING PARTNER has the meaning set forth in Section 6.7. 2.1.19 LIMITED PARTNERS means the Persons listed in Schedule I hereto in their capacity as limited partners of the Partnership (including each Person admitted to the Partnership in accordance with Section 6.5) and each Additional Limited Partner who is admitted to the Partnership as a substitute limited partner pursuant to Section 6.2, so long as each such Person continues to be a limited partner of the Partnership hereunder. 2.1.20 MANAGEMENT AGENT means Alliance Venture Management, LLC or any other party (which may be the General Partner or a partner or affiliate thereof) selected by the General Partner to act as agent of the Partnership with respect to managing the affairs of the Partnership. 2.1.21 MANAGEMENT FEE has the meaning set forth in Section 4.2. 2.1.22 NMS means the National Association of Securities Dealers Automated Quotation System, National Market System. 2.1.23 NET LOSS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period over (y) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period. 2.1.24 NET PROFITS FROM PORTFOLIO INVESTMENTS for any period means the excess of (x) the sum of all of the Partnership's Current Income plus Realized Investment Gain for such period over (y) the sum of all the Partnership's Realized Investment Loss and Partnership Expenses Allocable to Portfolio Investments for such period. 2.1.25 OPINION OF LIMITED PARTNER'S COUNSEL means a written opinion of any counsel selected by a Limited Partner which counsel and opinion shall be reasonably acceptable in form and substance to the General Partner in its sole discretion. 2.1.26 OPINION OF THE PARTNERSHIP'S COUNSEL means an opinion of counsel selected by the General Partner and reasonably acceptable (by reason of experience in the area of law involved) to the Limited Partner affected by such opinion or, if more than one Limited Partner is affected by such opinion, Limited Partner(s) holding one-third of the Limited Partner Interests so affected. 2.1.27 ORGANIZATIONAL EXPENSES means the reasonable expenses (including, without limitation, travel, printing, legal and accounting fees and expenses) incurred in connection with the organization and funding of the Partnership and the General Partner. 2.1.28 PARTNER INTEREST means a Partner's total ownership and interest in the Partnership based upon such Partner's aggregate Capital Contributions relative to the Capital Contributions of all Partners. 2.1.29 PARTNERSHIP EXPENSES means Partnership Expenses Allocable to Portfolio Investments and Partnership Expenses Not Allocable to Portfolio Investments. 2.1.30 PARTNERSHIP EXPENSES ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses directly relating to any Portfolio Investment (to the extent not borne or reimbursed by a Portfolio Company) , including, but not limited to: 2.1.30.1 all costs and expenses attributable to acquiring, holding, monitoring and disposing of the Partnership's investments (including, but not limited to, registration expenses and brokerage, finders', custodial and other fees); 2.1.30.2 legal, accounting, auditing and other fees and expenses directly relating to specific Portfolio Investments (including, but not limited to, expenses associated with negotiating, consummating, monitoring and disposing of the Partnership's investments); and 2.1.30.3 extraordinary expenses of the Partnership directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements), but not including the Management Fee, Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.31 PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS means all costs and expenses relating to the Partnership's activities and business other than Partnership Expenses Allocable to Portfolio Investments, including, but not limited to: 2.1.31.1 legal, accounting, auditing and other fees and expenses (including, but not limited to, expenses associated with the preparation of Partnership financial statements, tax returns and forms K-1); 2.1.31.2 extraordinary expenses of the Partnership not directly relating to specific Portfolio Investments (including, but not limited to, litigation and indemnification costs and expenses, judgments and settlements); and 2.1.31.3 the Management Fee, but not including Organizational Expenses and those expenses described in Section 4.1 as payable by the Management Agent. 2.1.32 PAYOUT with respect to each Limited Partner (other than a Defaulting Partner) means the time when such Limited Partner has received cumulative distributions from the Partnership (regardless of the source or character thereof) in an amount equal to its aggregate Capital Contributions. If a distribution of cash or securities causes the Partnership to reach and exceed Payout, the portion of the amount distributed which was necessary to reach Payout will be deemed to have been distributed before Payout, and any remaining amount will be deemed to have been distributed after Payout. 2.1.33 PERSON means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 2.1.34 PORTFOLIO COMPANY means any company in which the Partnership has an investment (excluding for such purposes Holdback Securities or a Short-Term Investment). 2.1.35 PORTFOLIO COMPANY FEES means: 2.1.35.1 all compensation (whether in cash or securities) directly or indirectly received by the General Partner, any of its managers, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but excluding any amount received by a manager of the General Partner) acting, directly or indirectly, on behalf of the Partnership from any Portfolio Company, whether as director fees, management fees, consultant fees or investment banking fees; and 2.1.35.2 all breakup fees, litigation proceeds or commitment fees received by the General Partner or any of its managers from transactions not consummated by the Partnership (in each case, net of all amounts necessary to reimburse the General Partner, each of its managers, the Management Agent and any employee or agent of the Management Agent for all costs and expenses incurred by any of them in connection with consummated or unconsummated transactions or in connection with generating any such fees and not previously reimbursed), but not including any amount received by the General Partner, any of its managers, members, employees or agents from Portfolio Companies as reimbursement for out-of-pocket expenses directly related to such Portfolio Companies. 2.1.36 PORTFOLIO INVESTMENTS means any investments held by the Partnership other than Short-Term Investments. 2.1.37 PRIME RATE means, on any date, a variable rate per annum equal to the rate of interest published, from time to time by the Wall Street Journal as the "prime rate" at large U.S. money center banks. 2.1.38 REALIZED INVESTMENT GAIN means: 2.1.38.1 the excess, if any, of the proceeds from the sale, redemption or other disposition of any Portfolio Investments over the Basis of such Portfolio Investments; and 2.1.38.2 the excess, if any, of the value (as determined pursuant to Section 8) of any Portfolio Investments distributed to the Partners over the Basis of such Portfolio Investments. 2.1.39 REALIZED INVESTMENT LOSS means: 2.1.39.1 the deficiency, if any, of the proceeds from the sale, redemption or other disposition of Portfolio Investments as compared to the Basis of such Portfolio Investments; 2.1.39.2 the deficiency, if any, of the value (as determined pursuant to Section 9) of any Portfolio Investments distributed to the Partners as compared to the Basis of such Portfolio Investments; and 2.1.39.3 the amount, as determined by the General Partner, by which Portfolio Investments have permanently declined in value as compared to the Basis of such Portfolio Investments. 2.1.40 SECURITIES ACT means the Securities Act of 1933, as amended. 2.1.41 SHORT-TERM INVESTMENT INCOME means the income earned on Short-Term Investments, including any gains and net of any losses from dispositions of Short-Term Investments and also net of any costs and expenses directly attributable thereto. 2.1.42 SHORT-TERM INVESTMENTS means commercial paper, governmental obligations, money market instruments, certificates of deposit and other similar obligations and securities, in each case having a maturity of one year or less at the time of purchase by the Partnership. 2.1.43 TAX DISTRIBUTIONS means distributions made to the General Partner with respect to a fiscal year equal to the amount by which the General Partner's cumulative estimated tax liabilities for the fiscal year and all prior fiscal years exceeds the aggregate amount of distributions made to the General Partner: 2.1.43.1 with respect to all prior fiscal years; and 2.1.43.2 with respect to the current fiscal year under Section 3.2.1. For this purpose, the General Partner's cumulative estimated tax liabilities means the product of the aggregate amount by which the Net Profits from Portfolio Investments included in the Carried Interest exceeds the Net Losses from Portfolio Investments included in the Carried Interest, times the highest marginal federal, state and local tax rates applicable to any of the General Partner's members and former members. 2.1.44 TAX EXEMPT PARTNER means any Limited Partner which is exempt from income taxation under ss.501(a) of the Code. 2.1.45 UBTI means unrelated business taxable income as defined in ss.512 and ss.514 of the Code. 2.2 DETERMINATIONS 2.2.1An "exchange of securities" will be treated as a sale if under generally accepted accounting principles the Partnership realizes gain or loss on such exchange, in which case the Basis of the securities received in the exchange will be adjusted to take cognizance of the gain or loss from such exchange. 2.2.2Any determination to be made based upon a specified proportion of the "Limited Partner Interests" shall be based upon the Limited Partners' Capital Contributions (less amounts returned pursuant to Section 2.3.2), excluding, for purposes of any Applicable Section (as such term is defined in Section 6.9 below) and any vote, approval or consent to the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law for which an election was made under Section 6.9, that portion of each Limited Partner's Capital Account which represents each such Limited Partner's Excess Interest (as such term is defined in Section 6.9); provided that for purposes of this Section 2.2.2 and except as set forth in Section 12.1, interests held by a Defaulting Partner shall be disregarded. 2.3 CAPITAL CONTRIBUTION COMMITMENT 2.3.1Each Partner agrees to make cash contributions (pro rata based upon the Partners' respective Commitments) to the capital of the Partnership in the aggregate amount equal to its Commitment by contributing installments in cash as follows: 50% of its Commitment on the Effective Date and thereafter, upon at least 30 days notice ("Capital Call Notice"). Each Capital Contribution will be made by delivery of a check made payable to the Partnership or by means of a wire transfer of funds to an account designated by the General Partner. 2.3.2The General Partner may cause the Partnership to return to the Partners all or any portion of any Capital Contribution to the Partnership which is not invested in a Portfolio Company or used to pay Partnership Expenses (including Management Fees) or Organizational Expenses. Each such return of Capital Contributions shall be made pro rata among all Partners in the same proportion as the Partners made such Capital Contributions and, so long as such Capital Contributions are returned to the Partners on or before the 120th day following the date such Capital Contributions were due (as set forth in the Capital Call Notice pursuant to which such Capital Contributions were made by the Partners to the Partnership), such returned Capital Contributions may be called again by the General Partner according to the provisions of this Section 2.3 as if such returned Capital Contributions had not been previously called. 2.4 CAPITAL ACCOUNTS A capital account ("Capital Account") will be established for each Partner on the books of the Partnership and will be adjusted as follows: 2.4.1CAPITAL CONTRIBUTIONS A Partner's Capital Contribution will be credited to its Capital Account when received by the Partnership; 2.4.2SHORT-TERM INVESTMENT INCOME Except as otherwise provided in 2.4.5 below, Short-Term Investment Income earned in each quarterly period will be credited to, and Short-Term Investment Loss for each quarterly period shall be debited against, the Capital Accounts of the Partners pro rata according to their respective Partner Interests; 2.4.3NET PROFITS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Profits from Portfolio Investments, such Net Profits from Portfolio Investments shall be credited: 2.4.3.1 84% to the Capital Accounts of the Partners pro rata according to their respective Partner Interests; and 2.4.3.2 16% to the Capital Account of the General Partner; 2.4.4NET LOSS FROM PORTFOLIO INVESTMENTS Except as otherwise provided in 2.4.5 below, for any period in which the Partnership has Net Loss from Portfolio Investments, such Net Loss from Portfolio Investments shall be debited: 2.4.4.1 84% against the Capital Accounts of all Partners pro rata according to their respective Partner Interests; and 2.4.4.2 16% against the Capital Account of the General Partner; 2.4.5SPECIAL GENERAL PARTNER ALLOCATIONS Notwithstanding anything in this Section 2.4, if at any time the General Partner's Capital Account is reduced to zero, 100% of Net Loss from Portfolio Investments, Organizational Expenses and Partnership Expenses Not Allocable to Portfolio Investments ("Excess Losses") will be debited against the Capital Accounts of the Limited Partners pro rata according to their respective Partner Interests. With respect to each quarterly period thereafter 100% of Short-Term Investment Income and Net Profits from Portfolio Investments will be credited to the Capital Accounts of the Limited Partners in proportion to their respective Partner Interests, until the Excess Losses have been recouped (i.e., an amount has been allocated 100% to the Limited Partners equal to the amount of the Excess Losses), at which time the allocations of Short-Term Investment Income and Net Profits from Portfolio Investments set forth in 2.4.2 and 2.4.3 above, respectively, will be reinstated; 2.4.6PARTNERSHIP EXPENSES NOT ALLOCABLE TO PORTFOLIO INVESTMENTS Partnership Expenses Not Allocable to Portfolio Investments will be debited against the Capital Accounts of Partners pro rata according to their respective Partner Interests. If Limited Partners are admitted subsequent to the formation of the Partnership pursuant to Section 6.5, the allocation of Organization Expenses and Partnership Expenses Not Allocable to Portfolio Investments will be adjusted as if the subsequently admitted Limited Partners had been admitted at the time of formation, except that the amount of interest described in Section 6.5 will be credited to and, upon payment thereof to the Management Agent, debited from the Capital Accounts of such Additional Limited Partners; 2.4.7ORGANIZATIONAL EXPENSES Organizational expenses will be debited against the Capital Account of Alliance; 2.4.8DISTRIBUTIONS DEBITED AGAINST CAPITAL ACCOUNT Any amount distributed to a Partner will be debited against such Partner's Capital Account. The General Partner normally will adjust the Partnership's Capital Accounts at the end of each quarterly period, but may adjust them more often if a new Partner is admitted to the Partnership or circumstances otherwise make it advisable in the General Partner's judgment; 2.4.9DISTRIBUTIONS IN KIND If any securities are to be distributed in kind to the Partners as provided in Section 3, such securities will first be written up or down to their value (as determined pursuant to Section 8 as of the date of such distribution), thus creating Realized Investment Gain or Realized Investment Loss (if any) , which shall be allocated in accordance with Section 2.4 to the Capital Accounts of the Partners, and upon the distribution of such securities to such Limited Partners, the value of such securities shall be debited, in accordance with Section 2.4, to the Capital Accounts of the Partners. 3. DISTRIBUTIONS 3.1 DISTRIBUTION POLICY The General Partner may in its sole discretion make distributions of cash or securities at any time and from time to time; provided, however, that no securities will be distributed in kind to the Partners until the earlier to occur of: 3.1.1such time as such securities may be sold by or for the account of any Partner pursuant to Rule 144 promulgated under the Securities Act, or any successor rule; or 3.1.2the final distribution of the assets of the Partnership to the Partners pursuant to Section 7.4. 3.2 CASH DISTRIBUTION At any time when Payout is not achieved, all distributions of cash shall be made to the Partners pro rata according to their Partner Interests, except that the General Partner shall also be entitled to receive Tax Distributions. At any time when Payout is achieved, all distributions of cash shall be made to the Partners in the following priority: 3.2.1First, 100% of each distribution shall be made to the General Partner until the General Partner has received distributions pursuant to this Section 3.2.1, or as Tax Distributions, in aggregate amount equal to 16% of Net Profits from Portfolio Investments for the period from the Effective Date to the date of such distribution; and 3.2.2Second, after the required distribution pursuant to 3.2.1 above, each distribution will be made to all Partners pro rata according to their respective Capital Accounts; provided that the amount distributed to the General Partner (other than Tax Distributions) shall in no event cause the General Partner's Capital Account to be reduced below zero and that any amount which is not distributed to the General Partner because of this provision shall be distributed to the Limited Partners pro rata according to their respective Partner Interests. 3.3 DISTRIBUTIONS IN KIND 3.3.1Subject to the terms of Sections 3.3.2 and 7.4, all distributions of securities shall be made as follows: 3.3.1.1 First, such securities will be distributed to the Partners pro rata according to their Partner Interests until an amount of such securities has been distributed to the Partners as has an aggregate value, as determined pursuant to Section 8, equal to the Partnership's Basis (as determined in accordance with the Code and as adjusted to reflect the effects of any transaction described in 2.2.2.1) in the total amount of such property to be distributed to the Partners pursuant to this Section 3.3.1.1 and 3.3.1.2 below, plus all Management Fees paid by the Partnership (to the extent not previously reimbursed); 3.3.1.2 Second, such securities will be distributed to Alliance until an amount of such securities has been distributed to Alliance as has an aggregate value equal to the Organizational Expenses paid by Alliance (to the extent not previously reimbursed); and 3.3.1.3 Third, such securities will be distributed 84% to the Partners pro rata according to their Partner Interests and, subject to 3.3.2 below, and 16% to the General Partner. 3.3.2At any time when Payout is not achieved, unless otherwise agreed by the General Partner, the Partnership shall not deliver to the General Partner, but rather will hold for the benefit of the General Partner and as security for the obligations of the General Partner pursuant to Section 7.3.3, all property otherwise to be distributed pursuant to 3.3.1.2 above ("Holdback Securities"); provided that at such time as Payout is achieved, the Partnership will immediately deliver all Holdback Securities to the General Partner. Notwithstanding the foregoing, for all purposes of this Agreement, such Holdback Securities will be deemed to have been distributed to the General Partner. Accordingly, e.g., the Capital Account of the General Partner will be reduced by the value of the Holdback Securities upon such distribution, such Holdback Securities will be the property of the General Partner and not of the Partnership, and there will be no adjustment to any Capital Account of any Partner on account of any change in the value of Holdback Securities subsequent to such distribution (unless and to the extent all or any portion of such Holdback Securities are contributed to the Partnership pursuant to Section 7.3.3). At the election of the General Partner, the Partnership will sell or exchange all or any portion of the Holdback Securities as requested by the General Partner; provided that such sale or exchange is with an unaffiliated third party and that the proceeds of such sale or exchange (net of any expenses of such sale, if the proceeds thereof are in cash) will be delivered to and held by the Partnership until Payout is achieved; and provided, further, that such proceeds will be paid to the General Partner promptly after Payout is achieved. 4. MANAGEMENT AGENT, MANAGEMENT FEE AND ORGANIZATIONAL EXPENSES 4.1 MANAGEMENT AGENT The General Partner may cause the Partnership to appoint a Management Agent to manage the affairs of the Partnership. The General Partner shall have the duty to manage the affairs of the Partnership during any period when there is no Management Agent, and shall be entitled to receive the Management Fee payable with respect to any period during which it so manages (as well as the amounts described in 4.2.5 and 4.2.6 below) . The appointment of the Management Agent shall not in any way relieve the General Partner of its responsibilities and authority vested pursuant to Section 5.1. The General Partner or the Management Agent shall pay: 4.1.1all ordinary overhead and administrative expenses of the Partnership (including salaries and related benefits, rent, travel, entertainment and equipment expenses but excluding any Partnership Expenses and any Organizational Expenses reimbursable under Section 4.3) incurred by the General Partner, the Management Agent or any of their respective managers, members, agents, employees or stockholders (to the extent not borne or reimbursed by a Portfolio Company) in connection with: 4.1.1.1 identifying and investigating investment opportunities for the Partnership 4.1.1.2 monitoring the Partnership's investments; and 4.1.1.3 providing Portfolio Company reports and information to the Limited Partners; and 4.1.2Organizational Expenses to the extent not reimbursed under Section 4.3. 4.2 MANAGEMENT FEE 4.2.1GENERAL Subject to Section 4.1, during each consecutive twelve-month or lesser period from and after the Effective Date (each such twelve-month period, a "Management Fee Year"), the Partnership will pay the Management Agent in advance, commencing with a payment on the Effective Date for the period from the Effective Date up to and including December 31, 1999, and thereafter on a quarterly basis on January 1, April 1, July 1 and October 1 of each year until final distribution of the Partnership's assets pursuant to Section 7.4 below (or as otherwise provided in Section 4.2.5 below), a fee as calculated below ("Management Fee"), as compensation for managing the affairs of the Partnership. 4.2.2CALCULATION OF MANAGEMENT FEE The Management Fee shall be 1.00% of the aggregate Commitments per year for the term of the Agreement, calculated in each year including the Commitments of any Limited Partners admitted pursuant to Section 6.5 as if made on the Effective Date. In addition, if in connection with admission of any Additional Limited Partner, any portion of the Management Fee is paid later than as specified in Section 4.2.1 above, the Management Fee will be adjusted to include, in respect of any such delayed amount, interest, from the date as of which such delayed amount was specified for payment through the date of actual payment thereof, at a rate equal to the Prime Rate plus two percentage points per annum. 4.2.3PARTIAL YEAR The Management Fee in any partial year will be pro-rated on a daily basis according to the actual number of days in such period. 4.2.4PORTFOLIO COMPANY FEES Portfolio Company Fees received by the General Partner, any of its general partners, any employee or agent of the General Partner, the Management Agent or any affiliate, principal, employee or agent of the Management Agent (but not by any amounts received by a manager of the General Partner), shall be deducted from the management fees paid by the Alliance Funds; provided that, with respect to Portfolio Company Fees comprised of stock or rights convertible into or exercisable or exchangeable for stock, so long as the recipient thereof executes and delivers to the General Partner an agreement to hold such property or the proceeds thereof for the benefit of the Management Agent, such property will not be deemed to be received, for purposes of the foregoing, and therefore will not be deducted, until such time as, and only to the extent that, the recipient thereof realizes cash proceeds with respect to such property, whether upon the sale or other transfer of such property or as distributions with respect thereto; and provided, further, that any such Portfolio Company Fees held as of the ninth anniversary of the Effective Date and not previously deemed received pursuant to this sentence will be deemed to have been received as of such date. 4.2.5EARLY TERMINATION In the event of an early termination of the Partnership pursuant to Section 7.2, the Management Fee (computed pursuant to Section 4.2.2 above) will be payable to the Management Agent through the date six months after the final distribution in connection therewith. 4.2.6ORGANIZATIONAL EXPENSES Alliance will pay the organizational expenses and set-up expenses of the Alliance Funds. The Alliance Funds will pay expenses directly related to the consummation of an investment whether or not consummated, the legal, custodial, and accounting expenses, and certain other related expenses of the Alliance Funds. The General Partner will pay expenses incurred in connection with investigating investment opportunities and monitoring investments, and will provide for normal operating overhead, including without limitation salaries, office space, and travel expenses for all personnel of the General Manager. 4.2.7NO LIABILITY TO PARTNERSHIP OR PARTNERS Neither the Management Agent nor any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (nor any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the Management Agent, or on behalf of the Management Agent, with respect to the Partnership or for any action taken, or omitted to be taken, by the Management Agent, or any shareholder, partner, director, officer, manager, member, employee, agent or affiliate of the Management Agent (or any of their respective shareholders, partners, directors, officers, managers, members, employees, agents or affiliates), so long as such person: 4.2.7.1 acted in good faith 4.2.7.2 acted in a manner reasonably believed to be in the best interests of the Partnership; and 4.2.7.3 was neither grossly negligent nor engaged in willful malfeasance. 5. GENERAL PARTNER 5.1 MANAGEMENT AUTHORITY 5.1.1The management of the Partnership will be vested exclusively in the General Partner, and the General Partner will have full control over the business and affairs of the Partnership. The General Partner will have the power on behalf and in the name of the Partnership to carry out any and all of the objects and purposes of the Partnership and to perform all acts and enter into and perform all contracts and other undertakings which, in its sole discretion, it deems necessary or advisable or incidental thereto, including the power to acquire or dispose of any security (including marketable securities). 5.1.2All matters concerning: 5.1.2.1 the allocation of Short-Term Investment Income, Current Income, Realized Investment Gain, Realized Investment Loss, Partnership Expenses, Partnership Expenses Allocable to Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments, Organizational Expenses, Carried Interest and the distribution of net proceeds and the return of capital among the Partners, including the taxes thereon; 5.1.2.2 accounting procedures and determinations, estimates of the amount of Management Fees payable by any Defaulting Partner or Regulated Partner; and 5.1.2.3 other determinations not specifically and expressly provided for by the terms of this Agreement, shall be determined by the General Partner in accordance with its reasonable interpretation of the provisions of this Agreement, whose determination shall be final and conclusive as to all the Partners. 5.2 LIMITATION ON INVESTMENTs The General Partner will not invest (including guarantees of a Portfolio Company's or its subsidiary's obligations) more than 20% of the Partnership's aggregate Commitments in any one Portfolio Company without the prior written consent of Limited Partners holding 80% of the Limited Partner Interests. 5.3 UBTI The General Partner shall use its reasonable efforts to ensure that it does not knowingly engage in a transaction which will cause any Tax Exempt Partner to recognize UBTI as a result of its investment in the Partnership. 5.4 PERMITTED CO-INVESTMENTS BY CERTAIN LIMITED PARTNERS, THE GENERAL PARTNER AND RELATED PARTIES; DIRECTOR SHARES 5.4.1The General Partner will not purchase securities in Portfolio Companies. Nothing in this Agreement will restrict the General Partner from permitting certain Limited Partners (and not necessarily all Limited Partners), managers and members of the General Partner and employees and stockholders of the Management Agent (collectively, the "Co-investors" and each individually a "Co-investor") to invest in Portfolio Companies; provided that: 5.4.1.1 in the case of each such investment by one or more Co-investors in a Portfolio Company (a "Co-investment"), each of the Co-investors purchases, contemporaneously with the purchase by the Partnership, securities issued by such Portfolio Company which are of the same class as purchased by the Partnership (and if the Partnership purchases more than one class of securities issued by such Portfolio Company, each of such Co-investors purchases an amount of each such class in the same proportions as purchased at such time by the Partnership) at a price and on other terms which are the same as, or less favorable to the Co-investors than, the price and terms at or on which the Partnership is then purchasing securities of such Portfolio Company; provided that in no event will a Co-investor be obligated, solely on account of having made a Co-investment in a Portfolio Company, to purchase additional securities of such Portfolio Company, whether or not the Partnership subsequently does so; and 5.4.1.2 the aggregate amounts invested by any managers and members of the General Partner in any Portfolio Company will not exceed 10% of the aggregate amount invested by the Partnership in such Portfolio Company at such time. 5.4.2Subject to Section 5.4.1 above, nothing in this Agreement will restrict managers, members, employees and agents of the General Partner and the Management Agent from acquiring shares of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, in connection with serving on the boards of directors of, or in similar capacities for, such companies. In no event will the receipt by any manager of the General Partner of stock of Portfolio Companies, or rights convertible into or exercisable or exchangeable for any such stock, be deemed to be Portfolio Company Fees. 5.5 NO TRANSFER OF GENERAL PARTNERSHIP INTEREST; NO WITHDRAWAL OR LOANS The General Partner will not sell, assign, pledge, mortgage or otherwise dispose of its General Partner interest in the Partnership and will not borrow or withdraw any amount from the Partnership. 5.6 NO LIABILITY TO LIMITED PARTNERS Neither the General Partner nor any manager, member, employee, agent or affiliate of the General Partner (nor any of their respective shareholders, partners, directors, officers, employees, agents or affiliates) shall be liable to any Partner or to the Partnership for any action taken, or omitted to be taken, as the General Partner, or on behalf of the General Partner, with respect to the Partnership or for any action taken, or omitted to be taken, by the General Partner, or any manager, member, employee, agent or affiliate of the General Partner (or any of their respective shareholders, partners, directors, officers, employees, agents or affiliates), so long as such person: 5.6.1acted in good faith; 5.6.2acted in a manner reasonably believed to be in the best interests of the Partnership; and 5.6.3was neither grossly negligent nor engaged in willful malfeasance. 5.7 INDEMNIFICATION OF GENERAL PARTNER AND OTHERS The Partnership will indemnify the General Partner, each of its managers and members and their respective partners, employees, agents and affiliates, including without limitation the Management Agent and the partners, stockholders and employees of the Management Agent, against any losses, liabilities, damages or expenses (including amounts paid for reasonable attorneys fees, judgments and settlements in connection with any threatened, pending or completed action, suit or proceeding but excluding the amounts described in Section 4.1 as payable by the General Partner or the Management Agent) to which any of such persons may become subject in connection with the Partnership or in connection with any involvement with a Portfolio Company (including serving as an officer, director, consultant or employee of any Portfolio Company) directly or indirectly on behalf of the Partnership but, in each case, only to the extent that such person: 5.7.1acted in good faith 5.7.2acted in what such person believed to be in the best interests of the Partnership or the Portfolio Company (as the case may be); and 5.7.3was neither grossly negligent nor engaged in willful malfeasance. The Partnership may, in the sole judgment of the General Partner, pay the expenses of any Person indemnifiable under this Section 5.7 in advance of the final disposition of any proceeding, so long as: 5.7.4the General Partner has a good faith belief such expenses are indemnifiable; and 5.7.5the General Partner receives a written agreement by such Person to repay the full amount advanced if there is a final determination that such Person did not satisfy the standards set forth in Sections 5.7.1 through 5.7.3 immediately above or that such Person is not otherwise entitled to indemnification as provided herein. 5.8 FORMATION OF NEW FUND OR BUSINESS ENDEAVOR No Limited Partner will, on account of entering into this Agreement or on account of its status as a Limited Partner of the Partnership, have any interest in the business endeavors of the other Partners other than its interest in the Partnership, and no Partner is, on account of entering into this Agreement or on account of its status as a Partner of the Partnership, restricted from entering into any future business activity, including with any other Partner; provided that the General Partner may not hereafter close the formation of a fund to invest primarily in equity securities until the time at which at least 75% of the Partners' aggregate Commitments have been invested, committed, reserved for follow-on investment, otherwise allocated for investment or used, or reserved to be used, to pay Partnership Expenses, Management Fees or Organizational Expenses. 5.9 INTEREST AS A LIMITED PARTNER To the extent that the General Partner acquires the interest of a Defaulting Partner or a Regulated Partner or any other Limited Partner, the General Partner will be deemed to be a Limited Partner with respect to such interest for all purposes of this Agreement. 6. LIMITED PARTNERS 6.1 LIMITED LIABILITY The Limited Partners will not be personally liable for any obligations of the Partnership and will have no obligation to make contributions to the Partnership in excess of their respective Commitments specified in Schedule I attached hereto, except to the extent set forth in the California Partnership Act; provided that a Limited Partner shall be required to return the portion of any distribution made to it in error (i.e., a distribution inconsistent with the terms of this Agreement). The Limited Partners will take no part in the control, direction or operation of the affairs of the Partnership and will have no power to bind the Partnership. 6.2 TRANSFER OF LIMITED PARTNERSHIP INTEREST A Limited Partner may not sell, assign, transfer, pledge, mortgage or otherwise dispose of all or any of its interest in the Partnership (including any transfer or assignment of all or any part of its interest to a person who becomes an assignee of a beneficial interest in the Partnership even though not becoming a substitute Limited Partner) unless the General Partner has consented to such transfer or assignment in writing. For purposes of this Section 6.2, a change in any trustee or fiduciary of a Limited Partner will not be deemed to be an assignment or transfer of a limited partnership interest pursuant to this Agreement, provided any such replacement trustee or fiduciary is also a fiduciary as defined under applicable state law and provided that income and loss allocable to the Limited Partner of the Partnership will continue to be included in the same filings under the same employee identification number with the Internal Revenue Service. Accordingly, such a change in a trustee or fiduciary may be made without the prior written consent of the General Partner, provided that the Limited Partner agrees to provide prompt written notice of such change to the General Partner. The voting rights of any Limited Partner's interest shall automatically terminate upon any transfer of such interest to a trust, heir, beneficiary, guardian or conservator or upon any other transfer if the transferor no longer retains control over such voting rights and the General Partner has not consented pursuant to Section 6.2(b) to such transferee becoming a substitute Limited Partner. No consent of any other Limited Partner will be required as a condition precedent to any such transfer or substitution. As a condition to any transfer of a Limited Partnership interest (including a transfer not requiring the consent of the General Partner), the transferor and the transferee shall provide such legal opinions and documentation as the General Partner shall reasonably request; provided that if the transfer is to be made from a Limited Partner to a co-trustee or trustee as contemplated above, an officer's certificate in form reasonably satisfactory to the General Partner shall be delivered by the Limited Partner to the General Partner in lieu of such legal opinions and other documentation. 6.2.1Notwithstanding anything to the contrary contained in this Section 6.2 or Section 6.10, a transferee or assignee will not become a substitute Limited Partner without the consent of the General Partner, in its sole discretion, and without executing and delivering to the General Partner a copy of this Agreement or amendment hereto in form and substance satisfactory to the General Partner in its sole discretion. Any substitute Limited Partner admitted to the Partnership with the consent of the General Partner will succeed to all rights and be subject to all the obligations of the transferring or assigning Limited Partner with respect to the interest to which such Limited Partner was substituted. 6.2.2The transferor and transferee of any Limited Partner's interest shall be jointly and severally obligated to reimburse the General Partner and the Partnership for all reasonable expenses (including reasonable attorneys' fees and expenses) of any transfer or proposed transfer of a Limited Partner's interest, whether or not consummated. 6.2.3The transferee of any Limited Partner interest shall be treated as having made all of the Capital Contributions made by, and received all of the distributions received by, the transferor of such interest. 6.2.4Anything in this Agreement to the contrary notwithstanding, no Partnership interest shall be subdivided for sale or assignment (including any assignment of a profits and loss interest) if such subdivision results in the creation of any Partnership interest (or interest in the Partnership's profits and losses) which would have had an initial offering price smaller than the minimum amount prescribed in Internal Revenue Service rules or Treasury regulations setting forth a private-placement safe harbor under the publicly traded partnership provisions of the Code. 6.3 NO WITHDRAWAL Subject to the provisions of Sections 6.2, and 6.10, no Limited Partner may withdraw as a Partner of the Partnership, nor may a Limited Partner be required to withdraw, nor may a Limited Partner borrow or withdraw any portion of its Capital Account from the Partnership. 6.4 NO TERMINATION The substitution, death, insanity, dissolution (whether voluntary or involuntary) or bankruptcy of a Limited Partner will not affect the existence of the Partnership, and the Partnership will continue for the term of this Agreement until its existence is terminated as provided herein. 6.5 SUBSEQUENT LIMITED PARTNERS The General Partner may accept additional Limited Partners ("Additional Limited Partners") up to and including the three month anniversary of the Effective Date; provided that the aggregate Commitments do not at any time exceed $25,000,000. Each Additional Limited Partner will be treated as having been a party to this Agreement as of the date hereof for all purposes (including allocation of Management Fees, Organizational Expenses, income, profits and loss); provided that each such Additional Limited Partner shall contribute to the Partnership, on the date of its admission to the Partnership, an amount of its Commitment equal to its portion of all Capital Contributions made by the other Partners to the Partnership prior to such admission date, plus interest from the date of such earlier Capital Contributions to the date of such Additional Limited Partner's admission to the Partnership at a rate equal to the greater of: 6.5.110% per annum: or 6.5.2the Prime Rate plus two percentage points per annum. For purposes of this Section 6.5, a Limited Partner that increases its Commitment shall be treated as an Additional Limited Partner with respect to the amount by which its Commitment increased. Upon the admittance of an Additional Limited Partner or the increase in a Limited Partner's Commitment, the General Partner may modify Schedule I attached hereto to reflect such admittance or increase. 6.6 NO ERISA ENTITIES Investment in the Alliance Funds is not open to institutions, pension plans and other funds subject to ERISA. 6.7 INDEMNIFICATION AND REIMBURSEMENT FOR PAYMENTS ON BEHALF OF A PARTNER 6.7.1If the Partnership is obligated to pay any amount to a governmental agency or to any other person (or otherwise makes a payment) because of a Partner's status or otherwise specifically attributable to a Partner (including, without limitation, federal withholding taxes with respect to foreign partners, state personal property taxes, state unincorporated business taxes, etc.), then such Partner ("Indemnifying Partner") shall indemnify the Partnership in full for the entire amount paid (including, without limitation, any interest, penalties and expenses associated with such payment). At the option of the General Partner, the amount to be indemnified may be charged against the Capital Account of the Indemnifying Partner and, at the option of the General Partner, either: 6.7.1.1 promptly upon notification of an obligation to indemnify the Partnership, the Indemnifying Partner shall make a cash payment to the Partnership equal to the full amount to be indemnified (and the amount paid shall be added to the Indemnifying Partner's Capital Account but shall not be deemed a Capital Contribution hereunder); or 6.7.1.2 the Partnership shall reduce subsequent distributions which would otherwise be made to the Indemnifying Partner until the Partnership has recovered the amount to be indemnified (provided that the amount of such reduction shall be deemed to have been distributed for all purposes of this Agreement, but such deemed distribution shall not further reduce the Indemnifying Partner's Capital Account). 6.7.2A Partner's obligation to make contributions to the Partnership under this Section 6.7 shall survive the termination, dissolution, liquidation and winding up of the Partnership and, for purposes of this Section 6.7, the Partnership shall be treated as continuing in existence. The Partnership may pursue and enforce all rights and remedies it may have against each Partner under this Section 6.7, including instituting a lawsuit to collect such contribution with interest calculated at a rate equal to the Prime Rate plus six percentage points per annum (but not in excess of the highest rate per annum permitted by law). 6.8 SECTION 754 ELECTION Upon the written request of Limited Partners holding a majority of the Limited Partner Interests, the General Partner may, in the General Partner's sole discretion, make an election provided for in ss.754 of the Code, if then permitted by applicable law. 6.9 BANK HOLDING COMPANY ACT OF 1956 With respect to any matter requiring the vote, approval or consent of Limited Partners under this Agreement, each of the Limited Partners subject to the provisions of the Bank Holding Company Act of 1956, as amended, may irrevocably elect in writing to the General Partner to terminate their rights hereunder or under applicable law (to the extent waivable) to vote, approve or consent to: 6.9.1counsel for Partnership (as contemplated in the definition of "Opinion of the Partnership's Counsel") and any and all of the matters referred to in Sections 6.8, 7.2, 8.3 and 12.1 ("Applicable Sections") of the Agreement; and 6.9.2the removal of the General Partner or any successor thereto and the appointment of any general partner of the Partnership under applicable law, with respect to such Limited Partner's interest (or any transferee thereof) in the Partnership in excess of five percent (an "Excess Interest"). Upon the receipt by the General Partner of such irrevocable written election, each such Limited Partner so electing may not (with respect to their Excess Interest) vote on, approve of or consent to its rights under applicable law on the matters contained in the Applicable Sections referred to in such election and such election will be binding upon any successor to such Excess Interest or any portion thereof. 6.10 LIMITED PARTNER'S DEFAULT ON COMMITMENT If any Limited Partner (a "Defaulting Partner") fails to make full payment of any portion of its Commitment when due and such failure is not cured within ten business days after receipt by such Limited Partner of written notice from the General Partner with respect to such failure to pay, the General Partner may in its discretion undertake any one or more of the following steps: 6.10.1 The General Partner may assist the Defaulting Partner in finding a buyer for the Defaulting Partner's Partnership interest, provided that the General Partner will have no obligation to contact any particular Limited Partner or other person with regard to such sale. 6.10.2 The Partnership may pursue and enforce all rights and remedies the Partnership may have against such Defaulting Partner with respect thereto, including a lawsuit to collect the overdue portion of the Commitment and any other amounts due the Partnership or General Partner hereunder, with interest at a rate equal to the Prime Rate plus six percentage points (but not in excess of the highest rate per annum permitted by law). 6.10.3 The General Partner may offer the Defaulting Partner's interest to the Partners (other than any Defaulting Partners) pro rata in accordance with their Commitments on the terms set forth below. If any Partner does not elect to purchase the entire interest offered to it, the remaining interest allocable to the Partners will be re-offered pro rata to the Partners who have purchased the entire interest offered to them until either all of such interest is acquired or no Partner wishes to make a further investment. At the closing of such purchase (on a date and at a place designated by the General Partner), each purchasing Partner shall: 6.10.3.1 deliver a non-interest bearing, non-recourse (except to the extent of the Partnership interest purchased and the proceeds therefrom) ten-year promissory note (in a form approved by the General Partner) payable to the Defaulting Partner in an amount equal to the portion of the Defaulting Partner's Capital Account being purchased by such Partner; and 6.10.3.2 assume the portion of the Defaulting Partner's obligation to make both defaulted and further Capital Contributions pursuant to its Commitment which is equal to the portion of the Defaulting Partner's interest being purchased by such Partner. The General Partner will handle the mechanics of making the offers set forth herein and will in its discretion impose reasonable time limits for acceptance. 6.10.4 If the entire Defaulting Partner's interest is not purchased in the manner set forth in Section 6.10.3 above, the General Partner in its sole discretion may offer the remaining interest either: 6.10.4.1 to a third party or parties on the same terms as originally offered to the Partners pursuant to Section 6.10.3 above (in which case such third party or parties will, as a condition of purchasing such interest, become a party to this Agreement); or 6.10.4.2 to the Partners in the manner provided in Section 6.10.3 above, but with no requirement to assume the Defaulting Partner's obligation to make further capital contributions pursuant to its Commitment, in which case the Defaulting Partner's Commitment shall be deemed reduced (effective on the date of the default) to the amount actually paid in and the aggregate Commitments of the Partnership shall be reduced by the amount of such Defaulting Partner's remaining contributions to be made pursuant to its Commitment. 6.10.5 In addition to, or instead of, the other remedies and undertakings available to the General Partner pursuant to this Section 6.10, the General Partner may, in its sole discretion, reduce (effective on the date of the default, after giving effect to the ten day cure period) any portion of such Defaulting Partner's Commitment (which has not been assumed by another Partner) to the amount of the Capital Contributions (which have not been purchased by another Partner) made by such Defaulting Partner (net of distributions pursuant to Section 3.2.2) and the aggregate Commitments of the Partnership shall be commensurately reduced. 6.10.6 Notwithstanding anything contained herein to the contrary, from and after any date on which a Defaulting Partner's Commitment is reduced pursuant to Section 6.10.5 above: 6.10.6.1 such Defaulting Partner will have no right to receive any distributions, except for distributions made upon the Partnership's liquidation; 6.10.6.2 such Defaulting Partner's Capital Account will not be credited with any Net Profits from Portfolio Investments or Short-Term Investment Income which shall instead be allocated to the Partners (other that any Defaulting Partners) in accordance with Sections 2.4.2 or 2.4.3, as appropriate (and as adjusted to treat the Defaulting Partner's Capital Contribution as equal to zero); 6.10.6.3 until such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.3.1 such Defaulting Partner's Capital Account shall continue to be debited in accordance with Section 2.4.4 for such Defaulting Partner's share of Net Loss from Portfolio Investments, Partnership Expenses Not Allocable to Portfolio Investments and Organizational Expenses as if there had been no reduction in such Defaulting Partner's Commitment or Capital Contributions; and 6.10.6.3.2 the Management Fee payable by the Partners shall be calculated as if there had been no reduction in such Defaulting Partner's Commitment; and 6.10.6.4 once such Defaulting Partner's Capital Account is reduced to zero: 6.10.6.4.1 such Defaulting Partner's Commitment shall be reduced to zero for all purposes of the Agreement, including the calculation of the Partnership's aggregate Commitments and determination of the Management Fee: and 6.10.6.4.2 such Defaulting Partner shall be liable each quarter to the General Partner or Management Agent for an amount equal to its portion of the Management Fee for such quarter as if there had been no reduction in such Defaulting Partner's Commitment. 6.10.7 No consent of any Limited Partner shall be required as a condition precedent to any transfer, assignment or other disposition of a Defaulting Partner's interest pursuant to this Section 6.10. 7. DURATION AND TERMINATION 7.1 DURATION The Partnership will terminate on the tenth anniversary of the Effective Date, except that, with the consent of Limited Partners holding a majority of the Limited Partner Interests, the term of the Partnership may be extended by the General Partner for additional one-year periods (but not for more than a total of two additional years). 7.2 EARLY TERMINATION Limited Partners holding 80% of the Limited Partner Interests may terminate the Partnership at any time. 7.3 TERMINATION AND LIQUIDATION OF PARTNERSHIP INTEREST Upon termination, the Partnership will be liquidated in an orderly manner. The General Partner will be the liquidator to wind up the affairs of the Partnership pursuant to this Agreement. 7.4 FINAL ALLOCATION AND DISTRIBUTION Upon termination of the Partnership (whether or not an early termination), the General Partner will make a final allocation of all kinds of income, loss and expense in accordance with Section 2 hereof and the Partnership's liabilities and obligations to its creditors shall be paid or adequately provided for prior to any distributions to the Partners. After payment or provision for payment of all debts of the Partnership, the remaining assets, if any, will be distributed among the Partners in accordance with the respective Capital Account balances (after giving effect to Section 2.4). 8. VALUATION OF PARTNERSHIP ASSETS 8.1 NORMAL VALUATION For purposes of this Agreement, the value of any security as of any date (or in the event such date is a holiday or other day which is not a business day, as of the next preceding business day) will be determined as follows: 8.1.1a security which is listed on a recognized securities exchange or the NMS will be valued at its last sales price or, if no sale occurred on such date, at the last "bid" price thereon; 8.1.2a security which is traded over-the-counter (other than on the NMS) will be valued at the most recent "bid" price; and 8.1.3all other securities will be valued on such date by the General Partner at fair market value in such manner as it may reasonably determine. 8.2 RESTRICTIONS ON TRANSFER OR BLOCKAGE Any security which is held under a representation that it has been acquired for investment and not with a view to public sale or distribution, or which is held subject to any other restriction, or where the size of the Partnership's holdings compared to the trading volume would affect its marketability, will be valued at such discount from the value determined under Section 8.1 above as the General Partner deems necessary to reflect properly the marketability of such security. 8.3 OBJECTION TO VALUATION Prior to acting upon its final valuation of any security pursuant to Sections 8.1.3 or 8.2, the General Partner shall provide the Limited Partners with notice of the General Partner's valuation of such security. If within 15 days after delivery of such notice Limited Partners holding a majority of the Limited Partner Interests deliver written notice to the General Partner objecting to the valuation of such security, then the General Partner will (at the Partnership's expense) cause an independent securities expert mutually acceptable to the General Partner and Limited Partners holding a majority of the Limited Partner Interests to review such valuation, and such expert's determination will be binding on the parties. 8.4 WRITE-DOWN TO VALUE Any securities which have permanently declined in value as determined by the General Partner will be written down to their value pursuant to the provisions of this Section 8 as of the date of such determination. 9. BOOKS OF ACCOUNTS; MEETINGS 9.1 BOOKS The Partnership will maintain complete and accurate books of account of the Partnership's affairs at the Partnership's principal office, which books will be open to inspection by any Partner (or its authorized representative) at any time during ordinary business hours. 9.2 FISCAL YEAR The fiscal year of the Partnership will be the calendar year, unless otherwise determined by the General Partner. 9.3 REPORTS The General Partner will furnish the Limited Partners: 9.3.1within 45 days after the end of each fiscal quarter, unaudited financial statements for such quarter and a report disclosing in summary form the status of all Portfolio Companies, and 9.3.2within 90 days after the end of each fiscal year, unaudited financial statements for such year, valuations of the Partnership's investments as of the end of such year (including a statement of each Partner's closing Capital Account and Fair Value Capital Account balances), and the Partnership's tax return and the Limited Partners' respective forms K-1 for such year. 9.4 TAX ALLOCATION 9.4.1The income, gains, losses, deductions and credits of the Partnership will be allocated for federal, state and local income tax purposes among the Partners so as to reflect as nearly as possible the allocation of such income, gains, losses, deductions and credits among the Partners for computing their Capital Accounts. Notwithstanding the preceding sentence, if the basis for federal income tax purposes of any property held by the Partnership differs from the basis of such property on the Partnership's books, any gain or loss arising from such property shall be allocated among the Partners so as to take into account the difference between the tax basis and the book basis of such property in any manner authorized by the Treasury Regulations under Section 704(c) of the Code and selected by the General Partner. 9.4.2If any Partner is treated for income tax purposes as realizing ordinary income because of receipt of its Partnership interest (whether under ss.83 of the Code or any similar provisions of any law, rule or regulation or any other applicable law, rule, regulation or doctrine) and the Partnership is entitled to any offsetting deduction, the Partnership's deduction will be allocated among the Partners in such manner as to, as nearly an possible, offset such ordinary income realized by such Partner. 9.4.3Notwithstanding any other provision of this Agreement, if a Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation ss.1.704-1(b)(2)(ii)(d)(4), (5) or (6) which gives rise to a negative capital account (or which would give rise to a negative capital account when added to expected adjustments, allocations or distributions of the same type), such Partner will be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible; provided that the Partnership's subsequent income, gains, losses, deductions and credits will be allocated among the Partners so as to achieve as nearly as possible the results that would have been achieved if this Section 9.4.3 had not been in this Agreement, except that no such allocation shall be made which would violate the provisions or purposes of Treasury Regulation ss.1.704-1(b). 9.5 ANNUAL MEETING Commencing in 1998, the General Partner will hold an annual general informational meeting for the Limited Partners. The General Partner will give all Limited Partners at least 30 days notice of each annual meeting. 9.6 TAX MATTERS PARTNER The General Partner is designated the "Tax Matters Partner" (as defined in Code ss.6231). 10. CERTIFICATE OF LIMITED PARTNERSHIP; POWER OF ATTORNEY 10.1 CERTIFICATE OF PARTNERSHIP A certificate of Limited Partnership within the meaning of the California Partnership Act ("Certificate") will be prepared following the execution and delivery of this Agreement. The General Partner will cause the Certificate to be filed and recorded in the office of the Secretary of State of the State of California and, to the extent required by local law, in the appropriate place in each state in which the Partnership may hereafter establish a place of business, but the Partnership will not be obligated to provide the Limited Partners with a copy of any amendment to or restatement of the Certificate. The General Partner will also cause to be filed, recorded and published such statements, notices, certificates or other instruments required by any provision of any applicable law which governs the formation of the Partnership or the conduct of its business from time to time. 10.2 POWER OF ATTORNEY Each of the undersigned does hereby constitute and appoint V.R. Ranganath (so long as Mr. Ranganath is a member of the General Partner), and each person who hereafter becomes a manager of the General Partner with full power to act without the others, as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign, acknowledge and deliver or file: 10.2.1 the Certificate; 10.2.2 any amendment to or cancellation of the Certificate 10.2.3 all instruments, documents and certificates which may from time to time be required by any law to effectuate, implement and continue the valid and subsisting existence of the Partnership 10.2.4 all instruments, documents and certificates which may be required to effectuate the dissolution and termination of the Partnership; and 10.2.5 in the case of a Defaulting Partner any bills of sale or other appropriate transfer documents necessary to effectuate transfers of such Defaulting Partner's interest pursuant to Section 6.10 above. The powers of attorney granted herein will be deemed to be coupled with an interest, will be irrevocable and will survive the death, incompetence, disability or dissolution of a Limited Partner. Without limiting the foregoing, the powers of attorney granted herein will not be deemed to constitute a written consent of any Limited Partner for purposes of Section 12.1. 11. RELATIONSHIP BETWEEN THE ALLINACE FUNDS AND THE PARTNERSHIP 11.1 The General Partner presently intends that the guidelines set forth in this Section 11 generally will control Co-investments and other dealings between any other Alliance Fund and the Partnership. 11.2 The Partnership will not purchase from or sell to another Alliance Fund, except with the prior approval of Limited Partners holding a majority of Limited Partner Interests. 11.3 The General Partner will decide whether the Partnership will invest in a company which meets the investment criteria of the Partnership and another Alliance Fund (as determined by the General Partner in good faith) but in which neither the Partnership nor such other Alliance Fund has previously invested. The extent to which the Partnership participates in an investment in such company (relative to the amount, if any, to be invested by another Alliance Fund) will be determined also by the General Partner in its sole discretion. 11.4 The Partnership will invest in a company in which an Alliance Fund has previously invested only upon approval of the General Partner. 12. MISCELLANEOUS 12.1 AMENDMENTS This Agreement may be amended by the General Partner in any manner that does not adversely affect the rights of any Limited Partner and the General Partner shall furnish notice of any such amendment to the Limited Partners. This Agreement may also be amended by action taken by both: 12.1.1 the General Partner; and 12.1.2 the Limited Partners owning a majority in interest of the Capital Accounts of all the Limited Partners at the time of the amendment, provided that such amendment does not discriminate among the Limited Partners. 12.2 NOTICES All notices provided for under this Agreement shall be in writing and shall be sufficient if sent by first-class mail to the address set forth in the schedule in the files of the Partnership as of the date of such notice for the party to whom such notice is to be given. 12.3 BINDING EFFECT OF AGREEMENT This Agreement, including Section 10.2 hereof, shall be binding on the successors, assigns and the legal representatives of each of the Partners. 12.4 COUNTERPARTS This Agreement may be executed in more than one counterpart with the same effect as if the Partners executing the several counterparts had all executed one document. 12.5 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the principles of conflicts of law thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date first above written. GENERAL PARTNER: LIMITED PARTNER: Alliance Venture Management, LLC Alliance Semiconductor Corporation By: /s/ V.R. Ranganath By: /s/ N.Damodar Reddy ---------------------------- --------------------------- signature of authorized signature of authorized representative representative V.R. Ranganath N. Damodar Reddy - --------------------------------- ------------------------------- printed name printed name President President and CEO - --------------------------------- ------------------------------- title title SCHEDULE I LIMITED PARTNERS
Limited Partner Capital Contribution Commitment - ---------------------------------------------------------------------------- Alliance Semiconductor Corporation $100,000,000.00
EX-21.01 7 0007.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21.01
ALLIANCE SEMICONDUCTOR CORPORATION SUBSIDIARIES OF REGISTRANT Name of Subsidiary of Alliance Jurisdiction or State of Semiconductor Corporation Incorporation - --------------------------------------- -------------------------- Nimbus Technology, Inc. California Alliance Semiconductor International Cayman Islands Corporation Alliance Semiconductor International Delaware Corporation Alliance Semiconductor (India) India Private Limited Alliance Venture Management, LLC California Alliance Ventures I, LP California Alliance Ventures II, LP California Alliance Ventures III, LP California
EX-23.01 8 0008.txt CONSENT OF INDEPENDENT ACCOUNTS EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-98402, No. 33-74830 and No. 333-13461) of Alliance Semiconductor Corporation of our report dated April 25, 2000 relating to the financial statements and the financial statement schedule, which appear in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California June 30, 2000 EX-23.02 9 0009.txt CONSENT OF INDEPENDENT ACCOUNTS EXHIBIT 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-98402, No. 33-74830 and No. 333-13461) of Alliance Semiconductor Corporation of our report dated January 22,1999 relating to the financial statements, which appears in this form 10-K. /s/ PRICEWATERHOUSECOOPERS Hsinchu, Taiwan, R.O.C. June 26, 2000 EX-27 10 0010.txt FINANCIAL DATA SCHEDULE
5 Alliance Semiconductor Corporation Financil Data Schedule 0000913293 Alliance Semiconductor 1000 US Dollars Year APR-1-2000 APR-4-1999 APR-1-2000 1 34,770 886,104 16,812 954 37,439 997,907 26,416 16,426 1,520,442 361,970 0 0 0 424 963,531 1,520,442 89,153 89,153 58,428 58,428 30,530 0 99 1,049,354 410,384 639,006 0 0 9,094 648,100 15.49 15.07
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