-----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, CfFt6jcdrfuZvx0JYjFADLgOj4hOesszZjXvZsvgCAs9+VrHqgF5tsj+PScx8kNU 5eKiYL/PFl7d9W/32o/0fw== 0000913293-01-500031.txt : 20010702 0000913293-01-500031.hdr.sgml : 20010702 ACCESSION NUMBER: 0000913293-01-500031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE SEMICONDUCTOR CORP /DE/ CENTRAL INDEX KEY: 0000913293 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [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: 1671313 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 s10k.txt ANNUAL REPORT ON FORM 10-K 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 March 31, 2001, 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 22, 2001, there were 41,522,266 shares of Registrant's Common Stock outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant on June 22, 2001, based upon the closing price of the Common Stock on the NASDAQ National Market for such date, was approximately $457,160,000. 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 March 31, 2001, are incorporated by reference into Part III hereof. -1- Exhibit Index on page 36 ================================================================================ 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 as the potential for further price erosion of the Company's products; additional cancellation of orders in the Company's backlog; continuing slowdown in the electronics industry; further decreased demand and increased competitive environment for the Company's products, including, without limitation, obsolescence of the Company's products; continued accumulation of excess inventory and price erosion or obsolescence of existing inventory, any of which may result in additional charges against the Company's earnings; inability to timely ramp up production of and deliver new or enhanced SRAM, DRAM or flash products; inability to successfully develop and introduce new products; inability to successfully recruit and retain qualified technical and other personnel; further adverse changes in the value of securities held by the Company, including those of Vitesse Semiconductor Corporation, PMC-Sierra, Inc., Broadcom Corporation, Chartered Semiconductor, United Microelectronics Corporation and Tower Semiconductor; further adverse changes in value of investments made by Alliance's venture funds managed by Alliance Venture Management, LLC; the Company's potential status as an 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. As the Company is currently experiencing, as well as 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 is currently experiencing (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 could continue to 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, 2001 contained 52 weeks, while the fiscal years ended March 31, 2000 and March 31, 1999 contained 52 weeks and 53 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 some 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 DRAMs Sales of the Company's DRAM products accounted for 57% of the Company's net revenues in fiscal 2001. During fiscal years 2000 and 1999, DRAM products contributed 56% and 40%, respectively, of the Company's net revenues. During fiscal year 2001, 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 0.18 micron. High Speed CMOS SRAMs Sales of the Company's SRAM products accounted for 43% of the Company's net revenues in fiscal 2001. During fiscal year's 2000 and 1999, SRAM products contributed approximately 43% and 58%, 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 Flash Memories During fiscal 2001, 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 available the 8-Mbit product with access times as fast as 80ns, and has achieved functional silicon on 4-Mbit product. The Company is co-developing a 16-Mbit product with one of its fab partners, United Microelectronics Corporation ("UMC"). 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 years 2000 and 2001 redesigning the product and still has not 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 has 84 development personnel (38 in the United States and 46 in India) as of March 31, 2001. 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 2001, 2000 and 1999, the Company spent approximately $13.8 million, $14.6 million and $14.1 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, develop and -4- bring to market such new products in a timely and cost effective manner, or that the Company will be able to 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 17 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, 2001, no customers accounted for 10% or more of the Company's net revenues. 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. See Note 1 of Notes to Consolidated Financial Statements. Historically, the semiconductor industry in general, and the semiconductor memory business in particular have experienced cyclical downturns in business every few years. The industry experienced such a downturn in the mid 1990's and had been recovering over the last few years, as had the Company. In the fourth fiscal quarter of fiscal year 2001, the industry and the Company experienced a significant downturn. The Company cannot predict when the current downturn will end. Even after the end of the current downturn, the Company fully expects that other downturns will occur. And while the Company will try to take precautions so that it will not be carrying significant inventory (as happened in both the current and the last downturns) when another downturn occurs, it is difficult to predict when such downturns will occur, and when customers will 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 downturns, when they occur. Additionally, even if the Company is able to prepare for downturns, any such downturns could 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 -5- Company's results of operations. The Company believes that its relations with its manufacturers' representatives and distributors generally are good. 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 63%, 59% and 50% of net revenues in fiscal 2001, 2000 and 1999, 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 19 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 ("National") in the United States. The Company has entered into foundry production agreements with all of its major foundries. In fiscal 2001, the Company entered into a foundry production agreement with Tower Semiconductor, Ltd. ("Tower"), in connection with an investment in a new fabrication facility being constructed by Tower. 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. -6- 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. 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 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. In January 2001, Tower satisfied the closing conditions of the share purchase agreements (as described in Investments section) it entered into with the Company to make an investment in Tower, in exchange for shares of Tower and certain manufacturing rights, including capacity rights and wafer credits. The investment in Tower, along with the investment of the Israel Corporation ("TIC"), SanDisk Corporation, Inc. ("SanDisk") and Macronix International Co., Ltd. to purchase an aggregate of 3,629,873 Tower shares, will be used to build and operate a new fabrication facility, which is expected to become operational in 2002. 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 2002. Disruption of operations at the Company's foundries for any reason, including work stoppages, fire, and 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 and customers. 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 those occurring during late fiscal 1996. 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 -7- 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 downturn such as the current downturn and as occurred in 1999, 1998 and 1997 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 into 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 22, 2001, the Company holds 64 United States patents covering certain aspects of its product designs or manufacturing technology, which patents expire between 2009 and 2019. The Company also has 27 pending United States patent applications, three 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 -8- 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 22, 2001, the Company is in discussions with one company who has 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. 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 and Latin America, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. 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 -9- 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 In the past six months, marketable securities held by the Company have experienced significant declines in their market value primary due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their fair value. Such evaluation included researching commentary from industry experts, analysts, and other companies, all of whom were not optimistic that the semiconductor sector would recover in the next quarter or two or three. Based on the continuing depression in the investments' stock prices from those originally used to record the investment and coupled with the expectation that stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for companies in the semiconductor industry in general management determined that a write-down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax, non-operating loss of approximately $509.4 million during the fourth quarter of fiscal 2001 based on the quoted price of the respective marketable securities as of March 31, 2001. This was recorded in the Write-down of Marketable Securities. 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. 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. During fiscal 2001, the Company sold 500,000 shares and recognized a pre-tax non-operating gain of approximately $33.5 million. At March 31, 2001, the Company owned approximately 16.4 million ordinary shares or approximately 1.64 million American Depository Shares or "ADSs" 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 than 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 as 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. -10- 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. 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 and the board seat, Alliance had participated in both strategic and operating decisions of USC on a routine basis 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 and 1999, the Company reported its proportionate share of equity income of USC of $9.5 million and $10.9 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. 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 were subject to a six-month "lock-up" or no trade period. This lock-up period expired 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 additional 20% or 56.6 million shares of UMC by way of a stock dividend. Subsequent to the completion of the merger, the Company accounted for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which became unrestricted on January 2, 2001 as an available-for-sale marketable security in accordance with SFAS 115. The portion of the investment in UMC, which is restricted beyond twelve months (approximately 50% and 42% of the Company's holdings at March 31, 2000 and 2001, respectively), is accounted for as a cost method investment and is presented as a long-term investment. As this -11- 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. 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. At the end of the fourth quarter of fiscal 2001, the Company wrote-down its investment in UMC and recognized a pre-tax, non-operating loss of approximately $460.0 million. This was recorded in the write-down of marketable securities. At March 31, 2001, the Company owned approximately 340.0 million shares of UMC. 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 than 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 possible 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 embedded 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. During fiscal 2001, the Company sold 287,522 shares and realized a pre-tax, non-operating gain of approximately $31.3 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8 million. This was recorded in the write-down of marketable securities. At March 31, 2001, the Company owned approximately 200,000 shares of Broadcom. 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 possible that Broadcom's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. 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 -12- 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. 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. In January 2001, upon the creation of Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"), the management agreement for Alliance Venture Management was amended to create series D and E member units which are entitled to receive a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively. Each of the owners of the series A, B, C, D and E 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, C, D or E 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, 2001, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures has invested approximately $9.1 million in ten companies, with a total fund allocation of $15.0 million. As of March 31, 2001, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $38.6 million in 14 companies, with a total fund allocation of $100.0 million. As of March 31, 2001, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $4.0 million in two companies, with a total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $6.5 million in three companies, with a total fund allocation of $60.0 million. 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 $5.7 million for the year ended March 31, 2001. In addition, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million, at the end of the fourth quarter fiscal 2001. This was recorded in the write-down of marketable securities and other investments. 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 has been formed in which certain of the Company's officers and employees, as well as the Company itself, has made similar venture investments, including investment in some of the same companies as Alliance Ventures. 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. 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 -13- 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 possible, 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. Solar Venture Partners, LP In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company has invested $12.5 million, $9.5 million is in the form of three promissory notes, which on March 31, 2001 were converted into a limited partnership interest in Solar. Due to changes in the venture capital market, Alliance has decided to limit its investment in Solar to $12.5 million already invested. Certain of the Company's officers and employees have invested in Solar. Solar has made investments in some of the same companies as Alliance Ventures. 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 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. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under the current accounting practice, the Company is required to offset the gain on the contracts with the loss on the Vitesse stock, both were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax, non-operating gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Vitesse and recognized a pre-tax, non-operating loss of approximately $52.9 million. At March 31, 2001, the Company owned 728,293 shares of Vitesse. 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 possible that Vitesse's stock and the Company's stock can both suffer significant loss in value at the same time, as occurred in fiscal 2001. 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"), -14- announced that it agreed to acquire Malleable. According to the terms of the acquisition, PMC exchanged 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC did 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. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in PMC and recognized a pre-tax, non-operating loss of approximately $10.8 million, which was recorded in the write-down of marketable securities. . At March 31, 2001, the Company owned 68,152 shares of PMC. 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 fiscal 2001. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value. Tower Semiconductor Ltd. In August 2000, the Company entered into a share purchase agreement with Tower Semiconductor ("Tower") under which Alliance committed to make a $75 million strategic investment in Tower as part of Tower's plan to build its new fab. In return for its investment, Alliance will receive equity, corresponding representation on Tower's Board of Director and committed production capacity in the advanced fab, which Tower intends to build. Pursuant to the agreement, the Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase price of $31 million in the fourth quarter of fiscal 2001. The Company has an obligation to purchase an additional 1,466,760 ordinary shares in four equal increments upon occurrence of events relating to Tower's construction of FAB 2 as specified in the agreement. These additional shares are expected to be purchased by the Company during fiscal 2002 and 2003. In connection with the share purchase agreement, the Company entered into a foundry agreement under which the Company is entitled to a certain amount of credits towards future wafer purchases from Tower. The amount of credits is determined upon each share purchase transaction by Alliance and is calculated based on the difference between Tower's average stock price for 30 days preceding a purchase transaction and Alliance's share purchase exercise price. At March 31, 2001, such wafer credits from Tower totaled $14.7 million. The wafer credits will be utilized as the Company purchases wafers from Tower in the future where 15% of order value will be applied against the wafer credits. Under the terms of the foundry agreement, the Company is guaranteed a capacity of up to 15% of available wafer starts but not to exceed 5,000 wafers starts per month. The guaranteed capacity may be reduced if the Company elects not to exercise its additional share purchase obligation. The Company accounts for its investment in Tower under the cost method based on the Company's inability to exercise significant influence over Tower's operations. 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 not be 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 -15- 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 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, and its new investment in Tower, 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 two years 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 two years, 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 has applied 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, UMC and Tower 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 is proceeding 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 -16- 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 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 March 31, 2001, the Company had 203 full-time employees, consisting of 84 in research and development, 6 in marketing, 19 in sales, 38 in administration and 56 in operations. Of the 84 research and development employees (38 in the US and 46 in India), 24 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 for Investments and Director 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 -17- of land in an office park under development in Hyderabad, India, for product development. Additionally, the Company leases sales offices in Natick, Massachusetts; Garner, North Carolina; San Diego, California; Berkshire, United Kingdom; Taipei, Taiwan; and Japan. ITEM 3 LEGAL PROCEEDINGS In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately $170 million (USD), 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. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. The plaintiffs appealed the setting aside of the default judgment against the Company to the Canadian Supreme Court. In June 2001, the Canadian Supreme Court refused to hear the appeal of the setting aside of the default judgment against the Company. 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 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 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 was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. 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 unsuccessful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is successful, 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. At March 31, 2001, 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. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -18- 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 62 Chairman, President, Chief Executive Officer, and Acting Chief Financial Officer C.N. Reddy 45 Executive Vice President for Investments, Director Bradley A. Perkins 44 Vice President, General Counsel and Secretary Ritu Shrivastava 50 Vice President, Technology Development
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 a director of the Company since its inception in February 1985. Mr. Reddy served as Secretary to the Company from February 1985 to October 2000. 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. In October 2000, Mr. Reddy resigned his positions as Chief Operating Officer and Secretary, and was appointed Executive Vice President for Investments. 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. Mr. Reddy is named inventor of over 15 patents related to SRAM and DRAM designs. C.N. Reddy is the brother of N. Damodar Reddy. Bradley A. Perkins joined the Company in January 1999, and was appointed Vice President and General Counsel. In January 2001, Mr. Perkins was appointed Secretary of the Company. 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. Mr. Perkins holds a B.S.E. in electrical engineering from Duke University, and a J.D. from McGeorge School of Law, University of the Pacific. Ritu Shrivastava joined the Company in November 1993, and was appointed Vice President - Technology Development in August 1995. Dr. 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 Fellow 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 ----------- ---------- 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 2nd Quarter 26.69 17.88 3rd Quarter 20.75 10.88 4th Quarter 16.19 10.69 2002 1st Quarter (through June $14.55 $10.00 22, 2001)
As of June 22, 2001, there were approximately 129 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, -------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- ------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues $208,678 $89,153 $47,783 $118,400 $82,572 Cost of revenues 187,913 58,428 60,231 117,400 84,630 -------- -------- ------- -------- -------- Gross profit (loss) 20,765 30,725 (12,448) 1,000 (2,058) Operating expenses: Research and development 13,766 14,568 14,099 15,254 15,012 Selling, general and 19,691 15,962 12,652 18,666 10,344 administrative -------- -------- ------- -------- -------- Income (loss)from (12,692) 195 (39,199) (32,920) (27,414) operations Gain on investments 75,801 1,049,130 15,823 - - Write-down of marketable securities and (509,449) - - - - Other investments Other income, net (200) 29 (1,126) 287 1,753 -------- -------- ------- -------- -------- Income (loss) before (446,540) 1,049,354 (24,502) (32,633) (25,661) income taxes Provision (benefit) for income taxes (179,956) 410,348 8,397 (11,421) (8,990) -------- -------- ------- -------- -------- Income (loss) before equity in income (loss) (266,584) 639,006 (32,899) (21,212) (16,671) of investees Equity in income (loss) of investees (5,737) 9,094 10,856 15,475 - -------- -------- ------- -------- -------- Net income (loss) $(272,321) $648,100 $(22,043) $(5,737) $(16,671) ======== ======== ======= ======== ======== Net income (loss) per share: Basic $(6.58) $15.49 $(0.53) $(0.15) $(0.43) ======== ======== ======= ======== ======== Diluted $(6.58) $15.07 $(0.53) $(0.15) $(0.43) ======== ======== ======= ======== ======== Weighted average number of common shares: Basic 41,376 41,829 41,378 39,493 38,653 ======== ======== ======= ======== ======== Diluted 41,376 42,992 41,378 39,493 38,653 ======== ======== ======= ======== ======== Year ended March 31, -------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- ------- -------- -------- (in thousands) Consolidated Balance Sheet Data: Working capital $289,659 $615,937 $22,102 $39,879 $78,000 Total assets 849,239 1,520,442 193,557 243,668 232,486 Stockholders' equity 547,289 963,955 163,570 189,111 204,594 Long term obligations 12,568 2,714 578 1,276 2,219
-21-
Fiscal Year 2001 Fiscal Year 2000 -------------------------------------- ------------------------------------- 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 $32,993 $63,815 $64,466 $47,404 $28,833 $23,497 $19,112 $17,711 Cost of revenues 75,557 42,530 39,943 29,883 18,242 15,412 12,304 12,470 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit (loss) (42,564) 21,285 24,523 17,521 10,591 8,085 6,808 5,241 Operating expenses: Research and 3,599 3,109 3,467 3,591 3,788 3,330 4,244 3,206 development Selling, general and 5,140 4,777 5,260 4,514 3,356 6,753 3,108 2,745 administrative -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from (51,303) 13,399 15,796 9,416 3,447 (1,998) (544) (710) operations Gain on investments 9,541 5,258 13,485 47,517 988,717 5,111 3,696 51,606 Write-down of marketable securities(509,449) - - - - - - - and other investments Other income (673) (200) 333 340 233 (56) (269) 121 (expense), net -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before (551,884) 18,457 29,614 57,273 992,397 3,057 2,883 51,017 income taxes Provision (benefit) (220,973) 5,654 12,053 23,310 410,944 (963) 1,186 (819) for income taxes -------- -------- -------- -------- -------- -------- -------- -------- (330,911) 12,803 17,561 33,963 581,453 4,020 1,697 51,836 Income (loss) before equity in income (loss) of investees Equity in income (2,092) (1,854) (1,093) (698) (368) 5,134 2,796 1,532 (loss) of investees -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $(333,003) $10,949 $16,468 $33,265 $581,085 $9,154 $4,493 $53,368 ======== ======== ======== ======== ======== ======== ======== ======== et income (loss) per share: Basic $(8.05) $0.27 $0.40 $0.80 $13.88 $0.22 $0.11 $1.28 ======== ======== ======== ======== ======== ======== ======== ======== Diluted $(8.05) $0.26 $0.39 $0.78 $13.48 $0.21 $0.10 $1.27 ======== ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares: Basic 41,383 41,296 41,326 41,543 41,864 41,858 41,812 41,608 ======== ======== ======== ======== ======== ======== ======== ======== Diluted 41,383 42,221 42,537 42,778 43,118 42,944 42,995 42,149 ======== ======== ======== ======== ======== ======== ======== ========
During the first and second quarters of fiscal year 2001, the Company experienced an increase in the average selling price and increased demand for DRAM and SRAM products. During the third and fourth quarters of fiscal year 2001, the Company experienced substantial order cancellations and reschedules. As a result, the Company experienced a decrease in certain product average selling prices and a decrease in demand. In the first fiscal quarter of 2001, the Company recognized a gain on its investment in Malleable Technologies, Inc. ("Malleable") when it was sold to PMC-Sierra, Inc. ("PMC"), for $11.0 million. Also in the first fiscal quarter, the Company recognized gains of $2.9 million on the sale of Broadcom Corporation ("Broadcom") securities, and $33.5 million on the sale of Chartered Semiconductor Corporation ("Chartered") securities. In subsequent quarters, the Company recognized gains of $28.5 million on additional sales of Broadcom securities. In the fourth fiscal quarter, the Company recorded a pre-tax charge of $509.4 million for a write-down of its marketable securities and other investments. In the third and fourth fiscal quarters, the Company recorded pre-tax charges of $53.9 million ($32.2 million net of tax) for decline in market value of certain inventory and to provide additional reserves for obsolete and excess inventory. 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"). -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," as well as elsewhere in this report. Overview
Overview Years ended -------------------------------- March March March 31, 2001 31, 2000 31, 1999 --------- ---------- --------- Revenue $208,678 $89,153 $47,783 ========= ========== ========= Net income $(272,321) $648,100 $(22,043) (loss) ========= ========== ========= Diluted earnings per share $(6.58) $15.07 $(0.53) ========= ========== =========
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 2001, DRAM products accounted for approximately 57% of net revenues, SRAM products accounted for approximately 43% of net revenues and flash products accounted for approximately less than 1% of net revenues. This compares to 56%, 43% and 1% of net revenues, respectively, for fiscal 2000. 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. On June 8, 2001, the Company announced that it expected that its revenues for the first quarter of fiscal 2002 will be approximately 50% to 55% below the $33.0 million reported in the fourth quarter of fiscal 2001, as a result of lower demand and lower average selling prices of some of its products. 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. -23- 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, -------------------------------------- 2001 2000 1999 ----------- ------------ ----------- Net revenues 100.0% 100.0% 100.0% Cost of revenues 90.1 65.5 126.1 ----------- ------------ ----------- Gross profit (loss) 9.9 34.5 (26.1) Operating expenses: Research and development 6.6 16.3 29.5 Selling, general and 9.4 17.9 26.5 administrative ----------- ------------ ----------- Income (loss) from operations (6.1) 0.3 (82.1) Gain on investments 36.3 1176.8 33.2 Write-down of marketable s ecurities and other (244.1) - - investments Other income (loss), net (0.1) 0.0 (2.4) ----------- ------------ ----------- Income (loss) before income taxes (214.0) 1177.1 (51.3) Provision (benefit) for income (86.2) 460.3 17.7 taxes ----------- ------------ ----------- Income (loss) before equity in (127.8) 716.8 (69.0) income (loss) of investees Equity in income (loss) of (2.7) 10.2 22.7 investees ----------- ------------ ----------- Net income (loss) (130.5)% 727.0% (46.3)% =========== ============ ===========
Net Revenues
Revenues Years ended Percentage change -------------------------------- ------------------- March March March 2000 1999 31, 31, 31, to to 2001 2000 1999 2001 2000 --------- --------- ---------- -------- --------- SRAMS $90,549 $38,088 $28,435 137.7% 33.9% DRAMS 117,938 50,235 18,424 134.8% 172.7% Other 191 830 924 (77.0)% (10.2)% --------- --------- ---------- -------- --------- Total $208,678 $89,153 $47,783 134.1% 86.6% Revenues ========= ========= ========== ======== =========
The Company's net revenues increased to $208.7 million in fiscal 2001 or approximately 134%, from $89.2 million in fiscal 2000. The increase in net revenues in fiscal 2001 was primarily due to a combination of sales of new products, overall increase in average selling prices and an increase in unit sales of the Company's SRAM and DRAM products during the first three quarters. During the fourth quarter of fiscal 2001 the Company's net revenues fell, largely due to a decrease in demand and in some cases a decrease in average selling prices. The Company's net revenues in fiscal 2000 increased to $89.2 million from $47.8 million in fiscal 1999, an increase of approximately 87%. The increase in net revenues in fiscal 2000 was due to a higher average selling price and an increase unit shipments of the Company's SRAM and DRAM products. Net revenue from the Company's DRAM product family in fiscal 2001 contributed $117.9 million or approximately 57%, up from $50.2 million or approximately 56% in fiscal 2000. During the first three quarters of fiscal 2001, sales of the Company's 16-Mbit DRAM in both the 1-Mbit x 16 configuration and the 4-Mbit x 4 configuration, increased significantly, along with an overall increase in the average selling prices. During the fourth quarter of fiscal 2001 demand for these products decreased as well as the average selling prices. DRAM net revenues for fiscal 1999 were $18.4 million or approximately 39% of total net revenues. Net revenue from the Company's SRAM product family in fiscal 2001 contributed $90.5 million or approximately 43% of the Company's revenues up from $38.1 million or approximately 43% in fiscal 2000. During the first three quarters of fiscal 2001, sales of the Company's 4-Mbit SRAM in both the 3.3V and 5V fast asynchronous configurations, increased significantly along with an overall increase in the average selling prices. During the fourth quarter of fiscal 2001 the demand for those products decreased but the average selling prices remained stable. SRAM net revenues in fiscal 1999 were $28.4 million, or approximately 59% of total net revenues. -24- 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 2001 accounted for approximately 73% compared to approximately 56% during fiscal 2000 and 52% in fiscal 1999. International net revenues in fiscal 2001 were $131.6 million or approximately 63% of total net revenues for fiscal 2001. This was an increase of approximately 148% over fiscal 2000. International net revenues in fiscal 2000 increased approximately 121% over fiscal 1999. International net revenues are derived from customers in Europe, Asia and the rest of the world. The largest percentage increase in international net revenues was to customers in Asia, which increased approximately 236% over fiscal year 2000. The increase was due to an overall increase in product demand and higher selling prices during the first three quarters of the year. During fiscal 2001, no single customer accounted for over 10% of net revenues. 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. On June 8, 2001, the Company announced that it expected that its revenues for the first quarter of fiscal 2002 will be approximately 50% to 55% below the $33.0 million reported in the fourth quarter of fiscal 2001, as a result of lower demand and lower average selling prices of some of its products. 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 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 2001 was approximately $20.8 million, or 10.0% of net revenues, as compared to $30.7 million, or approximately 34.5% of net revenues, for the same period in fiscal 2000, and a loss of approximately $12.4 million, or approximately 26.1% of net revenues, in fiscal 1999. During third and fourth quarter of fiscal 2001, the Company took pre-tax inventory charges of $53.9 million in recognition of lower average selling prices and inventory in excess of demand due to the decline in unit shipments for the Company's DRAM and SRAM products. 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 $20.0 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 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. Research and Development
Research and Development Years ended Percentage change --------------------------------- ------------------- March March March 2000 to 1999 31, 2001 31, 2000 31, 1999 2001 to 2000 ---------- ---------- ---------- --------- -------- Revenue $208,678 $89,153 $47,783 134.1% 86.6% ========== ========== ========== ========= ======== Research and $13,766 $14,568 $14,099 (5.5)% 3.3% Development ========== ========== ========== ========= ======== R&D as a percent of revenues 6.6% 16.3% 29.5% (59.6)% (44.6)% ========== ========== ========== ========= ========
-25- 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 $13.8 million or approximately 7% of net revenues for fiscal 2001 as compared to $14.6 million or approximately 16% of net revenues for fiscal 2000, and approximately $14.1 million or approximately 29% of net revenues for fiscal 1999. The small decrease in spending between fiscal 2001 and 2000 was due to lower depreciation expense for R&D equipment. The small increase in spending between fiscal 2000 and 1999 was higher mask and tooling charges. During fiscal 2001, 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 Administration Years ended Percentage change --------------------------------- ------------------- March March March 2000 to 1999 31, 2001 31, 2000 31, 1999 2001 to 2000 ---------- ---------- --------- --------- -------- Revenue $208,678 $89,153 $47,783 134.1% 86.6% ========== ========== ========= ========= ======== Selling, General $19,691 $15,962 $12,652 23.4% 26.2% and Administration ========== ========== ========= ========= ======== SG&A as a percent of revenues 9.4% 17.9% 26.5% (47.3)% (32.4)% ========== ========== ========= ========= ========
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 2001 were approximately $20 million or approximately 9% of net revenues as compared to approximately $16 million or approximately 18% in fiscal 2000 and approximately $12.7 million or approximately 26% of net revenues for fiscal 1999. The increase in spending between fiscal 2001 and 2000 was higher sales commissions principally due to the 134% growth in net revenues, travel and an increase in allowances for bad debts. 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 2000 was due principally to lower outside sales commissions. 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 Gain on investments during fiscal 2001 was largely attributed to the sale of Chartered and Broadcom securities. During fiscal 2001, the Company sold 500,000 shares of Chartered and recorded a pre-tax gain of $33.5 million and sold 287,522 shares of Broadcom and recorded a pre-tax gain $31.3 million. In June 2000, Malleable completed a merger with PMC-Sierra, resulting in the Company's selling its ownership interest in Malleable in exchange for 68,000 shares of PMC-Sierra Common Stock with a fair market value of $12.4 million. Upon completion of the transaction in June 2000, the Company recorded a pre-tax gain of $11.0 million. Subsequent to the transaction date, the Company's investment in PMC-Sierra is accounted for as an "available-for-sale" security in accordance with SFAS No. 115. In May 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 -26- 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. At March 31, 2001, the Company owned 200,000 shares of Broadcom. 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. Alliance received 247.7 million shares of UMC stock for its 247.7 million shares, or 15% ownership of USC, and approximately 35.6 million shares of UMC stock for its 48.1 million shares, or 3% ownership of USIC. At March 31, 2001 and 2000, the Company owned approximately 340.0 and 283.3 million shares, respectively or approximately 3.0% and 3.2% of UMC, and maintained its 25% and 4% 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 were subject to a six-month "lock-up" or no trade period. This lock-up period expired 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 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 became unrestricted in January 2001 as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company 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 42% of the Company's holdings at March 31, 2001), 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, which is 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, 2001, the Company owns 728,293 Vitesse shares, after distribution made to Alliance Venture Management in May 2000. Write-Down of Marketable Securities and Other Investments In the past six months, marketable securities held by the Company have experienced significant declines in their market value primarily due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their value. -27- Such evaluation included researching commentary from industry experts, analysts and other companies, all of whom were not optimistic that the semiconductor sector would recover in the quarter or two or three. Based on the continuing depression in the in investments' stock prices from those originally used to record the investment and coupled with the expectation that the stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for the companies in the semiconductor industry in general (including lower Fab capacity at UMC), management determined that a write down was necessary as of March 31, 2001. As a result the Company recorded a pre-tax loss of $506.8 million during the fourth quarter of fiscal 2001 based on the quoted market price of the respective marketable securities as of March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. This was recorded in the write-down of marketable securities and other investments. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under the current accounting practice, the Company is required to offset the gain on the contracts with the loss on the Vitesse stock, both were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. The Company has adopted SFAS No. 133 effective April 2, 2001. Under SFAS No. 133, the derivative contracts must be accounted for based on their fair value. These changes in fair value contracts must be reported in earnings until maturity. Other Income (Expense), Net Other Income (Expense), Net represents interest income from short-term investments and interest expense on short and long-term obligations. In fiscal 2001, Other Expense, Net was approximately $200,000 compared to a net income of $29,000 in fiscal 2000. The change from fiscal 2000 to fiscal 2001 was attributed to higher interest expense on short and long-term borrowing. In fiscal 1999 net expense was $1.1 million. Provision for Income Taxes The Company's effective tax rate for fiscal years 2001, 2000, and 1999 was (40.3%), 39.1%, and (34.3%), respectively. During fiscal 2001, the Company recorded a benefit for income taxes of approximately $180 million primarily as a result of a write down of marketable securities and other investments of $509.4 million in the fourth quarter. 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 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. -28- Equity in Income of Investees The Company, through Alliance Venture Management, invested approximately $62.0 million during fiscal 2001 in five Alliance venture funds, Alliance Ventures I, Alliance Ventures II, Alliance Ventures III, Alliance Ventures IV, and Alliance Ventures V. Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with approximately $20.0 million allocated to this fund. Alliance Ventures II, whose focus is in investing in internet start-up ventures has approximately $9.1 million invested to-date in ten companies, with approximately $15.0 million total designated for this fund. Alliance Ventures III, whose focus is on emerging companies in the networking and communication market areas has invested approximately $38.6 million in 14 companies and has been allocated up to $100.0 million for new investments. Alliance Ventures IV, whose focus is on emerging companies in the networking and communication market areas has invested approximately $4.0 million in two companies and has been allocated up to $40.0 million for new investments. Alliance Ventures V, whose focus is on emerging companies in the networking and communication market areas has invested approximately $6.5 million in three companies and has been allocated up to $60.0 million for new investments. Several of the Alliance Venture investments are accounted for under 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 $5.7 million for the year ended March 31, 2001. 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 is primarily due to lower net income and a decrease in the Company's ownership percentage from approximately 18% to 15%. 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 had experienced significant deterioration in the average selling prices for its SRAM and DRAM products during fiscal years 2001, 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 -29- 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 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 2001, 1999, 1998 and 1997, when the Company recorded pre-tax charges totaling approximately $53.9 million, $20.0 million, $15.0 million and $17.0 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. -30- 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 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. Effective April 2, 2001, we have adopted SFAS No. 133, and we are 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. 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. -31- 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 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. 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, 2001, the Company had approximately $6.1 million in cash and cash equivalents, a decrease of $28.7 million from March 31, 2000; and approximately $289.7 million in net working capital, a decrease of approximately $326.2 million from approximately $615.9 million at March 31, 2000. Additionally, the Company had short-term investments in marketable securities whose fair value at March 31, 2001 was $384.4 million. Refer to Notes 2-8 of Notes to the Consolidated Financial Statements for further details. During fiscal year 2001, operating activities used cash of approximately $26.3 million. This was primarily the result of net loss, the impact of non-cash items such as depreciation and amortization and the growth of inventory and accounts payable, offset by the non-cash investment losses. Cash used in operating activities of approximately $3.5 million in fiscal year 2000 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 approximately $23.6 million in fiscal year 1999 was primarily due to the operating loss of $22.0 million. Investing activities used cash in the amount of approximately $16.9 million in fiscal 2001 as result of proceeds from sale of the Company's holdings in Chartered in the amount of $45.5 million and Broadcom's $39.0 million, offset in part, by the Company's purchase of other investments of $66.0 million and investment in Tower and related wafer credits of approximately $31.0 million. In addition, the Company purchased $4.4 million of capital equipment during fiscal 2001. Investing activities during fiscal 2000 provided cash in the amount of approximately $38.9 million. This was 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 -32- part, by investments made by Alliance Ventures of $28.7 million. Investing activities in fiscal 1999 provided cash in the amount of approximately $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. Net cash provided by financing activities in fiscal 2001 was approximately $14.6 million as a result of borrowings from the Company's credit line of $22.2 million, offset in part, by the Company repurchasing its shares of common stock of $10.3 million. Net cash used in financing activities in fiscal 2000 was approximately $6.8 million. The use of cash for financing activities in fiscal 2000 was primarily the result of repurchase of 720,000 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 of approximately $1.8 million 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 we may need to raise additional funds to finance our activities beyond the next year or to consummate acquisitions of other businesses, products, wafer capacity or technologies. We could raise such funds by selling some our short-term investments, selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on terms that would be favorable to our shareholders and us, or at all. If we raise 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, UMC or Tower, 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 4 and 5 in the Notes to the Consolidated Financial Statements. 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, 2001. 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, 2001. Investment Risk As of March 31, 2001, our short-term investment portfolio consisted of marketable equity securities in Chartered Semiconductor, UMC, Broadcom Corporation, PMC-Sierra and Vitesse Semiconductor, the future value of which is subject to market value fluctuations. Refer to Notes 2, 3, 4, 5, 6, 7 and 8 for further details. In the past six months, marketable securities held by the Company have experienced significant declines in their market value primarily due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their value. Such evaluation included researching commentary from industry experts, analysts and other companies, all of whom were not optimistic that the semiconductor sector would recover in the quarter or two or three. Based on the continuing depression in the in investments' stock prices from those originally used to record the investment -33- and coupled with the expectation that the stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for the companies in the semiconductor industry in general (including lower Fab capacity utilization at UMC), management determined that a write down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax loss of $506.8 million during the fourth quarter of fiscal 2001 based on the quote market price of the respective marketable securities as of March 31, 2001 Foreign Currency Risk Based on our overall currency rate exposure at March 31, 2001, a near term 10.0% appreciation or depreciation in the value of the U.S. dollar would have an insignificant effect on our financial position, results of operations and cash flows over the next fiscal year. There can be no assurance that there will not be a material impact in the future. As of June 22, 2001, the Company owned approximately 340.0 million shares of UMC, a publicly traded Company in Taiwan. Since these shares are not tradeable in the United States they are subject to foreign currency risk. The market value of these holdings on June 22, 2001 based on the price per share of NTD 47.40 and the NTD/US dollar exchange rate of NTD 34.45 per US$ is US$467.8 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. -34- ================================================================================ 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. (3) Exhibits - See Exhibit Index on page 36 of this Form 10-K Annual Report. -35- ================================================================================ 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 10.35(N) Share Purchase Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower Semiconductor Ltd. 10.36(N) Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between SanDisk Corporation and Tower Semiconductor Ltd. 10.37(N) Registration Rights Agreement, dated as of January 18, 2001, by and between Tower Semiconductor Ltd., SanDisk Corporation, The Israel Corporation, Registrant, Macronix International Co., Ltd. and QuickLogic Corporation. -36- 10.38(N) Consolidated Shareholders Agreement, dated as of January 18, 2001 by and among SanDisk Corporation, The Israel Corporation, Registrant and Macronix International Co., Ltd. 10.39(N) Alliance / Tower Joinder Agreement, dated August 29, 2000, by and between Registrant and Tower Semiconductor Ltd. 10.40(N) Alliance / TIC Joinder Agreement, dated August 29, 2000, by and between Registrant and The Israel Corporation 10.41(O) Alliance Venture Management, LLC Amended Limited Liability Company Operating Agreement dated January 23, 2001 10.42(O) Alliance Ventures IV, LP Agreement of Limited Partnership dated January 23, 2001 10.43(O) Alliance Ventures V, LP Agreement of Limited Partnership dated January 23, 2001 10.44(O) Loan Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A. 10.45(O) Share Pledge Agreement dated May 17, 2001, by and between Registrant and Citibank, N.A. 21.01(O) Subsidiaries of Registrant 23.01(O) Consent of PricewaterhouseCoopers LLP (San Jose, California) + 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. ** 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 hereby incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Commission on June 30, 2000. (N)The document referred to is hereby incorporated by reference from Registrant's Quarterly Report on Form 10-Q filed with the Commission on February 13, 2000. (O)The document referred to is filed herewith. -37- ================================================================================ 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 29, 2001 By: /s/ N. Damodar Reddy ------------------------------------ N. Damodar Reddy Chairman of the Board, President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer, and 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 29, 2001 - ------------------------ President, Chief Executive N. Damodar Reddy Officer and Acting Chief Financial Officer /s/ C. N. Reddy Director, Executive Vice June 29, 2001 - ------------------------ President for Investments C. N. Reddy /s/ Sanford L. Kane Director June 29, 2001 - ------------------------ Sanford L. Kane /s/ Jon B. Minnis Director June 29, 2001 - ------------------------ Jon B. Minnis -38- 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, 2001 and 2000...............F-3 Consolidated Statements of Operations for the years ended March 31, 2001, 2000 and 1999...........................................F-4 Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2000 and 1999.....................................F-5 Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2000 and 1999...........................................F-6 Notes to Consolidated Financial Statements..............................F-7 Financial Statement Schedule: Report of Independent Accountants.......................................F-23 Schedule II - Valuation and Qualifying Accounts.........................F-24 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 of America 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California April 25, 2001 F-2
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Balance Sheets (in thousands) March 31, ------------------------- 2001 2000 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $6,109 $34,770 Restricted cash 1,925 2,804 Short term investments (Notes 384,374 883,300 2,3,4,5, 6, 7 and 8) Accounts receivable, net (Note 2) 18,001 15,858 Inventory (Note 2) 84,797 37,439 Related party receivables (Note 18) 2,369 1,778 Other current assets 1,079 1,958 ----------- ------------ Total current assets 498,654 977,907 Property and equipment, net (Note 2) 10,183 9,990 Investment in United Microelectronics Corp. (excluding short term portion) 228,633 505,478 (Notes 2 and 5) Investment in Tower Semiconductor 16,327 - Corporation (Note 2 and 11) 80,461 26,646 Alliance Ventures and other investments (Note 2, 9 and 10) Other assets 14,981 421 ----------- ------------ Total assets $849,239 $1,520,442 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short term borrowings (Note 2) $22,234 $- Accounts payable 76,130 27,133 Accrued liabilities 5,415 10,388 Income taxes payable 3,215 6,641 Deferred income taxes (Note 13) 101,143 316,903 Current portion of capital lease 858 905 obligation (Note 12) ----------- ------------ Total current liabilities 208,995 361,970 Long term obligations (Note 12) 11,882 1,517 Long term capital lease obligation (Note 686 1,197 12) Deferred income taxes (Note 13) 80,387 191,803 ----------- ------------ Total liabilities 301,950 556,487 ----------- ------------ Commitments and contingencies (Notes 12,16 and 17) 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; 42,725 and 42,406 427 424 shares issued and 41,440 and 41,686 shares outstanding Additional paid-in capital 197,350 193,260 Treasury stock (1,285 and 720 shares (22,762) (12,468) at cost) Retained earnings (deficit) 372,274 644,595 Accumulated other comprehensive - 138,144 income (Note 2) ----------- ------------ Total stockholders' equity 547,289 963,955 ----------- ------------ Total liabilities and stockholders' equity $849,239 $1,520,442 =========== ============
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, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Net revenues $208,678 $89,153 $47,783 Cost of revenues 187,913 58,428 60,231 ------------ ------------ ------------ Gross profit (loss) 20,765 30,725 (12,448) Operating expenses: Research and development 13,766 14,568 14,099 Selling, general and 19,691 15,962 12,652 administrative ------------ ------------ ------------ Income (loss) from (12,692) 195 (39,199) operations Gain on investments 75,801 1,049,130 15,823 Write-down of marketabl (509,449) - - securities and other investments Other income (loss), net (200) 29 (1,126) ------------ ------------ ------------ Income (loss) before (446,540) 1,049,354 (24,502) income taxes Provision (benefit) for (179,956) 410,348 8,397 income taxes ------------ ------------ ------------ Income (loss) before equity in income (loss) (266,584) 639,006 (32,899) of investees Equity in income (loss) of (5,737) 9,094 10,856 investees ------------ ------------ ------------ Net income (loss) $(272,321) $648,100 $(22,043) ============ ============ ============ Net income (loss) per share: Basic $(6.58) $15.49 $(0.53) ============ ============ ============ Diluted $(6.58) $15.07 $(0.53) ============ ============ ============ Weighted average number of common shares: Basic 41,376 41,829 41,378 ============ ============ ============ Diluted 41,376 42,992 41,378 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-4
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Statements of Stockholders' Equity (in thousands) Accumulated Common Stock Additional Other Retained Total -------------------------- Paid in Treasury Comprehensive Earnings Stockholder's Shares Amount Capital Stock Income (loss) (Deficit) Equity ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 40,449,988 $404 $183,099 $- $(12,930) $18,538 $189,111 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 - - - - - - (27,479) comprehensive loss ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 41,608,623 416 185,025 - (18,366) (3,505) 163,570 31, 1999 Issuance of common 797,482 8 4,719 - - - 4,727 stock under employee stock plans Repurchase of - - - (12,468) - - (12,468) common stock (1) Tax benefit on - - 3,516 - - - 3,516 exercise of stock options Cumulative - - - - 18,366 - translation adjustments Unrealized gain on - - - - 138,144 - investments (net of tax, $94,814) Net income - - - - - 648,100 Total - - - - - - 804,610 comprehensive income ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 42,406,105 424 193,260 (12,468) 138,144 644,595 963,955 31, 2000 Issuance of common stock under 319,246 3 2,349 - - - 2,352 employee stock plans Repurchase of - - - (10,294) - - (10,294) common stock (1) Tax benefit on - - 1,741 - - - 1,741 exercise of stock options Unrealized loss on - - - - (138,144) - investments Net income - - - - - (272,321) Total - - - - - - (410,465) comprehensive income ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balances at March 42,725,351 $427 $197,350 $(22,762) $- $372,274 $547,289 31, 2001 ============ ============ ============ ============ ============ ============ ============
(1) At March 31, 2000 and 2001, the Company held 720,000 and 1,285,000 shares in treasury, which have not been retired. After taking into account these treasury shares, the net outstanding shares at March 31, 2000 and 2001 was 41,686,105 and 41,440,351, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-5
ALLIANCE SEMICONDUCTOR CORPORATION Consolidated Statements of Cash Flows (in thousands) Year Ended March 31, --------------------------------- 2001 2000 1999 ---------- --------- ---------- Cash flows from operating activities: Net Income (loss) $(272,321) $648,100 $(22,043) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,202 4,417 3,789 Inventory write-downs 53,945 742 20,437 Non-recurring compensation - 3,655 - charge Equity in income of investees 5,737 (9,094) (10,856) (Gain)/ loss on investments (75,801 (1,049,130) (15,823) Write-down of marketable 509,449 - - securities and other investments Changes in assets and liabilities: Accounts receivable (2,143) (6,915) 6,773 Inventory (101,303) (25,254) (989) Related party receivables (591) 37 (1,815) Other assets 993 (99) 1,622 Accounts payable 48,997 19,087 (27,668) Accrued liabilities (4,973) 92 (2,446) Deferred income taxes (221,877) 399,168 25,466 Income tax payable (1,685) 10,157 - Long-term obligations 31,035 1,517 - ---------- --------- ---------- Net cash provided by (used in) (26,336) (3,520) (23,553) operating activities ---------- --------- ---------- Cash provided by (used in) investing activities: Purchase of property and (4,395) (2,816) (2,609) equipment Proceeds from sale of securities of United - 21,481 31,662 Semiconductor Corporation Proceeds from sale of 38,965 48,911 - securities of Broadcom Proceeds from sale of securities of Chartered 45,500 - - Semiconductor, Co. Purchase of securities of - - (3,098) United Silicon, Inc. Investment in Tower (16,327) - - Semiconductor Corporation Other assets (14,674) - - Purchase of Alliance Venture (66,007) (28,696) (1,000) and other investments ---------- --------- ---------- Net cash provided by (used in) (16,938) 38,880 24,955 investing activities ---------- --------- ---------- Cash flows from financing activities: Net proceeds from the issuance 2,352 4,727 1,938 of common stock Principal payments on lease (558) (1,439) (1,468) obligation Repurchase of common stock (10,294) (12,468) - Short-term borrowings 22,234 - - Restricted cash 879 2,371 1,337 ---------- --------- ---------- Net cash provided by (used in) 14,613 (6,809) 1,807 financing activities ---------- --------- ---------- Net increase (decrease) in cash (28,661) 28,551 3,209 and cash equivalents Cash and cash equivalents at 34,770 6,219 3,010 beginning of the period ---------- --------- ---------- Cash and cash equivalents at end $6,109 $34,770 $6,219 of the period ========== ========= ========== Supplemental disclosures of cash flow information: Cash paid (refunded) for income $29,501 $355 $(17,736) taxes ========== ========= ========== Cash paid for interest $733 $99 $214 ========== ========= ==========
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 under-capacity 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 the fourth quarter of fiscal year 2001, as well as, fiscal years 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, III, IV and V. (See Note 9). All significant inter-company 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 years ended March 31, 2001 and 2000 contained 52 weeks, while March 31, 1999 contained 53 weeks. Certain items previously reported in specific financial statement captions have been reclassified to conform to the fiscal year 2001 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 categorization of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2001, all short-term investment securities were designated as available-for-sale in accordance with SFAS 115. F-7 Available-for-sale securities are carried at fair value using available market information. Unrealized gains and losses are generally reported in accumulated other comprehensive income (loss) in the balance sheet. 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 or current replacement cost. 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 results 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 years 2000 and 2001, the Company entered into a number of "cashless collar" and "covered call" option transactions to partially hedge its holdings in Broadcom Corporation. In addition, during fiscal 2001, the Company entered into an "indexed debt" transaction to partially hedge its holdings in Vitesse Semiconductor Corporation. The Company may enter into other similar transactions in the future. F-8 Since Chartered, UMC, Broadcom, Vitesse and PMC-Sierra are in the semiconductor business, as is the Company, they 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 these companies. In addition, because they are semiconductor manufacturers, they are subject to additional risks, such as 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 these companies will increase in value or even maintain their value. Because of the cyclical nature of the semiconductor industry, it is possible that these investments, like the Company, will experience a significant business downturn in the future, which will significantly depress the value of these stocks. Additionally, because of the loss of its wafer production capacity rights if the Company sells more than 50% of its original holdings in Chartered or UMC, there can be no assurance that the Company can sell sufficient stock to realize its value on its investment in them. 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. 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, 2001, no customers accounted for 10% or more of the Company's net revenues. 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. 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 $131.5 million, $53.0 million, and $24.0 million of net revenues for the years ended March 31, 2001, 2000 and 1999, 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" and related interpretations. 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"). 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, ------------------------------ 2001 2000 1999 -------- -------- -------- Net income/(loss) available to $(272,321) $648,100 $(22,043) common shareholders ======== ======== ======== Weighed average common shares 41,376 41,829 41,378 outstanding (basic) Effect of dilutive options - 1,163 - -------- -------- -------- Weighed average common shares 41,376 42,992 41,378 outstanding (diluted) ======== ======== ======== Net income/(loss) per share: Basic $(6.58) $15.49 $(0.53) ======== ======== ======== Diluted $(6.58) $15.07 $(0.53) ======== ======== ========
F-9 Due to the Company incurring a net loss in 2001 and 1999, a calculation of EPS assuming dilution is not required for those years. At March 31, 2001 and 1999 there were 2,720,687 and 2,741,298 options outstanding to purchase common stock with respective weighted average purchase price of $11.11 and $5.37 that were excluded from the diluted loss per share computations because their effect would be anti-dilutive. 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 loss for fiscal year 2001 and 1999 was $410.5 million and $27.5 million, respectively, compared to total accumulated comprehensive income of $804.6 million for fiscal 2000. 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 Company has adopted SFAS No. 133 effective April 2, 2001 and as a result, the Company is required to adjust hedging instruments to fair value in the balance sheet, and recognize the offsetting gains or losses 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. NOTE 2. Balance Sheet Components Short-term Investments Short-term investments include the following available-for-sale securities at March 31, 2001 and 2000 (in thousands):
March 31, 2001 March 31, 2000 -------------------------- ------------------------ Number of Market Number of Market Shares Value Shares Value ------------- ----------- ------------ ---------- UMC 198,315 $320,086 141,650 $548,752 Chartered 1,642 39,481 2,141 201,789 Semiconductor Broadcom 200 5,780 488 62,831 Corporation Vitesse 728 17,341 852 69,928 Semiconductor PMC-Sierra 68 1,686 - - ----------- ---------- Total $384,374 $883,300 =========== ==========
Long-term Investments At March 31, 2001 and 2000, the Company's long-term investments were as follows (in thousands):
March 31, 2001 March 31, 2000 ------------------------- ------------------------- Number of Cost Number of Cost Shares basis Shares basis ------------- ---------- ------------ ---------- UMC 141,653 $228,633 141,650 $505,478 Tower Semiconductor 1,233 16,327 - - Alliance Venture 67,961 26,646 Investments Solar Venture 12,500 - Partners, LP ---------- ---------- Total $325,421 $532,124 ========== ==========
F-10 Accounts Receivable
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Accounts receivable: Trade receivables $21,582 $16,812 Less allowance for (3,581) (954) doubtful accounts and sales related reserves ----------- ----------- $18,001 $15,858 =========== ===========
Inventories
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Inventory: Work in process $41,350 $20,737 Finished goods 43,447 16,702 ----------- ----------- $84,797 $37,439 =========== ===========
Property and Equipment
March 31, ----------------------- 2001 2000 ----------- ----------- (in thousands) Engineering and test $16,715 $13,756 equipment Computers and software 11,769 9,474 Furniture and office 689 1,599 equipment Leasehold improvements 1,350 1,299 Land 288 288 ----------- ----------- 30,811 26,416 Less: Accumulated (20,628) (16,426) depreciation and amortization ----------- ----------- $10,183 $9,990 =========== ===========
Depreciation and amortization expense for fiscal yeFars 2001, 2000 and 1999 were $4.2 million, $4.4 million and $3.8 million, respectively. Property and equipment includes $2.2 million and $2.5 million of assets under capital leases at March 31, 2001 and 2000, respectively. Accumulated depreciation of assets under capital leases totaled $1,048,000 and $700,000 at March 31, 2001 and 2000, respectively. Accumulated Other Comprehensive Income Components of accumulated other comprehensivFe 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 ========== =========== =============
Short-term borrowings At March 31, 2001, the Company had short-term borrowings from a brokerage firm of approximately $22.2 million dollars secured by a portion of its holdings in Chartered Semiconductor, bearing interest at a rate of 6.5% per annum. NOTE 3. Write-Down of Marketable Securities In the past six months, marketable securities held by the Company have experienced significant declines in their market value primary due to the downturn in the semiconductor sector and general market conditions. Management has evaluated the marketable securities for potential "other-than-temporary" declines in their fair F-11 value. Such evaluation included researching commentary from industry experts, analysts, and other companies, all of whom were not optimistic that the semiconductor sector would recover in the next quarter or two or three. Based on the continuing depression in the investments' stock prices from those originally used to record the investment and coupled with the expectation that stock prices will not significantly recover in the next 6 to 9 months, based on unfavorable business conditions for companies in the semiconductor industry in general, management determined that a write-down was necessary as of March 31, 2001. As a result, the Company recorded a pre-tax, non-operating loss of approximately $509.4 million during the fourth quarter of fiscal 2001 based on the quoted price of the respective marketable securities as of March 31, 2001 as follows:
Pre-Tax Write-Down -------- (in thousands) UMC $460,014 Broadcom 3,778 Corporation Vitesse 32,298 PMC-Sierra 10,777 Other 2,582 -------- Total $509,449 ========
At the end of the fourth quarter fiscal 2001, the Company wrote-down several of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. This was recorded in the write-down of marketable securities and other investments. NOTE 4. 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, in which the Company decided not to participate. The Companies shares were subject to an additional three-month "lock-up" which expired 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. During fiscal 2001, the Company sold 500,000 shares and recognized a pre-tax non-operating gain of approximately $33.5 million. At March 31, 2001, the Company owned approximately 16.4 million ordinary shares or 1.64 million ADSs 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 than 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. NOTE 5. 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% 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. F-12 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 and the board seat, Alliance had participated in both strategic and operating decisions of USC on a routine basis 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 and 1999 the Company reported its proportionate share of equity income of USC of $9.5 million and $10.9 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. 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 does not have 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 expired 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 accounted for a portion (approximately 50% at March 31, 2000) of its investment in UMC, which became unrestricted on January 3, 2001, as an available-for-sale marketable security in accordance with SFAS 115. At March 31, 2000, the Company 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% and 42% of the Company's holdings at March 31, 2000 and 2001, respectively), 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. F-13 At the end of the fourth quarter of fiscal 2001 the Company wrote-down its investment in UMC and recognized a pre-tax, non-operating loss of approximately $460.0 million. (See Note 3). At March 31, 2001, the Company owned approximately 340.0 million shares of UMC. (See Note 2). 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. Note 6. Investment in Broadcom Corporation In 1998, the Company was approached by a startup company, Maverick Networks, Inc. ("Maverick"), regarding their need for embedded 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. During fiscal 2001, the Company sold 287,522 shares and realized a pre-tax, non-operating gain of approximately $31.3 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Broadcom and recognized a pre-tax, non-operating loss of approximately $3.8 million. (See Note 3). At March 31, 2001, the Company owned approximately 200,000 shares of Broadcom. (See Note 2). Note 7. Investment in 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 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. The Company records its investment in Vitesse Semiconductor Corporation as an available-for-sale marketable security in accordance with SFAS 115. In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date. Under current accounting practice, the Company offsets the gain on the contracts with the loss on the Vitesse stock, both of which were recorded in the write-down of marketable securities in the fourth quarter of fiscal 2001. The pre-tax, non-operating gain on the contracts amounted to $20.6 million, representing their intrinsic value at March 31, 2001. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in Vitesse and recognized a pre-tax, non-operating loss of approximately $52.9 million. (See Note 3). At March 31, 2001, the Company owned 728,293 shares of Vitesse. (See Note 2). 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 F-14 fiscal 2001. Thus, there can be no assurance that the Company's investment in Vitesse will increase in value or even maintain its value. Note 8. Investment in PMC-Sierra Corporation 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. On June 27, 2000, PMC-Sierra, Inc. ("PMC") acquired Malleable. PMC exchanged 1.25 million shares of PMC stock for the remaining 85% interest of Malleable that PMC did not already own. In connection with the merger, Alliance Ventures I received 68,152 shares of PMC for its 7% interest in Malleable. Upon the completion of the merger, the Company reported a gain of approximately $11.0 million based on the closing share price of $182.875 of PMC on the date of the merger. At the end of the fourth quarter fiscal 2001, the Company wrote-down its investment in PMC and recognized a pre-tax, non-operating loss of approximately $10.8 million. (See Note 3). At March 31, 2001, the Company owned 68,152 shares of PMC. (See Note 2). 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 fiscal 2001. Thus, there can be no assurance that the Company's investment in PMC will increase in value or even maintain its value. Note 9. 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. 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. In January 2001, upon the creation of Alliance Ventures IV, LP ("Alliance Ventures IV") and Alliance Ventures V, LP ("Alliance Ventures V"), the management agreement for Alliance Venture Management was amended to create series D and E member units which are entitled to receive a management fee of 15% of investment gains realized by Alliance Ventures IV and Alliance Ventures V, respectively. Each of the owners of the series A, B, C, D and E 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, C, D or E 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 series A, B, C, D or E member 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, 2001, Alliance Ventures I, whose focus is investing in networking and communication start-up companies, has invested $22.0 million in nine companies, with a fund allocation of $20.0 million. Alliance Ventures II, whose focus is in investing in internet start-up ventures has invested approximately $9.1 million in ten F-15 companies, with a total fund allocation of $15.0 million. As of March 31, 2001, Alliance Ventures III, whose focus is investing in emerging companies in the networking and communication market areas, has invested $38.6 million in 14 companies, with a total fund allocation of $100.0 million. As of March 31, 2001, Alliance Ventures IV, whose focus is investing in emerging companies in the semiconductor market areas, has invested $4.0 million in two companies, with a total fund allocation of $40.0 million. As of March 31, 2001, Alliance Ventures V, whose focus is investing in emerging companies in the networking and communication market areas, has invested $6.5 million in three companies, with a total fund allocation of $60.0 million. At the end of the fourth quarter fiscal 2001, the Company wrote-down certain of its investments in Alliance Ventures and recognized a pre-tax, non-operating loss of approximately $2.6 million. (See Note 3). Also, several of the Alliance Venture investments are accounted for under 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 $5.7 million for the year ended March 31, 2001. 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 has been formed in which certain of the Company's officers and employees, as well as the Company itself, has made similar venture investments, including investment in some of the same companies as Alliance Ventures. 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. 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. The market for these types of investments has, in the past, 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 possible 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. It is possible 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. Note 10. Investment in Solar Venture Partners, LP In August 2000, the Company agreed to invest $20 million in Solar Venture Partners, LP ("Solar"), a venture capital partnership whose focus is in investing in early stage companies in the areas of networking, telecommunications, wireless, software infrastructure enabling efficiencies of the Web and e-commerce, semiconductors for emerging markets and design automation. The Company has invested $12.5 million, $9.5 million is in the form of three promissory notes, which on March 31, 2001 were converted into a limited partnership interest in Solar. Due to changes in the venture capital market, Alliance has decided to limit its investment in Solar to $12.5 million already invested. Certain of the Company's officers and employees have also invested in Solar. Solar has made investments in some of the same companies as Alliance Ventures. Note 11. Investment in Tower Semiconductor Corporation In August 2000, the Company entered into a share purchase agreement with Tower Semiconductor ("Tower") under which Alliance committed to make a $75 million strategic investment in Tower as part of Tower's plan to build its new fab. In return for its investment, Alliance will receive equity, corresponding representation on Tower's Board of Director and committed production capacity in the advanced fab, which Tower intends to build. Pursuant to the agreement, the Company purchased 1,233,241 ordinary shares of Tower for an aggregate purchase price of $31 million in the fourth quarter of fiscal 2001. The Company has an obligation to purchase an additional 1,466,760 ordinary shares in four equal increments upon occurrence of events relating to Tower's construction of FAB 2 as specified in the agreement. These additional shares are expected to be purchased by the Company during fiscal 2002 and 2003. In connection with the share purchase agreement, the Company entered into a foundry agreement under which the Company is entitled to a certain amount of credits towards future wafer purchases from Tower. The amount of credits is determined upon each share purchase transaction by Alliance and is calculated based on the F-16 difference between Tower's average stock price for 30 days preceding a purchase transaction and Alliance's share purchase exercise price. At March 31, 2001, such wafer credits from Tower totaled $14.7 million and are included in other assets on the balance sheet. The wafer credits will be utilized as the Company purchases wafers from Tower in the future where 15% of order value will be applied against the wafer credits. Under the terms of the foundry agreement, the Company is guaranteed a capacity of up to 15% of available wafer starts but not to exceed 5,000 wafers starts per month. The guaranteed capacity may be reduced if the Company elects not to exercise its additional share purchase obligation. The Company accounts for its investment in Tower under the cost method based on the Company's inability to exercise significant influence over Tower's operations. NOTE 12. Long Term Obligations, Leases and Commitments In January 2001, the Company entered into two derivative contracts ("Agreements") with Bear Stearns and received aggregate cash proceeds of $31.5 million. The Agreements have payment provisions that incorporate a collar arrangement with respect to 490,000 shares of Vitesse Semiconductor common stock. As such, under the Agreements, the Company must pay Bear Stearns an amount based on the market price of Vitesse Semiconductor Common Stock in January 2003, the maturity date of the Agreements. If the stock price of Vitesse Semiconductor exceeds the ceiling of the collar, then the settlement amount increases by an amount determined by a formula included in the Agreements (generally equal to the excess of the value of the stock over the ceiling of the collar). If the stock price of Vitesse Semiconductor declines below the floor of the collar, then the settlement amount also decreases by the amount determined by a formula included in the Agreements (generally equal to the excess of the floor of the collar over the value of the stock). At March 31, 2001, the derivative contracts were in the money to the Company based on Vitesse Semiconductor's market price of $23.81 on that date and pre-tax, non-operating gain on the contracts of $20.6 million, representing their intrinsic value at March 31, 2001, was recorded. As a result, the Company's obligations under the Agreements were reduced to $10.9 million, which was included in long-term obligations at March 31, 2001. 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 2001 and 2007. Future minimum fiscal rental payments under non-cancelable leases are as follows:
Fiscal Year (in thousands) - ----------- -------------- 2002 $1,645 2003 1,607 2004 1,636 2005 1,696 2006 1,754 Thereafter 550 ------------- Total payments $8,888 =============
Rent expense for fiscal 2001, 2000, and 1999 was $1,799,000, $1,386,000 and $635,000 respectively. Capital Leases At March 31, 2001, equipment under capital leases amounted to approximately $2.2 million compared to $2.5 million at March 31, 2000. The original lease terms ranged from three to five years. The following is a schedule of future minimum fiscal lease payments under capital leases:
Fiscal Year (in thousands) - ------------------------- ---------- 2002 $908 2003 686 2004 100 ---------- Total payments minimum 1,694 lease payments Amount representing (150) interest ---------- 1,544 Less current portion (858) ---------- Long-term capital lease $686 obligations ==========
F-17 Letters of Credit At March 31, 2001, approximately $1.9 million in standby letters of credit were outstanding and expire through April 1, 2002, secured by restricted cash. NOTE 13. Provision (benefit) for income taxes The provision (benefit) for income taxes is comprised of the following:
March 31, ------------------------------ 2001 2000 1999 -------- --------- --------- (in thousands) Current: Federal $28,969 $14,340 $- State 5,291 228 - Foreign 34 - - -------- --------- --------- 34,294 14,568 - -------- --------- --------- Deferred: Federal (185,070) 340,351 8,397 State (29,180) 55,429 - -------- --------- --------- (214,250) 395,780 8,397 -------- --------- --------- Total $(179,956) $410,348 $8,397 provision (benefit) ======== ========= =========
Deferred tax assets (liabilities) comprise the following:
March 31, ------------------ 2001 2000 ------- --------- (in thousands) Inventory reserves $14,743 $1,982 Accrued expenses and 1,839 4,198 reserves Other 3,866 - ------- --------- Gross deferred tax 20,448 6,180 assets Investment in UMC (193,102) (398,851) Investment in Broadcom (2,254) (25,127) Investment in Chartered - (61,129) Investment in Vitesse (6,549) (27,952) Investment in PMC-Sierra (73) - Other - (1,827) ------- --------- Gross deferred tax (201,978) (514,886) liabilities ------- --------- $(181,530) $(508,706) ======= =========
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, ----------------------------------- 2001 2000 1999 ---------- ---------- ----------- (in thousands, except percentages) Federal statutory rate 35% 35% 35% Tax at federal $(156,289) $367,274 $(8,531) statutory rate State taxes, net of (25,893) 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 2,226 1,076 - ---------- ---------- ----------- Total $(179,956) $410,348 $8,397 ========== ========== ===========
The tax benefit associated with the exercises of non-qualified stock options and disqualifying dispositions of incentive stock options reduced taxes currently payable by $1.7 million and $3.5 million in fiscal years 2001 and 2000, respectively. F-18 Note 14. 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. On September 8, 2000, the number of shares reserved for issuance under the Plan was increased by 2,000,000 to 13,000,000. 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 2001, 2000, and 1999:
Options Options Outstanding ------------ -------------------------- Available Shares Weighted for Grant Average Prices ------------ ---------- --------------- Balance at March 31, 1998 1,358,489 3,675,431 $5.81 Options granted (1,405,150) 1,405,150 3.52 Options canceled 1,352,324 (1,352,324) 7.23 Options exercised - (986,959) 1.56 ------------ ---------- --------------- Balance at March 31, 1999 1,305,663 2,741,298 $5.37 Options authorized 2,000,000 - Options granted (1,150,950) 1,150,950 $11.91 Options canceled 925,374 (925,374) $5.49 Options exercised - (677,717) $5.85 ------------ ---------- --------------- Balance at March 31, 2000 3,080,087 2,289,157 $8.44 Options authorized 2,000,000 - Options granted (627,250) 627,250 $19.46 Options canceled 267,850 (267,850) $13.93 Options exercised - (274,195) $5.51 ------------ ---------- --------------- Balance at March 31, 2001 4,720,687 2,374,362 $11.11 ============ ========== ===============
As of March 31, 2001, options to purchase approximately 523,772 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 2001, 2000,and 1999 was $14.69, $8.57, and $2.44 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, F-19 which greatly affect the calculated values. Significant option groups outstanding at March 31, 2001, and related weighted average exercise price and contractual life information are as follows:
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 2001 Life 31, 2001 - ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 573,230 3.66 $2.94 189,710 $3.18 $4.06 $4.50 - 475,082 2.56 $6.97 175,862 $7.08 $10.94 $11.06 - 270,620 4.41 $11.18 54,124 $11.18 $11.19 $11.25 - 551,430 4.84 $13.06 80,776 $12.98 $17.25 $17.94 - 275,500 5.11 $19.71 1,000 $18.50 $20.50 $20.75 - 228,500 5.18 $25.07 22,300 $25.52 $29.13 - ------------- ------------ ------------ ---------- ------------- --------- $2.09 - 2,374,362 4.11 $11.11 523,772 $7.81 $29.13 ============= ============ ============ ========== ============= =========
The following assumptions are included in the estimated grant date fair value calculations for stock options:
2001 2000 1999 --------- ---------- ------------ Expected life 5.00 5.00 5.00 years years years Risk-free 4.8% 6.7% 5.7% interest rate Volatility 87.6% 86.0% 88.0% 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, 45,051, 119,765, and 171,676 shares were issued during fiscal 2001, 2000, and 1999, respectively. At March 31, 2001, there were 280,579 shares available under the ESPP. 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:
2001 2000 1999 --------- ----------- ----------- Expected life 6 months 6 months 6 months Risk-free 3.6% 6.4% 4.9% interest rate Volatility 87.6% 78.0% 88.0% 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 2001, 2000, and 1999 was $8.43, $2.24, and $2.55 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, 2001, 2000, and 1999, would have been as follows (in thousands, except per share data): F-20
March 31, ------------------------------- 2001 2000 1999 --------- --------- --------- Pro forma income $(274,635) $646,905 $(23,231) (loss): Pro forma net loss per share: Basic $(6.64) $15.47 $(0.56) Diluted $(6.64) $15.05 $(0.56)
NOTE 15. 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 2001, 2000 and 1999 the Company contributed approximately $115,000, $131,000 and $0, respectively. NOTE 16. Legal Matters In July 1998, the Company learned that a default judgment was entered against the Company in Canada, in the amount of approximately $170 million (USD), 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. Oral arguments were made before the Court of Appeals in June 2000. In July 2000 the Court of Appeals instructed the lower Court to allow the parties to take depositions regarding the issue of service of process, while also setting aside the default judgment against the Company. The plaintiffs appealed the setting aside of the default judgment against the Company to the Canadian Supreme Court. In June 2001, the Canadian Supreme Court refused to hear the appeal of the setting aside of the default judgment against the Company. The Company believes the resolution of this matter will not have a material adverse effect on its financial conditions and its results of operations. NOTE 17. 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 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 was transmitted to the CIT on June 26, 2000 for consideration. Micron has appealed the decision of the CIT to the Court of Appeals for the Federal Circuit. The Company cannot predict either the timing or the eventual results of the appeal, although it is expected to take a year or more to conclude. 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 unsuccessful, the antidumping order will be terminated and cash deposits will be refunded with interest. If the appeal is successful, 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. F-21 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. At March 31, 2001, 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. NOTE 18. Related Party Transactions On May 18, 1998, the Company provided loans to two of its officers and a director aggregating $1,735,000. The officers' 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 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, 2001. As of March 31, 2001, $1,616,000 was outstanding under these loans with accrued interest of $252,000. 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 19. 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, ------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) United States $77,114 $36,088 $23,770 Taiwan 35,666 11,310 6,061 Japan 36,775 10,251 3,269 Asia (except 19,069 6,211 5,807 Taiwan and Japan) Europe (except UK) 18,724 15,042 8,196 UK 20,363 10,251 371 Rest of world 967 - 309 --------- --------- --------- Total $208,678 $89,153 $47,783 ========= ========= =========
International net revenues in fiscal 2001 increased by 148% over fiscal 2000. 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 Asia, which increased approximately 236% over fiscal year 2000. This increase was due to an overall increase in product demand and higher average selling prices during the first three fiscal quarters of the year. International revenues increased 195% in fiscal 2000 compared to fiscal 1999. The largest increase in international net revenues was to customers in Europe, which was attributable to overall increase in product demand and higher average selling prices. NOTE 20. Subsequent Events (unaudited) In May 2001, the Company paid $11.0 million to Tower Semiconductor, in accordance with the terms of the share purchase agreement between the two companies. In May 2001, the Company entered into a secured loan agreement (the "Loan Agreement") with Citibank, N.A for up to $60 million. Under the terms of the Loan Agreement, the loan will mature on November 19, 2001 and bears interest at a per annum rate equal to LIBO Rate plus one percent. Both the principal and accrued interest are payable upon maturity. The borrowings under the Loan Agreement are secured by 181,670,000 shares of UMC common stock held by the Company. F-22 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, 2001, 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, 2001 F-23 ALLIANCE SEMICONDUCTOR CORPORATION Schedule II: Valuation and Qualifying Accounts (in thousands)
Balance at Balance Description beginning Additions Reduction at end of period of period - --------------------------------- ---------- --------- --------- --------- Year ended March 31, 2001 Allowance for doubtful $954 $3,310 $(683) $3,581 accounts and sales-related reserves Inventory related reserves for $8,270 $37,886 $(8,216) $37,940 excess and obsolescence; and lower of cost or market issues Year ended March 31, 2000 Allowance for doubtful $2,527 $6,209 $(7,782) $954 accounts and sales-related reserves Inventory related reserves for $15,701 $5,862 $(13,293) $8,270 excess and obsolescence; and 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 $14,967 $20,437 $(19,703) $15,701 excess and obsolescence; and lower of cost or market issues
F-24 EX-23.01 2 ex2301.txt CONSENT 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 reports dated April 25, 2001 relating to the financial statements and the financial statement schedule, which appear in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California June 27, 2001 EX-10.44 3 ex1044.txt CITIBANK LOAN AGREEMENT U.S. $60,000,000.00 LOAN AGREEMENT Dated as of May 17, 2001 between Alliance Semiconductor Corporation as Borrower and CITIBANK, N.A., as Lender ------------------------------------------ CREDIT AGREEMENT dated as of May 17, 2001 among Alliance Semiconductor Corporation a Delaware corporation (the "Borrower"), and CITIBANK, N.A. ("Citibank" or the "Lender"). R E C I T A L S WHEREAS, Lender has agreed to extend certain credit facilities to the Borrower the proceeds of which will be used for operational purposes and; WHEREAS, Borrower desires to secure all of the Obligations hereunder by granting to Lender, a first priority Lien on the Pledged Stock (as defined below) and any additional equity pledged under the Pledge Agreement from time to time: NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower and Lender agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Advance" means the advance by the Lender to the Borrower pursuant to Section 2.1. "Affiliate" means, as to any Entity, any other Entity that, directly or indirectly, controls, is controlled by or is under common control with such Entity. "Applicable Lending Office" means the office of the Lender specified on the signature page hereof, or such other office of the Lender as the Lender may from time to time specify to the Borrower. "Base Rate" means, for any period, a fluctuating interest rate per annum in effect from time to time which shall at all times be equal to the higher of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's Base Rate, and (b) 0.50% per annum above the Federal Funds Rate. "Business Day" means (a) a day on which banks are not required or authorized to close in New York, New York and (b) unless a Base Rate is in effect, on which dealings in deposits are carried on in the London interbank market. "Capital Stock" means, with respect to any Entity, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of, such Entity's capital stock or other ownership interests (including, without limitation, partnership interests (whether general or limited) or limited liability company membership interests), whether outstanding on, or issued after the date hereof, and any and all rights (other than any evidence of indebtedness), warrants or options exchangeable for or convertible into such Capital Stock or other ownership interests, as the case may be. "Central Depository" means the Taiwan Securities Central Depository Co., Ltd. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" has the meaning specified in Section 2.1. "Debt" of any Entity means (a) indebtedness of such Entity for borrowed money, (b) obligations of such Entity evidenced by bonds, debentures, notes or other similar instruments. "Default" means an Event of Default or an event that, with notice or lapse of time or both, would become an Event of Default. "Dollars" and "$" means lawful money of the United States of America. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 4143 of the Code. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Events of Default" has the meaning specified in Section 6.1. "Excluded Taxes" means, with respect to the Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office or its Applicable Lending Office is located and (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located. "Federal Funds Rate" means a fluctuating interest rate per annum equal for each day to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by it. "GAAP" means generally accepted accounting principles in the United States. "Indemnified Taxes" means Taxes other than Excluded Taxes. ----------------- "Interest Period" means the period beginning on the date the Advance is made or on the last day of the immediately preceding Interest Period, and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each Interest Period shall be one month unless the parties otherwise agree; provided, however, that (i) each Interest Period that begins on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month, (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, except that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day and (iii) any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. "Investment" means, with respect to any Entity, any advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any Guarantee) or any capital contribution to (by means of transfers of property to others, payments for property or services for the account or use of others, or otherwise), or any purchase or ownership of any stocks, bonds, notes, debentures or other securities of, any other Entity. "Lender" means Citibank, N.A. and any other Entity that shall ------ become a party pursuant to Section 7.5. "LIBO Rate" means for any Interest Period: (a) the offered rate for deposits in Dollars with a maturity comparable to such Interest Period appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Lender from time to time, for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) as of approximately 11:00 A.M. (London time) on the date two Business Days prior to the commencement of such Interest Period; (b) in the event that the rate referred to in clause (a) is unavailable at such time for any reason, an interest rate per annum equal to the rate per annum at which deposits in Dollars are offered by the principal office of the Lender in London, England to prime banks in the London interbank market at approximately 11:00 a.m. (London time) on the date two Business Days before the first day of such Interest Period in the amount of the Advance if the Advance were to be outstanding for such Interest Period. "LIBO Rate Reserve Percentage" for any Interest Period means the effective rate (expressed as a percentage) at which reserve requirements (including, without limitation, emergency, supplemental and other marginal reserve requirements) are imposed on the Lender during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind. A Entity shall be deemed to own subject to a Lien any property which such Entity has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Loan Documents" means this Agreement, the Note and the Pledge --------------- Agreement. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole or (b) the ability of the Borrower to perform its obligations under this Agreement or any of the other Loan Documents. "Maturity Date" unless such date is accelerated pursuant to the terms hereof, shall mean November 19, 2001, the date on which payment by the Borrower of all Obligations hereunder is due and owing to the Lender. "Multiemployer Plan" means a multiemployer plan defined as such in Section 4001(a)(3) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "Note" has the meaning specified in Section 2.5(b). "Obligations" shall mean all amounts owing to the Lender pursuant to the terms of this Agreement or any other Loan Document "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or the Pledge Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Entity" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee benefit or other plan established or maintained by the Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Pledge Agreement" means that certain Pledge Agreement dated as of May 17, 2001 substantially in the form of Exhibit B hereto. "Pledged Stock" means shares of the common stock of United Microelectronics Corp. that have been delivered to Lender or, to the Central Depository, pursuant to the terms of the Pledge Agreement. "Shares" means shares of the common stock of United Microelectronics Corp. "Subsidiary" means, with respect to any Entity, any corporation, partnership, limited liability company or other entity of which at least a majority of the shares of stock or other ownership interests having ordinary voting power (without regard to the occurrence of any contingency) to elect a majority of the board of directors or other managers of such entity is at the time directly or indirectly owned or controlled by such Entity or one or more Subsidiaries of such Entity or by such Entity and one or more Subsidiaries of such Entity. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any governmental authority. . ARTICLE II AMOUNTS AND TERMS OF THE ADVANCE . 2.1 The Commitment. The Lender agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower in Dollars from time to time from the date hereof through June 28, 2001 in the aggregate principal amount of $60,000,000.00 (the "Commitment"). The Commitment shall be reduced to $18,000,000.00 if the Lender notifies the Borrower that the Lender has a reasonable belief that the proceeds from a sale or an anticipated sale of the Pledged Stock may not readily and without undue cost and expense, be repatriated to the USA. 2.2 Advance. The Lender will make the proceeds of any Advance available to the Borrower by crediting the amount thereof, in immediately available funds, by no later than 12:00 noon (New York City time) on the date following a request for an Advance, to an account of the Borrower (Acct. No. 4296-905722, ABA No. 12000248) maintained with Wells Fargo Bank at its offices at 121 Park Center Plaza, San Jose, CA, 95113, Reference: [-----------]). 2.3 Interest Elections. The initial Interest Period shall expire thirty days from the date hereof. Borrower may elect subsequent Interest Periods as provided in this Section 2.3. To make an election pursuant to this Section 2.03, the Borrower shall notify the Lender of such election by telephone not later than 11:00 A.M. (New York City time) on the third Business Day prior to the effective date of such election. Each such telephonic election shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Lender of a written interest election request in a form approved by the Lender and signed by the Borrower. Each telephonic and written interest election request shall specify the following information: (1) the effective date of the election made pursuant to such interest election request, which shall be a Business Day; and (2) the Interest Period to be applicable after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period." 2.4 Termination of the Commitment. The Commitment shall automatically terminate at 5:00 P.M. on the date hereof unless prior to such time the conditions precedent set forth in Section 3.1 shall have been satisfied or waived and an Advance shall have been made. The Commitment once terminated under this Section 2.4 may not be reinstated. 2.5 Repayment of Advance; Note. -------------------------- (a) The Borrower hereby unconditionally promises to pay to the Lender the outstanding principal amount of the Advance on the Maturity Date. (b) The Advances shall be evidenced by a single promissory note of the Borrower (the "Note") in substantially the form of Exhibit A hereto, dated the date hereof, payable to the Lender in a principal amount equal to the Commitment and otherwise duly completed. 2.6 Prepayment of Advance. --------------------- (a) Optional Prepayments. The Borrower shall have the right at any time --------------------- and from time to time to prepay any Advance in whole or in part, subject to the requirements of this Section 2.6. (b) Terms Applicable to All Prepayments. The Borrower shall notify the Lender by telephone (confirmed by telecopy) of any optional prepayment hereunder not later than 11:00 A.M. (New York City time) three Business Days before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of the Advance or portion thereof to be prepaid. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.7 and shall be made in the manner specified in Section 2.5(b). 2.7 Interest. -------- (a) Subject to Sections 2.7(b) and 2.8, the Borrower agrees to pay interest on the Advance during each Interest Period therefor at a rate per annum equal to the LIBO Rate for such Interest Period plus 1.00% per annum. (b) Notwithstanding the foregoing, if any principal of or interest on the Advance or any fee or other amount whatsoever payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest upon demand, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of the Advance, 2.00% per annum plus the rate otherwise applicable to the Advance as provided above or (ii) in the case of any other amount, 1.00% per annum above the Base Rate. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Lender so notifies the Borrower, then, so long as an Event of Default is continuing, the Advance shall bear interest at the Base Rate at the end of the then current Interest Period. (c) Accrued interest on the Advance shall be payable in arrears upon the Maturity Date; provided, that (i) interest accrued pursuant to paragraph (b) of this Section 2.7 shall be payable on demand and (ii) in the event of any repayment or prepayment of the Advance, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment. (d) The Borrower agrees to pay to the Lender, so long as the Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or the equivalent), additional interest on the unpaid principal amount of the Advance, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the LIBO Rate for the then current Interest Period for the Advance from (ii) the rate obtained by dividing such LIBO Rate by a percentage equal to 100.00% minus the LIBO Rate Reserve Percentage for such Interest Period, payable on each date on which interest is payable on the Advance. A certificate of the Lender setting forth the amount to which the Lender is then entitled under this Section 2.7(d) shall be conclusive and binding on the Borrower in the absence of manifest error. (e) All computations of interest based on the Base Rate shall be made on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the LIBO Rate and computations of interest pursuant to Section 2.7(d) shall be made on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. (f) Alternate Rate of Interest. If prior to the commencement of any Interest Period the Lender determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the LIBO Rate for such Interest Period then the Lender shall give notice thereof to the Borrower by telephone or telecopy as promptly as practicable thereafter and, until the Lender notifies the Borrower that the circumstances giving rise to such notice no longer exist the Advance shall bear interest at the Base Rate plus 1.00% per annum. 2.8 Increased Costs. --------------- (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the LIBO Rate Reserve Percentage) or in the interpretation of (to the extent any such introduction or change occurs after the date hereof) any law or regulation or (ii) the compliance with any guideline or request of any central bank or other governmental authority adopted or made after the date hereof (whether or not having the force of law), there shall be any increase in the cost to the Lender of agreeing to make or making, funding or maintaining the Advance, the Borrower shall from time to time, within 10 days after delivery by the Lender to the Borrower of a certificate as to the amount of such increased cost, pay to the Lender the amount of the increased costs set forth in such certificate (which certificate shall be conclusive and binding on the Borrower in the absence of manifest error). (b) If the Lender determines that compliance with any law or regulation enacted or introduced after the date hereof or any guideline or request of any central bank or other governmental authority adopted or made after the date hereof (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and that the amount of such capital is increased by or based upon the existence of the Lender's Commitment and other commitments of this type, or the Advance, then, the Borrower shall pay to the Lender, within 10 days after delivery by the Lender to the Borrower of a certificate as to the amount required to compensate the Lender therefor, the amount required to compensate the Lender therefor (a certificate of the Lender as to such amount to be conclusive and binding on the Borrower in the absence of manifest error). 2.9 Break Funding Payments. In the event of (a) the payment of any principal of the Advance other than on the last day of an Interest Period (including as a result of an Event of Default), (b) the conversion of the Advance other than on the last day of an Interest Period therefor or (c) the failure to borrow, convert, continue or prepay the Advance on the date specified in any notice delivered pursuant hereto, then, in any such event, the Borrower shall compensate the Lender for the loss, cost and expense attributable to such event, which shall be deemed to include an amount determined by the Lender to be equal to the excess, if any, of (i) the LIBO Rate for the balance of such Interest Period (or for the Interest Period that would have commenced on such borrowing, conversion, continuation or prepayment), over (ii) the amount of interest that the Lender would earn on such principal amount for the balance of such Interest Period (or for such Interest Period) if the Lender were to invest such principal amount for such period at the interest rate that would be bid by the Lender (or an Affiliate of the Lender) for Dollar deposits from other banks in the London interbank market at the commencement of such period. A certificate of the Lender setting forth any amount or amounts that the Lender is entitled to receive pursuant to this Section 2.10 shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Lender the amount shown as due on any such certificate within 10 days after receipt thereof. 2.10 Taxes. ----- (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided, that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.11) the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant governmental authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant governmental authority in accordance with applicable law. (c) The Borrower shall indemnify the Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section 2.11) paid by the Lender and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant governmental authority. A certificate as to the amount of such payment or liability delivered to the Borrower by the Lender shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a governmental authority, the Borrower shall deliver to the Lender the original or a certified copy of a receipt issued by such governmental authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Lender. 2.11 Payments Generally. ------------------ (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest or fees, or under Section 2.9, 2.10 or 2.11, or otherwise) prior to 12:00 noon (New York City time) on the date when due, in Dollars and immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Lender, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Lender at its offices at 399 Park Avenue, New York, New York 10043. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. (b) If at any time insufficient funds are received by and available to the Lender to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied first, to pay interest then due hereunder, then to pay fees and other amounts hereunder, then to pay principal due hereunder. (c) The Borrower agrees that at any time after the occurrence and during the continuance of an Event of Default, in addition to (and without limitation of) any right of set-off, banker's lien, or counterclaim the Lender may otherwise have, the Lender shall be entitled, at its option, to offset balances held by it for the account of the Borrower at any of its offices, in Dollars or in any other currency, against any principal of or interest on the Advance to the Borrower hereunder, or any other obligation of the Borrower hereunder, which is not paid when due (regardless of whether such balances are then due to the Borrower), in which case it shall promptly notify the Borrower; provided, that failure to give such notice shall not affect the validity thereof. ARTICLE III CONDITIONS OF LENDING 3.1 Condition Precedent to an Advance. The obligation of the Lender to make an Advance is subject to the condition precedent that the Lender shall have received, on or before the date hereof, the following documents, each dated the date hereof and in form and substance satisfactory to the Lender: (a) A Note, duly executed by the Borrower, payable to the order of the Lender in the principal amount of the Commitment. (b) Certified copies of the certificate of incorporation or resolution of the Board of Directors of the Borrower (or equivalent documents) authorizing the Borrower to borrow money and pledge assets as collateral. (c) A certificate of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement, the Pledge Agreement, the Note and any other documents to be delivered hereunder. (d) A certificate of the Borrower as to the effect set forth in clauses (i) and (ii) of the last paragraph of this Section 3.1. (e) The Pledge Agreement, duly executed and delivered by each party and Shares having a market value (as determined by the Lender) at least equal to 400% of the Commitment have been delivered Pledgee, or to the Central Depository pursuant to the Pledge Agreement. (f) Evidence that the Borrower shall have paid all expenses relating to the execution, delivery and negotiation of the Loan Documents and related matters for which invoices have been presented, on or before such date (including, without limitation, the fees and expenses of counsel to the Lender), to the extent that statements for such fees and expenses have been delivered to the Borrower. (g) A duly completed Form FRU-1, satisfactory in form and substance to the Lender. The obligation of the Lender to make an Advance shall be subject to the further conditions precedent that on the date hereof and on the date of any Advance: (i) the representations and warranties set forth in Article IV are true and correct, before and after giving effect to the Advance and to the application of the proceeds thereof and (ii) no Default or Event of Default hereunder and no breach of the Pledge Agreement would result from such Advance or from the application of the proceeds thereof. ARTICLE IV REPRESENTATIONS AND WARRANTIES As of the date hereof and as of any date on which an Advance is requested, the Borrower represents and warrants to the Lender that: 4.1 Organization. The Borrower is duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.2 Authorization; Enforceability. The execution, delivery and performance of each of the Loan Documents by the Borrower are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. Each of the Loan Documents (other than the Note) has been duly executed and delivered by the Borrower and constitutes, and the Note when duly executed and delivered for value will constitute, a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3 Government Approvals; No Conflicts. The execution, delivery and performance of each of the Loan Documents by the Borrower (a) do not require any consent or approval of, registration or filing with, or any other action by, any governmental authority, (b) will not violate any applicable law or regulation or the articles of incorporation, bylaws or other organizational documents of the Borrower and (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower. 4.4 Financial Condition; No Material Adverse Change. Borrower has heretofore furnished to the Lender the consolidated balance sheet and statements of income, stockholders' equity and cash flows of Borrower and its Subsidiaries as of December 31, 2000. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Borrower as of such date and for such period in accordance with GAAP. Since December 31 2000 no event or circumstance has occurred that has had a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of Borrower and its Subsidiaries taken as a whole. 4.5 Litigation. There are no actions, suits or proceedings by or before any arbitrator or governmental authority now pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower (i) that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or (ii) that involve this Agreement or the transactions contemplated thereby. 4.6 Compliance with Laws and Agreements. The Borrower is in compliance with all applicable laws, regulations and orders of any governmental authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 4.7 Investment and Holding Company Status. The Borrower believes it is not an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 and has applied to the United States Securities and Exchange Commission for an exemption under the Investment Company Act of 1940. The Borrower is not a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 4.8 Margin Stock. No portion of the proceeds of any borrowing under this Agreement shall be used by the Borrower to purchase or carry any margin stock in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of the Board or to violate the Securities Exchange Act of 1934, in each case as in effect on the date or dates of such borrowing and such use of proceeds. ARTICLE V COVENANTS OF THE BORROWER 5.1 Covenants. So long as any principal of or interest on the Advance or any other amount payable hereunder or under the Note remains outstanding or the Commitment remains in effect, the Borrower covenants and agrees that: (a) The Borrower will (i) preserve and maintain its corporate existence and (ii) comply with all applicable laws, statutes, rules, regulations and orders, except for any non-compliance which could not (either individually or in the aggregate) reasonably be expected to result in Material Adverse Effect. (b) The Borrower will keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, and permit representatives of the Lender, during normal business hours, with the consent of the Borrower (which consent shall not be unreasonably withheld), to examine, copy and make extracts from its books and records, to inspect any of its property, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Lender. (c) The Borrower will maintain insurance with financially sound and reputable insurance companies, and with respect to property and risks of a character usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations. (d) The Borrower will furnish to the Lender: (1) as soon as possible and in any event within five Business Days after the occurrence of any Default, a statement of the chief financial officer of the Borrower setting forth details of such Default and the action which the Borrower has taken and proposes to take with respect thereto; (2) promptly after the sending or filing thereof, copies of all reports and registration statements which the Borrower files with the Securities and Exchange Commission or any national securities exchange; and (3) such other information respecting the condition or operations, financial or otherwise, of the Borrower as the Lender may from time to time reasonably request. (e) The Borrower will use the proceeds for its general operating requirements. and to pay fees and expenses relating to the financing hereunder; provided, that the Lender shall have no responsibility as to the use of any of such proceeds. (f) The Borrower will not (i) sell, lease, assign, convey, transfer or other dispose of, or (ii) create, incur, assume or suffer to exist any Lien or encumbrance upon any of its property pledged to the Borrower under the Pledge Agreement. except for Liens created pursuant to the Pledge Agreement. (g) The Borrower will not declare or pay any extraordinary dividend in respect of its common stock. 5.2 Maintenance of Pledge. Borrower hereby agrees that Lender will not be obligated to Advance any funds hereunder unless prior to any such Advance, Pledgor has delivered to Lender, or deposited with the Central Depository for the Benefit of the Lender, pursuant to the Pledge Agreement a number of Shares such that the market value of the Pledged Stock (as reasonably determined by the Lender) is no less than 400% of the aggregate of the principle and interest then outstanding. Thereafter Borrower agrees that whenever market value of the Pledged Stock (as reasonably determined by the Lender) is less than 300% of the aggregate of the principle and interest then outstanding Borrower shall pledge and deliver to Lender, or the Central Depository, pursuant to the Pledge Agreement for the benefit of the Lender such additional Shares such that subsequent to such delivery, the market value of the Pledged Stock (as determined by the Lender) is no less than 400% of the aggregate of the principle and interest then outstanding. Borrower it shall use its best efforts to provide and maintain for Lender and its Affiliates a perfected first priority lien in all of the Pledge Stock. ARTICLE VI EVENTS OF DEFAULT 6.1 Events of Default. If any of the following events ("Events of ------------------- ----------- Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of the Advance when the same becomes due and payable; or the Borrower shall fail to pay any interest on the Advance or any fee or other amount payable hereunder or under the Note when due and such failure remains unremedied for three days; or (b) Any representation or warranty made by the Borrower herein or in any certificate or other document delivered in connection with this Agreement shall prove to have been incorrect when made or deemed made; or (c) The Borrower shall fail to materially perform or observe any term, covenant, or agreement contained in this Agreement or the Pledge Agreement; (d) The Borrower shall fail to pay any principal of or premium or interest on any other Debt in an aggregate principal amount exceeding $ 5,000,000.00 of the Borrower when the same becomes due and payable, and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; or (e) Any judgment or order for the payment of money in excess of $5,000,000.00 shall be rendered against the Borrower, and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order and such proceedings shall not have been stayed or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (f) Borrower has merged with another Entity and the creditworthiness of the resulting Entity is materially weaker than the creditworthiness of the Borrower as of the date hereof. (g) the Borrower shall breach the Pledge Agreement; (h) The Pledge Agreement shall cease to be in full force and effect or shall be declared null and void or the Lender shall cease to have a valid and perfected First Priority Lien in any Collateral purporting to be covered thereby or the Borrower shall contest the validity of the Pledge Agreement or deny that it has any liability thereunder; then, and in any such event, the Lender may, by notice to the Borrower, (i) declare the obligation of the Lender to make Advance to be terminated, whereupon the same shall forthwith terminate, and/or (ii) declare the Advance and the Note, all interest thereon and all other Obligations to be forthwith due and payable, whereupon the Advance and the Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation of the Lender to make the Advance shall automatically be terminated and (B) the Advance and the Note, all such interest and all such Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. 6.2 Exchange Controls etc. The Maturity Date shall be accelerated by notice to Borrower from Lender if in the reasonable judgment of Lender restrictions on the ownership or disposition of Shares, or restrictions on the transfer or exchange of currency have been imposed such that Lender could not readily sell the Pledged Shares or transfer the proceeds of such sale to the United States of America. ARTICLE VII MISCELLANEOUS 7.1 Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Pledge Agreement, or the Note, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. This Agreement, the Pledge Agreement, and the Note and the documents referred to herein and therein constitute the entire agreement of the parties with respect to the subject matter hereof and thereof. 7.2 Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, to the respective addresses set forth on the signature pages hereof or at such other address as shall be designated by any party in a written notice to the other party. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Lender pursuant to Article II or VII shall not be effective until received by the Lender. 7.3 No Waiver; Remedies. No failure on the part of either party to exercise, and no delay in exercising, any right hereunder, under the Pledge Agreement, or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided in equity or at law. 7.4 Costs, Expenses and Indemnification. ----------------------------------- (a) The Borrower agrees to pay and reimburse on demand all reasonable costs and expenses incurred by the Lender in connection with the preparation, negotiation, execution and delivery, administration, modification, amendment or enforcement of this Agreement, the Note and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under or in connection with this Agreement. (b) The Borrower hereby indemnifies the Lender and each of its Affiliates and their respective officers, directors, employees, agents, advisors and representatives (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, fees and disbursements of counsel), joint or several, that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or relating to any investigation, litigation or proceeding or the preparation of any defense with respect thereto arising out of or in connection with or relating to this Agreement or the transactions contemplated hereby or thereby or any use made or proposed to be made with the proceeds of the Advance, whether or not such investigation, litigation or proceeding is brought by the Borrower, any of its stockholders or creditors, an Indemnified Party or any other Entity or an Indemnified Party is otherwise a party thereto, and whether or not any of the conditions precedent set forth in Article III are satisfied or the other transactions contemplated by this Agreement are consummated, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. 7.5 Assignments and Participations. ------------------------------ (a) The Lender may, without the consent of the Borrower, assign to another Person all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of the Commitment, the Advance and the Note); provided, however, that no such consent by the Borrower shall be required in the case of any assignment to a Subsidiary or Affiliate of the Lender. (b) The Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advance and the Note); provided, however, that the Lender's obligations under this Agreement (including, without limitation, its Commitment hereunder) shall remain unchanged. (c) Upon receiving Borrower's written consent, which shall not be unreasonably withheld, the Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 7.5, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower or any Subsidiaries or Affiliates thereof furnished to the Lender by or on behalf of the Borrower. (d) Notwithstanding any other provision set forth in this Agreement, the Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advance and the Note) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. (e) All amounts payable by the Borrower to the Lender under Sections 2.7(d), 2.9, 2.10 and 7.4(b) shall be determined as if the Lender had not sold or agreed to sell any participations in the Advance or the Note or its Commitment and as if the Lender were funding each of the Advance and Commitment in the same way that it is funding the portion of the Advance and Commitment in which no participations have been sold. 7.6 Governing Law; Submission to Jurisdiction. This Agreement and the Note shall be governed by, and construed in accordance with, the law of the State of New York (without regard to its conflicts of law provisions). The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York County for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 7.7 Severability. In case any provision in this Agreement, the Pledge Agreement or in the Note shall be held to be invalid, illegal or unenforceable, such provision shall be severable from the rest of this Agreement or the Note, as the case may be, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7.8 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 7.9 Survival. The obligations of the Borrower under Sections 2.7(d), 2.9, 2.10, 2.11 and 7.4 shall survive the repayment of the Advance and the termination of the Commitment. Each representation and warranty made or deemed to be made herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Advance, any Default or Event of Default that may arise by reason of such representation or warranty proving to have been false or misleading. 7.10 Waiver of Jury Trial. EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY. 7.11 No Fiduciary Relationship. The Borrower acknowledges that the Lender has no fiduciary relationship with, or fiduciary duty to, the Borrower arising out of or in connection with this Agreement or the Note, and the relationship between the Lender and the Borrower is solely that of creditor and debtor. This Agreement does not create a joint venture among the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. Alliance Semiconductor Corporation By: /s/ N. Damodar Reddy -------------------------------------- N. Damodar Reddy, President Address for Notices: 2575 Augustine Drive Santa Clara, California 95054 Facsimile: (408) 855-4999 Telephone: (408) 855-4900 CITIBANK, N.A. By: /s/ Herman Hirsch --------------------------------------- Herman Hirsch, Authorized Person Address for Notices: 390 Greenwich Street New York, New York 10013 Facsimile: (212) 723-8328 Telephone: (212) 723-7361 EXHIBIT A NOTE U.S.$60,000,000.00 Dated: May 17, 2001 FOR VALUE RECEIVED, the undersigned Alliance Semiconductor Corporation, a Delaware Corporation, (the "Borrower"), HEREBY PROMISES TO PAY to the order of CITIBANK, N.A. (the "Lender") on November 19, 2001("the Maturity Date") the principal sum of $60,000,000.00 (sixty million United States dollars) or, if less, the aggregate outstanding principal amount of the Advances plus any interest accrued as defined in and pursuant to the Loan Agreement as defined below. The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of the Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Loan Agreement. Both principal and interest are payable in lawful money of the United States of America at the office of the Lender at 399 Park Avenue, New York, New York 10043, This Note is the Note referred to in, and is entitled to the benefits of, the Loan Agreement dated as of May 17, 2001 (the "Loan Agreement", the terms defined therein being used herein as therein defined) between the Borrower and the Lender. The Loan Agreement contains provisions for acceleration of the Maturity Date hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the Maturity Date hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Note shall be governed by, and construed in accordance with, the laws of the State of New York, United States without regard to its conflicts of law provisions. Alliance Semiconductor Corporation By: /s/ N. Damodar Reddy -------------------------------------- N. Damodar Reddy, President EXHIBIT B [PLEDGE AGREEMENT] EX-10.45 4 ex1045.txt CITIBANK SHARE PLEDGE AGREEMENT Share Pledge Agreement This Share Pledge Agreement is made on the 17th of May, 2001 by and among: Alliance Semiconductor Corporation, a company duly organized and existing under the laws of the state of Delaware, United States of America ("USA"), whose address as indicated in the execution page of this Agreement (hereinafter to be referred to as "Pledgor") and Citibank N.A., a national banking association duly established and existing under the laws of the USA whose address as indicated in the execution page of this Agreement (hereinafter to be referred to as "Pledgee"). WITNESSETH WHEREAS, Pledgor is a foreign shareholder of United Microelectronics Corp. (the "Company"), a company incorporated and existing under the laws of the Republic of China ("ROC"), and the lawful owner of a number of Company's shares, WHEREAS, Pledgor and Pledgee are parties to the Loan Agreement (as defined below), and WHEREAS, as a condition to the Loan Agreement, the Pledgor is required to execute and deliver this agreement to create a pledge over a certain number of shares of the Company that it owns as a continuing security in favor of the Pledgee for the due and punctual performance of certain obligations and liabilities of the Pledgor. NOW, THEREFORE, in consideration of the foregoing and of the covenants and agreements herein contained, the parties hereto agree as follows: Article 1. DEFINITIONS In addition to the terms defined above and elsewhere herein as used in this Agreement, the following terms shall have their respective meanings as follows: "Central Depository" means the Taiwan Securities Central Depository Co., Ltd. "Loan Agreement" means the Loan Agreement between the Pledgor and the Pledgee, dated May 17, 2001. "Pledge" means the security interest over the Shares (as defined below) established pursuant to this Agreement (including but not limited to Article 2) and governed by Section 2, Chapter 7, Volume III of the Civil Code of the ROC where this Agreement does not otherwise specifically provide. "Secured Obligations" means all liabilities and obligations of Pledgor arising under the Loan Agreement and under this Agreement including but not limited to the interest, delay interest and expenses incurred for exercising the pledge hereunder and all extensions, renewals and modifications of any of the foregoing. "Shares" means 123,845,000 shares of the common stock issued by the Company and held by Pledgor and such other additional shares of the common stock issued by the Company, delivered to the Pledgee pursuant to the Loan Agreement (and subject to the terms hereof) and held by Pledgor as required under the Loan Agreement and any and all rights, benefits and interests under or in connection therewith. Article 2. PLEDGE ------ (a) As a continuing security for the Secured Obligations, Pledgor hereby pledges in favor of the Pledgee all of its rights, title and interests in and to the Shares to constitute a valid and first-priority pledge over the Shares. (b) Pledgor shall have the Shares ready for the closing of this Agreement and deposit the Shares into the Pledgor's account at the Central Depositary upon signing of this Agreement, or deliver Certificate(s) evidencing the Shares to Pledgee, if Pledgor has not at that time been able to establish an account at the Central Depositary . (c) Upon execution of this Agreement, the Pledgor shall execute such documents and perform other necessary procedures as required by the laws of the ROC or other rulings issued by the competent authorities of the securities industry of the ROC, including without limitation to the Central Depositary, or may be required by the Pledgee to effectuate a valid pledge over the Shares in favor of the Pledgee, including but not limited to submitting the application forms for creation of a pledge on book-entry shares to the Central Depositary, and/or providing such endorsements as may be required by the Pledgee. Article 3. REPRESENTATION AND WARRANTIES ----------------------------- As of the date of the Loan Agreement between Pledgor and Pledgee, and on any date that Shares are delivered to the Central Depository, or the Pledgee, pursuant to this Pledge Agreement, Pledgor hereby represents and warrants as follows: (a) Pledgor legally and beneficially owns the Shares; (b) all of the Shares have been duly and validly issued and are fully paid ; (c) the Shares delivered to and deposited at the Central Depository, or Pledgee, are authentic and Pledgor has complied with all required procedures to deposit the Shares in its account at the Central Depository; (d) the Shares are free from any liens, charges, claims by any third parties based on whatever ground, or encumbrances of any kind, other than the Pledge; (e) the execution, delivery and performance of this Agreement by the Pledgor will not contravene or violate any law, regulation, judgment or agreement to which the Pledgor is subject to or to which its property may be subject, nor any provision in the Articles of Incorporation, by-laws, internal regulations, any like corporate constituent documents or {shareholders'} stockholders'or board resolutions of the Pledgor; (f) the Pledge created hereunder constitutes valid and legally binding obligations of the Pledgor; and (g) there is no litigation, investigation, or governmental proceeding pending or threatened against Pledge or any of its properties which if adversely determined would have a material adverse effect on the Shares or the financial condition, operations, or business of Pledgor. Article 4. COVENANTS --------- (a) Pledgor covenants that without the Pledgee's prior written consent, {they} it shall not: (1) sell, transfer, assign or otherwise dispose of or purport to sell, transfer, assign or otherwise dispose of the Shares, or commit to do any of the foregoing; or (2) other than the Pledge created by this Agreement, create or suffer to exist any mortgage, pledge, charge, lien or other security interest over the Shares. (b) Pledgor covenants that it shall provide all necessary assistance to Pledgee in connection with all procedures to perfect and to foreclose the Pledge and all filings or applications with government agencies with respect to the perfection and foreclosure of the Pledge. Article 5. DIVIDENDS AND PROFITS --------------------- During the term of this Agreement: (a) any profits, dividends and other distributions of income or capital in respect of Shares otherwise payable or paid to the Pledgor, except for the existence of the Pledge by the issuance of additional securities ,shall become subject to the terms of this Agreement and the Pledgor shall deliver the cash, or endorse and deliver the certificates for such additional securities, to the Pledgee if the certificates of such additional securities are delivered to the Pledgor, or take such other actions necessary or appropriate in accordance with all provisions of this Agreement in respect of such additional securities so that the Pledge is validly created over and extended to cover such cash or additional securities; and (b) Pledgor shall promptly notify the Pledgee in writing within three (3) business days after it is notified of any cash or stock dividend distribution with respect to the Shares. Article 6. REALIZATION OF SECURITY ----------------------- The Pledgee shall immediately become entitled to enforce the Pledge and shall be entitled to sell, realize or dispose of all or any of the Shares in the manners permitted by the applicable law, regulation, and rulings and such other manners as it may see fit and as permitted by law if : (a) Pledgor commits any material breach or makes any default in the observance of any term, condition, undertaking or covenant contained in the Loan Agreement; or {(b)Pledgor commits any material breach or makes any default in the observance of any term, condition, undertaking or covenant contained in this Agreement; or (c) any representation or warranty in this Agreement was not true when made. Article 7. CONTINUING SECURITY Notwithstanding any intermediate payment or settlement of account or satisfaction of the whole or any part of the payment or obligation secured by the Pledge, the Pledge shall be a continuing security for the discharge of the Secured Obligations and shall extend to cover all or any sum or sums of money or obligation that the Pledgor owes from time to time to the Pledgee under the Loan Agreement and this Agreement. Article 8. RELEASE OF PLEDGE ----------------- Upon repayment and discharge in full of all the Pledgor's indebtedness and obligations under the Loan Agreement and this Agreement, the Pledgee will release the Pledge and agrees to execute such documents as shall be reasonably necessary to effect such release. This Agreement shall be deemed terminated unless otherwise mutually agreed by and between the Pledgor and the Pledgee. Article 9. INDEMNIFICATION Pledgor hereby agrees to indemnify Pledgee and its officers, directors, employees, attorneys, and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages, penalties, judgments, disbursements, costs, interest, expenses (including reasonable attorney fees), and amounts paid in settlement to which any of them may become subject which directly or indirectly arise from or relate to (i) the execution, delivery performance, administration, or enforcement of this Agreement; and (ii) any breach by Pledgor of any representation, warranty, covenant or other clause contained in this Agreement. Article 10. NOTICES ------- (a) Any notice, demand or communication from Pledgor to the Pledgee or vice versa shall be in writing and may be made by any authorized officer of the Pledgor or the Pledgee, as the case may be, upon the relevant party's giving, making or sending such notice, demand or communication. (b) Notices, demand and communication shall be addressed to the addressees shown on the execution page unless otherwise specified herein. Article 11. SEVERABILITY If any one or more of the provisions of this Agreement, or any part thereof, shall be declared or adjudged to be illegal, invalid or unenforceable under any applicable law, such illegality, invalidity or unenforceability shall not invalidate any of the other provisions of this Agreement, which shall remain in full force, validity and effect. Article 12. GOVERNING LAW AND JURISDICATION ------------------------------- This Agreement shall be governed and construed in accordance with the laws of the ROC. Any disputes arising out of this Agreement shall be submitted to the non-exclusive jurisdiction of the Taipei District Court, ROC. Article 13. SURVIVAL -------- All representations and warranties made in this Agreement shall survive the execution and delivery of this Agreement, and no investigation by Pledgee shall affect the representations and warranties of Pledgor herein or the right of Pledgee to rely upon them. Article 14. ENGLISH LANGUAGE This Agreement is in English only . No Chinese translation of this Agreement shall be of any force or effect, and shall be for convenience only. Article 15. AMENDMENT; ENTIRE AGREEMENT --------------------------- This Agreement represents the final agreement between parties hereto and supersedes all prior oral or written communications between the parties hereto , regarding the subject matter hereby provided. This Agreement may only be amended by a written agreement executed by the parties hereto. Article 16.Acknowledgement The parties acknowledge that Citibank N.A. (Taiwan branch) shall act as securities agent for Citibank N.A. (New York Branch) in this transaction. Article 17. SUCCESSORS AND ASSIGNS ---------------------- This Agreement shall be binding upon and inure to the benefit of Pledgor and Pledgee and their respective heirs, successors, and assigns, except that Pledgor may not assign nay of its rights or obligations under this Agreement without the prior written consent of Pledgee. Article 18. COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which shall constitute one original instrument. IN WITNESS WHEREOF the parties hereto have duly executed this Agreement as of the date first above written. Pledgor By: /s/ N. Damodar Reddy -------------------------------------- N. Damodar Reddy, President For Alliance Semiconductor Corporation 2575 Augustine Drive Santa Clara, California 95054 United States of America Telephone: (408) 855-4900 Fax: (408) 855-4999 The Pledgee By: /s/ Herman Hirsch -------------------------------------- Herman Hirsch, Authorized Person For Citibank N.A. 390 Greenwich Street New York, New York 10013 United States of America Telephone: (212) 723-7361 Fax: (212) 723-8328 Attention: Herman Hirsch EX-10.41 5 ex1041.txt AVM AMENDED OPERATING AGREEMENT Amended Limited Liability Company Operating Agreement This Amended Limited Liability Company Operating Agreement ("Agreement"), is entered into as of January 23, 2001, 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., Alliance Ventures II, L.P. and Alliance Ventures III, 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, and amended on February 28, 2000 ("Prior Agreements"); Whereas, the LLC proposes to additionally act as the general partner of Alliance Ventures IV, L.P. and Alliance Ventures V, 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 Agreements, for series of units to be known as Common Units, Series A units, Series B units, and Series C units for the purpose of allocating the carried interest in Alliance Ventures I, L.P., Alliance Ventures II, L.P. and Alliance Ventures III, L.P., respectively; Whereas, the Members desire to additionally provide for series of units to be known as Series D units and Series E units for the purpose of allocating the carried interest in Alliance Ventures IV, L.P. and Alliance Ventures V, L.P., respectively; 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: 1.7.1the 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 six classes of units, Common Units, Series A Units, Series B Units, Series C Units, Series D Units and Series E Units. The total number of Units the LLC is authorized to issue shall be 6,000,000, 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, 1,000,000 shall be Series C Units, 1,000,000 shall be Series D Units, and 1,000,000 shall be Series E 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, each Series C Unit shall be entitled to 10 votes per Unit, each Series D Unit shall be entitled to 10 votes per Unit, and each Series E 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. 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, Series D Units, Series E 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. and Carried Interest from Alliance Ventures II, 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, 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 the Alliance Ventures II, L.P. Partnership Agreement, respectively. 15.12 Carried Interest from Alliance Ventures III, L.P., Carried Interest from Alliance Ventures IV, L.P. and Carried Interest from Alliance Ventures V, L.P. shall mean the LLC's right to receive (as general partner of Alliance Ventures III, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of Alliance Ventures III, L.P. Partnership Agreement, the LLC's right to receive (as general partner of Alliance Ventures IV, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of Alliance Ventures IV, L.P. Partnership Agreement, and the LLC's right to receive (as general partner of Alliance Ventures V, L.P.) 15% of Net Profits from Portfolio Investments as set forth at Sections 3.2 and 3.3 of Alliance Ventures V, L.P. Partnership Agreement, respectively. 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/ 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 8,000 Series C Units $2,000.00 10,000 Series D Units $2,500.00 10,000 Series E Units $2,500.00 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 10,000 Series D Units $2,500.00 10,000 Series E Units $2,500.00 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 10,000 Series D Units $2,500.00 10,000 Series E Units $2,500.00 Bradley Perkins 632 Series A Units $158.00 1000 Series B Units $250.00 933 Series C Units $233.25 1000 Series D Units $250.00 1000 Series E Units $250.00 David Eichler 421 Series A Units $105.25 764 Series B Units $191.00 600 Series C Units $150.00 764 Series D Units $191.00 764 Series E Units $191.00 Shastri Divakaruni 2,941 Series B Units $735.25 6,000 Series C Units $1,500.00
EX-10.42 6 ex1042.txt ALLIANCE VENTURES IV PARTNERSHIP AGREEMENT Agreement of Limited Partnership This Agreement of limited partnership ("Agreement") is dated as of January 23, 2001 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 IV, 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., Alliance Ventures IV, L.P., Alliance Ventures V, 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 0.50% 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 Alliance 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 $40,000,000.00 EX-10.43 7 ex1043.txt ALLIANCE VENTURES V PARNTERSHIP AGREEMENT Agreement of Limited Partnership This Agreement of limited partnership ("Agreement") is dated as of January 23, 2001 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 V, 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., Alliance Ventures IV, L.P., Alliance Ventures V, 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 0.50% 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 [GRAPHIC OMITTED][GRAPHIC OMITTED] Schedule I Limited Partners Limited Partner Capital Contribution Commitment - ---------------------------------------------------------------------------- Alliance Semiconductor Corporation $60,000,000.00 EX-21.01 8 ex2101.txt SUBSIDIARIES OF REGISTRANT Exhibit 21.01
ALLIANCE SEMICONDUCTOR CORPORATION Subsidiaries of Registrant Name of Subsidiary of Alliance Jurisdiction or Semiconductor Corporation State of Incorporation - ---------------------------------- ---------------------- Nimbus Technology, Inc. California Alliance Semiconductor Cayman Islands International Corporation Alliance Semiconductor Delaware International 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 Alliance Ventures IV, LP California Alliance Ventures V, LP California Dioptech, Inc. Delaware
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