-----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, J+6ccGSceq62lLwdyclgiXrerfsy3xx/9uIkFXZ6Qszlj/PPL8mzjSPDREzWmuJR HmSRl8ibjqpauyga3XAigA== 0001012870-01-500778.txt : 20010515 0001012870-01-500778.hdr.sgml : 20010515 ACCESSION NUMBER: 0001012870-01-500778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERICOM SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0001001426 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770254621 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27026 FILM NUMBER: 1632861 BUSINESS ADDRESS: STREET 1: 2380 BERING DR CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084350800 MAIL ADDRESS: STREET 1: 2380 BERING DR CITY: SAN JOSE STATE: CA ZIP: 95131 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [_] 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 0-27026 Pericom Semiconductor Corporation (Exact Name of Registrant as Specified in Its Charter) California 77-0254621 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2380 Bering Drive San Jose, California 95131 (408) 435-0800 (Address of Principal Executive Offices and Issuer's Telephone Number, Including Area Code) 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 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 [_] As of May 7, 2001 the Registrant had outstanding 25,088,654 shares of Common Stock. Pericom Semiconductor Corporation Form 10-Q for the Quarter Ended March 31, 2001 INDEX PART I. FINANCIAL INFORMATION Page ---- Item 1: Financial Statements Condensed Balance Sheets as of March 31, 2001 and June 30, 2000 3 Condensed Statements of Income for the three months and nine months ended March 31, 2001 and March 31, 2000 4 Condensed Statements of Cash Flows for the nine months ended March 31, 2001 and March 31, 2000 5 Notes to Condensed Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3: Quantitative and Qualitative Disclosures about Market Risk 20 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 21 Signatures 22 2 PART I. FINANCIAL INFORMATION Item 1: Financial Statements Pericom Semiconductor Corporation Condensed Balance Sheets (In thousands)
March 31, June 30, 2001 2000 (1) ---- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 114,694 $ 124,115 Short-term investments 39,231 16,549 Accounts receivable: Trade (net of allowances of $5,362, and $3,343) 12,189 12,012 Other receivables 745 377 Inventories 15,934 13,166 Prepaid expenses and other current assets 267 209 Deferred income taxes 1,099 1,099 ----------------------------- Total current assets 184,159 167,527 Property and equipment - net 10,152 8,246 Investment in and advances to investee 4,152 4,287 Other assets 260 306 ----------------------------- Total $ 198,723 $ 180,366 ============================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,341 $ 8,983 Accrued liabilities 4,267 3,561 Income taxes payable 2,024 1,710 ----------------------------- Total current liabilities 13,632 14,254 Deferred income taxes 1,340 1,340 Shareholders' equity: Common stock 132,937 130,834 Accumulated other comprehensive loss (126) (90) Retained earnings 50,940 34,028 ----------------------------- Total shareholders' equity 183,751 164,772 ----------------------------- Total $ 198,723 $ 180,366 =============================
(1) Derived from the June 30, 2000 audited balance sheet included in the Company's Annual Report on Form 10-K. See notes to condensed financial statements. 3 Pericom Semiconductor Corporation Condensed Statements of Income (Unaudited) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended March 31 March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net revenues $25,908 $23,033 $94,987 $60,667 Cost of revenues 14,564 13,294 53,864 35,108 ----------------------------------------------------------- Gross profit 11,344 9,739 41,123 25,559 ----------------------------------------------------------- Operating expenses: Research and development 2,885 2,133 8,226 5,626 Selling, general and administrative 3,788 3,230 12,005 8,502 ----------------------------------------------------------- Total 6,673 5,363 20,231 14,128 ----------------------------------------------------------- Income from operations 4,671 4,376 20,892 11,431 Equity in net income (loss) of investee 108 (65) (249) (233) Interest income 2,089 769 6,635 1,517 ----------------------------------------------------------- Income before income taxes 6,868 5,080 27,278 12,715 Provision for income taxes 2,610 1,829 10,366 4,720 ----------------------------------------------------------- Net income $ 4,258 $ 3,251 $16,912 $ 7,995 =========================================================== Basic earnings per share $ 0.17 $ 0.16 $ 0.68 $ 0.40 =========================================================== Diluted earnings per share $ 0.16 $ 0.14 $ 0.62 $ 0.36 =========================================================== Shares used in computing basic earnings per share 24,984 20,570 24,851 19,741 =========================================================== Shares used in computing diluted earnings per share 27,111 23,450 27,286 22,382 ===========================================================
See notes to condensed financial statements. 4 Pericom Semiconductor Corporation Condensed Statements of Cash Flows (Unaudited) (In thousands)
Nine Months Ended March 31, --------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 16,912 $ 7,995 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,502 1,751 Equity in net loss of investee 249 233 Changes in assets and liabilities: Accounts receivable (545) (1,163) Inventories (2,768) (4,853) Prepaid expenses and other current assets (58) 340 Accounts payable (1,642) 1,125 Accrued liabilities 706 1,469 Income taxes payable 314 1,542 ------------------------------- Net cash provided by operating activities 15,670 8,439 ------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (4,408) (2,963) Purchase of short-term investments (30,981) (5,243) Maturities of short-term investments 8,263 4,400 Decrease (increase) in other assets 46 (86) Advances to investee (114) (1,862) ------------------------------- Net cash used in investing activities (27,194) (5,754) ------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock, net 2,103 102,563 ------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,421) 105,248 CASH AND CASH EQUIVALENTS: Beginning of period 124,115 8,328 ------------------------------- End of period $114,694 $113,576 =============================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 8,453 $ 2,129 ===============================
See notes to condensed financial statements. 5 Pericom Semiconductor Corporation Notes To Condensed Financial Statements (Unaudited) 1. Basis of Presentation The financial statements have been prepared by Pericom Semiconductor Corporation ("Pericom" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these unaudited financial statements include all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's financial position as of March 31, 2001 and the results of operations and cash flows for the three and nine-month periods ended March 31, 2001 and March 31, 2000. This unaudited quarterly information should be read in conjunction with the audited financial statements of Pericom and the notes thereto incorporated by reference in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The preparation of the interim condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed financial statements and the reported amounts of revenue and expenses during the period. Actual amounts could differ from these estimates. The results of operations for the three and nine- month periods ended March 31, 2001 are not necessarily indicative of the results to be expected for the entire year. The Company's fiscal periods in the accompanying financial statements have been shown as ending on June 30 and March 31. The Company's fiscal year 2000 ended on July 1, 2000. The three and nine-month periods in fiscal years 2001 and 2000 ended on March 31, 2001 and April 1, 2000, respectively. The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position or results of operations: advances and trends in new technologies; competitive pressures in the form of new products or price reductions on current products; changes in the overall demand for products and services offered by the Company; changes in customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risks associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; and the Company's ability to attract and retain employees necessary to support its growth. 2. Earnings Per Share Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Shares outstanding and basic and diluted earnings per share have been adjusted for the three and nine-month periods ended March 31, 2000 to account for the two-for-one stock split in September 2000. 6 Basic and diluted earnings per share for the three and nine-month periods ended March 31, 2001 and March 31, 2000 are computed as follows (in thousands, except for per share data):
Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 4,258 $ 3,251 $16,912 $ 7,995 ========================================================= Computation of common shares outstanding - basic earnings per share: Weighted average shares of common stock 24,984 20,570 24,851 19,741 --------------------------------------------------------- Shares used in computing basic earnings per share 24,984 20,570 24,851 19,741 ========================================================= Basic earnings per share $ 0.17 $ 0.16 $ 0.68 $ 0.40 ========================================================= Computation of common shares outstanding - diluted earnings per share: Weighted average shares of common stock 24,984 20,570 24,851 19,741 Dilutive options using the treasury stock method 2,127 2,880 2,435 2,641 --------------------------------------------------------- Shares used in computing diluted earnings per share 27,111 23,450 27,286 22,382 ========================================================= Diluted earnings per share $ 0.16 $ 0.14 $ 0.62 $ 0.36 =========================================================
Options to purchase 2,790,702 shares of Common stock at prices ranging from $17.25 to $42.75 and options to purchase 81,662 shares of Common stock at prices ranging from $20.63 to $26.44 were outstanding as of March 31, 2001 and March 31, 2000, respectively, but not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares as of such dates and therefore, would be anti-dilutive under the treasury stock method. 3. Inventories Inventories consist of (in thousands): March 31, June 30, 2001 2000 ---- ---- Raw materials $ 5,516 $ 2,478 Work in process 4,667 6,285 Finished goods 5,751 4,403 -------------------------- $15,934 $13,166 ========================== 7 4. Accrued Liabilities Accrued liabilities consist of (in thousands): March 31 June 30, 2001 2000 ---- ----- Accrued compensation $2,489 $2,066 External sales representative commissions 911 975 Other accrued expenses 867 520 --------------------------- $4,267 $3,561 =========================== 5. Industry and Segment Information In fiscal year 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, geographical areas and major customers. The Company operates in one reportable segment. 6. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" 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. For the three and nine month periods ended March 31, 2001 and 2000, comprehensive income, which was comprised of the Company's net income for the periods and changes in cumulative unrealized gain/(loss) on short-term investments was as follows:
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------------------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Net income $4,258 $3,251 $16,912 $7,995 Unrealized gain/(loss) on investment (126) 3 (36) (52) ------------------------------------------------------------------ Comprehensive income $4,132 $3,254 $16,876 $7,943 ==================================================================
7. Derivative Instruments and Hedging Activities On July 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. The Company does not have any derivatives as of March 31, 2001. There was no impact to the Company's financial statements due to the adoption of SFAS No. 133. 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Pericom Semiconductor Corporation The following information should be read in conjunction with the unaudited financial statements and notes thereto included in Part 1 - Item 1 of this Quarterly Report and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K (the "Form 10-K"). Results of Operations The following table sets forth certain statement of operations data as a percentage of net revenues for the periods indicated.
Three Months Ended Nine Months Ended March 31, March 31, ---------------------------------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 56.2% 57.7% 56.7% 57.9% ---------------------------------------------------------- Gross profit 43.8% 42.3% 43.3% 42.1% ---------------------------------------------------------- Operating expenses: Research and development 11.1% 9.3% 8.7% 9.3% Selling, general and administrative 14.7% 14.0% 12.6% 14.0% ---------------------------------------------------------- Total 25.8% 23.3% 21.3% 23.3% ---------------------------------------------------------- Income from operations 18.0% 19.0% 22.0% 18.8% Other income, net 8.5% 3.1% 6.7% 2.1% ---------------------------------------------------------- Income before income taxes 26.5% 22.1% 28.7% 21.0% Provision for income taxes 10.1% 7.9% 10.9% 7.8% ---------------------------------------------------------- Net income 16.4% 14.1% 17.8% 13.2% ==========================================================
Net Revenues Net revenues consist primarily of product sales, which are recognized upon shipment, less an estimate for returns and allowances. Net revenues increased 12.6% from $23.0 million for the quarter ended March 31, 2000 to $25.9 million for the quarter ended March 31, 2001. The increase in net revenues resulted from continued market acceptance of the Company's existing products and sales of new products in the Company's SiliconInterface(TM), SiliconSwitch(TM) and SiliconClock(TM) product lines. Sales to domestic and international distributors as a percentage of total revenues increased from 50.3% for the quarter ended March 31, 2000 to 58.5% for the quarter ended March 31, 2001. No direct customer accounted for 10% of net revenues in the quarter ended March 31, 2001 or in the quarter ended March 31, 2000. As a percentage of gross revenues, sales through distribution and contract manufacturing sales channels to one end-user customer, Cisco Systems, decreased from 16.3% in the quarter ended March 31, 2000 to 14.4% in the quarter ended March 31, 2001. Net revenues increased 56.5% from $60.7 million for the nine-month period ended March 31, 2000 to $95.0 million for the nine-month period ended March 31, 2001. The increase in net revenues resulted from overall strength in the semiconductor industry, continued market acceptance of the Company's existing products and sales of new products in the Company's SiliconInterface(TM), SiliconSwitch(TM) and SiliconClock(TM) product lines. Sales to domestic and international distributors as a percentage of total 9 revenues decreased to 56.1% in the first nine months of fiscal 2001 from 57.3% in the comparable period in fiscal 2000. Sales to one direct customer, an international distributor, accounted for approximately 8.4% of net revenues in the first nine months of fiscal 2001 as compared to approximately 11.5% in the comparable period in fiscal 2000. As a percentage of gross revenues, sales through distribution and contract manufacturing sales channels to one end-user customer, Cisco Systems, decreased from 13.4% in the nine months ended March 31, 2000 to 12.2% in the nine months ended March 31, 2001. Gross Profit Gross profit increased 16.5% from $9.7 million for the quarter ended March 31, 2000 to $11.3 million for the quarter ended March 31, 2001. Gross profit as a percentage of net revenues, or gross margin, increased from 42.3% in the quarter ended March 31, 2000 to 43.8% in the quarter ended March 31, 2001. The increase in gross margin resulted from the introduction and sale of new products at higher gross margins, a shift in mix towards a higher margin product line, cost reductions achieved through reduced assembly and test costs, and increased die per wafer resulting from reduced design geometries. Gross profit increased 60.5% from $25.6 million for the nine-month period ending March 31, 2000 to $41.1 million for the nine-month period ended March 31, 2001. Gross margin increased from 42.1% for the nine-month period ended March 31, 2000 to 43.3% for the nine-month period ended March 31, 2001. These increases are for the same reasons cited in the above analysis of the three-month periods ending March 31, 2001 and 2000. Research and Development Research and development expenses increased 38.1% from $2.1 million for the quarter ended March 31, 2000 to $2.9 million for the quarter ended March 31, 2001, and increased as a percentage of net revenues from 9.3% to 11.1%. Research and development expenses increased from $5.6 million for the nine-month period ended March 31, 2000 to $8.2 million for the nine-month period ended March 31, 2001, an increase of 46.4%, but decreased as a percentage of net revenue from 9.3% to 8.7% for those periods. The increase in expense is attributable to development costs for new products in each of the Company's product lines and expansion of the Company's engineering staff and related infrastructure as the Company continued its commitment to new product development. The Company believes that continued spending on research and development to develop new products and improve manufacturing processes is critical to the Company's success and, consequently, expects to increase research and development expenses in future periods over the long term. In the short term, research and development expenses may be flat or may decrease, as the Company focuses on cost control during the current industry slowdown. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management. Such costs also include advertising, sales materials, sales commissions and other marketing and promotional expenses. Selling, general and administrative expenses increased 18.8% from $3.2 million for the quarter ended March 31, 2000 to $3.8 million for the quarter ended March 31, 2001, and increased as a percentage of net revenues from 14.0% to 14.7%. Selling, general and administrative expenses increased from $8.5 million for the nine-month period ended March 31, 2000 to $12.0 million for the nine-month period ended March 31, 2001, an increase of 41.2%, but decreased as a percentage of net revenue from 14.0% to 12.6% for those periods. The increase in expense in each period was primarily attributable to increased staffing levels, particularly in sales and marketing and increases in commissions due to sales growth. The Company anticipates that selling, general and administrative expenses will increase in future periods over the long term due to increased staffing levels, particularly in sales and marketing, as well as increased commission expense to the extent the Company achieves higher sales levels. In the short term, selling, 10 general and administrative expenses may be flat or may decrease, as commission levels decrease due to reduced sales and as the Company focuses on cost control during the current industry slowdown. Other Income, Net Other income, net, includes interest income and the Company's allocated portion of net gains or losses of Pericom Technology, Inc. ("PTI"). Other income, net increased from $704,000 for the quarter ended March 31, 2000 to $2,197,000 for the quarter ended March 31, 2001. From the quarter ended March 31, 2000 to the quarter ended March 31, 2001, the Company's share of the net gains or losses of PTI increased from a loss of $65,000 to a gain of $108,000, and interest income rose from $769,000 to $2,089,000 due to interest earned on the increased cash balances that resulted from the net proceeds from the Company's follow-on public offering in March 2000. For the nine-month period ended March 31, 2000 compared with the same period ended March 31, 2001, other income, net, rose from $1,284,000 to $6,386,000 as the Company's share in the net losses of PTI increased from $233,000 to $249,000 and interest income rose from $1,517,000 to $6,635,000. Provision for Income Taxes The provision for income taxes increased from $1,829,000 for the quarter ended March 31, 2000 to $2,610,000 for the quarter ended March 31, 2001. The increase in the provision for income taxes for the current fiscal quarter is due primarily to the increase in taxable income. The effective tax rate of 38.0% in the quarter ended March 31, 2001 has increased from the 36.0% rate used in the comparable period in the prior year. The provision for income taxes also differed from the federal statutory rate due to state income taxes. For the nine-month periods ended March 31, 2001 and March 31, 2000, the provision for income taxes was $10,366,000 and $4,720,000, respectively, and the effective tax rates were 38.0% and 37.1%, respectively. In the first quarter of the fiscal 2000, the research and development tax credit had expired which caused the effective tax rate to increase. The research and development tax credit was subsequently extended and the overall effective tax rate for the prior fiscal year was 37.5%. Liquidity and Capital Resources Prior to the Company's initial public offering in October 1997, the Company used proceeds from the private sale of equity securities, bank borrowings and internal cash flow to support the Company's operations, acquire capital equipment and finance inventory and accounts receivable growth. Operating activities generated $15.7 million of cash during the first nine months of fiscal 2001 and $8.4 million of cash during the first nine months of fiscal 2000. Net cash used for investing activities increased from $5.8 million for the nine months ended March 31, 2000 to $27.2 million for the nine months ended March 31, 2001. The Company made capital expenditures of approximately $4.4 million during the nine months ended March 31, 2001 compared with $3.0 million in the comparable period of the previous year, and also increased net purchases of short-term investments by $21.9 million during the nine months ended March 31, 2001 compared to the nine months ended March 31, 2000. On March 8, 2000 the Company sold 2.2 million shares (on a pre-split basis before the Company's 2-for-1 stock split in September 2000) of common stock in a follow-on public offering. Net proceeds to the Company, before expenses, from this offering were $101,376,000 after underwriting discounts and commissions. Expenses were approximately $427,000. These funds are invested in short-term money market funds. As of March 31, 2001, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $153.9 million. Management believes that existing cash balances and cash generated from operations will be sufficient to fund necessary purchases of capital equipment and to provide working capital at least through the next twelve months. However, future events may require the 11 Company to seek additional capital sooner. If the Company determines that it needs to seek additional capital, the Company may not be able to obtain such additional capital on terms acceptable to it. Factors That May Affect Operating Results This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are "forward- looking statements" for purposes of these provisions, including any statements regarding: projections of revenues, expenses or other financial items; the plans and objectives of management for future operations; the Company's tax rate; the adequacy of allowances for returns, price protection and other concessions; proposed new products or services; the sufficiency of cash generated from operations and cash balances; the Company's exposure to interest rate risk; future economic conditions or performance; plans for increases in research and development expenses and selling, general and administrative expenses; plans to seek intellectual property protection for the Company's technologies; expectations regarding export sales and net revenues; the expansion of sales efforts; acquisition prospects; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although the Company believes that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. The Company's future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth (i) below, (ii) in the Company's Form 10-K under the heading "Risk Factors; Factors That May Affect Future Results", and (iii) in Note 1 to the Notes to Condensed Financial Statements. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and the Company assumes no obligation to update any such forward-looking statement or reason why actual results may differ. Downturns in the semiconductor industry, rapidly changing technology and evolving industry standards can harm our operating results. The semiconductor industry has historically been cyclical and periodically subject to significant economic downturns--characterized by diminished product demand, accelerated erosion of selling prices and overcapacity--as well as rapidly changing technology and evolving industry standards. In the past, our operating results have been harmed by excess supply in the semiconductor industry. For example, we believe that the decrease in our net revenues from $41.2 million in fiscal 1996 to $33.2 million in fiscal 1997 was primarily due to a cyclical downturn in the semiconductor industry. Accordingly, we may in the future experience substantial period-to-period fluctuations in our business and operating results due to general semiconductor industry conditions, overall economic conditions or other factors. Our business is also subject to the risks associated with the effects of legislation and regulations relating to the import or export of semiconductor products. If we do not develop products that our customers and end-users design into their products, or if their products do not sell successfully, our business and operating results would be harmed. We have relied in the past and continue to rely upon our relationships with our customers and end-users for insights into product development strategies for emerging system requirements. We generally incorporate new products into a customer's or end-user's product or system at the design stage. However, these design efforts, which can often require significant expenditures by us, may precede product sales, if any, by a year or more. Moreover, the value to us of any design win will depend in large part on the ultimate success of the customer's or end-user's product and on the extent to which the system's design accommodates components manufactured by our competitors. If we fail to achieve design wins or if the design wins fail to result in significant future revenues, our operating results would be harmed. If we have problems developing or 12 maintaining our relationships with our customers and end-users, our ability to develop well-accepted new products may be impaired. The trading price of our common stock and our operating results are likely to fluctuate substantially in the future. The trading price of our common stock has been and is likely to continue to be highly volatile. Our stock price could fluctuate widely in response to factors some of which are not within our control, including: . quarter-to-quarter variations in operating results; . announcements of technological innovations or new products by us or our competitors; . general conditions in the semiconductor and electronic systems industries; . changes in earnings estimates by analysts; and price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many high technology companies. In the past, our quarterly operating results have varied significantly and are likely to fluctuate in the future. A wide variety of factors affect our operating results. These factors might include the following: . general conditions in the semiconductor industry; . the timing of new product introductions and announcements by us and by our competitors; . customer acceptance of new products introduced by us; . growth or reduction in the size of the market for interface ICs; . a decline in the gross margins of our products; . changes in our product mix; . delay or decline in orders received from distributors; . the availability of manufacturing capacity with our wafer suppliers; . changes in manufacturing costs; . fluctuations in manufacturing yields; . the ability of customers to pay us; . expenses incurred in obtaining, enforcing, and defending intellectual property rights; and . increased research and development expenses associated with new product introductions or process changes. All of these factors are difficult to forecast and could seriously harm our operating results. Our expense levels are based in part on our expectations regarding future sales and are largely fixed in the short term. Therefore, we may be unable to reduce our expenses fast enough to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to our expectations or any material delay of customer orders could harm our operating results. In addition, if our operating results in future quarters fall below public market analysts' and investors' expectations, the market price of our common stock would likely decrease. The markets for our products are characterized by rapidly changing technology, and our financial results could be harmed if we do not successfully develop and implement new manufacturing technologies or develop, introduce and sell new products. The markets for our products are characterized by rapidly changing technology, frequent new product introductions and declining selling prices over product life cycles. We currently offer over 600 products. Our future success depends upon the timely completion and introduction of new products, across all our product lines, at competitive price and performance levels. The success of new products depends on a variety of factors, including the following: . product performance and functionality; . customer acceptance; 13 . competitive pricing; . successful and timely completion of product development; . sufficient wafer fabrication capacity; and . achievement of acceptable manufacturing yields by our wafer suppliers. We may also experience delays, difficulty in procuring adequate fabrication capacity for the development and manufacture of new products or other difficulties in achieving volume production of these products. Even relatively minor errors may significantly affect the development and manufacture of new products. If we fail to complete and introduce new products in a timely manner at competitive price and performance levels, our business would be significantly harmed. Intense competition in the semiconductor industry may reduce the demand for our products or the prices of our products, which could reduce our revenues. The semiconductor industry is intensely competitive. Our competitors include Cypress Semiconductor Corporation, Integrated Circuit Systems, Inc., Integrated Device Technology, Inc., Maxim Integrated Products, Inc., and Texas Instruments, Inc. Most of those competitors have substantially greater financial, technical, marketing, distribution and other resources, broader product lines and longer- standing customer relationships than we do. We also compete with other major or emerging companies that sell products to certain segments of our markets. Competitors with greater financial resources or broader product lines may have a greater ability to sustain price reductions in our primary markets in order to gain or maintain market share. We believe that our future success will depend on our ability to continue to improve and develop our products and processes. Unlike us, many of our competitors maintain internal manufacturing capacity for the fabrication and assembly of semiconductor products. This ability may provide them with more reliable manufacturing capability, shorter development and manufacturing cycles and time-to-market advantages. In addition, competitors with their own wafer fabrication facilities that are capable of producing products with the same design geometries as ours may be able to manufacture and sell competitive products at lower prices. Any introduction of products by our competitors that are manufactured with improved process technology could seriously harm our business. As is typical in the semiconductor industry, our competitors have developed and marketed products that function similarly or identically to ours. If our products do not achieve performance, price, size or other advantages over products offered by our competitors, our products may lose market share. Competitive pressures could also reduce market acceptance of our products, reduce our prices and increase our expenses. We also face competition from the makers of ASICs and other system devices. These devices may include interface logic functions, which may eliminate the need or sharply reduce the demand for our products in particular applications. Product price declines and fluctuations may cause our future financial results to vary. Historically, selling prices in the semiconductor industry generally, as well as for our products, have decreased significantly over the life of each product. We expect that selling prices for our existing products will continue to decline over time and that average selling prices for our new products will decline significantly over the lives of these products. Declines in selling prices for our products, if not offset by reductions in the costs of producing these products or by sales of new products with higher gross margins, would reduce our overall gross margins and could seriously harm our business. 14 The demand for our products depends on the growth of our end users' markets. Our continued success depends in large part on the continued growth of markets for the products into which our semiconductor products are incorporated. These markets include the following: . computers and computer related peripherals; . data communications and telecommunications equipment; . electronic commerce and the Internet; and . consumer electronics equipment. Any decline in the demand for products in these markets could seriously harm our business, financial condition and operating results. These markets have also historically experienced significant fluctuations in demand. We may also be seriously harmed by slower growth in the other markets in which we sell our products. Our contracts with our wafer suppliers do not obligate them to a minimum supply or set prices. Any inability or unwillingness of our wafer suppliers generally, and Chartered Semiconductor Manufacturing Ltd. in particular, to meet our manufacturing requirements would delay our production and product shipments and harm our business. In fiscal 2000, 1999 and 1998 we purchased approximately 75%, 85% and 90%, respectively, of our wafers from Chartered Semiconductor Manufacturing Ltd., and in the first nine months of fiscal 2001 we purchased 60% of our wafers from Chartered. In each fiscal period, only four other suppliers manufactured the remainder of our wafers. Our reliance on independent wafer suppliers to fabricate our wafers at their production facilities subjects us to possible risks such as: . lack of adequate capacity; . lack of available manufactured products; . lack of control over delivery schedules; and . unanticipated changes in wafer prices. Any inability or unwillingness of our wafer suppliers generally, and Chartered in particular, to provide adequate quantities of finished wafers to meet our needs in a timely manner would delay our production and product shipments and seriously harm our business. At present, we purchase wafers from our suppliers through the issuance of purchase orders based on our rolling six-month forecasts. The purchase orders are subject to acceptance by each wafer supplier. We do not have long-term supply contracts which obligate our suppliers to a minimum supply or set prices. We also depend upon our wafer suppliers to participate in process improvement efforts, such as the transition to finer geometries. If our suppliers are unable or unwilling to do so, our development and introduction of new products could be delayed. Furthermore, sudden shortages of raw materials or production capacity constraints can lead wafer suppliers to allocate available capacity to customers other than us or for the suppliers' internal uses, interrupting our ability to meet our product delivery obligations. Any significant interruption in our wafer supply would seriously harm our operating results and our customer relations. Our reliance on independent wafer suppliers may also lengthen the development cycle for our products, providing time-to-market advantages to our competitors that have in-house fabrication capacity. In the event that our suppliers are unable or unwilling to manufacture our key products in required volumes, we will have to identify and qualify additional wafer foundries. The qualification process can take up to six months or longer. Furthermore, we are unable to predict whether additional wafer foundries will become available to us or will be in a position to satisfy any of our requirements on a timely basis. 15 We depend on single or limited source assembly subcontractors with whom we do not have written contracts. Any inability or unwillingness of our assembly subcontractors to meet our assembly requirements would delay our product shipments and harm our business. We primarily rely on foreign subcontractors for the assembly and packaging of our products and, to a lesser extent, for the testing of finished products. Some of these subcontractors are our single source supplier for some of our new packages. In addition, changes in our or a subcontractor's business could cause us to become materially dependent on a single subcontractor. We have from time to time experienced difficulties in the timeliness and quality of product deliveries from our subcontractors and may experience similar or more severe difficulties in the future. We generally purchase these single or limited source components or services pursuant to purchase orders and have no guaranteed arrangements with these subcontractors. These subcontractors could cease to meet our requirements for components or services, or there could be a significant disruption in supplies from them, or degradation in the quality of components or services supplied by them. Any circumstance that would require us to qualify alternative supply sources could delay shipments, result in the loss of customers and limit or reduce our revenues. We may have difficulty accurately predicting revenues for future periods. Our expense levels are based in part on anticipated future revenue levels, which can be difficult to predict. Our business is characterized by short-term orders and shipment schedules. We do not have long-term purchase agreements with any of our customers, and customers can typically cancel or reschedule their orders without significant penalty. We typically plan production and inventory levels based on forecasts of customer demand generated with input from customers and sales representatives. Customer demand is highly unpredictable and can fluctuate substantially. If customer demand falls significantly below anticipated levels, our gross profit would be reduced. We compete with others to attract and retain key personnel, and any loss of, or inability to attract, key personnel would harm us. To a greater degree than non-technology companies, our future success will depend on the continued contributions of our executive officers and other key management and technical personnel. None of these individuals has an employment agreement with us and each one would be difficult to replace. We do not maintain any key person life insurance policies on any of these individuals. The loss of the services of one or more of our executive officers or key personnel or the inability to continue to attract qualified personnel could delay product development cycles or otherwise harm our business, financial condition and results of operations. Our future success also will depend on our ability to attract and retain qualified technical, marketing and management personnel, particularly highly skilled design, process and test engineers, for whom competition is intense. In particular, the current availability of qualified engineers is limited and competition among companies for skilled and experienced engineering personnel is very strong. During strong business cycles, we expect to experience continued difficulty in filling our needs for qualified engineers and other personnel. Our limited ability to protect our intellectual property and proprietary rights could harm our competitive position. Our success depends in part on our ability to obtain patents and licenses and preserve other intellectual property rights covering our products and development and testing tools. In the United States, we hold 28 patents covering certain aspects of our product designs and have at least 16 additional patent applications pending. Copyrights, mask work protection, trade secrets and confidential technological know-how are also key to our business. Additional patents may not be issued to us or our patents or other intellectual property may not provide meaningful protection. We may be subject to, or initiate, interference proceedings in the U.S. Patent and Trademark Office. These proceedings can consume significant financial and management resources. We may become involved in litigation relating to alleged infringement by us of others' patents or other intellectual property rights. This type of litigation is frequently expensive to both the winning party 16 and the losing party and takes up significant amounts of management's time and attention. In addition, if we lose such a lawsuit, a court could require us to pay substantial damages and/or royalties or prohibit us from using essential technologies. For these and other reasons, this type of litigation could seriously harm our business. Also, although we may seek to obtain a license under a third party's intellectual property rights in order to bring an end to certain claims or actions asserted against us, we may not be able to obtain such a license on reasonable terms or at all. Because it is important to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent, trade secret and mask work protection for our technologies. The process of seeking patent protection can be long and expensive, and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology or design around the patents we own. We also rely on trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants and third parties. However, these parties may breach these agreements. In addition, the laws of some territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States. The process technology used by our independent foundries, including process technology that we developed with our foundries, can generally be used by them to produce their own products or to manufacture products for other companies including our competitors. In addition, we may not have the right to implement key process technologies used to manufacture some of our products with foundries other than our present foundries. We may not provide adequate allowances for exchanges, returns and concessions. We recognize revenue from the sale of products when shipped, less an allowance based on future authorized and historical patterns of returns, price protection, exchanges and other concessions. We believe our methodology and approach are appropriate. However, if the actual amounts we incur exceed the allowances, it could decrease our revenue and corresponding gross profit. The complexity of our products makes us highly susceptible to manufacturing problems, which could increase our costs and delay our product shipments. The manufacture and assembly of our over 600 products are highly complex and sensitive to a wide variety of factors, including: . the level of contaminants in the manufacturing environment; . impurities in the materials used; and . the performance of manufacturing personnel and production equipment. In a typical semiconductor manufacturing process, silicon wafers produced by a foundry are cut into individual die. These die are assembled into individual packages and tested for performance. Our wafer fabrication suppliers have from time to time experienced lower than anticipated yields of suitable die. In the event of such decreased yields, we would incur additional costs to sort wafers, an increase in average cost per usable die and an increase in the time to market for our products. These conditions could reduce our net revenues and gross margin and harm our customer relations. We do not manufacture any of our products. Therefore, we are referred to in the semiconductor industry as a "fabless" producer. Consequently, we depend upon third party manufacturers to produce semiconductors that meet our specifications. We currently have third party manufacturers that can produce semiconductors that meet our needs. However, as the industry continues to progress to smaller manufacturing and design 17 geometries, the complexities of producing semiconductors will increase. Decreasing geometries may introduce new problems and delays that may affect product development and deliveries. Due to the nature of the industry and our status as a "fabless" semiconductor company, we could encounter fabrication- related problems that may affect the availability of our products, delay our shipments or increase our costs. A large portion of our revenues is derived from sales to a few customers, who may cease purchasing from us at any time. A relatively small number of customers have accounted for a significant portion of our net revenues in each of the past several fiscal years. We expect this trend to continue for the foreseeable future. Techmosa, an international distributor that in turn ships to many end users, accounted for approximately 11.5% of net revenues during the first nine months of fiscal 2000 and approximately 8.4% of net revenues during the first nine months of fiscal 2001. Sales to our top five customers accounted for approximately 25.3% of net revenues in the first nine months of fiscal 2000 and approximately 35.9% of net revenues in the first nine months of fiscal 2001. Of our end-user customers, Cisco Systems accounted for approximately 13.4% of our gross revenues in the first nine months of fiscal 2000 and sales to our top five end-user customers accounted for approximately 33.9% of gross revenues in the same period. For the nine months ended March 31, 2001 sales to Cisco Systems were 12.2% of gross revenues and sales to our top five end-user customers were approximately 38.3% of gross revenues. We do not have long-term sales agreements with any of our customers. Our customers are not subject to minimum purchase requirements, may reduce or delay orders periodically due to excess inventory and may discontinue selling our products at any time. Our distributors typically offer competing products in addition to ours. For the nine months ended March 31, 2000, sales to domestic and international distributors represented approximately 57.3% of net revenues, and for the nine months ended March 31, 2001 sales to our distributors were 56.1% of net revenues. The loss of one or more significant customers, or the decision by a significant distributor to carry the product lines of our competitors, could decrease our revenues. Almost all of our wafer suppliers and assembly subcontractors are located in Southeast Asia, which exposes us to the problems associated with international operations. Almost all of our wafer suppliers and assembly subcontractors are located in Southeast Asia, which exposes us to risks associated with international business operations, including the following: . disruptions or delays in shipments; . changes in economic conditions in the countries where these subcontractors are located; . currency fluctuations; . changes in political conditions; . potentially reduced protection for intellectual property; . foreign governmental regulations; . import and export controls; and . changes in tax laws, tariffs and freight rates. In particular, there is a potential risk of conflict and further instability in the relationship between Taiwan and the People's Republic of China. Conflict or instability could disrupt the operations of one of our principal wafer suppliers and several of our assembly subcontractors located in Taiwan. 18 Because we sell our products to customers outside of the United States, we face foreign business, political and economic risks that could seriously harm us. In the nine months ended March 31, 2000, approximately 30% of our net revenues derived from sales in Asia excluding Japan, approximately 8% from sales in Europe and approximately 9% from sales in Japan. In the nine months ended March 31, 2001, approximately 28% of our net revenues derived from sales in Asia excluding Japan, approximately 12% from sales in Europe and approximately 7% from sales in Japan. We expect that export sales will continue to represent a significant portion of net revenues. We intend to expand our sales efforts outside the United States. This expansion will require significant management attention and financial resources and further subject us to international operating risks. These risks include: . tariffs and other barriers and restrictions; . unexpected changes in regulatory requirements; . the burdens of complying with a variety of foreign laws; and . delays resulting from difficulty in obtaining export licenses for technology. We are also subject to general geopolitical risks in connection with our international operations, such as political and economic instability and changes in diplomatic and trade relationships. In addition, because our international sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors' products that are denominated in local currencies. Regulatory, geopolitical and other factors could seriously harm our business or require us to modify our current business practices. Our potential future acquisitions may not be successful because we have not made acquisitions in the past. We have depended on internal growth in the past and have not made any acquisitions. As part of our business strategy, we expect to seek acquisition prospects that would complement our existing product offerings, improve market coverage or enhance our technological capabilities. We have no current agreements or negotiations underway with respect to any acquisitions, and we may not be able to locate suitable acquisition opportunities. Future acquisitions could result in the following: . potentially dilutive issuances of equity securities; . large one-time write-offs; . the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets; . difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies; . diversion of management's attention from other business concerns; and . risks of entering geographic and business markets in which we have no or limited prior experience and potential loss of key employees of acquired organizations. We are not certain that we will be able to successfully integrate any businesses, products, technologies or personnel that may be acquired in the future. Our failure to do so could seriously harm our business. Our operations and financial results could be severely harmed by natural disasters. Our headquarters and some of our major suppliers' manufacturing facilities are located near major earthquake faults. One of the foundries we use is located in Taiwan, which suffered a severe earthquake during fiscal 2000. We did not experience significant disruption to our operations as a result of that earthquake. However, if a major earthquake or other natural disaster were to affect our suppliers, our sources of supply could be interrupted, which would seriously harm our business. 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk At March 31, 2001, our investment portfolio consisted of investment-grade fixed income securities, excluding those classified as cash equivalents, of $39.2 million. These securities are subject to interest rate risk and will decline in value if market interest rates increase. For example, if market interest rates were to increase immediately and uniformly by 10% per annum from levels as of March 31, 2001, the fair market value of the portfolio would decrease. However, we do not believe that such a decrease would have a material effect on our results of operations over the next fiscal year. Due to the short duration and conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk. 20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a. Exhibits Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation of the Registrant, as amended 3.2 Amended and Restated Bylaws of the Registrant (1) (1) Incorporated herein by reference to the Company's fiscal 1999 Annual Report on Form 10-K, File No. 000-27026, in which the exhibit bears the same name. b. Reports on Form 8-K. No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended March 31, 2001. 21 SIGNATURES Pursuant to the requirements 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. Pericom Semiconductor Corporation (Registrant) Date: May 11, 2001 By: /s/ Alex Hui ------------------------- Alex Hui Chief Executive Officer Date: May 11, 2001 By: /s/ Michael D. Craighead ------------------------- Michael D. Craighead Chief Financial Officer (Chief Accounting Officer) 22 EX-3.1 2 dex31.txt RESTATED ARTICLES OF INCORPORATION OF REGISTRANT EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF PIONEER SEMICONDUCTOR CORPORATION, A CALIFORNIA CORPORATION The undersigned, Alex C. Hui and Chi-Hung Hui, do hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of Pioneer Semiconductor Corporation, a California corporation. TWO: The Articles of Incorporation of said corporation are amended and restated in full to read as follows: ARTICLE I The name of this Corporation is Pioneer Semiconductor Corporation. ARTICLE II The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation Code. ARTICLE III A. Classes of Stock. This Corporation is authorized to issue two classes --------------------- of shares, designated "Preferred Stock" and "Common Stock." The total number of shares which the Corporation is authorized to issue is fifty million (50,000,000) shares. Thirty million (30,000,000) shares shall be Common Stock, without par value (the "Common Stock"), and twenty million (20,000,000) shares shall be Preferred Stock, without par value (the "Preferred Stock"). B. Rights, Preferences and Privileges of Preferred Stock. The Preferred ---------------------------------------------------------- Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in these Articles of Incorporation, to fix or alter the individual rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preference of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE IV The rights, preferences, privileges, restrictions and other matters relating to the shares of Series A Preferred Stock and Series B Preferred Stock are as follows: A. Designation. Five million two hundred thousand (5,200,00) shares of ----------------- Preferred Stock are hereby designated "Series A Preferred Stock" (hereinafter referred to as the "Series A Stock") with the rights, preferences and privileges specified herein. Four million (4,000,000) shares are hereby designated and known as "Series B Preferred Stock" (hereinafter referred to as the "Series B Stock") with the rights, preferences and privileges specified herein. One million eight hundred seventy-five thousand (1,875,000) shares of Preferred Stock are hereby designated "Series C Preferred Stock" (hereinafter referred to as the "Series C Stock"). As described further herein, all of the rights, privileges, preferences and restrictions of the Series C Stock shall be and hereby are deemed pari passu (on an equal basis) with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent) any of those of the Series A Stock and Series B Stock. B. Dividends. The holders of outstanding Series A Stock, Series B Stock --------------- and Series C Stock shall be entitled, to receive in any fiscal year, when and as declared by the Board of Directors of the corporation, out of any assets at the time legally available therefor, dividends at the rate of $.04 per share of Series A Stock per annum, $.08 per share of Series B Stock per annum and $.13 per share of Series C Stock per annum, before any dividend is paid on Common Stock. The Series A Stock, Series B Stock and Series C Stock shall rank on a parity basis as to the declaration and payment of dividends thereon, and no dividend shall be paid on or declared and set apart for the shares of a series of the Preferred Stock unless at the same time a like proportion to the relative annual dividend, ratably in proportion to the respective annual dividend rate fixed therefor, shall be paid on or declared and set apart for the other series of the Preferred Stock. Such dividends may be payable quarterly or otherwise as the Board of Directors may from time to time determine. Dividends may be declared and paid upon Common Stock in any fiscal year of the corporation only if dividends shall have been paid to or declared and set apart upon all shares of Series A Stock, Series B Stock and Series C Stock at such annual rate for each quarter of such fiscal year of the corporation including the quarter in which such dividends upon Common Stock are declared. To the extent dividends are paid on the Common Stock, the holders of Series A Stock, Series B Stock and Series C Stock shall be entitled to dividends at least as large per share (as determined on an as-converted basis) as those declared or paid with respect to the Common Stock. The right to such dividends on Series A Stock, Series B Stock and Series C Stock shall not be cumulative and no right shall accrue to holders of Series A Stock, Series B Stock and Series C Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. C. Liquidation Preference. --------------------------- (1) In the event of any liquidation, dissolution, or winding up of the corporation, either voluntary or involuntary, the holders of the Series A Stock, Series B Stock and Series C Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount per share of Series A Stock equal to the sum of $.50 plus all declared but unpaid dividends (the "Series A Liquidation Preference"), an amount per share of Series B Stock equal to the sum of $1.00 plus all declared but unpaid dividends (the "Series B Liquidation Preference") and an amount per share of Series C Stock equal to the sum of $1.60 plus all declared but unpaid dividends (the "Series C Liquidation Preference"), for each share of Series A Stock, Series B Stock and Series C Stock, respectively, then held by them. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Stock, Series B Stock and Series C Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed pari passu among the holders of the Series A Stock, Series B Stock and Series C Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. After the payment or setting apart of payment to the holders of Series A Stock, Series B Stock and Series C Stock of the full amounts to which they shall be entitled as aforesaid, the holders of Common Stock shall be entitled to receive ratably on a per share basis all the remaining assets of the corporation. (2) A consolidation or merger of the corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the corporation, shall be deemed to be a liquidation, dissolution, or winding up within the meaning of this Section C. D. Voting Rights. ------------------ (1) The holder of each share of the Series A Stock, Series B Stock and Series C Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A Stock, Series B Stock and Series C Stock could be converted on the record date for the vote or consent of shareholders and, subject to the provisions of subsections (2) and (3) below, shall have voting rights and powers equal to the voting rights and powers of the Common Stock and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the corporation. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series A Stock, Series B Stock and Series C Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (2) At each annual election of directors of the corporation, the holders of Series A Stock shall be entitled, voting as a single class, to elect one (1) director of the corporation. In the case of any vacancy in the office of a director elected by the holders of Series A Stock, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of the holders of the Series A Stock, voting as a single class, given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders. Except for a vacancy created by the removal of a director as provided below and prior to an annual or special meeting of the holders of the Series A Stock convened for the purpose of electing a director to fill a vacancy on the Board of Directors as provided above, the acting and incumbent director previously elected pursuant to this subparagraph (2) may appoint a director to serve until the holders of the Series A Stock duly elect a successor director. Any director who shall have been elected by the holders of Series A Stock may appoint a director to serve as such until the holders of the Series A Stock duly elect a successor director. Any director who shall have been elected by the holders of the Series A Stock may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of that percentage of the Series A Stock required by Section 303(a) of the California General Corporations Law, given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders, and any such vacancy thereby created may be filled by the holders of the Series A Stock represented at such meeting or by such unanimous written consent. (3) At each annual election of directors of the corporation, the holders of Series B Stock and Series C Stock, voting together as a single class, shall be entitled, voting separately as a single class, to elect one (1) director of the corporation. In the case of any vacancy in the office of a director elected by the holders of Series B Stock and Series C Stock, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of the holders of the Series B Stock and Series C Stock, voting together as a single class, given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders. Except for a vacancy created by the removal of a director as provided below and prior to an annual or special meeting of the holders of the Series B Stock and Series C Stock convened for the purpose of electing a director to fill a vacancy on the Board of Directors as provided above, the acting and incumbent director previously elected by the holders of Series B Stock and Series C Stock may appoint a director to serve as such until the holders of the Series B Stock and Series C Stock duly elect a successor director. Any director who shall have been elected by the holders of the Series B Stock and Series C Stock may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of that percentage of the Series B Stock and Series C Stock required by Section 303(a) of the California General Corporations Law, given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders, and any such vacancy thereby created may be filled by the holders of the Series B Stock and Series C Stock represented at such meeting or by such unanimous written consent. (4) At each annual election of directors of the corporation, the holders of Common Stock shall be entitled, voting as a separate class, to elect all remaining directors not elected pursuant to subparagraphs (2) and (3) above. In the case of any vacancy in the office of a director elected by the holders of Common Stock, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of the holders of a majority of the Common Stock given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders. Except for a vacancy created by the removal of a director as provided below and prior to an annual or special meeting of the holders of the Common Stock convened for the purpose of electing a director to fill a vacancy on the Board of Directors as provided above, the acting and incumbent director previously elected pursuant to this subparagraph (4) may appoint a director to serve as such until the holders of the Common Stock duly elect a successor director. Any director who shall have been elected by the holders of the Common Stock may be removed during the aforesaid term of office, either for or without cause, by, and only by, the affirmative vote of the holders of that percentage of the Common Stock required by Section 303(a) of the California General Corporations Law, given at a special meeting of such shareholders duly called for that purpose or by the unanimous written consent of such shareholders, and any such vacancy thereby created may be filled by the holders of the Common Stock represented at such meeting or by such unanimous written consent. E. Conversion. The holders of the Series A Stock, Series B Stock and --------------- Series C Stock shall have conversion rights as follows (the "Conversion Rights"): (1) Right to Convert. Each share of Series A Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing fifty cents ($.50) by the Series A Conversion Price (as hereinafter defined). Each share of Series B Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing one dollar ($1.00) by the Series B Conversion Price (as hereinafter defined) in effect at the time of conversion. Each share of Series C Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing one dollar and sixty cents ($1.60) by the Series C Conversion Price (as hereinafter defined) in effect at the time of conversion. The initial conversion price per share of Series A Stock (the "Series A Conversion Price"), Series B Stock (the "Series B Conversion Price") and Series C Stock (the "Series C Conversion Price") shall be fifty cents ($0.50), one dollar ($1.00) and one dollar and sixty cents ($1.60), respectively. The Series A Conversion Price, Series B Conversion Price and Series C Conversion Price are sometimes collectively referred to herein as the "Conversion Prices"). The initial Conversion Prices shall be subject to adjustment as hereinafter provided. (2) Automatic Conversion. Each share of Series A Stock, Series B Stock and Series C Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Price upon the earlier of (i) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation to the public at a price per share of Common Stock of not less than $3.00 (as adjusted for stock splits, stock dividends and the like) from which the aggregate gross proceeds to the corporation (prior to underwriting commissions and expenses) is not less than $10,000,000 or (ii) the voluntary conversion into Common Stock of seventy percent (70%) or more of the originally issued shares of Series A Stock, Series B Stock and Series C Stock treated for such purpose as one class. (3) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of the Series A Stock, Series B Stock and Series C Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the effective Series A Conversion Price, Series B Conversion Price and Series C Conversion Price. Before any holder of Series A Stock, Series B Stock or Series C Stock shall be entitled to convert the same into full shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Series A Stock, Series B Stock or Series C Stock, and shall give written notice to the corporation at such office that such holder elects to convert the same. The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Stock, Series B Stock or Series C Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and a check payable to such holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Stock, Series B Stock or Series C Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Series A Stock, Series B Stock or Series C Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series A Stock, Series B Stock or Series C Stock shall not be deemed to have converted such Series A Stock, Series B Stock or Series C Stock until immediately prior to the closing of such sale of securities. (4) Adjustments to Conversion Price for Diluting Issues. (a) Special Definitions. For purposes of this paragraph (4), the following definitions shall apply: (i) 'Options' shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (ii) 'Original Issue Date' shall mean the date on which a share of Series C Stock was first issued. (iii) 'Convertible Securities' shall mean any evidence of indebtedness, shares (other than Common Stock, Series A Stock, Series B Stock and Series C Stock) or other securities convertible into or exchangeable for Common Stock. (iv) 'Additional Shares of Common Stock, shall mean all shares of Common Stock issued (or, pursuant to subparagraph (4)(c), deemed to be issued) by the corporation after the original issue date, other than Common Stock issued or issuable: (w) upon conversion of shares of Series A Stock, Series B Stock and Series C Stock; (x) to officers, directors or employees of, or consultants to, the corporation pursuant to a stock grant, option plan or purchase plan or other employee stock incentive program (collectively, the "Plans") approved by the Board of Directors; (y) as a dividend or distribution on Series A Stock, Series B Stock and Series C Stock; and (z) by way of dividend or other distribution on Common Stock excluded from the definition of Additional Shares of Common Stock by the foregoing clauses (w), (y) or this clause (z) or Common Stock so excluded. (b) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a particular share of Series A Stock, Series B Stock or Series C Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the corporation is less than the Series A Conversion Price, Series B Conversion Price or Series C Conversion Price in effect on the date of, and immediately prior to such issue, for such share of Series A Stock, Series B Stock or Series C Stock, respectively. (c) Deemed Issuance of Additional Shares of Common Stock. (i) Options and Convertible Securities. In the event the corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such convertible securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to subparagraph E(4)(e) hereof) of such Additional Shares of Common Stock would be less than the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (x) no further adjustment in the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (y) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series A Conversion Price, Series B Conversion Price or Series C Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and (z) no readjustment pursuant to clause (y) above shall have the effect of increasing the Series A Conversion Price, Series B Conversion Price or Series C Conversion Price to an amount which exceeds the lower of (i) the Series A Conversion Price, Series B Conversion Price or Series C Conversion Price on the original adjustment date, or (ii) the Series A Conversion Price, Series B Conversion Price or Series C Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (ii) Stock Dividends and Subdivisions. In the event the corporation at any time or from time to time after the Original Issue Date shall declare or pay any dividend on the Common Stock payable in Common Stock, or effect a split or subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common), then and in any such event, Additional Shares of Common Stock shall be deemed to have been issued: (x) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (y) in the case of any such subdivision, at the close of business on the date immediately prior to the date upon which such corporate action becomes effective. (d) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subparagraph (4)(c) of this Section E) without consideration or for a consideration per share less than the applicable Series A Conversion Price, Series B Conversion Price and/or Series C Conversion Price in effect immediately prior to such event, such Series A Conversion Price, Series B Conversion Price and/or Series C Conversion Price, as applicable, shall be reduced, concurrently with such issue, to a price (calculated to the nearest tenth of a cent) determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided that, for the purposes of this paragraph (d), all shares of Common Stock issuable upon exercise of outstanding Options and conversion of outstanding Convertible Securities shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to paragraph (iii), such Additional Shares of Common Stock shall be deemed to be outstanding. (e) Determination of Consideration. For purposes of this paragraph E(4), the consideration received by the corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (i) Cash and property: Such consideration shall: (x) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation excluding amounts paid or payable for accrued interest or accrued dividends; (y) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (z) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (x) and (y) above, as determined in good faith by the Board of Directors. (ii) Options and Convertible Securities. The consideration per share received by the corporation for Additional Shares of Common Stock deemed to have been issued pursuant to subparagraph E(4)(C)(i), relating to Options and Convertible Securities, shall be determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (iii) Stock Dividends and Stock Subdivisions. Any Additional Shares of Common Stock deemed to have been issued, relating to stock dividends and stock splits or subdivisions, shall be deemed to have been issued for no consideration. (f) Adjustment for Combinations or Consolidation of Common Stock. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (5) Adjustments for Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision or combination provided for elsewhere in paragraph (4) above, provision shall be made so that the holders of the Series A Stock, Series B Stock and Series C Stock shall thereafter be entitled to receive upon conversion of the Series A Stock, Series B Stock and Series C Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this paragraph (5) with respect to the rights of the holders of the Series A Stock, Series B Stock and Series C Stock after the recapitalization to the end that the provisions of this paragraph E (including adjustment of the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price then in effect and the number of shares issuable upon conversion of the Series A Stock, Series B Stock and Series C Stock) shall be applicable after that event as nearly equivalent as may be practicable. (6) No Impairment. The corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this paragraph E and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Stock, Series B Stock and Series C Stock against impairment. (7) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price pursuant to this paragraph E, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Stock, Series B Stock and Series C Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Series A Stock, Series B Stock and Series C Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price, Series B Conversion Price and Series C Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Stock, Series B Stock and Series C Stock. (8) Notices of Record Date. In the event that this corporation shall propose at any time: (a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of the shares of its Common Stock outstanding involving a change in the Common Stock; or (d) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business or to liquidate, dissolve or wind up; then, in connection with each such event, this corporation shall send to the holders of the Series A Stock and Series B Stock: (i) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (c) and (d) above; and (ii) in the case of the matters referred to in (c) and (d) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of the Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon the occurrence of such events). (9) Issue Taxes. The corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Stock, Series B Stock and Series C Stock. (10) Reservation of Common Stock Issuable Upon Conversion. The corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Stock, Series B Stock and Series C Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Stock, Series B Stock and Series C Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Stock, Series B Stock and Series C Stock, the corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (11) Notices. Any notice required by the provisions of paragraph (8) to be given to the holders of shares of Series A Stock, Series B Stock and Series C Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the corporation. F. Rights and Preferences of Other Series of Preferred Stock. The Board -------------------------------------------------------------- of Directors of the corporation shall be authorized, in designating additional series of Preferred Stock of the corporation and fixing the rights, privileges and preferences relating thereto, to fix such rights, privileges and preferences of such additional series of Preferred Stock as to be of equal seniority and grade as the Series A Stock, Series B Stock and Series C Stock herein designated. Without limitation of the foregoing, the board may fix the dividend and liquidation preferences of any such additional series of preferred stock so that such additional series of preferred stock are entitled to participate pari passu with the Series A Stock, Series B Stock and Series C Stock as to dividends and liquidating distributions in such amounts as the board shall designate as the dividend and liquidation preferences for any such additional series of Preferred Stock. G. Repurchase of Common Stock. Each holder of an outstanding share of ------------------------------- Series A Stock, Series B Stock and Series C Stock shall be deemed to have consented, for purposes of Sections 502, 503, and 506 of the California General Corporation Law to distributions made by the corporation in connection with the repurchase, at cost, of shares of Common Stock issued to or held by employees upon termination of their employment pursuant to agreements providing for the right of such repurchase between the corporation and such employees. H. Protective Provisions. --------------------------- (1) So long as any shares of Series A Stock are outstanding, the Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of a majority of the then outstanding shares of Series A Stock, voting separately as a class; (a) materially and adversely alter or change any of the powers, preferences, privileges or rights of the Series A Stock; or (b) increase the authorized number of shares of Series A Stock; or (c) amend the provisions of this paragraph (H)(1); or (d) designate or issue any new class or series of shares having preferences superior to the Series A Stock as to dividends, conversion rights or liquidation. (2) So long as any shares of Series B Stock are outstanding, the Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of a majority of the then outstanding shares of Series B Stock, voting separately as a class; (a) materially and adversely alter or change any of the powers, preferences, privileges or rights of the Series B Stock; or (b) increase the authorized number of shares of Series B Stock; or (c) amend the provisions of this paragraph (H)(2); or (d) designate or issue any new class or series of shares having preferences superior to the Series B Stock as to dividends, conversion rights or liquidation. (3) So long as any shares of Series C Stock are outstanding, the Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of a majority of the then outstanding shares of Series C Stock, voting separately as a class; (a) materially and adversely alter or change any of the powers, preferences, privileges or rights of the Series C Stock; or (b) increase the authorized number of shares of Series C Stock; or (c) amend the provisions of this paragraph (H)(3); or (d) designate or issue any new class or series of shares having preferences superior to the Series C Stock as to dividends, conversion rights or liquidation. (4) So long as any shares of Series A Stock, Series B Stock and Series C Stock are outstanding, the corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of a majority of the then outstanding shares of Series A Stock, Series B Stock and Series C Stock, voting together as a single class, sell, convey or otherwise dispose of all or substantially all of its property or business, or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation), or effect any transaction or series of related transactions pursuant to which shares of the corporation representing more than fifty percent (50%) of the voting power of the corporation are disposed of. ARTICLE V A. Limitation of Directors' Liability. The liability of the directors of --------------------------------------- this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. Indemnification of Corporate Agents. This corporation is authorized ---------------------------------------- to provide indemnification of its agents (as defined in Section 317 of the California Corporations Code) for breach of their duty to this corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by such Section 317, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. C. Repeal or Modification. Any repeal or modification of the foregoing --------------------------- provisions of this Article V shall be prospective only and shall not adversely affect any right of indemnification or limitation of liability of an agent of this Corporation relating to acts or omissions occurring prior to such repeal or modification. THREE: The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors of said corporation. FOUR: The foregoing amendment and restatement of the Articles of Incorporation was duly approved by the holder of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the California Corporations Code. The total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment and restatement is 3,885,513 shares of Common Stock, 5,200,000 Series A Preferred Stock and 2,150,000 shares of Series B Preferred Stock. The number of shares voting in favor of the foregoing amendment and restatement equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock, voting separately as a class, more than 50% of the outstanding shares of Series A Preferred Stock, voting separately as a class, more than 50% of the outstanding shares of Series B Preferred Stock, voting separately as a class, and more than 50% of the outstanding shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock, voting together as a class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: July 8, 1993. /s/ Alex C. Hui ---------------------------------- Alex C. Hui President /s/ Chi-Hung Hui ---------------------------------- Chi-Hung Hui Secretary CERTIFICATE OF AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION OF PIONEER SEMICONDUCTOR CORPORATION Alex C. Hui and Chi-Hung Hui hereby certify that: 1. They are the President and the Secretary, respectively, of Pioneer Semiconductor Corporation, a California corporation (the "Corporation"). 2. Article I of the Restated Articles of Incorporation of said Corporation shall be amended to read in full as follows: "The name of this corporation is Pericom Semiconductor Corporation." 3. The foregoing Amendment has been approved by the Board of Directors of said Corporation. 4. The foregoing Amendment has been approved by the required vote of the shareholders of said Corporation in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares entitled to vote with respect to the foregoing Amendment was 3,885,513 shares of Common Stock, 5,200,000 shares of Series A Preferred Stock, 2,150,000 shares of Series B Preferred Stock, and 1,875,000 shares of Series C Preferred Stock; and the number of shares voting in favor of the foregoing Amendment equaled or exceeded the vote required, such required vote being more than 50% of the outstanding shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing Certificate are true and correct of our own knowledge. Executed at San Jose, California, on October 31, 1993. /s/ Alex C. Hui ------------------------------------- Alex C. Hui /s/ Chi-Hung Hui ------------------------------------- Chi-Hung Hui CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF PERICOM SEMICONDUCTOR CORPORATION, a California Corporation ________________________________ The undersigned Alex C. Hui and Chi-Hung Hui hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of Pericom Semiconductor Corporation, a California corporation (the "Corporation"). TWO: The Articles of Incorporation of said Corporation are amended as follows: Article III shall be amended in its entirety to read as follows: "ARTICLE III A. Classes of Stock. This Corporation is authorized to issue two classes ---------------- of shares, designated "Preferred Stock" and "Common Stock." The total number of shares which the Corporation is authorized to issue is forty-four million two hundred and twenty-five thousand (44,225,000) shares. Thirty million (30,000,000) shares shall be Common Stock, without par value, (the "Common Stock") and fourteen million two hundred and twenty-five thousand (14,225,000) shares shall be Preferred Stock, without par value (the "Preferred Stock"). Five million two hundred thousand (5,200,000) shares or Preferred Stock are hereby designated "Series A Preferred Stock," two million one hundred and fifty thousand (2,150,000) shares are hereby designated "Series B Preferred Stock," one million eight hundred and seventy-five thousand (1,875,000) shares are designated "Series C Preferred Stock" and five million (5,000,000) shares shall remain undesignated. Effective upon the amendment of the Articles of Incorporation as set forth herein, each outstanding share of Common Stock of the Corporation shall be reverse split into one-third (1/3rd) of a share of Common Stock. B. Preferred Stock. The undesignated shares of Preferred Stock shall be --------------- issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in these Articles of Incorporation, to fix or alter the individual rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preference of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series." The second sentence of Article IV(A) shall be amended in its entirety to read as follows: "Two million one hundred and fifty thousand (2,150,000) shares are hereby designated and known as "Series B Preferred Stock" hereinafter referred to as the "Series B Stock") with the rights, preferences and privileges specified herein." Article IV(I) shall be added to read as follows: ARTICLE IV "I. Status of Converted Stock. In case any shares of any series of ------------------------- Preferred Stock shall be repurchased or converted pursuant to Article IV hereof, the shares so converted shall be canceled and shall not be issued by this Corporation and upon such conversion, the number of authorized shares of class and series, if any, to which such shares of Preferred Stock belonged shall be reduced by the number of shares so converted. Upon the conversion pursuant to Article IV(E) hereof of all the then outstanding shares of Preferred Stock, Sections (A) through (H) of this Article IV shall become void and shares of such classes of Preferred Stock shall not be deemed outstanding for any purpose whatsoever." Article VI shall be added to read as follows: "ARTICLE VI A. Date Effective. This Article shall become effective only when the -------------- Corporation shall become a "listed corporation" within the meaning of Section 301.5(d) of the California Corporations Code. B. No cumulative Voting. The election of directors by the shareholders -------------------- shall not be by cumulative voting. At each election of directors by the shareholders, each shareholder entitled to vote may vote all the shares held by that shareholder for each of several nominees for director up to the number of directors to be elected. The shareholder may not cast more votes for any single nominee than the number of shares held by that shareholder." THREE: The foregoing amendments of Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. FOUR: The foregoing amendments of Articles of Incorporation was duly approved by the holders of the requisite number of shares of the Corporation in accordance with Sections 902 and 903 of the California General Corporation Law; the total number of outstanding shares entitled to vote with respect to the foregoing amendment was 4,278,147 shares of Common Stock, 5,200,000 shares of Series A Preferred Stock, 2,150,000 shares of Series B Preferred Stock and 1,875,000 shares of Series C Preferred Stock. The number of shares voting in favor of the foregoing amendments equaled or exceeded the vote required, such required voting being a majority of the outstanding shares of Common Stock and Preferred Stock, voting together as a single class and a majority of the outstanding shares of Preferred Stock, voting as a separate class. The undersigned declare under penalty of perjury that he has read the foregoing Certificate of Amendment of Articles of Incorporation and knows the contents thereof, and that the statements therein are true and correct of his own knowledge. Executed at San Jose, California on November 14, 1995. /s/ Alex C. Hui ---------------------------- Alex C. Hui President /s/ Chi-Hung Hui ---------------------------- Chi-Hung Hui Secretary CERTIFICATE OF AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION OF PERICOM SEMICONDUCTOR CORPORATION, a California Corporation ________________________________ The undersigned Alex C. Hui and Chi-Hung Hui hereby certify that: ONE: They are the Chief Executive Officer and Secretary, respectively, of Pericom Semiconductor Corporation, a California corporation (the "Corporation"). TWO: The first two paragraphs of Article III of the Restated Articles of Incorporation of the Corporation are amended to read as follows: "ARTICLE III A. Classes of Stock. This Corporation is authorized to issue two classes ---------------- of shares, designated "Preferred Stock" and "Common Stock." The total number of shares which the Corporation is authorized to issue is seventy-four million two hundred and twenty-five thousand (74,225,000) shares. Sixty million (60,000,000) shares shall be Common Stock, without par value, (the "Common Stock") and fourteen million two hundred and twenty-five thousand (14,225,000) shares shall be Preferred Stock, without par value (the "Preferred Stock"). Five million two hundred thousand (5,200,000) shares or Preferred Stock are hereby designated "Series A Preferred Stock," two million one hundred and fifty thousand (2,150,000) shares are hereby designated "Series B Preferred Stock," one million eight hundred and seventy-five thousand (1,875,000) shares are designated "Series C Preferred Stock" and five million (5,000,000) shares shall remain undesignated. Effective upon the amendment of this Article III as herein set forth, each outstanding share of Common Stock of this corporation is split up and converted into two (2) shares of Common Stock." THREE: The foregoing amendment of the Restated Articles of Incorporation was duly approved by the Board of Directors on August 11, 2000. FOUR: The foregoing amendment of Restated Articles of Incorporation is to effect a two-for-one stock split and a proportionate increase is authorized in the authorized number of shares of Common Stock. The Corporation has only one class of shares outstanding, Common Stock, there are no shares of Series A Preferred, Series B Preferred or Series C Preferred Stock outstanding. Pursuant to Section 902 (c) of the California Corporations Code shareholder approval is not required for this action. FIVE: The foregoing amendment of the Restated Articles of Incorporation of the Corporation shall become effective at the close of business on August 24, 2000. IN WITNESS WHEREOF, the undersigned have executed this certificate on August 22, 2000. /s/ Alex C. Hui --------------------------------- Alex C. Hui Chairman of the Board, Chief Executive Officer and President /s/ Chi-Hung Hui --------------------------------- Chi-Hung Hui Vice President, Technology and Secretary Each of the undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed on this 22nd day of August 2000, at San Jose, California. /s/ Alex C. Hui --------------------------------- Alex C. Hui Chairman of the Board, Chief Executive Officer and President /s/ Chi-Hung Hui --------------------------------- Chi-Hung Hui Vice President, Technology and Secretary -----END PRIVACY-ENHANCED MESSAGE-----