-----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, T/aE6gbq1cqZfXyPEkr9rj+Vqplk9Wv7suk6E1AmUITDSZ+rXUsfsYPEQv9XInIL QP198xnyPEMr+Is59fggHQ== /in/edgar/work/20000905/0000912057-00-040165/0000912057-00-040165.txt : 20000922 0000912057-00-040165.hdr.sgml : 20000922 ACCESSION NUMBER: 0000912057-00-040165 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000905 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL MICROCIRCUITS INC CENTRAL INDEX KEY: 0001053182 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 942188228 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-45184 FILM NUMBER: 716844 BUSINESS ADDRESS: STREET 1: 525 LOS COCHES STREET CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4082636300 S-1 1 s-1.txt FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 2000 REGISTRATION NO. 333-XXXXX - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- INTERNATIONAL MICROCIRCUITS, INC. (Exact name of registrant as specified in its charter) ------------------------------ CALIFORNIA 3674 94-2188223 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code number) Identification No.)
525 LOS COCHES STREET MILPITAS, CALIFORNIA 95035 (408) 263-6300 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ ILHAN REFIOGLU PRESIDENT AND CHIEF EXECUTIVE OFFICER INTERNATIONAL MICROCIRCUITS, INC. 525 LOS COCHES STREET MILPITAS, CALIFORNIA 95035 (408) 263-6300 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: DENNIS C. SULLIVAN, ESQ. NORA L. GIBSON, ESQ. JOHN M. FOGG, ESQ. JAMIE W. STEWART, ESQ. LYNN E. FULLERTON, ESQ. LORA D. BLUM, ESQ. GRAY CARY WARE & FREIDENRICH LLP WILSON SONSINI GOODRICH & ROSATI, P.C. 400 HAMILTON AVENUE ONE MARKET, SPEAR STREET TOWER PALO ALTO, CALIFORNIA 94301-1825 SAN FRANCISCO, CALIFORNIA 94105 (650) 833-2000 (415) 947-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE Common Stock (no par value)................................. $72,450,000 $19,127
(1) Estimated solely for the purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED SEPTEMBER , 2000 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. shares [LOGO] Common Stock We are offering shares of our common stock and some of our stockholders are offering shares. We have granted the underwriters an option to purchase a maximum of additional shares to cover over-allotments of shares. Prior to this offering, there has been no public market for our common stock. The public offering price is expected to be between $ and $ per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "IIMI." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
Per Share Total ---------------- ---------------- Public offering price....................................... $ $ Underwriting commissions.................................... $ $ Proceeds, before expenses, to us............................ $ $ Proceeds to the selling stockholders........................ $ $
Delivery of the common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. WIT SOUNDVIEW NEEDHAM & COMPANY, INC. Prospectus dated , 2000 [INSIDE FRONT COVER] IMI Clocks Zero Delay Buffers EMI Reduction Integrated Circuits High Performance Logic Integrated Circuits IMI Spread Spectrum Clock Generator [Graphic representation of integrated circuits and comparison of electromagnetic wave lengths before EMI reduction and after EMI reduction.] [IMI Logo] [GATEFOLD] Markets Computing Consumer Electronics Communications [Graphic representations of products that use our integrated circuits] [INSIDE BACK COVER] [IMI Logo] [Graphic representation of timing device] TABLE OF CONTENTS
PAGE -------- Prospectus Summary.......................................... 3 Risk Factors................................................ 7 Forward-Looking Statements.................................. 17 Use of Proceeds............................................. 18 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Consolidated Financial Data........................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 31 Management.................................................. 44 Related Party Transactions.................................. 52 Principal and Selling Stockholders.......................... 54 Description of Capital Stock................................ 56 Shares Eligible for Future Sale............................. 58 Underwriting................................................ 60 Legal Matters............................................... 62 Experts..................................................... 62 Where You Can Find More Information......................... 62 Index to Consolidated Financial Statements.................. F-1 Appendix: "Meet the Management" Presentation................ A-1
-------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WE NOR THE UNDERWRITERS HAVE AUTHORIZED ANY PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE AND THE UNDERWRITERS ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. -------------- DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS," THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. OUR BUSINESS We design, develop and market high performance integrated circuits for the computing, communications, and consumer electronics markets. Our product portfolio includes integrated circuit timing devices and EMI reduction and high performance logic integrated circuits. We believe our gate-array-based architecture, proprietary input/output structures and extensive mixed-signal cell library enable us to deliver flexible, high performance solutions to our customers faster than many of our competitors, which in turn assists our customers in achieving their time-to-market objectives. Our design methodology gives us fast design and prototype cycle times and enables rapid product introductions. We sell our products to leading systems manufacturers in the computing, communications and consumer electronics markets. Our customers include Apple, Canon, Cisco, Dell, Fujitsu Siemens, Hewlett-Packard, IBM, NEC, Panasonic, Pioneer, Sharp, Samsung, Sanyo, Sony and Xerox. We believe that we have developed a compelling product portfolio, as evidenced by our significant design wins with industry leaders, such as Compaq and Cisco, which has resulted in the integration of our products into some of Compaq's personal computers and Cisco's leading-edge routers. In addition, our timing devices are designed into the Intel reference mobile motherboard. We have also successfully penetrated the digital camera, DVD and minidisc player markets with recent design wins at Sanyo, Sony and Kenwood. OUR OPPORTUNITY There exists a growing demand for fast, high-bandwidth electronic systems characterized by ever-improving performance, flexibility, reliability and functionality, as well as decreasing size, cost and power consumption. This demand has resulted in both the development of new, and the enhancement of existing, electronic systems, such as digital cameras, DVD players, game consoles, internet appliances, network routers and switches, notebook computers and set-top boxes. The components of these electronic systems, which include microprocessors, memory, logic, and timing devices, must continue to increase in performance in order to enable the continued development of higher performance systems. Advances in the development of a particular type of integrated circuit timing device, known as a clock, are particularly critical as they generate the timing signals necessary for communication among the components within systems as well as between systems. Other integrated circuits that are becoming increasingly important in complex, high-speed systems such as computer servers, workstations and networking systems, where data transfers at optimum speeds are essential, include zero delay buffers and high performance, low power logic. High performance electronics systems often emit elevated levels of electromagnetic interference, or EMI. Because EMI is regulated by the Federal Communications Commission, systems manufacturers are seeking solutions to reduce levels of EMI. In order to meet the demand for higher performance systems in the computing, communications and consumer electronics markets, systems manufacturers require high performance integrated circuits with programmable features that allow the manufacturers to rapidly design and test systems, assisting them in meeting their time-to-market and cost objectives. 3 OUR SOLUTION To address these needs, we have developed a portfolio of product families consisting of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits for the computing, communications and consumer electronics markets. Our products are based upon a flexible platform with which we are able to quickly build new products to meet our customers' requirements. We focus our product development efforts on applications in areas where we have identified a market opportunity and a large customer need. We currently offer more than 100 products, of which more than 50% have been introduced during the last 12 months. The key elements of our solution are: - UNIQUE AND FLEXIBLE DESIGN SOLUTION. Our design methodology and product design architectures have been optimized to enable rapid new product introductions and to provide flexibility during the development process while minimizing costs. - HIGH PERFORMANCE PRODUCTS. We design and manufacture our products to meet or exceed manufacturers' highest standards and specifications as evidenced by the integration of our products into the systems of industry leaders, such as Cisco, Compaq, Dell and Sony. - BROAD FEATURE SET. We offer products with unique programmability features and integration levels to address a broad range of system requirements and functionality. - CUSTOMER RESPONSIVENESS. We believe our unique fast time-to-market design capability enables us to respond to customer requests more rapidly than our competition. OUR STRATEGY Our objective is to be a leading supplier of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits to the computing, communications and consumer markets. Key elements of our strategy include: - further increase our market share through the continued penetration of existing customers and the expansion of our sales, marketing and applications support organization to acquire new customers; - leveraging our core competencies in timing and EMI solutions across the high growth communications and consumer products markets; - extending our leadership in the EMI market to maintain our position as the EMI solution provider of choice; - further penetration of industry leaders in an effort to influence the purchasing decisions of additional customers within those industries; and - continuing to expand our product offerings as end-product performance requirements and process technologies evolve. CORPORATE INFORMATION International Microcircuits, Inc. was incorporated in California in November 1972 and reincorporated in Delaware in 2000. Our principal executive offices are located at 525 Los Coches Street, Milpitas, California 95035, our telephone number is (408) 263-6300, and our website is located at www.imicorp.com. Information on our website is not a part of this prospectus. 4 THE OFFERING Common stock offered by us........................... shares Common stock offered by the selling stockholders....................................... shares Common stock to be outstanding after this offering... shares Use of proceeds...................................... To repay outstanding indebtedness and redeem our Series A redeemable preferred stock and for general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds." We will not receive any of the proceeds from the sale of shares by the selling stockholders. Proposed Nasdaq National Market symbol............... IIMI
The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of June 30, 2000 and excludes: - 1,793,748 shares of common stock issuable upon exercise of options outstanding as of June 30, 2000 under our 1995 and 1997 stock option plans, with a weighted average exercise price of $0.54 per share, and 3,691,000 shares reserved for future grants under our option plans; and - 200,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan. ------------------------------------------------ Unless specifically stated, the information in this prospectus: - reflects the automatic conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into an aggregate of 10,662,057 shares of our common stock and 3,159,128 shares of our Series A redeemable preferred stock and the redemption of all such shares of Series A redeemable preferred stock for $12.4 million upon the closing of this offering; - reflects a three-for-two stock split that was effected in February 1998, a three-for-two stock split that was effected in February 2000 and a three-for-two stock split to be effected in September 2000; - does not take into account the possible sale of additional shares of common stock to the underwriters to cover over-allotments; - assumes the reincorporation of our company in Delaware prior to the completion of this offering; and - reflects the creation of a new class of preferred stock and an increase in the number of authorized shares of common stock to 100,000,000 shares upon the closing of this offering. Dial-a-dB, Dial-a-Drive, Dial-a-Frequency, Dial-a-Skew and IMI are trademarks of International Microcircuits, Inc. This prospectus contains product names, trade names and trademarks of International Microcircuits, Inc. and other organizations. 5 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) You should read the following summary financial information with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.
THREE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue.......................... $35,694 $27,857 $34,165 $38,998 $44,326 $10,516 $11,507 Gross profit(1)...................... 13,204 10,350 14,239 15,995 20,273 4,507 5,565 Operating income (loss).............. 2,832 1,305 (934) 2,813 4,074 1,027 855 Net income (loss).................... 1,197 1,029 (2,197) 987 1,774 425 217 Net income (loss) per share(2): Basic.............................. $ 0.07 $ 0.06 $ (0.17) $ 0.33 $ 0.47 $ 0.13 $ 0.05 Diluted............................ $ 0.07 $ 0.06 $ (0.17) $ 0.01 $ 0.06 $ 0.01 $ 0.00 Weighted average shares(2): Basic.............................. 17,213 17,213 13,008 2,735 3,602 3,028 3,982 Diluted............................ 17,213 17,213 13,008 14,642 15,908 16,176 16,052
AS OF JUNE 30, 2000 -------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 4,670 Working capital........................................... 6,455 Total assets.............................................. 17,817 Long-term debt, including current portion................. 5,700 Mandatorily redeemable securities......................... 15,821 Total stockholders' equity (deficit)...................... (14,389)
- ------------------------ (1) Gross profit excludes stock-based compensation expense of $73,000 for the year ended March 31, 2000 and $60,000 for the three months ended June 30, 2000, which is combined with other stock-based compensation and included in operating income. (2) See Note 1 of Notes to our consolidated financial statements for a description of the computation of the number of shares and net income (loss) per share. (3) Adjusted to reflect the sale by us of shares of common stock in this offering, at an assumed initial public offering price of $ per share after deducting the estimated underwriting discount and offering expenses, and to give effect to the conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into common stock and Series A redeemable preferred stock, the redemption of all such shares of Series A redeemable preferred stock, and the application of the net proceeds of the offering. See "Use of Proceeds" and "Capitalization." 6 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON SHARES. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR COMMON SHARES COULD DECLINE AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO HARM OUR BUSINESS. OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND THEREFORE MAY FAIL TO MEET EXPECTATIONS WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE. Our operating results have varied widely in the past and are likely to do so in the future. In addition, our operating results may not follow any past trends. Our future operating results will depend on many factors and may fail to meet our expectations for a number of reasons, including those set forth in these risk factors. Any failure to meet expectations could cause our stock price to significantly fluctuate or decline. Factors that could cause our operating results to fluctuate include risks related to our internal operations, our dependence on our suppliers and customers and other risks affecting our industry generally. These factors are difficult or impossible to forecast. We place orders to purchase our products from independent foundries several months in advance of the scheduled delivery date, often in advance of receiving firm orders from our customers. If anticipated shipments in any quarter are canceled or do not occur as quickly as expected, expense and inventory levels could be disproportionately high. A significant portion of our expenses are relatively fixed, and the timing of increases in expenses is based in large part on our forecast of future revenue. As a result, if revenue does not meet our expectations we may be unable to quickly adjust expenses to levels appropriate to actual revenue, which could harm our operating results. As a result of these factors, our operating results may vary significantly from quarter to quarter. Any shortfall in revenue or net income from levels expected by securities analysts or investors could cause a decline in the trading price of our stock. WE DEPEND ON THE FREQUENT INTRODUCTION OF NEW PRODUCTS AND OUR INABILITY TO DEVELOP THESE NEW PRODUCTS COULD ADVERSELY AFFECT OUR BUSINESS. The markets for our products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Product life cycles are continually becoming shorter, which may cause the gross margins of semiconductor products to decline as the next generation of competitive products is introduced. Therefore, our future success is highly dependent upon our ability to frequently develop new products, introduce them in commercial quantities to the marketplace and have them selected for inclusion in products of systems manufacturers. Our failure to develop new products, to have our products available in commercial quantities ahead of competitive products or to have them selected for inclusion in products of manufacturers would have a material adverse effect on our results of operations and financial condition. WE DERIVE MOST OF OUR REVENUE FROM SALES TO A SMALL NUMBER OF LARGE MANUFACTURERS, AND IF WE ARE NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY RESCHEDULE, REDUCE OR CANCEL ORDERS, OUR REVENUE WOULD BE REDUCED AND OUR FINANCIAL RESULTS WOULD SUFFER. Our largest customers account for a substantial percentage of our revenue. During fiscal 2000, sales of our products to Apple Computer, Dell Computer and IBM, directly and through distributors and contract manufacturers, accounted for approximately 22.7%, 19.6% and 12.4%, respectively, of our net revenue. During the first quarter of fiscal 2001, sales to Apple Computer, Dell Computer and 7 Sanyo accounted for approximately 19.4%, 21.0% and 10.6%, respectively, of our total revenue. Sales to these large customers have varied significantly on a quarterly and annual basis and will continue to fluctuate in the future. We cannot assure you that we will be able to retain our key customers, that we will be able to attract additional customers or that our customers will be successful in selling their products which incorporate our integrated circuits. The loss of one or more of our largest customers, any substantial reduction or delay in sales to these customers or their contract manufacturers, or our inability to successfully develop relationships with additional customers could harm our sales and financial results. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results. WE ARE SUBSTANTIALLY DEPENDENT ON TWO OF OUR PRODUCT FAMILIES. ANY FAILURE TO CONTINUE TO GROW THESE PRODUCT FAMILIES WOULD HAVE A NEGATIVE EFFECT ON OUR REVENUE AND FINANCIAL RESULTS. Our business, revenue and operating results are heavily dependent on our clock and EMI reduction product families. In fiscal 2000, sales of clocks comprised 62% of our revenue and sales of EMI reduction integrated circuits comprised 31% of our revenue. If sales of these product families decline, it may have a disproportionate effect on our revenue and operating results. For example, the growth in sales of our EMI reduction products faces several potential risks. If the Federal Communications Commission changes or rescinds existing EMI emission standards, the demand for our EMI reduction products would decline or cease. In addition, if manufacturers develop alternative solutions to achieve EMI reduction, the demand for our EMI reduction devices will not grow according to our forecasts. Any failure to continue to grow our core clock and EMI reduction product families would have a negative effect on our revenue and financial results. WE RELY ON INDEPENDENT FOUNDRIES FOR THE MANUFACTURE OF OUR INTEGRATED CIRCUITS, AND THE FAILURE OF ANY OF THESE SUPPLIERS TO DELIVER PRODUCTS OR OTHERWISE PERFORM AS REQUESTED COULD DAMAGE OUR RELATIONSHIPS WITH OUR CUSTOMERS AND HARM OUR SALES AND FINANCIAL RESULTS. We do not operate any manufacturing facilities, and we rely on independent foundries to manufacture all of our products. These independent foundries fabricate products for other companies, including some of our competitors, and may also produce products of their own design. From time to time, there are manufacturing capacity shortages in the semiconductor industry. We do not have long-term supply contracts with any of our suppliers. Therefore, our suppliers are not obligated to manufacture products for us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. Our reliance on independent foundries involves a number of risks, including: - the inability to obtain adequate manufacturing capacity; - the unavailability of or interruption in access to certain process technologies necessary for the manufacture of our products; - reduced control over delivery schedules, quality assurance, manufacturing yields and costs; and - potential misappropriation of our intellectual property. In fiscal 1999 and fiscal 2000, we purchased all of our wafers from IBM Microelectronics, Chartered Semiconductor and Tower Semiconductor. If one or more of these foundries is unable or unwilling to produce adequate supplies of processed wafers on a timely basis, it could cause significant delays and expense in locating a new foundry and redesigning circuits to be compatible with the new manufacturer's processes and, consequently, could have a material adverse effect on our results of operations and financial condition. 8 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 development cycle for our products, providing time-to-market advantages to our competitors that have in-house fabrication capacity. IF OUR INDEPENDENT FOUNDRIES DO NOT ACHIEVE SATISFACTORY YIELDS, OUR RELATIONSHIPS WITH OUR CUSTOMERS MAY BE HARMED. The fabrication of silicon wafers is a complex process. Minute levels of contaminants in the manufacturing environment, defects in photomasks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial portion of the integrated circuits on a wafer to be non-functional. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. As a result, foundries often experience problems achieving acceptable yields, which are represented by the number of good integrated circuits as a proportion of the number of total integrated circuits on any particular wafer. Poor yields from our independent foundries would reduce our ability to deliver our products to customers, harm our relationships with our customers and harm our business and our financial results. WE DEPEND ON A LIMITED NUMBER OF ASSEMBLY SUBCONTRACTORS WITH WHOM WE DO NOT HAVE LONG-TERM 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. 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 services through 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 assembly and packaging sources could delay shipments, result in the loss of customers and limit or reduce our revenue. OUR INDUSTRY IS HIGHLY CYCLICAL AND DOWNTURNS IN THE BUSINESS CYCLE COULD REDUCE OUR REVENUE AND THE PROFITABILITY OF OUR BUSINESS. The semiconductor industry is highly cyclical. Downturns in the industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of average selling prices. In some cases, these downturns have lasted more than one year. A downturn in the semiconductor industry could reduce our revenue if demand drops or our gross margins if average selling prices decline. We may in the future experience substantial period-to-period fluctuations in our business and operating results due to general industry conditions. 9 INTENSE COMPETITION IN THE SEMICONDUCTOR INDUSTRY MAY REDUCE THE DEMAND FOR OUR PRODUCTS OR THE PRICES OF OUR PRODUCTS, WHICH COULD REDUCE OUR REVENUE. The semiconductor industry is intensely competitive. Our competitors include Cypress Semiconductor, Integrated Circuit Systems, Motorola, Pericom Semiconductor, Philips Semiconductor and Texas Instruments. Most of these 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 and 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, some of our larger competitors who have their own wafer fabrication facilities 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. OUR SUCCESS IS DEPENDENT ON THE GROWTH OF THE COMPUTING, COMMUNICATION AND CONSUMER ELECTRONICS MARKETS AND OUR ABILITY TO MARKET AND SELL OUR INTEGRATED CIRCUITS TO MANUFACTURERS SERVING THOSE MARKETS. In fiscal 1999, fiscal 2000 and the first quarter of fiscal 2001, we derived a majority of our revenue from the sale of integrated circuits for applications in the computing market, such as personal computers, notebook computers and workstations. The computing market, and in particular the personal computer industry, is subject to price competition, rapid technological change, evolving standards, short product life cycles and continuous erosion of average selling prices. Should the computing market decline or experience slower growth, a decline in the order rate for our products could occur. We expect that sales of our products for applications in the computing market, as well as applications in the communications and consumer electronic markets, will account for a significant portion of our revenues in the future. Our ability to market and sell our integrated circuits to manufacturers in those markets will have a significant impact on our financial performance for the foreseeable future. If the markets for these products and applications decline or fail to develop as expected or we are not successful in our efforts to market and sell our products to manufacturers who incorporate integrated circuits into these products, our financial results will be harmed. 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 would affect our revenue and, 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. 10 WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS, AND WE ALLOCATE RESOURCES BASED ON OUR FORECASTS OF CUSTOMER DEMAND, WHICH COULD LEAD TO EXCESS INVENTORY OR LOST REVENUE OPPORTUNITIES. We generally do not enter into long-term purchase contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our financial results. Our sales are generally made on the basis of purchase orders which may be cancelled at any time by customers rather than long-term non-cancelable purchase contracts, and we manufacture our products according to our estimates of customer demand. This process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may allocate resources to products that we may not be able to sell or we may have to sell our products to other customers at lower prices. As a result, we would have excess inventory, which would adversely affect our financial results. Conversely, if we underestimate customer demand, we may forego revenue opportunities or damage our customer relationships. WE ARE DEPENDENT UPON OUR INTERNATIONAL SALES AND MANUFACTURING. ECONOMIC, POLITICAL OR MILITARY EVENTS IN A COUNTRY OR REGION WHERE WE MAKE SIGNIFICANT SALES OR OUTSOURCE SIGNIFICANT MANUFACTURING COULD HARM OUR BUSINESS. During fiscal 2000, approximately 75.2% of our total revenue was derived from international sales. During the first quarter of fiscal 2001, approximately 72.5% of our revenue was derived from international sales. A substantial portion of these international sales consist of sales to foreign subcontractors who incorporate our integrated circuits into products for domestic systems manufacturers. We anticipate that international sales will continue to represent a significant portion of our total revenue for the foreseeable future. In addition, a majority of our semiconductor products are manufactured, and substantially all are assembled, outside of the United States by independent foundries and subcontractors. We are subject to the risks inherent in doing business internationally, including: - unexpected changes in regulatory requirements; - fluctuations in exchange rates; - political and economic instability; - imposition of tariffs and other barriers and restrictions; and - the burdens of complying with a variety of foreign laws. The occurrence of any of these events could harm our sales and financial results. In addition, we are in the process of establishing a wholly-owned subsidiary in Istanbul, Turkey where we intend to develop a design facility. We expect to have several design engineers in this facility by the end of fiscal 2001 and hope to continue to add personnel in the future. Any inability to manage, or communicate effectively with, our design team in Turkey, could delay our development efforts and divert our management's attention. THE PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE DUE TO FOREIGN EXCHANGE FLUCTUATIONS. Foreign currency fluctuations may affect the prices of our products. Prices for our products are currently denominated in U.S. dollars for sales to our customers throughout the world. If there is a significant devaluation of the currency in a specific country, the prices of our products will increase relative to that country's currency and our products may be less competitive in that country. Also, we 11 cannot be sure that our international customers will continue to be willing to place orders denominated in U.S. dollars. If they do not, our revenue and operating results will be subject to foreign exchange fluctuations. OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS, WHICH INCREASES OUR COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF OUR OPERATING RESULTS. Our products are technologically complex. Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products often last for many months. Longer sales cycles require us to invest significant resources in sales and marketing prior to the generation of revenue. Long sales cycles also subject us to other risks, including customers' budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another period due to unforeseen delays in customers' purchase decisions. The time required for our customers to incorporate our products into their own can vary significantly and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results. IF WE ARE UNABLE TO OBTAIN AND MAINTAIN LICENSES OF KEY INTELLECTUAL PROPERTY FROM THIRD PARTIES, THE QUALITY OF OUR PRODUCTS MAY BE AFFECTED AND, AS A RESULT, OUR OPERATING RESULTS COULD BE HARMED. From time to time, we license technology from third parties to develop new products or product enhancements. For example, we currently license technology used in our EMI reduction products from Lexmark International. We may seek to license additional intellectual property from third parties in the future. If we are unable to obtain any third-party license required to develop new products and product enhancements, or if a licensor should cease to support our licensed technology, we may have to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm the competitiveness of our products. OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM CHALLENGES BY THIRD PARTIES. Our success and ability to compete depends in large part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The laws of many foreign countries in which our products are or may be developed, manufactured or sold, including Turkey, where we are developing our own design center, and various countries in Asia, where most of our subcontractors are located, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely in these countries. If competitors are able to use our technology, our ability to compete effectively could be harmed. 12 WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR SIGNIFICANT COSTS. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the past, we have been subject to claims regarding alleged infringement of other parties' intellectual property rights. We could become subject to litigation in the future either to protect our intellectual property or as a result of allegations that we infringe others' intellectual property rights. Claims that our products infringe proprietary rights would force us to defend ourselves, and possibly our customers or manufacturers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages, as well as invalidation of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could force us to do one or more of the following: - stop selling our products that incorporate the challenged intellectual property; - obtain a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all; - pay damages; or - redesign those products that use the disputed technology. If we are forced to take any of the foregoing actions, our business could be severely harmed. OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS OR RESULT IN CLAIMS AGAINST US. We develop complex products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in, among other things, a delay in recognition or loss of revenue, loss of market share or failure to achieve market acceptance. These defects may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and harm our relationships with our customers. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers or could damage market acceptance of our products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. The occurrence of these problems would likely harm our business. WE DEPEND UPON KEY MANAGEMENT AND THE LOSS OF CERTAIN KEY MEMBERS OF MANAGEMENT COULD NEGATIVELY IMPACT OUR BUSINESS PROSPECTS. Our future success is substantially dependent on the continued services and continuing contributions of our senior management and other key personnel, particularly Ilhan Refioglu, our President and Chief Executive Officer, and Gregory J. Richmond, our Vice President, Engineering and Chief Technology Officer. Loss of the services of any of our executive officers or other key employees could harm our business. We have no long-term employment agreements with any of our key personnel other than Dr. Refioglu, whose employment agreement expires in September 2000 but is automatically renewable for one-year terms unless either party elects not to renew the agreement. We do not maintain key person life insurance on any of our key employees. 13 BECAUSE OF INTENSE COMPETITION FOR TECHNICAL AND MANAGERIAL PERSONNEL, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD HARM OUR BUSINESS. We are dependent upon our ability to attract and retain highly-skilled technical and managerial personnel. We believe that our future success in developing marketable products and achieving a competitive position will depend in large part upon whether we can attract and retain skilled personnel. Retention of scientific and engineering personnel in our industry typically requires us to present attractive compensation packages, including stock option grants. Competition for such personnel is intense, particularly in the Silicon Valley, and there can be no assurance that we will be successful in attracting and retaining the personnel we require to successfully develop new and enhanced products and to continue to grow and operate profitably. WE MAY MAKE ACQUISITIONS WHICH COULD SUBJECT US TO A NUMBER OF OPERATIONAL RISKS. In order to grow our business and maintain our competitive position, we may acquire other businesses in the future. We cannot predict whether or when any acquisitions will occur, and we cannot assure you that any acquired business will be successfully integrated into our operations or will perform as we expect. Any future acquisitions could involve risks, including the assumption of additional liabilities and diversion of management's attention from other business concerns. Furthermore, we may issue equity securities or incur debt to pay for any future acquisitions. If we issue equity securities, your percentage ownership of our company would be reduced. We may also enter into joint venture transactions. Joint ventures have the added risk that the other joint venture partners may have economic, business or legal interests or objectives that are inconsistent with our interests and objectives. We may also have to fulfill our joint venture partners' economic or other obligations if they fail to do so. If we are unable to integrate any future acquisitions into our operations successfully, our business could be harmed. 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 assembly subcontractors we use is located in Taiwan, which recently suffered a severe earthquake. 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 operations or those of our suppliers, our business would be seriously harmed. A SIGNIFICANT PORTION OF THE NET PROCEEDS OF THIS OFFERING WILL BE USED TO REPAY INDEBTEDNESS, AND MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE REMAINDER OF THE PROCEEDS. We expect to use a significant portion of the net proceeds of this offering to repay indebtedness totaling approximately $5.7 million and to redeem preferred stock owned by TA Associates and its related investment funds for $12.4 million. As a result, the full amount raised in this offering will not be available to fund our future operations. We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development efforts. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to us. Our management will have broad discretion in determining how to spend the remainder of the net proceeds from this offering and may spend the proceeds in a manner that our stockholders may not deem desirable. We cannot assure you that our investments and use of the net proceeds of this offering will yield favorable returns or results. 14 INVESTMENT FUNDS AFFILIATED WITH TA ASSOCIATES WILL OWN A MAJORITY OF OUR OUTSTANDING STOCK UPON COMPLETION OF THIS OFFERING AND, AS A RESULT, CAN CONTROL THE ELECTION OF OUR BOARD OF DIRECTORS AND THE OUTCOME OF MOST ISSUES SUBMITTED TO OUR STOCKHOLDERS. Upon completion of this offering, investment funds affiliated with TA Associates will hold, in the aggregate, approximately % (or % if the underwriters' over-allotment option is exercised) of our outstanding common stock. In addition, two of the directors that will serve on our board following this offering will be representatives of TA Associates. By virtue of such stock ownership, these investment funds, acting alone, can control most matters submitted to our stockholders, including the election of our directors, and will continue to exercise control over our business, policies and affairs. This concentration of voting power could have the effect of delaying, deterring or preventing a change of control of our company or other business combination that might otherwise be beneficial to our stockholders. DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Some provisions of our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: - authorizing the board to issue additional preferred stock; - prohibiting cumulative voting in the election of directors; - limiting the persons who may call special meetings of stockholders; - prohibiting stockholder actions by written consent; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DECLINE. Sales of a substantial number of shares of our common stock in the public market following this offering, or the fact that a large number of shares simultaneously will become available for sale, could cause the market price of our common stock to decline. The number of shares of common stock available for sale in the public market will be limited by lock-up agreements under which the holders of substantially all of our outstanding shares of common stock and options to purchase common stock will agree not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Wit SoundView Corporation. Upon the expiration of these lock-up agreements and assuming the full exercise of all vested options to purchase common stock outstanding on June 30, 2000, approximately shares of common stock will become eligible for sale simultaneously. Moreover, Wit SoundView Corporation may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition to the adverse effect a price decline could have on holders of our common stock, such a decline would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE STOCK YOU PURCHASE. The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after the 15 offering. Therefore, based on an estimated initial public offering price of per share, if you purchase our common stock in this offering you will suffer immediate dilution of approximately per share. If additional shares are sold by the underwriters following exercise of their over-allotment option, or if outstanding options or warrants for our common stock are exercised, there will be further dilution. OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE. There previously has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how liquid that market might become. The initial public offering price for our common stock was determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. In addition, the stock market in general, and the Nasdaq National Market and stocks of technology companies in particular, have experienced extreme price and volume fluctuations. This volatility is often unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been initiated against the company. This type of litigation, if initiated against us, could result in substantial costs and a diversion of management's attention and resources, which would significantly harm our business. 16 FORWARD-LOOKING STATEMENTS Statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus about our future plans and intentions, results, levels of activity, performance, goals or achievements or other future events constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in our forward-looking statements. These factors include, among others, those listed under "Risk Factors" or described elsewhere in this prospectus. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "would," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. We are under no obligation to update any of our forward-looking statements after the date of this prospectus. You should not place undue reliance on forward-looking statements. 17 USE OF PROCEEDS We estimate our net proceeds from the sale of the shares of common stock offered by us in this offering to be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of $ per share and after deducting the estimated underwriting discount and offering expenses. We will not receive any of the proceeds from the sale of shares by the selling stockholders. We intend to use the net proceeds of this offering: - to repay outstanding principal of approximately $3.2 million and accrued interest under a bank term loan and $2.5 million and accrued interest under a promissory note payable to a stockholder; - to redeem all outstanding shares of our Series A redeemable preferred stock for $12.4 million; and - for general corporate purposes, including capital expenditures and working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. However, we have no current commitments or agreements with respect to any of these types of acquisitions or investments. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. The term loan is payable in quarterly installments through December 2002 and bears interest, at our election, at the bank's prime rate plus 0.5%, or the LIBOR rate plus 2.0%. The interest rate on the term loan was 8.57% at June 30, 2000. The promissory note is payable upon the closing of this offering and bears interest at the rate of 9.0% per annum. DIVIDEND POLICY We have never paid cash dividends on our capital stock. We currently intend to retain future earnings to finance the growth and development of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our bank credit facility currently prohibit the payment of dividends. 18 CAPITALIZATION The following table sets forth our short-term debt and capitalization as of June 30, 2000: - on an actual basis, assuming that our reincorporation in Delaware and a three-for-two stock split had taken place as of June 30, 2000; - on a pro forma basis, giving effect to the conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into an aggregate of 10,662,057 shares of common stock and 3,159,128 shares of Series A redeemable preferred stock; - on a pro forma basis, as further adjusted to reflect the sale by us of shares of common stock in this offering, at an assumed initial public offering price of $ per share after deducting the estimated underwriting discount and offering expenses, and our receipt and application of the net proceeds.
AS OF JUNE 30, 2000 ----------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- ------------ (IN THOUSANDS, EXCEPT SHARE DATA) Current portion of long-term debt........................... $ 600 $ 600 $ -- ======== ======== ======== Long-term debt, net of current portion...................... $ 5,100 $ 5,100 $ -- -------- -------- -------- Mandatorily redeemable securities: Mandatorily redeemable convertible preferred stock, no par value; 4,950,000 shares authorized, 3,159,128 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted..................................... 13,824 -- -- Series A redeemable preferred stock, no par value; 4,950,000 shares authorized, no shares issued or outstanding, actual; 4,950,000 shares authorized, 3,159,128 shares issued and outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted.............................................. -- 12,442 -- Redeemable common stock, no par value; 1,316,250 shares authorized, issued and outstanding, actual; pro forma and pro forma as adjusted............................. 1,997 1,997 1,997 -------- -------- -------- Total mandatorily redeemable securities................... 15,821 14,439 1,997 -------- -------- -------- Stockholders' equity (deficit): Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued or outstanding actual, pro forma and pro forma as adjusted................... -- -- -- Common stock, $0.001 par value; 100,000,000 shares authorized, 3,257,172 shares issued and outstanding, actual; 100,000,000 shares authorized, 13,919,229 shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted(1).................................. 3 14 Additional paid-in capital.............................. 8,208 9,579 Deferred stock-based compensation....................... (4,223) (4,223) (4,223) Notes receivable from stockholders...................... (367) (367) (367) Retained earnings (accumulated deficit)................. (18,010) (18,010) (18,010) -------- -------- -------- Total stockholders' equity (deficit)...................... (14,389) (13,007) -------- -------- -------- Total capitalization.................................. $ 6,532 $ 6,532 $ ======== ======== ========
- -------------------------- (1) Excludes: - 1,793,748 shares issuable upon exercise of options outstanding as of June 30, 2000 under our 1995 and 1997 stock option plans, with a weighted average exercise price of $0.54 per share, and 3,691,000 shares reserved for future grants under our option plans; and - 200,000 shares reserved for issuance under our 2000 employee stock purchase plan. See "Use of Proceeds," "Management--Stock Plans" and "Description of Capital Stock" and Note 7 of Notes to our consolidated financial statements. 19 DILUTION The pro forma net tangible book value (deficit) of our common stock as of June 30, 2000 was approximately $(13.0) million, or $(0.85) per share. Pro forma net tangible book value (deficit) per share represents the amount of our total assets, excluding net intangible assets, less our total liabilities, divided by the total number of shares of common stock outstanding, after giving effect to the conversion of all outstanding shares of our mandatorily redeemable convertible preferred stock into an aggregate of 10,662,057 shares of common stock and 3,159,128 shares of Series A redeemable preferred stock, and the redemption of all outstanding shares of Series A redeemable preferred stock. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock immediately after the offering. After giving effect to the sale by us of shares of common stock in this offering, at an assumed initial public offering price of $ per share, and after deducting the estimated underwriting discount and offering expenses payable by us, the pro forma net tangible book value of our common stock would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value (deficit) per share as of June 30, 2000...................................... $(0.85) Increase in net tangible book value attributable to new public investors...................................... ------ Pro forma net tangible book value per share after the offering.................................................. ------ Dilution per share to new public investors.................. $ ======
The following table summaries, on a pro forma basis, as of June 30, 2000: - the number of shares of common stock purchased from us; - the total consideration paid to us; - the average price per share paid by existing stockholders; and - the price per share paid by new investors, before deducting the estimated underwriting discount and offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ----------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE ---------- ---------- ---------- ---------- ------------- Existing stockholders................ 15,235,479 % $5,325,000 % $ New investors........................ $ ---------- ----- ---------- ----- Total.............................. 100.0% $ 100.0% ========== ===== ========== =====
If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to , or % of the total shares of common stock outstanding after this offering. The information in the above table excludes 1,793,748 shares issuable upon exercise of options outstanding at June 30, 2000 under our 1995 and 1997 stock option plans, with a weighted average exercise price of $0.54 per share. To the extent these options are exercised, there will be further dilution to the new investors. See "Management--Stock Plans" and Note 7 to our consolidated financial statements. 20 SELECTED CONSOLIDATED FINANCIAL DATA You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this prospectus. The consolidated statement of operations data for the years ended March 31, 1998, 1999 and 2000 and the consolidated balance sheet data as of March 31, 1999 and 2000 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the years ended March 31, 1996 and 1997 and the consolidated balance sheet data as of March 31, 1996, 1997 and 1998 are derived from audited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the three month periods ended June 30, 1999 and 2000 and the consolidated balance sheet data as of June 30, 2000 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements include all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations. The results of operations for the three months ended June 30, 2000 are not necessarily indicative of the results that may be expected for any other future period.
THREE MONTHS FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30, ---------------------------------------------------- ------------------- 1996 1997 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenue................................... $35,694 $27,857 $34,165 $38,998 $44,326 $10,516 $11,507 Cost of revenue............................... 22,490 17,507 19,926 23,003 24,053 6,009 5,942 ------- ------- ------- ------- ------- ------- ------- Gross profit(1)............................... 13,204 10,350 14,239 15,995 20,273 4,507 5,565 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development.................... 2,265 3,819 4,887 6,997 7,945 1,597 2,141 Selling, general and administrative......... 8,107 5,226 4,966 5,923 6,903 1,472 1,821 Stock-based compensation.................... -- -- 5,320 262 1,351 411 748 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.................. 10,372 9,045 15,173 13,182 16,199 3,480 4,710 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)....................... 2,832 1,305 (934) 2,813 4,074 1,027 855 Gain (loss) on disposals of property and equipment................................... 19 80 (1,440) 294 436 109 109 Interest and other income (expense), net...... (856) 330 (1,039) (1,089) (684) (181) (95) ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes....................................... 1,995 1,715 (3,413) 2,018 3,826 955 869 Income tax (provision)........................ (798) (686) 1,216 (1,031) (2,052) (530) (652) ------- ------- ------- ------- ------- ------- ------- Net income (loss)............................. $ 1,197 $ 1,029 $(2,197) $ 987 $ 1,774 $ 425 $ 217 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share: Basic....................................... $ 0.07 $ 0.06 $ (0.17) $ 0.33 $ 0.47 $ 0.13 $ 0.05 ======= ======= ======= ======= ======= ======= ======= Diluted..................................... $ 0.07 $ 0.06 $ (0.17) $ 0.01 $ 0.06 $ 0.01 $ 0.00 ======= ======= ======= ======= ======= ======= ======= Weighted average shares(2): Basic....................................... 17,213 17,213 13,008 2,735 3,602 3,028 3,982 ======= ======= ======= ======= ======= ======= ======= Diluted..................................... 17,213 17,213 13,008 14,642 15,908 16,176 16,052 ======= ======= ======= ======= ======= ======= =======
AS OF MARCH 31, ---------------------------------------------------- AS OF JUNE 30, 1996 1997 1998 1999 2000 2000 -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents..................... $ 5 $ 2,298 $ 2,191 $ 4,113 $ 4,911 $ 4,670 Working capital............................... 2,532 3,927 6,674 5,436 5,875 6,455 Total assets.................................. 13,726 13,306 16,703 15,105 16,422 17,817 Long-term debt, including current portion..... 2,930 3,024 16,500 8,250 6,450 5,700 Mandatorily redeemable securities............. -- -- 13,725 14,225 15,821 15,821 Total stockholders' equity (deficit).......... 5,907 7,462 (17,917) (16,943) (15,358) (14,389)
- ------------------------------ (1) Gross profit excludes stock-based compensation of $73,000 for the year ended March 31, 2000 and $60,000 for the three months ended June 30, 2000 which has been combined with other stock-based compensation. (2) See Note 1 of Notes to our consolidated financial statements for an explanation of the calculation of shares used in computing per share amounts. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We design, develop and market high performance integrated circuits for the computing, communications and consumer electronics markets. We were founded in 1972 as a supplier of semi-custom gate-array integrated circuits. In 1991, we entered the timing device market. We introduced our first EMI reduction circuits in 1994, our first zero delay buffers in fiscal 2000, and our initial line of high performance logic integrated circuits in fiscal 2001. In 1997, we decided to focus our efforts on establishing a leadership position in the timing device market and discontinued production of semi-custom gate-array integrated circuits. At that time, we also decided to outsource all wafer fabrication to independent foundries and discontinued operation of our own wafer fabrication facility. All fixed assets related to our wafer fabrication facility were sold, and a $1.4 million loss on the transaction was recorded in fiscal 1998. In December 1997, we recapitalized our company, resulting in a group of investors, led by TA Associates, acquiring a 92% equity interest in our company. In connection with this recapitalization, we received $13.8 million in net proceeds from the sale of equity securities and incurred indebtedness of $15.0 million. An aggregate of 15,896,250 shares out of a total of 17,212,500 outstanding shares of common stock held by our founder were redeemed for $24.3 million, $21.8 million of which was paid in cash and $2.5 million of which was paid by issuance of a promissory note. Our founder retained an 8% equity interest in our company. The recapitalization was accounted for as a leveraged recapitalization such that our assets and liabilities remain at their historical bases for financial reporting purposes. For income tax purposes, the transaction was treated as a taxable business combination such that the financial statements reflect a "step-up" in tax basis. We recorded a $5.3 million stock-based compensation charge in fiscal 1998 primarily related to the repurchase of outstanding stock options in connection with the recapitalization. In July 1998, we disposed of land and a building with a net book value of $2.8 million. We recorded a gain of $3.0 million on the disposal of this property. We subsequently leased the land and building from the buyer and deferred the gain on sale, which is being recognized ratably over the seven-year term of the lease. We recognized $436,000 of the gain during fiscal 2000. We derive all of our revenue from the sale of our integrated circuit products. We sell our products through our direct sales force and indirectly through distributors and manufacturers' representatives. Revenue from product sales to original equipment manufacturers and from sales to distributors who have no, or limited, product return rights and no price protection rights, is recognized upon shipment, net of allowances for estimated returns. When distributors have product return or price protection rights, we defer revenue recognition until the time the distributor sells the product to the end customer. Our international revenue was 69.3%, 80.5% and 75.3% of our total revenue for fiscal 1998, 1999 and 2000, respectively, and 72.5% for the three months ended June 30, 2000. All of our sales are denominated in U.S. dollars. A substantial portion of this international revenue consists of sales to foreign contract manufacturers and assemblers who incorporate our integrated circuits into products for domestic systems manufacturers. We expect that revenue derived from shipments to international 22 customers will continue to represent a significant and growing portion of our total revenue. During fiscal 2000, sales of our products to Apple, Dell and IBM, directly and through distributors and contract manufacturers, accounted for 22.7%, 19.6% and 12.4%, respectively, of our revenue. During the quarter ended June 30, 2000, sales to Apple, Dell and Sanyo accounted for 19.4%, 21.0% and 10.6%, respectively, of our revenues. A significant percentage of our sales are made to distributors and to contract manufacturers and assemblers who incorporate our integrated circuits into products for systems manufacturers, including Apple and Dell. Natsteel Electronics, a contract manufacturer, accounted for 18.8% of our revenue in fiscal 2000. Natsteel Electronics, Global Electronics, one of our Japanese distributors, and Jabil Circuit, another contract manufacturer, accounted for 14.6%, 12.0% and 10.7%, respectively, of our revenue in the quarter ended June 30, 2000. Historically, average selling prices in the semiconductor industry generally, and for our products, have decreased over the life of a particular product. We attempt to maintain gross margins as average selling prices decline through the introduction of new products with higher margins and through manufacturing efficiencies and cost reductions. We believe that as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty. Our cost of revenue consists primarily of fabrication costs, assembly and test costs, costs of materials and overhead from operations. We outsource all our fabrication and assembly operations and a small percentage of our final test operations. Accordingly, a significant portion of our cost of revenue consists of payments to our contract manufacturers. We conduct supply chain management, assembly engineering, quality assurance and documentation control at our facility in Milpitas, California. There can be no assurance that we will be able to reduce our cost of revenue to keep pace with anticipated decreases in average selling prices. Our gross profit margins vary among our product families. Generally, our gross margins are higher on our EMI reduction integrated circuits and zero delay buffers than on our clocks. We expect that our overall gross margins will fluctuate from period to period as a result of shifts in product mix, anticipated decreases in average selling prices and our ability to reduce product costs. Research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, the cost of developing prototypes and fees paid to consultants. We charge all research and development expenses to operations as incurred. We believe that continued investment in research and development is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in absolute dollars in future periods. Selling expenses consist primarily of sales commissions, salaries and related expenses for personnel engaged in sales, marketing and field support activities, and other costs associated with the promotion of our products. We intend to pursue aggressive selling and marketing campaigns and to expand our direct sales organization. We therefore expect that our selling expenses will increase in absolute dollars in future periods. General and administrative expenses consist primarily of salaries and related expenses for administrative and finance personnel, professional fees and other corporate expenses. We expect that, in support of our continued growth and our operations as a public company, general and administrative expenses will continue to increase in absolute dollars in the foreseeable future. In connection with the grant of stock options to employees between April 1, 1999 and June 30, 2000, we recorded deferred stock-based compensation of $3.6 million in fiscal 2000 and $2.1 million in fiscal 2001, representing the difference between the deemed value of our common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred stock-based compensation is presented as a reduction of stockholders' equity, with accelerated amortization recorded over the vesting period which is typically four years. We amortized $974,000 and $689,000 of deferred stock-based compensation during fiscal 2000 and the three months ended June 30, 2000. The 23 amount of stock-based compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. RESULTS OF OPERATIONS The following table sets forth consolidated statement of operations data as a percentage of revenue for the periods indicated:
FISCAL YEAR ENDED THREE MONTHS MARCH 31, ENDED JUNE 30, --------------------------------- ------------------- 1998 1999 2000 1999 2000 -------- -------- -------- -------- -------- Net revenue.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.......................................... 58.3 59.0 54.3 57.1 51.6 ----- ----- ----- ----- ----- Gross profit............................................. 41.7 41.0 45.7 42.9 48.4 ----- ----- ----- ----- ----- Operating expenses: Research and development............................... 14.3 17.9 17.9 15.2 18.6 Selling, general and administrative.................... 14.5 15.2 15.6 14.0 15.9 Stock-based compensation............................... 15.6 0.7 3.0 3.9 6.5 ----- ----- ----- ----- ----- Total operating expenses............................. 44.4 33.8 36.5 33.1 41.0 ----- ----- ----- ----- ----- Operating income (loss).................................. (2.7) 7.2 9.2 9.8 7.4 Gain (loss) on disposals of property and equipment....... (4.2) 0.8 1.0 1.0 0.9 Interest and other income (expense), net................. (3.1) (2.8) (1.6) (1.7) (0.7) ----- ----- ----- ----- ----- Income (loss) before provision for income taxes.......... (10.0) 5.2 8.6 9.1 7.6 Income tax (provision) benefit........................... 3.6 (2.7) (4.6) (5.1) (5.7) ----- ----- ----- ----- ----- Net income (loss)........................................ (6.4)% 2.5% 4.0% 4.0% 1.9% ===== ===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 NET REVENUE. Net revenue increased by 9.4% to $11.5 million in the three months ended June 30, 2000 from $10.5 million in the same period in 1999. The increase in net revenue was the result of increased unit sales of our products due to new product design wins and customer applications, offset by a slight decrease in average selling prices. We expect that average selling prices will continue to decline in the near term until sales volumes of our new higher-margin products increase. GROSS PROFIT. Gross profit increased by 23.5% to $5.6 million in the three months ended June 30, 2000 from $4.5 million in the same period in 1999. Gross margin increased to 48.4% in the three months ended June 30, 2000 compared to 42.9% in the same period in 1999. The increase was due to a shift in product mix to our higher-margin EMI reduction integrated circuits and zero delay buffer products and to lower per unit manufacturing costs. Gross profit for the three months ended June 30, 2000 excludes $60,000 of stock-based compensation. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 34.1% to $2.1 million in the three months ended June 30, 2000 from $1.6 million in the same period in 1999. The increase was primarily due to the hiring of additional development personnel, an increase in fees paid to consultants and increased prototyping costs. These increased expenditures were primarily related to the development of new integrated circuit designs using smaller manufacturing geometry and customizations. Research and development expenses increased as a percentage of revenue to 18.6% in the three months ended June 30, 2000, compared to 15.2% in the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 23.7% to $1.8 million in the three months ended June 30, 2000 from $1.5 million in the 24 same period in 1999. The increase was primarily due to increased sales and marketing expenses related to the expansion of our direct international sales force, the hiring of additional applications engineers and higher sales commissions resulting from increased revenue. INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income (expense) was $95,000 in the three months ended June 30, 2000, compared to a net expense of $181,000 in the same period in 1999. The improvement resulted primarily from a decrease in the average balance of our outstanding indebtedness. PROVISION FOR INCOME TAXES. Our effective income tax rate was 75% and 55.5% for the three month periods ended June 30, 2000 and June 30, 1999, respectively. The effective rates were higher than our statutory rate due to the effect of stock-based compensation charges. FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999 NET REVENUE. Net Revenue increased by 13.7% to $44.3 million in fiscal 2000 from $39.0 million in fiscal 1999. The increase in net revenue resulted primarily from increased unit sales of our EMI reduction integrated circuits and clocks and the introduction of our zero delay buffer product family in the second half of fiscal 2000. These increased unit sales were offset slightly by a decline in average selling prices. GROSS PROFIT. Gross profit increased by 26.7% to $20.3 million in fiscal 2000 from $16.0 million in fiscal 1999. Gross margin increased to 45.7% in fiscal 2000, compared to 41.0% in fiscal 1999. The increase was due to a shift in product mix toward an increased percentage of higher-margin products, including new clocks and zero delay buffers in fiscal 2000. Lower per unit manufacturing costs also contributed to the improvement in gross margin. Gross profit for the year ended March 31, 2000 excludes stock-based compensation of $73,000. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 13.5% to $8.0 million in fiscal 2000 from $7.0 million in fiscal 1999. Research and development expenses increased as a result of planned increases in headcount, consultants' fees and prototyping costs for the design of new clocks and zero delay buffers. Research and development expenses remained at 18.0% of revenue during fiscal 1999 and 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 16.5% to $6.9 million in fiscal 2000 from $5.9 million in fiscal 1999. The increase was primarily due to increased sales and marketing expenses related to the expansion of our direct international sales force, the hiring of additional applications engineers and higher sales commissions resulting from increased revenue. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense was $773,000 in fiscal 2000 compared to $1,098,000 in fiscal 1999. The improvement resulted primarily from a decrease in the average balance of our outstanding indebtedness. PROVISION FOR INCOME TAXES. Our effective tax rate was 54% in fiscal 2000 compared to 51% in fiscal 1999. The effective rates were higher than our statutory rate due to the effect of stock-based compensation charges. FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998 NET REVENUE. Net Revenue increased by 14.1% to $39.0 million in fiscal 1999 from $34.2 million in fiscal 1998. The increase in net revenue resulted primarily from increased unit sales of our EMI reduction integrated circuits and clocks as the result of the addition of new customers with multiple design wins, partially offset by a decrease in average selling prices. 25 GROSS PROFIT. Gross profit increased by 12.3% to $16.0 million in fiscal 1999, from $14.2 million in fiscal 1998. Gross margin decreased to 41.0% in 1999 compared to 41.7% in 1998. The decrease was due to the decline in average selling prices. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by 43.2% to $7.0 million in fiscal 1999 from $4.9 million in fiscal 1998. The increase was due to increased headcount and prototype costs related to the design of higher performance products. Research and development expenses increased as a percentage of revenue to 17.9% in fiscal 1999 from 14.3% in fiscal 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 19.3% to $5.9 million in fiscal 1999 from $5.0 million in fiscal 1998. The increase was due primarily to higher levels of sales commissions and increased headcount in the marketing department. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense was $1.1 million in fiscal 1999 compared to $800,000 in fiscal 1998. During fiscal year 1999, interest expense increased due to an increase in the average balance of our outstanding indebtedness. PROVISION FOR INCOME TAXES. Our effective tax rate was 51% in fiscal 1999 compared to 36% in fiscal 1998. The tax benefit was the result of our net losses in fiscal 1998. 26 QUARTERLY RESULTS OF OPERATIONS The following tables present unaudited quarterly data for the nine quarters ended June 30, 2000, and this data expressed as a percentage of revenue for such quarters. In our opinion, this unaudited information includes all adjustments, consisting of only normal recurring adjustments that we consider necessary to present fairly, in all material respects, the unaudited quarterly results when read in conjunction with our audited consolidated financial statements. Results of operations for any quarter are not necessarily indicative of the results to be expected for the entire fiscal year or for any future period.
QUARTER ENDED -------------------------------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1998 1998 1998 1999 1999 1999 1999 2000 2000 -------- --------- -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Net revenue.................. $9,091 $10,745 $10,042 $9,120 $10,516 $12,498 $11,511 $9,801 $11,507 Cost of revenue.............. 5,530 6,269 5,903 5,301 6,009 6,872 6,242 4,930 5,942 ------ ------- ------- ------ ------- ------- ------- ------ ------- Gross profit................. 3,561 4,476 4,139 3,819 4,507 5,626 5,269 4,871 5,565 ------ ------- ------- ------ ------- ------- ------- ------ ------- Operating expenses: Research and development... 1,342 1,617 2,086 1,952 1,597 1,919 1,903 2,526 2,141 Selling, general and administrative........... 1,404 1,659 1,474 1,386 1,472 1,692 1,768 1,971 1,821 Stock-based compensation... 64 64 64 70 411 108 323 509 748 ------ ------- ------- ------ ------- ------- ------- ------ ------- Total operating expense................ 2,810 3,340 3,624 3,408 3,480 3,719 3,994 5,006 4,710 ------ ------- ------- ------ ------- ------- ------- ------ ------- Operating income (loss)...... 751 1,136 515 411 1,027 1,907 1,275 (135) 855 Gain (loss) on disposals of plant and equipment........ -- 76 109 109 109 109 109 109 109 Interest and other income (expense), net............. (411) (275) (227) (176) (181) (168) (179) (156) (95) ------ ------- ------- ------ ------- ------- ------- ------ ------- Income (loss) before provision for income taxes...................... 340 937 397 344 955 1,848 1,205 (182) 869 Income tax provision......... (174) (478) (203) (176) (530) (782) (612) (128) (652) ------ ------- ------- ------ ------- ------- ------- ------ ------- Net income (loss)............ $ 166 $ 459 $ 194 $ 168 $ 425 $ 1,066 $ 593 $ (310) $ 217 ====== ======= ======= ====== ======= ======= ======= ====== =======
QUARTER ENDED -------------------------------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1998 1998 1998 1999 1999 1999 1999 2000 2000 -------- --------- -------- -------- -------- --------- -------- -------- -------- Net revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue.............. 60.8 58.3 58.8 58.1 57.1 55.0 54.2 50.3 51.6 ----- ----- ----- ----- ----- ----- ----- ----- ----- Gross profit................. 39.2 41.7 41.2 41.9 42.9 45.0 45.8 49.7 48.4 ----- ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Research and development... 14.8 15.0 20.8 21.4 15.2 15.3 16.5 25.8 18.6 Selling, general and administrative........... 15.4 15.5 14.7 15.2 14.0 13.5 15.4 20.1 15.9 Stock-based compensation... 0.7 0.6 0.6 0.8 3.9 0.9 2.8 5.2 6.5 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total operating expense................ 30.9 31.1 36.1 37.4 33.1 29.7 34.7 51.1 41.0 ----- ----- ----- ----- ----- ----- ----- ----- ----- Operating income (loss)...... 8.3 10.6 5.1 4.5 9.8 15.3 11.1 (1.4) 7.4 Gain (loss) on disposals of plant and equipment........ 0.0 0.7 1.1 1.2 1.0 0.9 0.9 1.1 0.9 Interest and other income (expense), net............. (4.6) (2.6) (2.2) (1.9) (1.7) (1.4) (1.5) (1.6) (0.7) ----- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision for income taxes...................... 3.7 8.7 4.0 3.8 9.1 14.8 10.5 (1.9) 7.6 Income tax provision......... (1.9) (4.4) (2.1) (2.0) (5.1) (6.3) (5.3) (1.3) (5.7) ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)............ 1.8% 4.3% 1.9% 1.8% 4.0% 8.5% 5.2% (3.2)% 1.9% ===== ===== ===== ===== ===== ===== ===== ===== =====
27 NET REVENUE. Our quarterly operating results have been affected by seasonal factors. Original equipment manufacturers that purchase our integrated circuits for incorporation into personal computers and consumer electronics typically increase their purchases during the pre-year-end holiday period. As a result, our revenues have historically peaked in the second and third quarter of each fiscal year and declined in the fourth quarter of the fiscal year. We expect these seasonal fluctuations to continue for the foreseeable future. The increases in quarterly revenue from one fiscal year to the next were primarily due to increased unit shipments as the result of new customer design wins. GROSS PROFIT. Gross margins improved in each quarter of fiscal 2000 over the corresponding quarter in fiscal 1999 due to a shift in product mix toward our higher-margin EMI reduction and zero delay buffer integrated circuits and to reductions in per unit manufacturing costs. Gross margins have varied on a sequential quarterly basis due to seasonal revenue levels and quarterly fluctuations in product mix. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased over the nine-quarter period primarily due to the hiring of additional development personnel and consultants and an increase in prototyping costs. The high expenditures in the quarters ended December 31, 1998 and March 31, 2000 were due to unusually large numbers of prototypes delivered during those quarters. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses fluctuate primarily as the result of sales commissions, which are based on quarterly revenue. The unusually high expenditures in the quarters ended March 31, 2000 and June 30, 2000 were related to the expansion of our direct international sales force and the hiring of additional applications engineers. We may experience a delay in generating or recognizing revenue for a number of reasons. Orders at the beginning of each quarter typically do not equal expected revenues for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining orders in a quarter for shipment in that quarter to achieve our revenue objectives. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified time frames without significant penalty. Most of our expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed in the near term. In addition, our expense levels are based in part on our expectations regarding future revenues. As a result, any shortfall in revenue relative to our expectations could cause significant changes in our operating results from quarter to quarter. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of our control. Due to the foregoing factors, you should not rely on our quarterly revenue and operating results to predict our future performance. LIQUIDITY AND CAPITAL RESOURCES Since fiscal 1998 we have financed our operations through net cash flow from our operations. At June 30, 2000, we had $4.7 million of cash and cash equivalents and $6.5 million of working capital. Net cash provided by (used in) operating activities was $(2.3) million, $4.9 million and $3.9 million in fiscal 1998, 1999 and 2000, respectively. The net cash used in fiscal 1998 primarily represented our net loss and cash used to finance our increases in accounts receivable and inventory. In fiscal 1999, net income and an increase in accounts payable were the primary sources of cash from operating activities. In fiscal 2000, net income and an increase in accrued expenses and other liabilities, offset by a decrease in accounts receivable, were the primary sources of cash from operating activities. 28 Net cash provided by (used in) investing activities was $(1.0) million, $5.1 million, and $(1.4) million in fiscal 1998, 1999 and 2000, respectively. Net cash used in investing activities in fiscal 1998 and fiscal 2000 primarily represented purchases of equipment for development activities. Net cash provided by investing activities in fiscal 1999 primarily represented the proceeds from the sale of our building. We intend to purchase approximately $2.0 million of equipment to be used in development activities in fiscal 2001. Net cash provided by (used in) financing activities was $3.2 million, ($8.0) million and $(1.7) million in fiscal 1998, 1999 and 2000, respectively. In fiscal 1998, we sold preferred stock and incurred long-term debt to finance the repurchase of 10,597,500 shares of outstanding common stock in conjunction with our recapitalization. Net cash used for financing activities in fiscal 1999 and 2000 primarily represented principal payments on our long-term debt. We have a line of credit arrangement under a loan agreement with a bank which allows for borrowings up to the lesser of $5.0 million or (i) 80% of our net outstanding eligible accounts receivable balances, plus (ii) 50% of our net outstanding eligible foreign accounts receivable, plus (iii) 100% of our net outstanding eligible receivables supported by a letter of credit from a financial institution. The loan agreement also includes a term loan arrangement. Borrowings under our line of credit and our term loan bear interest, at our election, at either the bank's prime rate, which was 9.5% at June 30, 2000, plus 0.5%, or the LIBOR rate, which was 6.57% at June 30, 2000, plus 2%. The line of credit expires on December 16, 2002. There were no borrowings outstanding under this line of credit arrangement at June 30, 2000. In connection with our recapitalization, we borrowed $15.0 million from a bank under our term loan arrangement. The term loan is payable in quarterly installments of principal and interest through December 2002. Debt issuance costs of $325,000 are being amortized over the term of the term loan. During fiscal 2000, we made principal payments on the term loan aggregating $1.8 million, of which $900,000 were made in advance of the scheduled due date. During the three month period ended June 30, 2000, the Company made principal payments on the term loan aggregating $750,000, all of which were made in advance of the scheduled due date (unaudited). We believe that the net proceeds from this offering, together with our current balances of cash, anticipated cash flow from operations and borrowings available under our line of credit will satisfy our anticipated working capital and capital expenditure requirements for at least the next 12 months. After the next 12 months, our capital and operating requirements will depend on many factors, including the levels at which we maintain inventory and accounts receivable, costs of securing access to adequate manufacturing capacity and increases in our operating expenses. Additional capital may also be required for the consummation of any acquisitions, businesses, products or technologies. To the extent that the funds generated from this offering, together with existing resources and cash generated from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private financing or borrowings. No assurance can be given than additional funds will be available or that we can obtain funds on terms favorable to us. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS INTEREST RATE RISK Our cash and cash equivalents are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short maturities of our investments, the carrying value approximates the fair value. In addition, we do not use our investments for trading or other speculative purposes. We have performed an analysis to assess the potential effect of reasonably possible near-term changes in interest and foreign currency exchange rates. The effect of such rate changes is not expected 29 to be material to our results of operations, cash flows or financial condition. All transactions to date have been denominated in U.S. dollars. FOREIGN CURRENCY EXCHANGE RISK Substantially all of our sales are denominated in U.S. dollars and as a result, we have relatively little exposure to foreign currency exchange risk with respect to any of our sales. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supersedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized on the balance sheet at their fair market value, and that the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivative. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of Effective Date of FASB Statement No. 133," is effective for all fiscal quarters and years beginning after June 15, 2000. We do not currently have, or plan to enter into, forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for hedging, trading or speculative purposes. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. The SEC is preparing to issue interpretative guidance relating to SAB 101, and the FASB continues to address revenue and other related accounting issues. Our management believes that we are in compliance with all of the rules and related guidance as they currently exist related to SAB 101. However, any changes to generally accepted accounting principles in these areas could impact the accounting for our operations. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--An Interpretation of APB Opinion No. 25" (FIN 44). This Interpretation clarifies the definition of employee for the purposes of applying Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. 30 BUSINESS OVERVIEW We design, develop and market high performance integrated circuits for the computing, communications and consumer electronics markets. Our product portfolio includes timing devices and EMI reduction and high performance logic integrated circuits. We believe our gate-array-based architecture, proprietary input/output structures and extensive mixed-signal cell library enable us to deliver flexible, high performance solutions to our customers faster than many of our competitors, which in turn assists our customers in achieving their time-to-market objectives. Our design methodology gives us fast design and prototype cycle times and enables rapid new product introductions. We have leveraged our design expertise to develop a portfolio of mixed signal silicon platforms that can be quickly customized to produce different products in the last few manufacturing steps without compromising performance. We derive all of our revenues from the sales of our integrated circuit products. We sell our integrated circuits to some of the leading original equipment manufacturers in the computing, communications and consumer electronics markets. We believe that we have developed a compelling product portfolio, as evidenced by our design wins with industry leading manufacturers, including Apple, Canon, Cisco, Dell, Fujitsu Siemens, Hewlett Packard, IBM, NEC, Panasonic, Pioneer, Sharp, Samsung, Sanyo, Sony and Xerox. For example, our timing devices are designed into the Intel reference 815E mobile motherboard and are referenced in the design reference guide for Intel 815E chipset-based notebooks. In addition, we have earned design wins at Cisco, which have resulted in the integration of our products into some of Cisco's leading edge routers. We have also successfully penetrated the digital camera, DVD and minidisc player market with recent design wins at Sanyo, Sony and Kenwood. INDUSTRY BACKGROUND DEMAND FOR HIGH PERFORMANCE ELECTRONIC SYSTEMS Electronic systems play an increasingly important role in our lives, as evidenced by the growth in personal computing, communications and consumer electronics markets. The growth of these markets has been driven by the demand for, and availability of, electronic systems characterized by ever-improving performance, flexibility, reliability and functionality, as well as decreasing size, cost and power consumption. In addition, the dramatic growth of the Internet has resulted in consumer demand for greater bandwidth and higher speed. These demands have resulted in both the development of new, and the enhancement of existing, products in the computing, communications and consumer markets, such as digital cameras, DVD players, game consoles, internet appliances, network routers and switches, notebook computers and set-top boxes. Advances in integrated circuits and improvements in semiconductor technology have contributed significantly to the increased performance of, and demand for, these electronic systems. These advances have also enabled the continuing transition from analog to digital systems. The performance of the components of these systems, which include microprocessors, memory, logic, and timing devices, must continue to improve in order to enable the continued development of higher performance systems. THE COMPONENTS RESPONSIBLE FOR SYSTEM PERFORMANCE Electronic systems generate and manipulate electrical signals using primarily four types of components: - control integrated circuits, such as microprocessors and controllers, which perform arithmetic and control functions; 31 - memory integrated circuits, which store data and instructions for future retrieval; - logic integrated circuits, which control the transfering, buffering and routing of data; and - timing devices, which generate, buffer and distribute precise timing signals required to synchronize the operation of control and memory integrated circuits. While control and memory integrated circuits primarily consist of digital circuits, integrated circuit timing devices and high performance logic typically consist of digital and analog circuits, or mixed-signal circuits. Digital circuits process discrete electrical signals in a binary format, while analog circuits process continuous electrical signals over a specified range. Mixed-signal circuits process both digital and analog signals on a single integrated circuit to achieve higher levels of integration and enhanced performance. The development of these mixed-signal integrated circuits incorporates a level of circuit design complexity that presents significant development challenges, requiring a high level of design expertise. THE ROLE OF TIMING DEVICES IN ELECTRONIC SYSTEMS Timing devices enable communication among the components within systems as well as between systems. For proper communication between devices, their input and output signals must be coordinated. Timing devices are often described as providing the "heartbeat" of a system, as they generate the pulse by which all the system's components coordinate their communication. Historically, the crystal oscillator has dominated the timing device market. A crystal oscillator contains a piece of quartz that vibrates at a single and fixed frequency, producing a timing signal. Although crystal oscillators can meet the timing requirements of relatively simple electronic systems, they are not ideally suited for many of the timing functions required in more complex systems. For example, each crystal oscillator can generate only one base frequency and, therefore, a separate crystal oscillator is required for each base frequency generated within a system. Most complex systems, such as personal computers, use multiple frequencies in their operation making the use of crystal oscillators in such systems space and cost-prohibitive. Another shortcoming of the crystal oscillator is that, in many applications, an additional integrated circuit is required to amplify or multiply the oscillator signal. Furthermore, crystal oscillators tend to become more expensive and less reliable at the higher frequencies required by high performance systems. Over the last decade, the shortcomings of crystal oscillators have caused the personal computing market to shift to the use of a type of integrated circuit timing device known as a clock. A single clock can generate multiple base frequencies, enabling the replacement of multiple crystals with a single timing device, thereby lowering cost. Clocks also produce high quality signals over a broad spectrum of frequencies, including the higher frequencies required for high performance systems. Another benefit of clocks is their ability to generate multiple copies of the same frequency while maintaining high signal integrity. In addition, clocks provide frequency selection, which permits system manufacturers to select the clock frequencies, thereby significantly reducing system development time. As digital solutions become more pervasive, the same transition from crystal oscillators to clocks that the computing market experienced is now occurring in many other high volume applications, such as digital cameras, DVD players, game consoles, internet appliances, network routers and switches and set-top boxes. According to industry sources, the total market for clocks and crystal oscillators is expected to grow from $2.8 billion in 1999 to over $3.8 billion by 2001, an 18% compounded annual growth rate. In 1999, the market for clocks was approximately $378 million, or 14% of the total market for clocks and crystal oscillators. The market for clocks is expected to grow to over $850 million, or 23% of the total market, by 2001, a 50% compounded annual growth rate. Another category of timing device, the zero delay buffer, is an integrated circuit that generates multiple outputs from a single input signal received from a timing device without causing the delay 32 typically created when an electronic signal is transmitted through a system. Zero delay buffers are increasingly being used in complex, high-speed systems such as computer servers, workstations and networking systems, where data transfers at optimum speeds are essential. THE ROLE OF HIGH PERFORMANCE LOGIC IN ELECTRONIC SYSTEMS Logic integrated circuits control the transfer, buffering and routing of data between system components. Without a very high degree of precision in the transfer, buffering and routing of electrical signals, the system either will operate at a degraded performance level or crash. Systems with large memory and energy efficiency requirements, such as computer servers and networking routers, are increasingly requiring high performance, low-power buffering logic. These products can be sold as complements to zero delay buffers in many applications. According to Insight Onsite, this high performance buffering logic segment is expected to grow from $370 million in 2000 to over $478 million by 2003. PERFORMANCE CHALLENGES Electronic system trends, including analog to digital conversion and increasing performance and functionality, have driven the demand for high-speed, high-performance integrated circuits to handle the transfer, routing, buffering and timing of digital and analog signals, at high speeds with minimal loss of signal quality. In order to meet the market demand for higher performance systems, designers require integrated circuits that effectively address the following performance issues: - PROPAGATION DELAY. Propogation delay refers to the time required to transfer an electrical signal from a source to a destination. Long propagation delays create signal transfer bottlenecks and reduce system speed. - JITTER. Jitter refers to the inevitable random fluctuations in the frequency and phase of signals. Excess jitter in a signal can cause a loss of data or a system crash. - SKEW. Skew refers to the timing relation between the arrival of two or more signals at a designated place in the integrated circuit or system. The need to wait for all signals to arrive before a function can be performed results in added delay, and thus, lower system performance. - EMI. EMI is a phenomenon that occurs when electromagnetic waves within systems interfere with other electronic signals. All operating circuits emit electromagnetic waves. EMI can impair system performance and interfere with electronic systems in close proximity. THE GROWING IMPORTANCE OF EMI High performance computing, communications and consumer electronics systems operate at high frequencies and, as a result, emit elevated levels of EMI. These high performance systems are also particularly susceptible to system disruption due to incoming EMI. When EMI becomes too high at one frequency, it interferes with communications systems using that frequency. Because EMI disrupts the operations of cellular phones, televisions and other communications systems, regulatory agencies worldwide place strict limitations on the peak emissions allowed from any electronic device. For example, the Federal Aviation Administration bans the use of computers and other electronic equipment during take-offs and landings to prevent EMI from affecting avionics instruments. As a result of EMI regulation by the Federal Communications Commission, manufacturers of electronic equipment must reduce EMI to remain in compliance with governmental standards. Manufacturers have employed a variety of methods to solve the EMI problem, such as the use of shielding material, most of which have proven to increase end product size and weight and to be costly and time consuming to deploy. Spread spectrum technology has become the EMI reduction approach of choice because of its flexibility, ease of use and cost advantages. This technique is used to modulate 33 the output frequency of a clock generator by a very small percentage, thus reducing the peak energy generated by the occurrence of multiple signal transitions without compromising the precision timing requirements of the system. INDUSTRY DEMANDS In order to meet the demand for higher performance systems in the computing, communications and consumer electronics markets, systems manufacturers require high performance integrated circuits with programmable features that allow the manufacturers to rapidly design and test systems, assisting them in meeting their time-to-market and cost objectives. Due to both short design time and limited product life cycles that these manufacturers face, they require integrated circuit vendors to develop products rapidly and to deliver them in volume. In addition, manufacturers need solutions that reduce the overall footprint and cost of ownership of timing devices in their systems, while at the same time, effectively handling some of the associated system performance issues such as propagation delay, jitter, skew and EMI. Several major market trends have made system reliability at high frequency and high data transfer rates even more challenging. System clock frequencies have increased at a very rapid rate, shortening the time available to perform data transfers. The increasing system-wide EMI emissions that result from higher-frequency integrated circuits have compelled system designers to develop and implement new ways to further reduce these emissions. These factors all increase the need for very high performance timing, EMI reduction and logic circuits with outstanding performance specifications. Integrated circuit vendors are further required to accomplish these tasks in a cost-effective manner that responds flexibly to specific customer needs. THE IMI SOLUTION We design, develop and market high performance integrated circuits for the computing, communications, and consumer electronics markets. Leveraging our extensive mixed-signal design expertise and applications knowledge, we combine quick time-to-market design capabilities and customer responsiveness to provide compelling solutions for these markets. Our product portfolio includes clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits. The key elements of our solution are: UNIQUE AND FLEXIBLE DESIGN SOLUTION. We believe our gate-array-based architecture, proprietary input/output structures and extensive mixed-signal cell library enable us to deliver flexible, high performance solutions to our customers faster than many of our competitors, which in turn assists our customers in achieving their time-to-market objectives. Our design methodology gives us fast design and prototype cycle times and enables rapid new product introductions. Our product design architectures have been optimized to provide flexibility during the development process while minimizing costs. In addition, our flexible design methodology enables us to customize our products at the end of the manufacturing process, thereby effectively reducing our inventory exposure. If any particular component is in higher demand than forecasted, base material can be diverted to that product, enabling us to respond rapidly to specific customer demands. HIGH PERFORMANCE PRODUCT SOLUTIONS. - CLOCKS. We manufacture all of our clock products using the most advanced process technology in the timing device industry. This process technology, coupled with our advanced designs, enables us to provide timing devices that operate at high frequencies and well within industry standards for jitter and skew. A majority of our timing devices incorporate spread spectrum technology to reduce EMI. This combination of high frequency, high performance and EMI 34 reduction features makes our timing devices an ideal choice for manufacturers of high performance systems. - ZERO DELAY BUFFERS. We offer zero delay buffers in a wide variety of configurations to meet various customer cost and performance targets. Our zero delay buffers offer excellent jitter and input/output skew performance over a broad range of frequencies, providing our customers with additional design flexibility and performance margins. - EMI REDUCTION INTEGRATED CIRCUITS. Through the use of spread spectrum technology, we provide manufacturers with a cost-effective EMI reduction solution. We have leveraged our early EMI reduction research to implement variations of this technique, including programmable spread percentage and simplified spread profiles. Consequently, we believe we provide the most comprehensive EMI reduction portfolio currently available, offering our customers a wide range of alternatives in performance and cost. - HIGH PERFORMANCE LOGIC INTEGRATED CIRCUITS. We believe we offer the highest performance 1.8 volt to 3.3 volt logic available in the market today, with typical propagation delays as low as one nanosecond. Based on our proprietary technology, our high-speed logic integrated circuits offer superior signal integrity compared to alternative commercially available solutions. This provides our customers with higher system performance and better system design margin. BROAD FEATURE SET. We offer products with a wide range of features and integration levels to address a broad range of system requirements. Our clock products, for example, now include a variety of programmable features, including incremental frequency selection, EMI reduction control, and features that can alter device functionality. We have developed unique programmable features, such as programmable EMI control, or Dial-a-dB, and programmable frequency adjustment, or Dial-a-Frequency, thus increasing functionality and performance, without increasing package size or cost. In addition, our products are software programmable, enabling system designers to control the configuration and functionality of the device. These features give system designers the ability to more rapidly design and test systems, thereby achieving faster time-to-market and lower costs. CUSTOMER RESPONSIVENESS. We develop long term relationships with our customers by working closely with their development engineers and providing quality customer service. We believe our unique fast time-to-market design capability enables us to respond to customer requests more rapidly than our competition. In addition, our production planning organization works closely with customer procurement groups to maintain aggressive product lead times, excellent on time delivery performance and flexible delivery terms. Some of the key factors that enable us to respond quickly to our larger customers includes electronic data exchange capability, remote warehousing programs, annual purchasing agreements and other joint development projects and other services intended to enhance responsiveness. Our service-oriented approach has allowed us to work closely with leading systems manufacturers, understand and address their current needs and anticipate their future requirements. OUR STRATEGY Our objective is to be a leading supplier of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits to the computing, communications and consumer markets. Key elements of our strategy include: FURTHER EXPAND MARKET SHARE. Our strategy is to continue strengthening our position as an industry leader in the timing and EMI markets and to rapidly expand market share in the high performance logic market. We intend to further penetrate existing customers in our target markets by leveraging our design wins to pursue additional design wins on complementary products. Further, we intend to expand our sales, marketing and applications support organizations in order to establish new customer relationships in our target markets. 35 LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH GROWTH MARKETS. Our leading timing and EMI solutions have been and, we believe, will continue to be a point of entry into high-growth markets. We believe that timing and EMI solutions will increasingly be adopted in rapidly growing communications and consumer products markets such as DVD players, digital cameras, game consoles, internet appliances, network routers and switches and set-top boxes. In addition, we believe that the high level of technical support we provide will enable us to retain and cultivate customer relationships in the existing and emerging markets for our products. EXTEND OUR LEADERSHIP IN THE EMI MARKET. We intend to continue to be the EMI solution provider of choice across the computing, communications and consumer markets. Leveraging years of development, we offer the industry's most comprehensive EMI reduction product portfolio. We plan to continue to focus our internal resources on product development to remain at the forefront of EMI technology. FURTHER PENETRATE INDUSTRY LEADERS. Our strategy is to leverage our proven expertise in producing high performance products to further penetrate leading accounts, such as Cisco and Lucent in the communications market, Apple, Dell and IBM in the computing market and Sanyo and Sony in the consumer market. We believe that establishing accounts with these industry leaders will enable us to attract other customers. Additionally, we target industry leaders like AMD, ATI, Intel, nVidia and VIA that set the specifications for future system designs. We work closely with these companies to be adopted into their reference platforms. This enables broad acceptance of our products with leading manufacturers. CONTINUE TO EXPAND PRODUCT OFFERINGS. We currently offer one of the most extensive timing solutions in the industry and more EMI reduction products than any of our competitors. We plan to continue to expand our portfolio by developing new timing, EMI reduction and logic products and to transition products over time to new product families and new manufacturing processes as product performance requirements and process technologies evolve. Our design methodology enables us to customize our products to individual system requirements rapidly while enjoying the economies of scale of sharing the same base die with numerous other products. 36 PRODUCTS We offer a portfolio of product families consisting of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits for the computing, communications and consumer electronics markets. Our products are based upon a flexible platform with which we are able to quickly and easily build new products. We focus our product development efforts on applications in areas where we have identified a market opportunity and a large customer need. As of June 30, 2000, our offerings included over 100 products, of which more than 50% have been introduced during the last twelve months. The following table summarizes our current product families: NUMBER OF PRODUCT FAMILY PRODUCTS PRINCIPAL APPLICATIONS Clocks: Computing 54 desktop computers notebook computers servers and workstations Application Specific 12 digital cameras DVD players minidisc players peripherals Zero Delay Buffers 17 memory modules network routers and switches servers and workstations EMI Reduction Integrated Circuits 19 digital cameras DVD players peripherals High Performance Logic Integrated Circuits 10 network routers and switches servers and workstations
CLOCKS Our clocks have jitter and skew performance that is typically well within industry standard specifications. These products incorporate many features including hard-wired and software controls for frequency selection, spread spectrum modulation control, functional configuration, testability and power controls. We have added registers and serial data interface to our clocks to further increase functionality. All of our computer clocks include spread spectrum technology to reduce EMI, and almost all have features to allow the user to tune the amount of spread required for their particular system to meet FCC regulations. Our clocks incorporate low noise output drivers to minimize both the internal and external noise created by faster output edge rates. For extremely high frequency architectures, we have optimized high-performance differential outputs to produce clock outputs capable of running at frequencies well in excess of the requirements of most current electronic systems. COMPUTING APPLICATIONS We develop products based on the specifications and requirements of Intel, other manufacturers and major third party vendor requirements. This has led to the development of over 50 products specifically designed for desktop and high-performance computing applications. Due to the trend of 37 integrating more clocks into a single component, most hard-wired control functions have been combined with output functionality utilizing dual mode pins. Notebook computer clocks require high precision clocks, programmability, spread spectrum and other functional controls. Due to the need for low power modes, these clocks tend to incorporate more features related to power control and reduction, such as low frequency modes or various power down or sleep modes. The clocks for these applications tend to be assembled in small pin count packages, and tend to be offered in a smaller range of frequency combinations and number of clock outputs. To address this market, we offer products that operate at lower frequencies and within a smaller range of frequencies and are assembled in packages with fewer pins. APPLICATION SPECIFIC CLOCKS We have worked directly with several key manufacturers to develop application specific clocks for products such as digital cameras, DVD players, game consoles and printers. After developing the product, we also offer these clocks as standard products. These low skew, low jitter clocks incorporate a subset of the features found in our computing clocks, and in general are offered in smaller pin count packages. ZERO DELAY BUFFERS Leveraging our clock design expertise, we have developed a family of low skew, programmable zero delay buffers. These devices accept an input reference clock signal and then synchronize it with an output signal. Most of our zero delay buffers have external feedback loops that give the user the ability to adjust the input to output delays by loading or delaying the feedback signal. Our zero delay buffers run at frequencies higher than most available in the market today, with an operating range as wide as 10MHz to 150MHz. EMI REDUCTION INTEGRATED CIRCUIT One of our fastest growing products is EMI reduction integrated circuits. In conjunction with these products, we have developed a variety of spread spectrum techniques offering customers a choice in cost and EMI reduction performance. Our EMI products provide the exact amount of EMI reduction required for manufacturers' systems. Manufacturers can tune the amount of EMI reduction required for their systems to meet FCC requirements with our programmable integrated circuits. These products also include a frequency multiplication function to eliminate the need for expensive higher order crystals. HIGH PERFORMANCE LOGIC INTEGRATED CIRCUITS To complement our zero delay buffers, we offer two families of high speed, low skew 1.8 volt to 3.3 volt bus interface and back plane logic products, our advanced low voltage CMOS, or AVC, and advanced very low voltage CMOS, or ALVC, families. Our AVC family is composed of 16, 18, and 20 bit registers, latches, buffers and transceivers and results in a typical propagation delay of one nanosecond. We believe this is currently the fastest and lowest noise low voltage transistor transistor logic, or LVTTA, compatible family available in the market today. Our logic products operate over a wide temperature range, making them robust enough for both commercial and industrial applications. Our ALVC family meets older 3.3 volt specifications with typical propagation delays of 3.5 nanoseconds, and serves the more mature logic market. TECHNOLOGY Our key technological advantage lies in our ability to combine mixed-signal integrated circuit design expertise with fast time-to-market architectures and development tools. This technological 38 advantage enables us to produce clocks, zero delay buffers, EMI reduction integrated circuits and high performance logic with leading edge performance. Our design expertise, coupled with our proprietary gate-array design methodology, has resulted in a portfolio of mixed signal silicon platforms that can be quickly customized to produce different products in the last few manufacturing steps without compromising performance. CLOCK CIRCUIT DESIGN At the core of each clock is a phase lock loop, or PLL, circuit consisting of a high performance phase-detector, charge-pump, loop-filter, and voltage control oscillator. This PLL generates a signal which it then manipulates with frequency dividers and phase conditioning circuitry to produce one or more copies of a particular timing signal. We believe our extensive development effort has resulted in proprietary PLL circuitry with minimum sensitivity to digital switching noise to produce timing signals with exceptionally low jitter and skew. We believe our PLL technology enables us to provide superior clock products for current and next generation electronic systems. GATE-ARRAY DEVELOPMENT METHODOLOGY We have developed a unique gate-array design methodology that provides superior product configurability while maintaining performance and minimizing cost. We have extensive experience in optimizing the individual gate geometry and placement for best electrical performance, development speed and minimum silicon area. Unlike the alternative standard cell and EPROM circuit methodologies broadly employed in the industry, our design allows us to use any transistor available, to efficiently change the type or quantity of logic functions available and to change power supply configurations, which is critical to controlling noise in mixed signal applications. We have made, and expect to make, substantial investments in computer aided design tools required to automate many of the development steps and to ensure accurate prediction of silicon performance. This technology has enabled us to extend our gate-array methodology to portions of the analog circuitry in proprietary transistor-arrays which allows us to configure analog performance quickly. SILICON PLATFORM PORTFOLIO While our gate-array design methodology enables us to maximize the utilization of digital devices, there remains a need to optimize analog devices on the chip such as PLLs, logic gates, and input/ output pads. As a result, we have developed a flexible analog design methodology that enables programming using device interconnect layers which contain one, two or three PLLs and associated logic and input/output pads. Configuring these platforms in the last few steps of the CMOS process enables us to quickly meet the demanding time-to-market requirements of today's high performance systems for both prototype samples and full volume production. DESIGN FOR PROGRAMMABILITY Our extensive experience in designing timing products for various applications enables us to design analog and digital circuits which are electrically programmable to facilitate development of user configurable products. This not only allows the user to quickly optimize the performance of our products for their particular system, but also allows a particular product to address a much wider market or customer base. Examples of design features that allow users to electrically configure or "dial in" parameters include: - DIAL-A-DB--enables configuration of spread spectrum profiles, amplitudes, and modulation rates for optimum EMI reduction; - DIAL-A-FREQUENCY--enables configuration of output frequencies with fine resolution to maximize system performance; 39 - DIAL-A-DRIVE--enables configuration of output buffer strengths to match board trace impedance for optimum signal integrity; and - DIAL-A-SKEW--enables configuration of output skews or delays relative to other generated or reference signals to provide optimum clock edge placement despite trace length or component tolerance mismatches on system boards. EMI REDUCTION We have developed and continue to develop cost-effective EMI reduction integrated circuits that consume minimum silicon area and power. Our proprietary and patented techniques provide for virtually unlimited user programmable spread spectrum profiles, which are independent of operating frequency. This enables users to optimize the operating speed of electronic systems while maintaining full control of the amount of EMI reduction provided to meet regulatory standards. The most common programmable spread spectrum profile used in our products is the Lexmark profile which provides optimum EMI reduction for a given modulation frequency and index. In addition to using spread spectrum techniques, we have also developed proprietary and patented edge rate control circuits to further minimize EMI. CLOCK AND LOGIC INPUT AND OUTPUT BUFFER DESIGN In addition to optimizing standard CMOS or transistor transistor logic level input and output buffers for single ended clock reception and distribution, we have extended our portfolio of proprietary and patented input/output buffers to include those required for interface to today's high performance systems. These include pseudo emitter coupled logic, series stub terminated logic for double data rate memory applications, and several differential drivers required to support the latest AMD Athlon systems, Intel Pentium 4 and Rambus. Significant experience in clock distribution and logic interface has enabled engineering to fine tune the models and design methodology used to optimize the performance of input/output buffers with low jitter, skew, EMI, power consumption and ground bounce. Each of the input/output buffers is designed using a transistor-array that is common to every input/output pad, allowing optimization of product pin locations and customization of input/output performance using only the upper metal interconnect layers of the CMOS wafer process. 40 CUSTOMERS We currently sell our products, directly and through distributors and contract manufacturers, to more than 60 systems manufacturers. The following table lists manufacturers who purchased, directly or indirectly, at least $100,000 of our products during the quarter ended June 30, 2000: MARKET CUSTOMERS Computing Apple Dell IBM LG Matsushita NEC Fujitsu Siemens Sony Communications Cisco Harris Metricom Motorola Consumer Electronics and Peripherals Canon LG Matsushita Okidata Samsung Sanyo Sony
During fiscal 2000, sales of our products to Apple Computer, Dell Computer and IBM, directly and through distributors and contract manufacturers, accounted for 22.7%, 19.6% and 12.4%, respectively, of our revenue. During the quarter ended June 30, 2000, sales to Apple Computer, Dell Computer and Sanyo accounted for 19.4%, 21.0% and 10.6%, respectively, of our revenues. A significant percentage of our sales are made to distributors and to contract manufacturers and assemblers who incorporate our integrated circuits into products for systems manufacturers, including Apple Computer and Dell Computer. Natsteel Electronics, a contract manufacturer, accounted for 18.8% of our revenue in fiscal 2000. Natsteel Electronics, Global Electronics, one of our Japanese distributors, and Jabil Circuit, another contract manufacturer, accounted for 14.6%, 12.0% and 10.7%, respectively, of our revenue in the quarter ended June 30, 2000. SALES, MARKETING AND TECHNICAL SUPPORT We sell our products primarily through our direct sales force and a worldwide network of independent sales representatives. We sell our products in Japan exclusively through distributors. We intend to expand our direct sales organization as well as our sales representative and distributor channels. We believe that our customers' purchase decisions are based on time to market, performance, service and cost. Many of our customers have long relationships with us based on our success in meeting these criteria. We believe that our ability to respond rapidly to changes in demand for new or modified designs with consistent high quality is a major factor in our success at sustaining customer relationships. Our marketing efforts are focused on increasing brand name awareness and identifying and developing customer opportunities. Key components of our marketing efforts include targeting industry 41 leaders like AMD, ATI, Intel, nVidia and VIA that set the specifications for future system designs. We work closely with these companies to be adopted in their reference platforms. This adoption results in broad acceptance of our products by other manufacturers. In addition, our marketing group provides technical and strategic sales support to our direct sales personnel and sales representatives including in-depth product presentations, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration and other support functions. A high level of continuing service and support is critical to our objective of developing long-term customer relationships. We emphasize customer service and technical support in order to provide our customers and their end users with the knowledge and resources necessary to successfully utilize our product line. Our customer service utilizes a technical team of field and factory applications engineers, technical marketing personnel and, when required, product design engineers. We provide extensive customer support throughout the qualification and sale process as well as on an ongoing basis. As of June 30, 2000, we employed 10 people in sales and marketing and seven people in technical support. MANUFACTURING We qualify and utilize third-party suppliers for the manufacture of silicon wafers. Currently, all of our wafers are manufactured by Chartered Semiconductor, IBM Microelectronics and Tower Semiconductor. These manufactured wafers are packaged at five primary assemblers, and we have qualified at least two additional assemblers for each package type. We agree with our suppliers on production schedules based on order backlog and demand forecasts for the approaching six month period. We test over 95% of our products at our Milpitas, California facility. Currently, the remainder are tested at various third-party offshore testing facilities. We do not expect to expand our testing facilities in Milpitas, and, as a result, expect the percentage of our products tested by third parties offshore to increase as we exceed the capacity of our domestic facilities. RESEARCH AND DEVELOPMENT The design process for our products is extremely complex, involving the development of a prototype through computer-aided design, the use of simulation methodology, the generation of photo masks for the manufacturing process, the fabrication of wafers and the characterization of the prototype on test systems before submission to customers for qualification. Our research and development efforts concentrate on the design and development of new leading-edge products for our markets and the continued enhancement of our design capabilities. Over the last three fiscal years, we have developed and introduced approximately 130 new products. We have developed libraries of proprietary mixed-signal integrated circuit designs and have invested in extensive computer-aided design and engineering resources specifically designed to support the increasing complexity and customizable nature of our products. Investments in research and development were approximately $4.9 million, $7.0 million and $8.0 million in fiscal 1998, 1999 and 2000, respectively. These expenses typically include costs for engineering personnel, prototype costs, and the amortization of design tools and support overhead related to new and existing product development. As of June 30, 2000, our research and development staff consisted of 33 people. COMPETITION We believe the principal competitive factors in the markets in which we compete are: - timeliness of new product introductions; - product performance, features, functionality and reliability; 42 - service and support; - product pricing; - adoption of emerging industry standards; - brand name; - access to customers; and - size and scope of distribution network. In the clock and EMI reduction markets our primary competitors include Cypress Semiconductor and Integrated Circuit Systems. In the zero delay buffer market, our primary competitors include Cypress Semiconductor, Motorola and Texas Instruments. In the logic market, our primary competitors include Integrated Device Technology, Pericom Semiconductor, Philips Semiconductor and Texas Instruments. We believe we generally compete effectively with respect to these factors. INTELLECTUAL PROPERTY We hold several patents, copyrights, mask works and trademarks as well as pending U.S. and foreign patent applications with respect to our various products. We expect to continue to file applications for additional intellectual property rights in the future as a means of protecting our technology and market position. In addition, we actively protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. From time to time, we license technology from third parties to augment product feature sets or accelerate our development schedules. We currently license technology used in our EMI reduction products from Lexmark International under an agreement that expires in August 2003. EMPLOYEES As of June 30, 2000, we employed a total of 86 full-time employees, including 33 primarily engaged in research and development, 17 in sales and marketing, 30 in manufacturing operations and six in general administration activities. We also from time to time employ part-time employees and hire contractors. Our employees are not represented under any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are good. FACILITIES Our headquarters are located in Milpitas, California. We lease approximately 38,710 square feet for our corporate headquarters which includes research and development, sales and marketing, general and administrative and manufacturing operations. This lease expires in July 2005. We lease a sales office in Tokyo, Japan, pursuant to an agreement that expires in July 2002. We lease a sales office in Taipei, Taiwan pursuant to an agreement that expires in May 2001. We also lease approximately 1,800 square feet of space in Istanbul, Turkey for our design facility, under a lease that expires in August 2001. We believe our current facilities will be adequate to meet our needs for the foreseeable future. 43 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors, and their ages as of August 31, 2000, are as follows:
NAME AGE TITLE - ---- -------- ----- Ilhan Refioglu, Ph.D................. 52 President, Chief Executive Officer and Director Arvinder S. Chadha................... 41 Vice President, Manufacturing Richard L. Reifer.................... 44 Vice President, Sales Gregory J. Richmond.................. 40 Vice President, Engineering and Chief Technical Officer Judith A. Signorino.................. 54 Vice President, Finance and Chief Financial Officer Kazuo Tomari......................... 50 Vice President, Japan Business Operations Michael C. Child..................... 45 Director Kurt R. Jaggers...................... 41 Director
ILHAN REFIOGLU. Dr. Refioglu has been our President since March 1996 and was elected as our Chief Executive Officer in January 1998. He has served as a member of our Board of Directors since January 1998. From June 1995 to March 1996, Dr. Refioglu was an independent consultant. From August 1984 to June 1995, Dr. Refioglu served as Vice President of Strategic Businesses at Exar Corporation, a semiconductor manufacturer. Dr. Refioglu received a B.S. in Electrical Engineering from Middle East Technical University in Ankara, Turkey and both an M.S. and Ph.D. in Electrical Engineering from Arizona State University. ARVINDER S. CHADHA. Mr. Chadha has been our Vice President, Manufacturing since May 1999. Mr. Chadha joined us in June 1997 as Director of Product Assurance and became our Director of Manufacturing in April 1998. From February 1993 until May 1997, Mr. Chadha was employed as Reliability and Failure Analysis Manager for Exar Corporation. Mr. Chadha received a B.S. in Mechanical Engineering from Jabalpur University in India and an M.S. in Industrial Engineering from Oregon State University. RICHARD L. REIFER. Mr. Reifer has been our Vice President, Sales since May 1996. From May 1993 until May 1996, Mr. Reifer served as Group Manager, Marketing Operations at Exar Corporation. From July 1985 until May 1996, Mr. Reifer held various marketing positions at Exar Corporation. Mr. Reifer received a B.A. in Economics from the University of Pittsburgh and an M.A. from California State University, San Bernardino in Political Economy. GREGORY J. RICHMOND. Mr. Richmond has been our Vice President, Engineering and Chief Technical Officer since February 1999. From March 1993 until February 1999, Mr. Richmond was employed as Vice President of Frequency Timing Generators for Integrated Circuit Systems, a semiconductor manufacturer. Mr. Richmond received a B.S. in Electrical Engineering from Walla Walla College and an M.S. in Electrical Engineering from Stanford University. JUDITH A. SIGNORINO. Ms. Signorino has been our Vice President, Finance and Chief Financial Officer since May 1999. Ms. Signorino joined us in September 1996 as Corporate Controller and became our Finance Director in December 1997. From May 1995 until September 1996, Ms. Signorino was employed as Corporate Cost Manager for Rohm Corporation, a semiconductor manufacturer. Ms. Signorino received a B.S. in Business Administration from San Jose State University and an M.B.A. from the University of Santa Clara. 44 KAZUO TOMARI. Mr. Tomari has been our Vice President, Japan Business Operations since August 2000. Mr. Tomari joined us in May 1996 as Director of New Business Development, became our Director of Japan Sales and New Business Development in August 1997, our Director of Japan Business Operations in October 1998 and President of our IMI Japan K.K. subsidiary in August 2000. From August 1979 until April 1996, Mr. Tomari was employed as Director of Consumer Products at Exar Corporation. Mr. Tomari received a B.S. in Geography from Nihon University, Tokyo and a B.S. in Electrical Engineering from San Jose State University. MICHAEL C. CHILD. Mr. Child has been a member of our Board of Directors since December 1999. Mr. Child has been employed by TA Associates, a venture capital investment firm, since July 1982 where he currently serves as a Managing Director. Mr. Child received a B.S. in Electrical Engineering from the University of California, Davis, and an M.B.A. from Stanford University. Mr. Child also serves as a director of Finisar Corporation and Fargo Electronics, as well as several private companies. KURT R. JAGGERS. Mr. Jaggers has been a member of our Board of Directors since December 1997. Mr. Jaggers has been employed by TA Associates since August 1990, where he currently serves as a Managing Director. Mr. Jaggers received a B.S. and an M.S. in Electrical Engineering and an M.B.A. from Stanford University. Mr. Jaggers also serves as a director of Invitrogen, as well as several private companies. Each of our executive officers is elected by our Board of Directors and serves at its discretion. Each of our officers and directors, other than nonemployee directors, devotes his or her full time to our affairs. Our nonemployee directors devote such time to our affairs as is necessary to discharge their duties. There are no family relationships among any of our directors, officers or key employees. COMMITTEES OF THE BOARD OF DIRECTORS Our board of directors has a Compensation Committee and an Audit Committee. AUDIT COMMITTEE. The audit committee of our Board of Directors recommends the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our independent auditors, including the results and scope of their audit. The audit committee currently consists of Messrs. , and . COMPENSATION COMMITTEE. The compensation committee of our Board of Directors reviews and recommends to the Board the compensation and benefits of all of our executive officers and establishes and reviews general policies relating to our compensation and employee benefits. The compensation committee currently consists of Messrs. and . COMPENSATION OF DIRECTORS Our directors do not receive cash compensation for their services as directors or members of committees of the Board of Directors. 45 EXECUTIVE COMPENSATION SUMMARY COMPENSATION The following table sets forth information regarding compensation received during the fiscal year ended March 31, 2000 by our Chief Executive Officer and each of our other executive officers whose total salary and bonus earned during the fiscal year ended March 31, 2000 exceeded $100,000: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------- NUMBER OF SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1) - --------------------------- -------- -------- ---------- --------------- Ilhan Refioglu ................................ $280,800 $135,000 -- $9,455 President and Chief Executive Officer Arvinder S. Chadha ............................ 154,230 61,319 58,500 4,619 Vice President, Manufacturing Richard L. Reifer ............................. 169,231 67,068 33,750 552 Vice President, Sales Gregory J. Richmond ........................... 202,308 100,000 -- 8,167 Vice President, Engineering and Chief Technical Officer Judith A. Signorino ........................... 129,230 51,738 45,000 5,433 Vice President, Finance and Chief Financial Officer
- ------------------------ (1) Represents insurance premiums paid by us and 401(k) matching contributions. OPTION GRANTS DURING FISCAL 2000 The following table sets forth information regarding grants of stock options to each of the executive officers named in the Summary Compensation Table above during the fiscal year ended March 31, 2000. All of these options were granted under our 1997 equity compensation plan and are immediately exercisable, subject to a right of repurchase by us which lapses at the rate of 20% one year from the date of grant, an additional 20% two years from the date of grant and an additional 1.67% per month for 24 months thereafter. The percentage of total options set forth below is based on an aggregate of 553,200 options granted during the fiscal year. All options were granted at the fair market value of our common stock, as determined by the Board of Directors on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. 46 The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the SEC and do not represent our estimate or projection of the future common stock price.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF % OF TOTAL DEEMED STOCK PRICE COMMON OPTIONS VALUE PER APPRECIATION SHARES UNDER GRANTED EXERCISE SHARE AT FOR OPTION TERM OPTIONS IN PRICE PER EXPIRATION DATE OF --------------------- NAME GRANTED 2000 SHARE DATE GRANT 5% 10% - ---- ------------ ---------- --------- ---------- --------- --------- --------- Ilhan Refioglu.......... -- -- -- -- -- -- -- Arvinder S. Chadha...... 58,500 10.6% $ .87 12/17/09 $50,700 $31,885 $80,803 Richard L. Reifer....... 33,750 6.1 .87 12/17/09 29,250 18,395 46,617 Gregory J. Richmond..... -- -- -- -- -- -- -- Judith A. Signorino..... 45,000 8.1 .87 12/17/09 39,000 24,527 62,156
OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS The following table sets forth the number of shares of common stock acquired and the value realized upon exercise of stock options during the fiscal year ended March 31, 2000 and the number of shares of common stock subject to exercisable and unexercisable options held as of March 31, 2000 by each of the executive officers named in the Summary Compensation Table above.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT 3/31/00 OPTIONS AT 3/31/00(1) ACQUIRED ON VALUE ------------------- --------------------- NAME EXERCISE REALIZED(2) VESTED UNVESTED VESTED UNVESTED - ---- ----------- ----------- -------- -------- --------- --------- Ilhan Refioglu..................... 421,875 $321,525 -- 116,438 -- $66,788 Arvinder S. Chadha................. -- -- 21,024 103,281 $16,538 39,134 Richard L. Reifer.................. -- -- 73,125 95,625 57,525 50,925 Gregory J. Richmond................ 202,500 45,000 -- 277,500 -- 45,000 Judith A. Signorino................ 41,345 29,376 -- 45,000 -- 3,000
- ------------------------ (1) The value of unexercised options set forth above is calculated based on the deemed fair value of the underlying securities on March 31, 2000 of $0.93 per share, minus the per share exercise price. (2) The value realized upon exercise is based on the deemed fair value of the underlying securities on the date of exercise, minus the per share exercise price, multiplied by the number of shares acquired upon exercise. EMPLOYMENT CONTRACT In December 1997, we entered into an employment agreement with Ilhan Refioglu, our President and Chief Executive Officer. The initial term of the agreement ended in September 1999; however the agreement provides for successive one-year extensions of the term thereafter unless either party elects not to renew the agreement. The agreement fixes Dr. Refioglu's base salary at $280,000 per year and entitles him to such bonuses as the Board of Directors may award from time to time, as well as other benefits provided to our other senior executives. If we terminate Dr. Refioglu's employment other than for cause (which is defined to include fraud, embezzlement, misappropriation or breach of fiduciary duty against us, conviction of a felony or crime involving moral turpitude, breach of the covenants of the agreement, or repeated failure to perform his duties under the agreement), or if Dr. Refioglu voluntarily terminates his employment following a significant diminution in his responsibilities or power or a breach of the agreement by us that is not promptly cured, Dr. Refioglu will be entitled to receive 47 his salary and benefits for one year, and payment for unpaid bonus and accrued vacation, and all options which would have vested on or before two years from the termination date shall vest. STOCK PLANS As of June 30, 2000, 3,430,250 shares of common stock had been issued upon exercise of options outstanding under our 1997 equity compensation plan and 1995 stock option plan. Options to purchase 1,793,748 shares of common stock, at a weighted average exercise price of $0.54, were outstanding, and 3,691,000 shares remained available for future grants. We do not expect to grant further options under the 1995 stock option plan. 1997 EQUITY COMPENSATION PLAN Our 1997 equity compensation plan was adopted by the Board of Directors and approved by the stockholders in November 1997. We are authorized to issue up to 5,540,437 shares of common stock under this plan. This number of shares will be increased on April 1, 2001 and each subsequent April 1 during the term of the plan by 5% of the number of shares of common stock issued and outstanding on the immediately preceding March 31. The 1997 equity compensation plan is administered by the Board of Directors or by a committee of the Board, who determine, consistent with the provisions of the plan, the persons to whom awards are granted and all of the terms and conditions of awards. The administrator has the authority to construe and interpret the terms of the plan and awards granted under it and to amend or terminate the plan, subject to stockholder approval of any amendment increasing the maximum number of shares issuable under the plan or as otherwise required by law. Generally, no amendment or termination may adversely affect any outstanding award without the consent of the affected participant. Unless terminated sooner by the Board of Directors, the plan will terminate automatically on November 19, 2007, the tenth anniversary of its adoption by the Board. The plan authorizes grants of awards in the form of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock purchase rights and bonuses, and stock appreciation rights. While incentive stock options, and stock appreciation rights appurtenant to an incentive stock option, may be granted only to employees, including officers and employee directors, all other awards may be granted to employees, non-employee directors and consultants. Subsequent to the listing date of the shares and the occurrence of a material modification to the plan, the issuance of all shares reserved, the expiration of the plan, the first shareholder meeting electing directors three years after the first registration of an equity security, or another date required by Section 162(m) of the Code, no participant under the plan shall be eligible to be granted options and stock appreciation rights covering more than 1,687,500 shares of our common stock in any 12 month period. The exercise price of incentive stock options granted under the 1997 equity compensation plan must not be less than the fair market value of a share of common stock on the date of grant. In the case of nonstatutory stock options, the exercise price must not be less than 85% of the fair market value of a share of common stock on the date of grant. With respect to any optionee who owns stock representing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option must be equal to at least 110% of the fair market value of a share of the common stock on the date of grant, and the term of the option may not exceed five years. The terms of all other options may not exceed ten years. The aggregate fair market value, determined as of the date of option grant, of the common stock for which an incentive stock option may become exercisable for the first time may not exceed $100,000 in any calendar year. However, an incentive stock option or a nonstatutory stock option may be granted with an exercise price lower than that set forth above if such option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. In addition, the plan authorizes the administrator to include as part of an option agreement a provision entitling an optionee 48 to a further option, a re-load option, if the optionee exercises an option by surrendering other shares of our common stock. The administrator has the discretion to determine the vesting provisions and exercise requirements, if any, of all options granted under the plan. Awards of restricted stock may be made under the 1997 equity compensation plan either in the form of a restricted stock purchase right or a restricted stock bonus. Restricted stock purchase rights are exercisable at prices determined by the administrator, provided the purchase price per share must be at least 85% of the fair market value of a share of common stock on the date the award is made, while restricted stock bonuses are granted in consideration of services rendered to us. Awards of restricted stock may be made subject to vesting restrictions and other conditions as established by the administrator and are not transferable by the participant until vested. Vesting may be based on the participant's continued service with us. While the participant will have voting rights and the right to receive dividends or other distributions paid with respect to the restricted stock, any dividends or distributions paid in stock are subject to the same vesting restrictions as the original award. Unless otherwise provided by the administrator, if a participant's service terminates for any reason, the participant will forfeit any then unvested shares acquired as a restricted stock bonus, and we will have the option to repurchase for the amount of the participant's original purchase price any then unvested shares acquired by exercise of a restricted stock purchase right. The administrator may grant stock appreciation rights under the 1997 equity compensation plan in the form of tandem stock appreciation rights, concurrent stock appreciation rights or independent stock appreciation rights. Tandem stock appreciation rights and concurrent stock appreciation rights are granted pursuant to an option and are subject to the same terms and conditions applicable to such option. Independent stock appreciation rights are granted independent of any option and are subject to the same terms and conditions applicable to nonstatutory stock options. The plan provides that in connection with a change in control, if the acquiring corporation fails to assume the plan's outstanding awards or replace them with substantially equivalent new awards, all awards will become immediately exercisable in full. Any award not assumed by the acquiring corporation or exercised prior to a change in control will terminate upon the change in control. In addition, the plan allows the administrator to provide in any award agreement full acceleration of the exercisability of the award if, within 18 months following a change in control, the participant is "involuntarily terminated without cause" or is "constructively terminated." 1995 STOCK OPTION PLAN Our 1995 stock option plan was adopted by the Board of Directors and approved by the stockholders in March 1995. We are authorized to issue up to 3,375,000 shares of common stock under this plan. The 1995 stock option plan is administered by the Board of Directors or by a committee of the Board, who determine, consistent with the provisions of the plan, the persons to whom awards are granted and all of the terms and conditions of awards. The administrator has the authority to construe and interpret the terms of the plan and awards granted under it and to amend or terminate the plan, subject to stockholder approval of any amendment increasing the maximum number of shares issuable under the plan or as otherwise required by law. Generally, no amendment or termination may adversely affect any outstanding award without the consent of the affected participant. Unless terminated sooner by the Board of Directors, the 1995 stock option plan will terminate automatically on the tenth anniversary of its adoption by the Board. The 1995 stock option plan allows grants of incentive stock options to employees, including officers and employee directors. In addition, it allows grants of nonstatutory options to employees, nonemployee directors and consultants. No employee may be granted options to purchase more than 2,025,000 shares in any one fiscal year; however, an employee may be granted options up to an additional 2,025,000 shares in connection with the optionee's initial employment. 49 The exercise price of incentive stock options granted under the 1995 stock option plan must not be less than the fair market value of a share of common stock on the date of grant. In the case of nonstatutory stock options, the exercise price must not be less than 85% of the fair market value of a share of common stock on the date of grant. With respect to any optionee who owns stock representing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any option must be equal to at least 110% of the fair market value of a share of the common stock on the date of grant, and the term of the incentive stock option may not exceed five years. The terms of all other options may not exceed ten years. The aggregate fair market value (determined as of the date of option grant) of the common stock for which an incentive stock option may become exercisable for the first time may not exceed $100,000 in any calendar year. The board or any committee administering the 1995 stock option plan has discretion to determine vesting schedules and exercise requirements, if any, of all options granted under the plan. In the event of a merger with another corporation, the acquiring corporation may assume the outstanding options or substitute new options. Any outstanding options not assumed or substituted by the acquiring corporation shall terminate as of the closing date of the merger. In the event of our dissolution or liquidation, any outstanding options will terminate immediately prior to such dissolution or liquidation. 2000 EMPLOYEE STOCK PURCHASE PLAN Our 2000 employee stock purchase plan was adopted by the Board of Directors and approved by the stockholders in September 2000. A total of 200,000 shares of common stock are reserved for issuance under the plan. This plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be administered by the Board of Directors. Employees, including officers and employee directors, are eligible to participate in the plan if they are employed by us for more than 20 hours per week and have been so employed for at least three months. The plan will be implemented during sequential six-month offering periods, the first of which will commence on the effective date of this offering and will terminate on March 31, 2001. After the effective date of this offering, offering periods under the plan will generally begin on April 1 and October 1 of each year. The employee stock purchase plan permits eligible employees to purchase our common stock through payroll deductions, which may not exceed 15% of the employee's base salary. Stock may be purchased under the plan at a price equal to 85% of the fair market value of our common stock on either the first or the last day of the offering period, whichever is lower. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of a participant's employment with us. Participants may not purchase shares of common stock having a value, measured at the beginning of the offering period, greater than $25,000 in any calendar year or more than a number of shares in any six-month offering period determined by dividing $12,500 by the fair market value of a share of our common stock at the beginning of the offering period. 401(K) PLAN Effective May 1, 1986, we adopted the International Microcircuits, Inc. Employees Saving & Retirement Plan, or the 401(k) plan, which is intended to be a tax-qualified defined contribution plan under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended. Under the terms of the 401(k) plan, eligible employees may elect to contribute from 1% to 15% of their compensation as salary deferral contributions to the 401(k) plan, subject to certain statutorily prescribed limits ($10,500 for calendar year 2000). The 401(k) plan also permits, but does not require, us to make discretionary employer contributions. Since April 1999, we have been making employer contributions, based on quarterly operating profits, of up to 100% of a participant's salary deferral contribution not to exceed 6% of each participant's compensation. As a tax-qualified plan, contributions to the 401(k) plan 50 are generally deductible by us when made, and are not taxable to participants until distributed from the 401(k) Plan. Pursuant to the 401(k) plan, participants may direct the trustees to invest their accounts in selected investment options. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit this indemnification under some circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation which provide that our directors shall not be personally liable for monetary damages to us or our stockholders for a breach of fiduciary duty as a director, except liability for: - a breach of the director's duty of loyalty to us or our stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - an act related to our unlawful stock repurchase or payment of a dividend under Section 174 of the Delaware General Corporation Law; or - transactions from which the director derived an improper personal benefit. These limitations of liability do not apply to liabilities arising under the federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation also authorizes us to indemnify its officers, directors and other agents to the fullest extent permitted under Delaware law. As permitted by the Delaware General Corporation Law, our bylaws provide that: - We are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; - We are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and - the rights provided in the bylaws are not exclusive. We have entered into indemnification agreements with each of our directors and officers, and these indemnification agreements may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law and may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification by us is sought. In addition, we are not aware of any threatened litigation or proceeding which may result in a claim for indemnification. We have maintained directors' and officers' liability insurance since September 1998, and we intend to continue to maintain this insurance in the future. 51 RELATED PARTY TRANSACTIONS RECAPITALIZATION On December 16, 1997, we effected a recapitalization through a series of transactions. The recapitalization consisted of: - FINANCING TRANSACTION. We sold and issued 3,159,128 shares of our mandatorily redeemable convertible preferred stock at a price of $4.376 per share. Entities affiliated with TA Associates, Inc. purchased 3,147,702 of those shares for an aggregate purchase price of $13.8 million. Michael C. Child and Kurt R. Jaggers, members of our Board of Directors, are Managing Directors of TA Associates, Inc. Upon the closing of this offering, each outstanding share of mandatorily redeemable convertible preferred stock will be converted into one share of our Series A redeemable preferred stock and 3.375 shares of our common stock, or a total of 10,662,057 shares of common stock. The Series A redeemable preferred stock is redeemable at our option or at the option of the holder. Upon the closing of this offering, we intend to use $12.4 million of the proceeds to redeem all of the outstanding shares of our Series A redeemable preferred stock. - TERM LOAN. We borrowed $15.0 million from Fleet National Bank. This term loan is payable in quarterly installments through December 2002 and bears interest, at our election, at the bank's prime rate plus 0.5% or the LIBOR rate plus 2.0%. - REPURCHASE. We used a portion of the proceeds from the financing transaction and the term loan to repurchase 15,892,250 shares, or approximately 92%, of our common stock owned by our then sole shareholders, Frank Deverse and his family partnership, Golden Legacy Limited Partnership, for a price of $1.517 per share, or $24.2 million. In addition to the proceeds from the financing transaction and term loan, we funded this repurchase through the issuance of a $2.5 million promissory note to Mr. Deverse. The note bears interest at a rate of 9.0% per annum, payable semiannually. The principal is due in equal semiannual payments beginning on the date we fully repay the $15.0 million dollar term loan, provided, however, that all unpaid principal and interest becomes due upon the earlier of December 16, 2003 or the closing of a qualified initial public offering. Golden Legacy delivered $1.3 million and 877,500 shares of our common stock into an escrow to provide a fund against which future claims for indemnification could be made by us or TA Associates for breaches of representations and warranties made by the sellers in connection with the repurchase. - OPTION BUYOUT. In connection with the repurchase of shares of our common stock, we also purchased outstanding options to purchase an aggregate of 3,269,025 shares of our common stock from our employees at a net price of $1.19 per share, which consisted of $1.517 per share less their $0.32 exercise price. - PUT OPTION. As a condition to the repurchase, we granted Golden Legacy Limited Partnership the right to require us to purchase an additional 1,316,250 shares of our common stock at a price of $1.517 per share. - OTHER AGREEMENTS. We, affiliates of TA Associates and various other equity holders also entered into a stockholders agreement that, among other things, provides for restrictions on the transfer of shares, preemptive rights and registration rights. Additionally, the affiliates of TA Associates holding our mandatorily redeemable convertible preferred stock have the right to elect four of our directors, and to vote with other holders of our capital stock in the election of other directors. 52 SETTLEMENT OF CLAIMS In October 1998, TA Associates asserted various claims against Mr. Deverse and Golden Legacy for alleged breaches of representations and warranties made in connection with the repurchase of shares from them. We assigned to TA Associates our rights to make claims based on these alleged breaches. Thereafter, Mr. Deverse and Golden Legacy sought indemnification from us and from Ilhan Refioglu, our President and Chief Executive Officer, and Judith A. Signorino, our Vice President Finance and Chief Financial Officer, against the claims asserted by TA Associates. In August 2000, the parties agreed in principle to a resolution of the dispute under which the cash portion of the escrow fund and accrued interest, totaling approximately $1.45 million, would be released to TA Associates and the 877,500 shares of our common stock held in the escrow would be released to Mr. Deverse and Golden Legacy. Formal documentation of the settlement is pending. LOANS TO EXECUTIVE OFFICERS In connection with the purchase of shares of our common stock by Ilhan Refioglu, our President and Chief Executive Officer, we loaned Dr. Refioglu $33,550 on December 16, 1997, $35,588 on August 18, 1998 and $54,450 on January 3, 2000. These loans bear interest at a rate of 6.50% per annum, 5.12% per annum and 6.07% per annum, respectively. In connection with the purchase of shares of our common stock by Gregory J. Richmond, our Vice President, Engineering and Chief Technology Officer, we loaned Mr. Richmond $48,000 on December 30, 1999 and $96,000 on January 3, 2000. These loans bear interest at a rate of 6.07% per annum. OTHER TRANSACTIONS We have entered into indemnification agreements with Mr. Child and Mr. Jaggers. We also intend to enter into indemnification agreements with each of our other directors and executive officers. See "Management--Indemnification of Directors and Executive Officers and Limitation of Liability." We are a party to an employment agreement with Dr. Refioglu. See "Management--Employment Contract." 53 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information known to us regarding the beneficial ownership of our common stock as of July 31, 2000, and as adjusted to reflect the sale of the common stock offered hereby, by: - each stockholder who is known by us to beneficially own more than 5% of our common stock; - each of our executive officers listed on the Summary Compensation Table under "Management"; - each of our directors; - all of our executive officers and directors as a group; and - the selling stockholders.
SHARES BENEFICIALLY OWNED PRIOR TO NUMBER SHARES BENEFICIALLY THE OFFERING OF SHARES OWNED AFTER OFFERING(1) ----------------------- BEING ------------------------ BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE - ---------------- ---------- ---------- --------- ----------- ---------- 5% STOCKHOLDERS: Entities affiliated with TA Associates, Inc. (2)................... 10,623,495 69.2% % Golden Legacy Limited Partnership (3).... 1,316,250 8.6 EXECUTIVE OFFICERS AND DIRECTORS: Ilhan Refioglu (4)....................... 1,425,937 9.3 Arvinder S. Chadra (5)................... 180,000 1.2 Richard L. Reifer (6).................... 270,000 1.7 Gregory J. Richmond (7).................. 480,000 2.6 Judith A. Signorino (8).................. 180,000 1.2 Michael C. Child (9)..................... 10,623,495 69.2 Kurt R. Jaggers (10)..................... 10,623,495 69.2 All executive officers and directors as a group (8 persons) (11)................. 13,517,559 88.1 OTHER SELLING STOCKHOLDERS:
- ------------------------ * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All shares of common stock subject to options exercisable within 60 days following July 31, 2000 are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of that person. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Accordingly, percent ownership is based on: (i) before the offering 15,349,146 shares of common stock outstanding as of July 31, 2000 plus any shares issuable pursuant to options held by the person or group in question which may be exercised within 60 days following July 31, 2000; and (ii) after the offering, an additional shares to be issued by us in the offering. Except as indicated in the other footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them. 54 (2) Includes: - 1,651,003 shares held by Advent Atlantic and Pacific III L.P.; - 8,796,559 shares held by TA/Advent VIII L.P.; and - 175,932 shares held by TA Investors LLC. TA/Advent VIII L.P., Advent Atlantic & Pacific III L.P. and TA Investors LLC are part of an affiliated group of investment partnerships. The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP III Partners L.P. TA Associates, Inc. is the general partner of TA Associates AAP III Partner L.P. and is the sole manager of TA Associates VIII LLC and TA Investors LLC. In such capacity, TA Associates, Inc., through an executive committee, exercises sole voting and investment power with respect to all shares held of record by the name investment partnerships; individually, no stockholder, director or officer of TA Associates, Inc., unless listed above, is deemed to have or share such voting or investment power. The address of TA Associates, Inc. is 125 High Street, High Street Tower, Suite 2500, Boston, MA 02110. (3) Golden Legacy Limited Partnership is a family partnership under the control of Frank Deverse. (4) Includes 274,500 shares subject to repurchase by us within 60 days following July 31, 2000, 116,437 shares issuable upon exercise of options all of which are unvested and would be subject to repurchase by us within 60 days following July 31, 2000 and 42,250 shares held in the Refioglu Trust, 21,125 of which are registered in the name of Daver Refioglu and 21,125 of which are registered in the name of Dalan Refioglu. Dr. Refioglu's address is c/o International Microcircuits, Inc., 525 Los Coches Street, Milpitas, CA 95035. (5) Includes 124,312 shares issuable upon exercise of options of which 92,320 shares are unvested and would be subject to repurchase by us within 60 days following July 31, 2000. (6) Includes 168,750 shares issuable upon exercise of options of which 78,750 shares are unvested and would be subject to repurchase by us within 60 days following July 31, 2000. (7) Includes 95,625 shares subject to repurchase by us within 60 days following July 31, 2000 and 202,500 shares issuable upon exercise of options all of which are unvested and would be subject to repurchase by us within 60 days following July 31, 2000. (8) Includes 30,445 shares subject to repurchase by us within 60 days following July 31, 2000 and 45,000 shares issuable upon exercise of options all of which are unvested and would be subject to repurchase by us within 60 days following July 31, 2000. (9) Mr. Child disclaims beneficial ownership of all shares held by affiliates of TA Associates, Inc. of which Mr. Child is a Managing Director, except to the extent of 18,510 shares of common stock in which he has an ownership interest through TA Investors LLC. See Note 2 above. (10) Mr. Jaggers disclaims beneficial ownership of all shares held by affiliates of TA Associates, Inc. of which Mr. Jaggers is a Managing Director, except to the extent of 24,433 shares of common stock in which he has an ownership interest through TA Investors LLC. See Note 2 above. (11) Includes 10,623,495 shares held by TA Associates, Inc. and its affiliates as to which Mr. Child and Mr. Jaggers disclaim beneficial ownership. See Notes 2, 10 and 11 above. Also includes 417,445 shares subject to repurchase by us within 60 days following July 31, 2000 and 702,000 shares issuable upon the exercise of options, 580,008 of which are unvested and would be subject to repurchase by us within 60 days following July 31, 2000. See Notes 4 through 9 above. 55 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. The following is a summary of the material terms of our common stock and preferred stock. Please see our certificate of incorporation, filed as an exhibit to the registration statement of which this prospectus is a part, for more detailed information. COMMON STOCK As of June 30, 2000, there were 15,235,479 shares of our common stock outstanding held of record by 47 stockholders, assuming the conversion of our convertible preferred stock into common stock. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Upon the closing of this offering, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends declared by the board. In the event of a liquidation, dissolution or winding up of the company, holders of common stock are entitled to share ratably in the assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock. Holders of our common stock have no preemptive, conversion or redemption rights. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon the closing of this offering will be, fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of our mandatorily redeemable convertible preferred stock will be converted into an aggregate of 10,662,057 shares of common stock and 3,159,128 shares of Series A redeemable preferred stock, and all such shares of Series A redeemable preferred stock will be redeemed. Thereafter, up to 5,000,000 shares of undesignated preferred stock will be authorized for issuance. Our Board of Directors has the authority, without further action by our stockholders, to issue preferred stock in one or more series. In addition, the Board of Directors may fix the rights, preferences and privileges of any preferred stock it determines to issue. Any or all of these rights may be superior to the rights of the common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the company or to make removal of management more difficult. Additionally, the issuance of preferred stock may decrease the market price of our common stock. At present, we have no plans to issue any shares of preferred stock. REGISTRATION RIGHTS Under the Stockholders Agreement dated as of December 16, 1997, holders of an aggregate of shares of our common stock, including the 10,662,057 shares of common stock into which outstanding shares of mandatorily redeemable convertible preferred stock will be converted upon the closing of this offering, have various registration rights. Beginning 90 days after the date of this prospectus, the purchasers of our mandatorily redeemable convertible preferred stock have the right to require us, on not more than two occasions, to file a registration statement under the Securities Act to register the shares of common stock into which their mandatorily redeemable convertible preferred stock is converted at our expense. Demand for this registration must be made by holders of at least 50% of the shares that are entitled to this registration. We may, under some circumstances, defer this registration for up to 90 days, and the underwriters of the offering under this registration have the right, subject to some limitations, to limit the number of shares included. 56 If we propose to register any of our securities under the Securities Act for our own account or for the account of other security holders, the purchasers of our mandatorily redeemable convertible preferred stock, as well as certain other holders of our common stock, including Frank Deverse and Golden Legacy Limited Partnership, are entitled to notice of that registration and have the right to include some or all of their shares of common stock in that registration, at our expense, subject to marketing and other limitations. ANTITAKEOVER PROVISIONS DELAWARE LAW We will be subject to Section 203 of the Delaware General Corporation Law regulating corporate takeovers, which prohibits a Delaware corporation from engaging in any business combination with an "interested stockholder," unless: - prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (a) any person that is the owner of 15% or more of the outstanding voting securities of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and (b) the affiliates and associates of any such person. CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Provisions of our certificate of incorporation and bylaws, which will become effective upon the closing of this offering, may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the company. These provisions could cause the price of our common stock to decrease. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control of the company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . LISTING We have applied to have our common stock approved for listing on the Nasdaq National Market under the trading symbol "IIMI." 57 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has not been a public market for out common stock. Future sales of substantial amounts of our common stock in the public market, or the possibility of these sales, could adversely affect the trading price of our common stock. Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options to purchase common stock after June 30, 2000. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as defined in Rule 144 under the Securities Act, which would be subject to the limitations and restrictions described below. The remaining shares of common stock outstanding upon completion of this offering will be "restricted securities" as defined in Rule 144. These securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. Sales of these restricted securities in the public market, or the availability of these shares for sale, could adversely affect the trading price of our common stock. Holders of approximately of these restricted securities, including all of our officers and directors and the entities affiliated with them, have entered into lock-up agreements providing that, subject to limited exceptions, they will not sell, directly or indirectly, any common stock without the prior consent of Wit SoundView Corporation for a period of 180 days from the date of this prospectus. The number of restricted securities that will be available for sale in the public market, subject in some cases to the volume limitations and other restrictions of Rule 144, will be as follows: - approximately shares will be eligible for immediate sale as of the date of this prospectus; - approximately additional shares will be eligible for sale beginning 90 days after the date of this prospectus under Rules 144 and 701; and - approximately additional shares will be eligible for sale beginning 180 days after the date of this prospectus upon expiration of the lock-up agreements described above. Approximately remaining restricted securities will not be eligible for sale pursuant to Rule 144 until the expiration of their applicable one-year holding periods, which will expire between 2000 and 2000. In general, under Rule 144, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares not to exceed the greater of (1) one percent of the then outstanding shares of common stock or (2) the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale and notice requirements, as well as to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Shares issued upon exercise of options granted by us prior to the date of this prospectus will be available for sale in the public market under Rule 701 of the Securities Act. Rule 701 permits resales of these shares in reliance upon Rule 144 but without compliance with various restrictions, including the holding period requirement, imposed under Rule 144. 58 As of June 30, 2000, options to purchase an aggregate of 1,793,748 shares of common stock were outstanding under our stock option plans. We intend to file registration statements on Form S-8 under the Securities Act approximately 90 days after the date of this prospectus to register an aggregate of shares of common stock issued or reserved for issuance under our stock option plans and employee stock purchase plan. Shares of common stock issued under the foregoing plans, after the filing of related registration statements, will be freely tradable in the public market, subject to the Rule 144 limitations applicable to our affiliates, lock-up agreements with the underwriters and vesting restrictions imposed by us. 59 UNDERWRITING Upon the terms and subject to the conditions contained in an underwriting agreement, the underwriters named below, for whom Wit SoundView Corporation and Needham & Company, Inc. are acting as representatives, have severally agreed to purchase from us and the selling stockholders an aggregate of shares of common stock. The number of shares that each underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES - ------------ -------- Wit SoundView Corporation................................... Needham & Company, Inc...................................... ------ Total................................................... ======
The underwriting agreement provides that the underwriters are obligated to purchase all of the shares in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. The obligations of the underwriters under the underwriting agreement may be terminated [at their discretion on the basis of their assessment of the state of the]financial markets and also upon the occurrence of events stated in the underwriting agreement. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us at the public offering price less the underwriting commissions. The option may be exercised only to cover any over-allotments of shares. The underwriters propose to offer our shares initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL ------------------------------- ------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting commissions paid by us......... $ $ $ $ Underwriting commissions paid by selling stockholders.............................. Expenses payable by us...................... $ $ $ $
The underwriters have reserved for sale, at the public offering price, up to shares for our employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent that these persons purchase reserved shares. Any purchaser of 60 reserved shares that is associated with a member of the National Association of Securities Dealers, Inc. will agree not to resell the shares within 90 days after the date of this prospectus. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same terms as the other shares. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares being offered. We have agreed, subject to some exceptions, that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission, a registration statement under the U.S. Securities Act of 1933 relating to any of our shares or securities convertible into or exchangeable or exercisable for any of our shares, or publicly disclose the intention to make any such offer, pledge, disposition or filing, without the prior written consent of Wit SoundView Corporation for a period of 180 days after the date of this prospectus. Our officers, directors and other stockholders that own collectively shares have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of our shares or securities convertible into or exchangeable or exercisable for any of our shares, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our shares, whether settled by delivery of our shares or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Wit SoundView Corporation for a period of 180 days after the date of this prospectus. We have agreed to indemnify the underwriters against liabilities under the Securities Act of 1933 or contribute to payments which the underwriters may be required to make in respect of those liabilities. We have applied to list the shares on the Nasdaq National Market. There has been no active public market for our shares. The offering price is to be determined through negotiations between us and the representatives of the underwriters. The principal factors considered in determining the offering price, in addition to prevailing market conditions, include: - the recent market prices of, and the demand for, publicly traded shares of generally comparable companies; - our current financial condition; - the history of, and the prospects for, our company and the industry in which we compete; - the ability of our management; - our past and present operations; - the prospects for, and anticipated timing of, our future revenue; - the present state of our development; - the percentage interest being sold by us as compared to our valuation; and - the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids, in accordance with Regulation M under the Securities Exchange Act of 1934. 61 - Over-allotment involves sales by the underwriters in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares which they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the shares in the open market after the distribution has been completed in order to cover syndicate short positions. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares which they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the shares originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. A prospectus in electronic format, from which you can link to a "Meet the Management" presentation through an embedded hyperlink (click here for "Meet the Management" presentation), is being made available on an internet website maintained by Wit SoundView's affiliate, Wit Capital Corporation. In addition, other dealers purchasing shares from Wit SoundView have agreed to make a prospectus in electronic format available on websites maintained by each of those dealers. The "Meet the Management" presentation, including the accompanying slides included in the appendix, is part of this prospectus. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, P.C., San Francisco, California. As of the date of this prospectus, Gray Cary Ware & Freidenrich LLP beneficially owns 7,500 shares of our common stock. EXPERTS The financial statements as of March 31, 2000 and 1999 and for each of the three years in the period ended March 31, 2000 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1, including the exhibits and schedules thereto, under the Securities Act with respect to the shares to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information about us and the shares to be sold in this offering, please refer to the registration 62 statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to, are not necessarily complete, and in each instance please refer to the copy of the contract, agreement or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by this reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file with the SEC at the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C., Washington, D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement will also be available to you on the SEC's Web site. The address of this site is http://www.sec.gov. 63 INTERNATIONAL MICROCIRCUITS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of March 31, 1999 and 2000 and June 30, 2000 (unaudited)............................. F-3 Consolidated Statements of Operations for the Years Ended March 31, 1998, 1999 and 2000 and the three months ended June 30, 1999 (unaudited) and 2000 (unaudited)............ F-4 Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Years Ended March 31, 1998, 1999 and 2000 and the three months ended June 30, 2000 (unaudited)............................................... F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1999 and 2000 and the three months ended June 30, 1999 (unaudited) and 2000 (unaudited)............ F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of International Microcircuits, Inc. The reincorporation in Delaware and stock split described in Note 12 to the financial statements have not been consummated at September 5, 2000. When the reincorporation in Delaware and stock split have been consummated, we will be in a position to furnish the following report: "In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of International Microcircuits, Inc. and its subsidiary at March 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California April 28, 2000, except as to Note 12, which is as of September , 2000" F-2 INTERNATIONAL MICROCIRCUITS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA MANDATORILY REDEEMABLE SECURITIES AND STOCKHOLDERS' MARCH 31, EQUITY AS OF ------------------- JUNE 30, JUNE 30, 1999 2000 2000 2000 -------- -------- --------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................ $ 4,113 $ 4,911 $ 4,670 Accounts receivable, less allowance for doubtful accounts of $149, $239 and $262 (unaudited)........ 3,980 4,168 6,515 Inventory............................................ 2,677 2,640 2,404 Deferred income taxes................................ 1,937 1,784 1,481 Other current assets................................. 312 452 450 -------- -------- -------- Total current assets............................... 13,019 13,955 15,520 Property and equipment, net............................ 1,844 2,082 1,929 Other assets........................................... 242 385 368 -------- -------- -------- Total assets....................................... $ 15,105 $ 16,422 $ 17,817 ======== ======== ======== LIABILITIES, MANDATORILY REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt.................... $ 900 $ 900 $ 600 Accounts payable..................................... 3,906 2,881 3,640 Accrued expenses and other liabilities............... 2,777 4,299 4,825 -------- -------- -------- Total current liabilities.......................... 7,583 8,080 9,065 Long-term debt, net of current portion................. 7,350 5,550 5,100 Deferred income taxes.................................. 124 -- -- Deferred gain on sale-leaseback........................ 2,766 2,329 2,220 -------- -------- -------- Total liabilities.................................. 17,823 15,959 16,385 -------- -------- -------- Mandatorily redeemable securities (Note 6)............. 14,225 15,821 15,821 $ 14,439 -------- -------- -------- -------- Commitments and contingencies (Note 5) Stockholders' equity (deficit): Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued or outstanding actual, pro forma and pro forma as adjusted................ -- -- -- -- Common stock, $0.001 par value; 100,000,000 shares authorized; 2,374,000 and 3,229,000 and 3,257,000; 13,919,000 shares issued and outstanding, pro forma (unaudited)........................................ 2 3 3 14 Additional paid-in capital........................... 1,764 5,957 8,208 9,579 Deferred stock-based compensation.................... (64) (2,724) (4,223) (4,223) Notes receivable from stockholders................... (168) (367) (367) (367) Retained earnings (accumulated deficit).............. (18,477) (18,227) (18,010) (18,010) -------- -------- -------- -------- Total stockholders' equity (deficit)............... (16,943) (15,358) (14,389) $(13,007) -------- -------- -------- ======== Total liabilities, mandatorily redeemable securities and stockholders' equity (deficit)...................................... $ 15,105 $ 16,422 $ 17,817 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements F-3 INTERNATIONAL MICROCIRCUITS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ------------------------------ --------------------- 1998 1999 2000 1999 2000 -------- -------- -------- --------- --------- (UNAUDITED) Net revenue....................................... $34,165 $38,998 $44,326 $10,516 $11,507 Cost of revenue (exclusive of stock-based compensation of $0, $0 and $73 for the years ended March 31, 1998, 1999 and 2000 and $0 and $60 for the three month periods ended June 30, 1999 and 2000................................... 19,926 23,003 24,053 6,009 5,942 ------- ------- ------- ------- ------- Gross profit...................................... 14,239 15,995 20,273 4,507 5,565 ------- ------- ------- ------- ------- Operating expenses: Research and development (exclusive of stock-based compensation of $0, $7 and $566 for the years ended March 31, 1998, 1999 and 2000 and $34 and $444 for the three month periods ended June 30, 1999 and 2000 (unaudited)................................... 4,887 6,997 7,945 1,597 2,141 Selling, general and administrative (exclusive of stock-based compensation of $5,320, $255 and $712 for the years ended March 31, 1998, 1999 and 2000 and $377 and $244 for the three month periods ended June 30, 1999 and 2000 (unaudited)................................... 4,966 5,923 6,903 1,472 1,821 Stock-based compensation........................ 5,320 262 1,351 411 748 ------- ------- ------- ------- ------- Total operating expenses...................... 15,173 13,182 16,199 3,480 4,710 ------- ------- ------- ------- ------- Operating income (loss)........................... (934) 2,813 4,074 1,027 855 Gain (loss) on disposals of property and equipment....................................... (1,440) 294 436 109 109 Interest expense.................................. (783) (1,098) (773) (196) (160) Interest and other income (expense), net.......... (256) 9 89 15 65 ------- ------- ------- ------- ------- Income (loss) before provision for income taxes... (3,413) 2,018 3,826 955 869 Income tax (provision) benefit.................... 1,216 (1,031) (2,052) (530) (652) ------- ------- ------- ------- ------- Net income (loss)................................. $(2,197) $ 987 $ 1,774 $ 425 $ 217 ======= ======= ======= ======= ======= Net income (loss) per share: Basic........................................... $ (0.17) $ 0.33 $ 0.47 $ 0.13 $ 0.05 ======= ======= ======= ======= ======= Diluted......................................... $ (0.17) $ 0.01 $ 0.06 $ 0.01 $ 0.00 ======= ======= ======= ======= ======= Weighted average shares: Basic........................................... 13,008 2,735 3,602 3,028 3,982 ======= ======= ======= ======= ======= Diluted......................................... 13,008 14,642 15,908 16,176 16,052 ======= ======= ======= ======= ======= Pro forma net income per share (unaudited): Basic........................................... $ 0.07 $ 0.00 ======= ======= Diluted......................................... $ 0.06 $ 0.00 ======= ======= Pro forma weighted average shares (unaudited): Basic........................................... 14,264 14,644 ======= ======= Diluted......................................... 15,908 16,052 ======= =======
The accompanying notes are an integral part of these consolidated financial statements F-4 INTERNATIONAL MICROCIRCUITS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
NOTES RETAINED TOTAL COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE EARNINGS STOCKHOLDERS' ------------------- PAID-IN STOCK-BASED FROM (ACCUMULATED EQUITY SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT) (DEFICIT) -------- -------- ---------- ------------- ------------ ------------ ------------- Balance, March 31, 1997.......... 17,212 $ 17 $ 539 $ -- $ -- $ 6,906 $ 7,462 Recapitalization and redemption of common stock.......................... (15,897) (16) (497) -- -- (23,743) (24,256) Recapitalization and reclassification of common stock to mandatorily redeemable securities..................... (1,316) (1) (42) -- -- -- (43) Issuance of common stock upon exercise of options for cash... 533 -- 174 -- -- -- 174 Issuance of common stock upon exercise of options for notes receivable..................... 608 1 197 -- (198) -- -- Accretion of mandatorily redeemable securities.......... -- -- -- -- -- (26) (26) Beneficial conversion feature related to issuance of Mandatorily Redeemable Convertible Preferred Stock.... -- -- 192 -- -- -- 192 Deemed dividend related to beneficial conversion feature of Mandatorily Redeemable Convertible Preferred Stock.... -- -- (24) -- -- -- (24) Other stock-based compensation... -- -- 801 -- -- -- 801 Net loss......................... -- -- -- -- -- (2,197) (2,197) ------- ------ ------ ------- ----- -------- -------- Balance, March 31, 1998.......... 1,140 1 1,340 -- (198) (19,060) (17,917) Collection of notes receivable from stockholder............... -- -- -- -- 48 -- 48 Issuance of common stock upon exercise of options for cash... 1,181 1 177 -- -- -- 178 Issuance of common stock upon exercise of options for notes receivable..................... 111 -- 36 -- (36) -- -- Repurchased shares............... (58) -- (19) -- 18 -- (1) Accretion of mandatorily redeemable securities.......... -- -- -- -- -- (404) (404) Deferred stock-based compensation................... -- -- 71 (71) -- -- -- Amortization of deferred stock-based compensation....... -- -- -- 7 -- -- 7 Deemed dividend related to beneficial conversion feature of Mandatorily Redeemable Convertible Preferred Stock.... -- -- (96) -- -- -- (96) Other stock-based compensation... -- -- 255 -- -- -- 255 Net income....................... -- -- -- -- -- 987 987 ------- ------ ------ ------- ----- -------- -------- Balance, March 31, 1999.......... 2,374 2 1,764 (64) (168) (18,477) (16,943) Issuance of common stock upon exercise of options for cash... 393 -- 86 -- -- -- 86 Issuance of common stock upon exercise of options for notes receivable..................... 574 1 198 -- (199) -- -- Repurchased shares............... (112) -- (30) -- -- -- (30) Accretion of mandatorily redeemable securities.......... -- -- -- -- -- (1,524) (1,524) Amortization of deferred stock-based compensation....... -- -- -- 974 -- -- 974 Deferred stock-based compensation................... -- -- 3,634 (3,634) -- -- -- Deemed dividend related to beneficial conversion feature of Mandatorily Redeemable Convertible Preferred Stock.... -- -- (72) -- -- -- (72) Other stock-based compensation... -- -- 377 -- -- -- 377 Net income....................... -- -- -- -- -- 1,774 1,774 ------- ------ ------ ------- ----- -------- -------- Balance, March 31, 2000.......... 3,229 3 5,957 (2,724) (367) (18,227) (15,358) Issuance of common stock upon exercise of options for cash (unaudited).................... 28 -- 4 -- -- -- 4 Deferred stock-based compensation (unaudited).................... -- -- 2,188 (2,188) -- -- -- Amortization of stock-based compensation (unaudited)....... -- -- -- 689 -- -- 689 Stock issued to consultants for services (unaudited)........... -- -- 59 -- -- -- 59 Net income (unaudited)........... -- -- -- -- -- 217 217 ------- ------ ------ ------- ----- -------- -------- Balance, June 30, 2000 (unaudited).................... 3,257 $ 3 $8,208 $(4,223) $(367) $(18,010) $(14,389) ======= ====== ====== ======= ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 INTERNATIONAL MICROCIRCUITS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ------------------------------ ------------------------- 1998 1999 2000 1999 2000 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................ $ (2,197) $ 987 $ 1,774 $ 425 $ 217 Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 1,120 871 1,125 234 273 Stock-based compensation............................... 801 262 1,351 411 748 Loss (gain) on disposals of property and equipment..... 1,440 (294) (439) (109) (109) Deferred income taxes.................................. (1,217) (187) 29 118 303 Change in operating assets and liabilities: Accounts receivable, net............................. (1,815) (483) (188) (1,430) (2,347) Inventory............................................ (2,090) 811 37 (787) 236 Prepaid and other assets............................. 15 638 (282) (72) 19 Accounts payable..................................... 1,302 1,362 (1,025) 1,329 759 Accrued expenses and other liabilities............... 364 926 1,521 1,082 526 -------- ------- ------- ------- ------- Net cash provided by (used in) operating activities....................................... (2,277) 4,893 3,903 1,201 625 -------- ------- ------- ------- ------- CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of property and equipment...................... (1,182) (816) (1,363) (286) (120) Proceeds from disposal of property and equipment......... 134 5,870 2 -- -- -------- ------- ------- ------- ------- Net cash provided by (used in) investing activities....................................... (1,048) 5,054 (1,361) (286) (120) -------- ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from long-term debt......................... 15,000 -- -- -- -- Principal payments on long-term debt..................... (4,024) (8,250) (1,800) (450) (750) Proceeds from issuance of common stock................... 174 178 86 11 4 Redemption of common stock............................... (21,756) -- -- -- -- Proceeds from issuance of preferred stock................ 13,824 -- -- -- -- Repurchase of common stock............................... -- (1) (30) -- -- Proceeds from note receivable from stockholder........... -- 48 -- -- -- -------- ------- ------- ------- ------- Net cash provided by (used in) financing activities....................................... 3,218 (8,025) (1,744) (439) (746) -------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents....... (107) 1,922 798 476 (241) Cash and cash equivalents at beginning of period........... 2,298 2,191 4,113 4,113 4,911 -------- ------- ------- ------- ------- Cash and cash equivalents at end of period................. $ 2,191 $ 4,113 $ 4,911 $ 4,589 $ 4,670 ======== ======= ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest................................... $ 681 $ 968 $ 524 $ 196 $ 160 ======== ======= ======= ======= ======= Cash paid for income taxes............................... $ -- $ 1,631 $ 2,053 $ -- $ -- ======== ======= ======= ======= ======= NON-CASH TRANSACTIONS: Accretion of mandatorily redeemable securities........... $ 26 $ 404 $ 1,524 $ 292 $ -- ======== ======= ======= ======= ======= Promissory note issued in conjunction with the redemption of stockholder's common stock.......................... $ 2,500 $ -- $ -- $ -- $ -- ======== ======= ======= ======= ======= Issuance of common stock for stockholder notes receivable............................................. $ 198 $ 36 $ 199 $ -- $ -- ======== ======= ======= ======= ======= Repurchase of common stock for cancellation of stockholder notes receivable........................... $ -- $ 18 $ -- $ -- $ -- ======== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY International Microcircuits, Inc. (the "Company") was incorporated in California in 1972 and is a leading supplier of timing and EMI reduction integrated circuits for a broad range of applications. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Inter-Mic, a Foreign Sales Corporation. All significant intercompany balances and transactions are eliminated in consolidation. UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying interim consolidated balance sheet as of June 30, 2000, consolidated statements of operations and cash flows for the three months ended June 30, 1999 and 2000 and the consolidated statement of changes in stockholders' equity (deficit) for the three months ended June 30, 2000, together with related notes are unaudited. In the opinion of management such unaudited information includes all adjustments, consisting of only normal recurring adjustments, which the Company considers necessary to present fairly, in all material respects, the Company's consolidated financial position as of June 30, 2000, the results of operations and cash flows for the three months ended June 30, 1999 and 2000 and changes in stockholders' equity (deficit) for the three months ended June 30, 2000. Results of operations for the three months ended June 30, 2000 are not necessarily indicative of the results for the entire fiscal year of for any other future period. RECAPITALIZATION During the year ended March 31, 1998, the Company entered into a series of agreements providing for the recapitalization of the Company (the "Recapitalization"). The Recapitalization was comprised of a number of interrelated transactions including (i) the redemption of approximately 92% of the shares of common stock owned by the then sole stockholder (the "Redemption"); (ii) the sale of 3,159,128 shares of the Company's Mandatorily Redeemable Convertible Preferred Stock for $13.8 million to investors to partially finance the Redemption; (iii) the borrowing from a financial institution of $15.0 million to provide additional financing for the Redemption and the ongoing operations of the Company; and (iv) the repurchase of a portion of the outstanding options to purchase shares of the Company's common stock. Until November 19, 1997, the Company's common stock was owned by a sole stockholder, at which time the Company began a series of transactions which redeemed 15,896,250 shares of the sole stockholder's total holdings of 17,213,000 shares of common stock for $1.51 per share, or $24.3 million including repurchase costs. The Redemption was paid by $21.8 million of cash and issuance of a $2.5 million promissory note. Pursuant to the Recapitalization and Redemption, the stockholder also has the right to require the Company to repurchase his remaining 1,316,250 shares of common stock at any time after the second anniversary of the closing of the Redemption but before the third anniversary of the closing of the Redemption, at a per share purchase price of $1.51. Based upon the voting rights of the holders of Mandatorily Redeemable Convertible Preferred Stock, such stockholders control the Company and have the right to elect the Company's Board of Directors and to influence other aspects of the Company's business. See Note 6. The issuance of the F-7 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Mandatorily Redeemable Convertible Preferred Stock resulted in a beneficial conversion feature in the amount of $192,000, which was recorded as a deemed dividend on preferred stock over the two year period from issuance to when the security became convertible. The 1995 Stock Option Plan provides that all outstanding options to purchase the Company's common stock vest immediately upon close of a Change in Control event, as defined. The sale of the Mandatorily Redeemable Convertible Preferred Stock resulted in such a Change in Control event and, therefore, all of the options then outstanding became fully vested. The Company, however, purchased for cash from participating employees, at a net price of $1.19 per share, options to purchase 3,269,025 shares of common stock, representing the $1.51 per share paid in connection with the Redemption, less the $0.32 exercise price of the options purchased from the employees. The aggregate cash payment of $3.9 million was recorded as employee compensation expense in the accompanying statement of operations for the year ended March 31, 1998. The remaining outstanding options at the date of consummation of the Recapitalization (i) were exercised for cash, (ii) were exercised by issuance of a promissory note or (iii) remained outstanding. STOCK SPLIT In February 1998, the Company effected a three-for-two stock split. In February 2000, the Company effected another three for two stock split. The number of shares and prices of common stock and options presented in these financial statements have been retroactively restated to give effect to the stock splits. REVENUE RECOGNITION Revenue from product sales to original equipment manufacturers and from sales to distributors who have no, or limited, product return rights and no price protection rights, is recognized upon shipment, net of allowances for estimated returns. When distributors have product return or price protection rights, the Company defers revenue recognition until the time the distributor sells the product to the end customer. For products shipped to distributors, no revenue or cost of sales is recorded. However, the Company records a receivable for the selling price, relieves inventory at cost of goods shipped and defers the margin in accrued liabilities. CONCENTRATION OF CREDIT RISK, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade accounts receivable. The majority of the Company's receivables are derived from sales to customers in the computer and telecommunication markets in the United States, Asia and Europe. Concentrations of credit risk with respect to trade receivables for international sales are limited as the sales are primarily made under letter of credit arrangements or the sales amounts are prepaid by the customer. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility. The Company's write-offs of accounts receivable were not significant for each of the three years ended March 31, 2000. The Company's sales are denominated in U.S. dollars and the risk of foreign exchange fluctuations has been minimal. F-8 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) The Company is dependent on independent foundries and a limited number of assembly subcontractors with whom it has no long term contracts. The inability or unwillingness of these suppliers to meet the Company's requirements would delay our product shipments and harm our business. INVENTORY Inventory is stated at the lower of cost or market, cost being determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment and leasehold improvements are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets which are generally three to five years. Leasehold improvements and equipment under capital leases are amortized over the shorter of the lease term or their estimated useful lives. LONG-LIVED ASSETS The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. USE OF ESTIMATES The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from those estimates. STOCK COMPENSATION The Company accounts for stock-based employee compensation arrangements using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of grant over the stock option exercise price. Expense associated with stock-based compensation is amortized on an accelerated basis over the vesting period of the individual award consistent with the method described in Financial Accounting Standards Board Interpretation No. 28 ("FIN 28"). The Company accounts for stock issued to nonemployees in accordance with the provisions of Statement of Financial Accounting standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and Emerging Issues Task Force Consensus No. 96-18, stock option awards issued to nonemployees are accounted for at their fair value, determined using the Black-Scholes option pricing method. The fair value of each nonemployee F-9 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) stock option or award is remeasured at each period end until a commitment date is reached, which is generally the vesting date. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components and is effective for periods beginning after December 15, 1997. The Company had no items of other comprehensive income during any of the periods presented. NET INCOME (LOSS) PER SHARE The Company reports both basic net income (loss) per share, which is based on the weighted average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted net income (loss) per share which is based on the weighted average number of common shares outstanding and dilutive potential common shares outstanding. Diluted net income per share includes the conversion of the Mandatorily Redeemable Preferred Stock into common stock and Series A Redeemable Preferred Stock as if the conversion occurred at the beginning of the period. Dividends related to Series A Redeemable Preferred Stock reduce net income available to common stockholders. All potential dilutive securities are excluded from the calculation in the year ended March 31, 1998 as their inclusion would be anti-dilutive. F-10 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) The following tables set forth the computation of basic and diluted net income (loss) per share of common stock (in thousands, except per share amounts):
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------ ------------------------- 1998 1999 2000 1999 2000 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) BASIC: Net income(loss).................. $(2,197) $ 987 $ 1,774 $ 425 $ 217 Deemed dividend related to beneficial conversion feature of preferred stock................. (24) (96) (72) (24) -- ------- ------- ------- ------- ------- Net income (loss) attributable to common stockholders............. $(2,221) $ 891 $ 1,702 $ 401 $ 217 ======= ======= ======= ======= ======= Weighted average common shares outstanding..................... 13,008 3,185 4,031 3,708 4,561 Less: Weighted average unvested common shares subject to repurchase...................... -- (450) (429) (680) (579) ------- ------- ------- ------- ------- Denominator for basic calculation... 13,008 2,735 3,602 3,028 3,982 ======= ======= ======= ======= ======= Basic net income (loss) per share... $ (0.17) $ 0.33 $ 0.47 $ 0.13 $ 0.05 ======= ======= ======= ======= ======= DILUTED: Net income (loss)................. $(2,197) $ 987 $ 1,774 $ 425 $ 217 Deemed dividend related to beneficial conversion feature of preferred stock................. (24) (96) (72) (24) -- Series A preferred stock dividend........................ -- (746) (746) (187) (187) ------- ------- ------- ------- ------- Net income (loss) attributable to common stockholders............... $(2,221) $ 145 $ 956 $ 214 $ 30 ======= ======= ======= ======= ======= Weighted average common shares outstanding..................... 13,008 3,185 4,031 3,708 4,561 Effect of dilutive securities: Stock options................... -- 795 1,215 1,806 1,829 Convertible preferred stock..... -- 10,662 10,662 10,662 10,662 ------- ------- ------- ------- ------- Denominator for diluted calculation....................... 13,008 14,642 15,908 16,176 16,052 ======= ======= ======= ======= ======= Diluted net income (loss) per share............................. $ (0.17) $ 0.01 $ 0.06 $ 0.01 $ 0.00 ======= ======= ======= ======= =======
Potential common shares which were antidilutive in the year ended March 31, 1998 and excluded from the calculation include 10,662,000 shares of Mandatorily Redeemable Convertible Preferred Stock and options to purchase 3,217,000 shares of common stock. No potential common shares were excluded from any other period presented. F-11 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PRO FORMA NET INCOME PER SHARE (UNAUDITED) Pro forma basic net income per share for the year ended March 31, 2000 and three months ended June 30, 2000 is computed using the weighted average number of common shares outstanding, including the conversion of all the outstanding shares of Mandatorily Redeemable Convertible Preferred Stock into 10,662,057 shares of common stock and 3,159,128 shares of Series A Redeemable Preferred Stock effective upon the closing of the Company's initial public offering, as if such conversion occurred on April 1, 1999 and April 1, 2000, respectively. Pro forma diluted net income per share is computed using the pro forma weighted average number of common and potential common shares outstanding. Pro forma potential common shares consist of common stock subject to repurchase and stock options and warrants using the treasury stock method. PRO FORMA MANDATORILY REDEEMABLE PREFERRED SECURITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED) Effective upon the closing of the Company's initial public offering, the outstanding shares of Mandatorily Redeemable Convertible Preferred Stock will be converted into 10,662,057 shares of common stock and 3,159,128 shares of Series A redeemable preferred stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma statement of stockholders' equity as if such conversion had occurred at June 30, 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement on Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at fair market value, and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect to such derivative. The Company currently does not hold any derivative instruments that will be affected by the adoption of SFAS No. 133. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosures related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, "Amendment: Revenue Recognition in Financial Statements" which extends the effective date of SAB 101 to the fourth fiscal quarter of fiscal years commencing after December 15, 1999. The SEC is preparing to issue interpretative guidance relating to SAB 101, and the FASB continues to address revenue and other related accounting issues. The management of the Company believes it is in compliance with all of the rules and related guidance as they currently exist related to SAB 101. However, any changes to generally accepted accounting principles in these areas could impact the Company's accounting for its operations. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). This Interpretation clarifies the definition of employee for the F-12 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) purposes of applying Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that FIN 44 will not have a material effect on the financial position or results of operations of the Company. NOTE 2--BALANCE SHEET COMPONENTS (IN THOUSANDS):
MARCH 31, ------------------- JUNE 30, 1999 2000 2000 -------- -------- ----------- (UNAUDITED) INVENTORY: Work in process............................... $ 1,879 $ 753 $1,393 Finished goods................................ 798 1,887 1,011 ------- ------- ------ $ 2,677 $ 2,640 $2,404 ======= ======= ====== PROPERTY AND EQUIPMENT: Building improvements......................... $ 17 $ 50 Machinery and equipment....................... 6,627 7,020 Furniture and fixtures........................ 250 250 Software...................................... 1,854 2,646 ------- ------- 8,748 9,966 Less: Accumulated depreciation and amortization................................ (6,904) (7,884) ------- ------- $ 1,844 $ 2,082 ======= =======
During July 1998, the Company disposed of land and a building with a net book value of $2,810,000. The Company recorded a gain on disposal of $3,060,000. The Company subsequently leased the land and building from the buyer and deferred the gain on disposal which will be recognized ratably over the life of the lease, which is 84 months. The Company recognized $294,000 and $436,000 of the gain during the years ended March 31, 1999 and 2000, respectively. During December 1997, the Company disposed of property and equipment with a net book value of $1,574,000 primarily related to its gate array product line. The Company recorded a loss on the disposal of $1,440,000.
MARCH 31, ------------------- 1999 2000 -------- -------- ACCRUED EXPENSES AND OTHER LIABILITIES: Accrued compensation...................................... $ 768 $1,748 Customer deposits......................................... 76 64 Deferred income on sales to distributors.................. 188 716 Other..................................................... 1,745 1,771 ------ ------ $2,777 $4,299 ====== ======
F-13 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--LINE OF CREDIT: The Company has a line of credit arrangement under a Loan Agreement, effective December 16, 1997, (the "Agreement") with a bank which allows for borrowings up to the lesser of $5 million or (i) 80% of net outstanding eligible accounts receivable balances, as defined, plus (ii) 50% of net outstanding eligible foreign accounts receivable, as defined, plus (iii) 100% of the net outstanding eligible receivables supported by a letter of credit from a financial institution. The Agreement also includes a term loan arrangement (see Note 4). Borrowings under the line of credit bear interest at either the bank's prime rate (9% at March 31, 2000) plus 0.5% or the LIBOR rate (7% at March 31, 2000) plus 2%, at the election of the Company. The line of credit expires on December 16, 2002. In addition, the Agreement requires the Company to comply with certain financial covenants, with which the Company was in compliance as of March 31, 2000. There were no borrowings outstanding under this line of credit arrangement at March 31, 2000. NOTE 4--LONG-TERM DEBT (IN THOUSANDS):
MARCH 31, ------------------- 1999 2000 -------- -------- LONG-TERM DEBT CONSISTS OF: Term loan................................................. $5,750 $3,950 Promissory note........................................... 2,500 2,500 ------ ------ 8,250 6,450 Less: Current portion..................................... (900) (900) ------ ------ $7,350 $5,550 ====== ======
TERM LOAN Pursuant to the Recapitalization, the Company borrowed $15 million under a term loan arrangement from a bank. The term loan bears interest at either the bank's prime rate (9% at March 31, 2000) plus 0.5% or the LIBOR rate (7% at March 31, 2000) plus 2.0%, at the election of the Company. On September 11, 1998, the term loan agreement was amended to reduce the quarterly principal payments and to waive compliance with certain covenants. The term loan is payable in quarterly installments of principal and interest through December 2002. The Agreement requires that the Company maintain certain financial covenants with which it was in compliance at March 31, 2000. Debt issuance costs of $325,000 are being amortized over the term of the term loan. During the year ended March 31, 2000, the Company made principal payments on the term loan aggregating $1,800,000, of which $900,000 were made in advance of the scheduled due date. During the three month period ended June 30, 2000, the Company made principal payments on the term loan aggregating $750,000, all of which were made in advance of the scheduled due date (unaudited). PROMISSORY NOTE In December 1997, the Company borrowed $2.5 million under a promissory note (the "Note") issued to the Company's former sole stockholder pursuant to the Redemption. The Note bears interest at 9% per annum. Interest on the unpaid principal balance is payable semi-annually. The principal balance will be payable in equal semiannual installments beginning on the date the Company has fully repaid the $15 million term loan, provided, however, that all principal and accrued interest will be due F-14 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--LONG-TERM DEBT (IN THOUSANDS): (CONTINUED) and payable on the earlier of (i) December 16, 2003 or (ii) upon the closing of a qualified initial public offering, as defined. Future maturities of long-term debt are as follows (in thousands):
MARCH 31, - --------- 2001........................................................ $ 900 2002........................................................ 1,800 2003........................................................ 1,250 2004........................................................ 2,500 ------ $6,450 ======
NOTE 5--COMMITMENTS: The Company leases its primary facilities under an operating lease that was entered into in July 1998 and which expires in June 2005. Rent expense for the years ended March 31, 1999 and 2000 were $375,000 and $627,000, respectively. No rent expense was incurred in the year ended March 31, 1998. Future commitments under the non-cancelable lease are (in thousands):
YEAR ENDING MARCH 31, - --------------------- 2001........................................................ $ 627 2002........................................................ 627 2003........................................................ 627 2004........................................................ 627 2005........................................................ 627 Thereafter.................................................. 157 ------ $3,292 ======
F-15 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--MANDATORILY REDEEMABLE SECURITIES: The articles of incorporation of the Company, as restated, authorize 6,600,000 shares of preferred stock of which 4,950,000 shares have been designated Mandatorily Redeemable Convertible Preferred Stock and 4,950,000 shares have been designated as Series A Redeemable Preferred Stock. A summary of mandatorily redeemable securities is as follows:
MARCH 31, ------------------- 1999 2000 -------- -------- Mandatorily Redeemable Convertible Preferred Stock, no par value; 3,159,128 shares issued and outstanding.......... $13,742 $13,824 Mandatorily Redeemable Common Stock, no par value; 1,316,250 shares issued and outstanding................. 473 1,997 Series A Redeemable Preferred Stock, no par value; no shares issued or outstanding............................ -- -- ------- ------- $14,225 $15,821 ======= =======
MANDATORILY REDEEMABLE COMMON STOCK Pursuant to the Recapitalization and the Redemption, the Company redeemed 15,896,250 shares of common stock held by its sole stockholder. In addition, the sole stockholder obtained the right to redeem his remaining 1,316,250 shares of common stock during the period from the second anniversary of the closing of the Redemption to the third anniversary of the closing of the Redemption at a per share price of $1.51. As a result of this redemption right, the Company has reclassified these shares from common stock to mandatorily redeemable securities. The Company has accreted to the mandatory redemption amount of $1,997,000 over the two year period from the closing date of the Redemption to the date the shares became redeemable. Such accretion aggregated $26,000, $404,000 and $1,524,000 for the years ended March 31, 1998, 1999 and 2000, respectively. At March 31, 2000, the shares were redeemable by the holder. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A REDEEMABLE PREFERRED STOCK Pursuant to the Recapitalization, the Company issued 3,159,128 shares of Mandatorily Redeemable Convertible Preferred Stock at a purchase price of $4.376 per share. The Mandatorily Redeemable Convertible Preferred Stock and Series A Redeemable Preferred Stock have certain rights with respect to voting, dividends, liquidation, redemption and conversion as follows: VOTING--The holders of Mandatorily Redeemable Convertible Preferred Stock are entitled to elect four Directors of the Company and are entitled to vote for all other Directors of the Company with holders of other shares of capital stock on an equal basis. The holders of Mandatorily Redeemable Convertible Preferred Stock are entitled to vote together with holders of common stock upon all matters submitted to a vote of shareholders on an equal basis, excluding those matters required to be submitted to a class or series vote. Holders of Series A Redeemable Preferred Stock are not entitled to vote on any matters except to the extent otherwise required under the Corporation Law. The holders of Series A Redeemable Preferred Stock are entitled to elect one Director. DIVIDENDS--Holders of Mandatorily Redeemable Convertible Preferred Stock are entitled to receive dividends as the Board of Directors may determine in its sole discretion, provided a dividend is F-16 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--MANDATORILY REDEEMABLE SECURITIES: (CONTINUED) also declared on all outstanding shares of common stock. Holders of Series A Redeemable Preferred Stock are entitled to receive cumulative dividends at a per share rate of 6% of $3.9384 per annum, whether or not they have been declared and whether or not there are profits, surplus, or other funds of the Company legally available for the payment of dividends, and in preference to any declaration or payment of any dividend on the common stock or other capital stock of the Company ranking junior to Series A Redeemable Preferred Stock. The issuance of the Mandatorily Redeemable Convertible Preferred Stock resulted in a beneficial conversion feature in the amount of $192,000, which was reflected as a deemed dividend on preferred stock over the two year period from issuance to when the security became convertible. Deemed dividends on preferred stock totaled $24,000, $96,000 and $72,000 for the years ended March 31, 1998, 1999 and 2000, respectively. LIQUIDATION--Upon any liquidation, dissolution or winding up of the Company, the holders of Mandatorily Redeemable Convertible Preferred Stock are entitled to receive, prior to any distribution to the holders of common stock or of any other stock ranking on liquidation junior to Mandatorily Redeemable Convertible Preferred Stock, an amount equal to $4.376 per share, plus any accumulated but unpaid dividends and any interests accrued to which such holder is then entitled. However, if the holders would receive more in the event their shares were converted into Series A Redeemable Preferred Stock and common stock (see below for conversion rights), then each holder would receive an amount equal to such holder's Series A Redeemable Preferred Stock liquidation preference amount (as defined below), plus any dividends accumulated but unpaid, in addition to an amount equal to such holder's common stock liquidation preference amount. The holders of Series A Redeemable Preferred Stock are entitled to receive, prior and in preference to any distribution to the holders of common stock or of any other stock ranking on liquidation junior to Series A Redeemable Preferred Stock, an amount equal to $3.9384 per share plus any accumulated but unpaid dividends and any interests accrued to which such holder is then entitled. REDEMPTION--At any time after December 5, 2003, any holder of Mandatorily Redeemable Convertible Preferred Stock may require the Company to redeem up to 50% of the outstanding shares held by such holder at $4.376 per share. At any time after December 5, 2004, any holder of Mandatorily Redeemable Convertible Preferred Stock may require the Company to redeem up to all the outstanding shares held by such holder. The Company shall redeem all outstanding shares of Series A Redeemable Preferred Stock upon the election of at least 66 2/3% of the holders upon the closing of a qualified initial public offering ("IPO"). Pursuant to a request of the principal underwriter or the Company at the closing of an IPO, and upon the election of at least 66 2/3% of the holders of Series A Redeemable Preferred Stock, the holders can agree to waive their redemption election right. In the event that this may occur, all outstanding shares shall be exchanged for notes ("Series A Notes") in the aggregate principal amount equal to the aggregate Series A Redeemable Preferred Stock redemption price equal to $3.9384 per share. The Series A Notes shall mature on the second anniversary of the IPO effective date and bear interest at a rate of 10% per annum. The Company may also elect to redeem all shares of Series A Redeemable Preferred Stock at any time upon the closing of an IPO. At any time after the later of the first anniversary of the date of conversion of the Mandatorily Redeemable Convertible Preferred Stock and December 5, 2003, the Company may elect, or any Series A Redeemable Preferred Stock holder may require the Company, to redeem up to 50% of the outstanding shares held by the holder. At any time after the later of the second anniversary of the date of the conversion of the Mandatorily Redeemable Convertible Preferred Stock and December 5, 2004, F-17 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--MANDATORILY REDEEMABLE SECURITIES: (CONTINUED) the Company may elect, or any Series A Redeemable Preferred Stock holder may require the Company, to redeem up to all of the outstanding shares held by the holder. CONVERSION--The holders of Mandatorily Redeemable Convertible Preferred Stock have conversion rights, subject to the election of at least 66 2/3% of the holders. Each share of Mandatorily Redeemable Convertible Preferred Stock is convertible into one share of Series A Redeemable Preferred Stock and the number of shares of common stock which results from dividing the per share Conversion Value by the Conversion Price per share (at issuance, the conversion ratio into common stock was one-for-one, subject to adjustments for future stock splits and dividends). At March 31, 2000, the per share Conversion Value was $4.376 and the Conversion Price per share was $1.30. The Mandatorily Redeemable Convertible Preferred Stock shall be automatically converted into shares of common stock and Series A Redeemable Preferred Stock as of the closing of the Company's first underwritten offering to the public provided that (i) such offering generates net proceeds of not less than $20 million at a price of $8.75 per share of common stock, (ii) such stock is listed on either the New York Stock Exchange or the NASDAQ National Market System, and (iii) if a redemption of Series A Redeemable Preferred Stock is made, either (A) all outstanding shares of Series A Redeemable Preferred Stock are redeemed, (B) cash in an amount sufficient to redeem all outstanding shares of Series A Redeemable Preferred Stock is segregated and irrevocably held by the Company for payment to holders of Series A Redeemable Preferred Stock or (C) all outstanding shares of Series A Redeemable Preferred Stock are exchanged for Series A Notes. A sufficient number of shares of common stock and Series A Redeemable Preferred Stock are reserved to satisfy the rights of conversion of the holders of the Mandatorily Redeemable Convertible Preferred Stock. NOTE 7--STOCK OPTION PLANS: The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the Company's Board of Directors in November 1995. The 1995 Plan provided for grants of incentive stock options to employees, nonemployee directors and consultants at prices determined by the Board of Directors, subject to certain conditions as defined. Generally, these conditions limited prices for the grants ranging from 85% to 110% of the fair market value of the stock, as determined by the Board of Directors, at the date of grant based on the type of the award and the number of shares of common stock held by the grantee at the date of the award. Options generally vest at a rate of not less than 25% per year over four years following the date of grant subject to the optionee's continuous service or vest immediately upon a Change in Control event. In November 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997 Plan") which provides for granting of incentive and nonstatutory stock options, stock bonuses, restricted stock purchase rights and stock appreciation rights ("SARs"). Incentive stock options and stock appreciation rights may be granted only to employees, and stock awards other than incentive stock options and stock appreciation rights may be granted only to employees, directors or consultants. The 1997 Plan permits the optionee to surrender an exercisable SAR for an amount equal to the excess of the market price of the common stock over the SAR price when the right is exercised. There were no outstanding SARs at March 31, 2000. Options granted under the 1997 Plan are generally for periods not to exceed ten years and are granted at prices not less than 100% and 85%, for incentive and nonstatutory stock options, respectively, of the fair market value of the stock, as determined by the Board of Directors, on the date F-18 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--STOCK OPTION PLANS: (CONTINUED) of grant. Incentive stock options or awards to purchase restricted stock granted to stockholders who own greater than 10% of the outstanding stock are for periods not to exceed five years, and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant, or in the case of restricted stock purchase award, the purchase price is at least 100% of the fair market value of the stock on the date of grant. Subject to certain provisions of the 1997 Plan relating to changes in stock ownership, no person shall be eligible to be granted options and stock appreciation rights covering more than 750,000 shares of the Company's common stock in any twelve month period. Options granted under the 1997 Plan will generally provide for vesting of at least 20% per year of the total number of shares subject to the option. A total of 5,540,437 shares of common stock have been reserved for issuance under the 1997 Plan at March 31, 2000. Restricted stock awards issued under the 1997 Plan provide that the purchase price shall in no event be less than 85% of the stock's fair market value on the date such award is made. There was no restricted stock issued under the 1997 Plan as of March 31, 2000. Activity under the 1995 and 1997 Plans is summarized as follows:
WEIGHTED AVERAGE OPTIONS EXERCISE OUTSTANDING PRICE ----------- -------- Balance at March 31, 1997............................... 2,492,355 $0.33 Granted................................................. 5,157,000 0.23 Exercised............................................... (1,141,425) 0.33 Repurchased for cash (See Note 1)....................... (3,269,025) 0.33 Cancelled............................................... (21,517) 0.33 ---------- Balance at March 31, 1998............................... 3,217,388 0.25 Granted................................................. 906,750 0.46 Exercised............................................... (1,292,336) 0.17 Cancelled............................................... (614,634) 0.18 ---------- Balance at March 31, 1999............................... 2,217,168 0.28 Granted................................................. 553,200 0.84 Exercised............................................... (966,887) 0.29 Cancelled............................................... (226,012) 0.31 ---------- Balance at March 31, 2000............................... 1,577,469 0.47 Granted (unaudited)..................................... 301,500 0.95 Exercised (unaudited)................................... (29,603) 0.15 Cancelled (unaudited)................................... (55,618) 0.70 ---------- Balance at June 30, 2000 (unaudited).................... 1,793,748 0.54 ==========
F-19 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--STOCK OPTION PLANS: (CONTINUED) The options outstanding and currently exercisable by exercise price at March 31, 2000 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING AVERAGE EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE PRICE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE - --------------------- ----------- -------- ------------ ----------- -------- 0.15....$..... 825,407 $0.15 7.86 440,419 $0.15 0.33....$..... 38,812 $0.33 6.28 36,101 $0.33 0.70....$..... 5,625 $0.70 8.56 2,026 $0.70 0.71....$..... 202,500 $0.71 8.89 55,896 $0.71 0.73....$..... 81,000 $0.73 9.21 -- -- 0.80....$..... 85,500 $0.80 9.44 -- -- 0.87....$..... 338,625 $0.87 9.67 -- -- --------- ------- 1,577,469 534,442 ========= =======
FAIR VALUE DISCLOSURES For purposes of the following pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the minimum value method with the following assumptions used for grants in the years ended March 31, 1998, 1999 and 2000: dividend yield of 0.0%; average risk free interest rates of 5.04% through 6.56% and weighted average option life of five years. The weighted average fair value of options granted during the years ended March 31, 1998, 1999 and 2000 with exercise prices equal to the market price at the date of grant is $0.47, $0.35 and $0.86 per share, respectively. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net income (loss) would have been the pro forma amounts indicated below:
YEAR ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- Pro forma net income (loss)......................... $(2,930) $ 898 $1,657 Pro forma net income (loss) per share: Basic............................................. $ (0.23) $0.25 $ 0.39 Diluted........................................... $ (0.23) $0.00 $ 0.05
REPURCHASED OPTIONS Pursuant to the Recapitalization, the Company offered to purchase previously granted options held by employees for 3,793,838 shares of common stock at a net price of $1.19 per share. Employees accepted the Company's offer with respect to options for an aggregate of 3,269,025 shares, and the Company purchased these options from employees for cash totaling $3,894,000. The Company recorded a charge of $4,519,000 in December 1997 relating to the purchase and offer to purchase such options. F-20 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--STOCK OPTION PLANS: (CONTINUED) The remaining outstanding options not purchased by the Company were exercised for cash or stockholder notes at $0.48 per share, or remained outstanding. STOCK COMPENSATION During the year ended March 31, 1998, the Company determined that $1,197,000 of stock compensation existed relating to certain options granted during the year. The Company began recognizing the compensation ratably over the vesting period and expensed a total of $284,000 until the Recapitalization, at which time all options outstanding became immediately vested. The unrecognized stock compensation for these options of $913,000 was expensed as part of the charge recorded in connection with the Company's offer and purchase of options described above. In connection with certain employee stock option grants, the Company recognized deferred stock-based compensation, which is being amortized over the vesting periods of the related options, generally four years, using an accelerated basis. Future compensation charges are subject to reduction for any employee who terminates employment prior to such employee's option vesting date. During the years ended March 31, 1999 and 2000 and the three months ended June 30, 2000, the Company granted options and recorded deferred stock-based compensation of $71,000, $3,634,000 and $2,188,000 (unaudited), respectively, net of reversals associated with unvested shares of terminated employees. Unamortized deferred stock-based compensation at March 31, 1999, March 31, 2000 and June 30, 2000 was $64,000, $2,724,000 and $4,223,000 (unaudited), respectively. SHAREHOLDER NOTES At March 31, 1999 and 2000, stockholder notes used to exercise options to purchase common stock were outstanding totaling $168,000 and $367,000, respectively. Interest on the stockholder notes ranges from 5.12% to 6.50% per annum, compounded annually, and payable on each December 31 during the term of the notes. The principal portion of the stockholder notes matures in 6 years, but can be paid in full before maturity at the option of the holder. The Company recorded stock compensation of $255,000 and $39,000 related to outstanding stockholder notes during fiscal 1999 and 2000, respectively, representing the difference between the original exercise price of the stock options and the fair market value of the Company's common stock at each respective year end. In June 1999, the shareholder notes were amended so that no further stock compensation expense will be recorded. OPTIONS TO CONSULTANTS In May 2000, the Company entered into an agreement to receive design services in exchange for cash and an option to purchase 60,000 shares of common stock at $0.95 per share. The option will become exercisable in increments as the services are performed and will be accounted for as a variable award. At June 30, 2000, approximately 6,000 shares were earned and had become exercisable and the Company expensed the related fair value of approximately $59,000. The Company believes that the fair value of the stock options are more reliably measurable than the fair value of the services received. F-21 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--INCOME TAXES: The components of the provision for (benefit of) income taxes are as follows (in thousands):
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- CURRENT PROVISION: Federal.......................................... $ -- $1,001 $1,738 State............................................ 1 217 285 ------- ------ ------ 1 1,218 2,023 ------- ------ ------ DEFERRED PROVISION: Federal.......................................... (1,053) (159) 24 State............................................ (164) (28) 5 ------- ------ ------ (1,217) (187) 29 ------- ------ ------ Provision for income taxes......................... $(1,216) $1,031 $2,052 ======= ====== ======
Deferred income taxes comprise the following:
MARCH 31, ------------------- 1999 2000 -------- -------- Accrued expenses and reserves............................... $ 747 $ 811 Deferred gain on sale-leaseback............................. 1,109 859 Other....................................................... 81 114 ------ ------ Deferred income tax assets.................................. 1,937 1,784 Less: Depreciation.......................................... (124) -- ------ ------ Net deferred income tax assets.............................. $1,813 $1,784 ====== ======
The provision for income taxes differs from the amount which would result by applying the applicable statutory federal rate to income before income taxes as follows:
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- Provision at federal statutory rate................ $(1,195) $ 706 $1,339 State taxes........................................ (108) 134 200 Stock-based compensation........................... 334 172 566 Other.............................................. (247) 19 (53) ------- ------ ------ $(1,216) $1,031 $2,052 ======= ====== ======
NOTE 9--ROYALTY COMMITMENTS: In September 1993, the Company entered into a license agreement, which was subsequently amended, that grants the Company a worldwide, nonexclusive license to make, have made, sell or otherwise transfer certain semiconductor chips in exchange for royalty payments. This license expires in F-22 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--ROYALTY COMMITMENTS: (CONTINUED) March 2003. Royalty expense was $405,000, $871,000 and $886,000 for the years ended March 31, 1998, 1999 and 2000, respectively. NOTE 10--BENEFIT PLANS: The Company has a retirement plan under Section 401(k) of the Internal Revenue Code. To be eligible for participation in the plan an employee must be at least 18 years old. Employees may contribute up to 20% of their annual compensation on a pre-tax basis. In fiscal 2000, the Company made matching contributions of $109,000. No such contributions were made in prior years. NOTE 11--INFORMATION CONCERNING BUSINESS SEGMENTS AND MAJOR CUSTOMERS: INFORMATION ABOUT PRODUCTS AND SERVICES The Company operates in a single industry segment where it designs, develops and markets timing and EMI reduction integrated circuits for a broad range of applications. The Company does not have separate operating segments for which discrete financial statements are prepared. The Company's management makes operating decisions and assesses performance based primarily on product revenues and related gross margins. INFORMATION ABOUT GEOGRAPHIC AREAS The Company markets its products in the United States and foreign countries. The following summarizes net revenues by geography (in thousands):
YEARS ENDED MARCH 31, ------------------------------ 1998 1999 2000 -------- -------- -------- United States.................................... $10,488 $ 7,623 $10,931 Taiwan........................................... 10,314 10,481 9,260 Singapore........................................ 1,896 8,349 10,268 Japan............................................ 1,631 3,189 6,760 Other............................................ 9,836 9,356 7,107 ------- ------- ------- $34,165 $38,998 $44,326 ======= ======= =======
INFORMATION ABOUT MAJOR CUSTOMERS Net revenue from three end users (directly and through distributors and contract manufacturers) accounted for 23%, 20% and 12%, respectively, of revenue in the year ended March 31, 2000. Revenue from one end user accounted for 16% of revenue in the year ended March 31, 1999. No one end user accounted for greater than 10% of total net revenue in the year ended March 31, 1998. Net revenues from two contract manufacturers accounted for 19% and 10%, respectively, of revenue in the year ended March 31, 2000. No one distributor accounted for greater than 10% of revenue in the year ended March 31, 1998 and 1999. One distributor accounted for 30% and 12% of total accounts receivable at March 31, 1999 and 2000, respectively. F-23 INTERNATIONAL MICROCIRCUITS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SUBSEQUENT EVENTS: Subsequent to June 30, 2000, the Board of Directors authorized the reincorporation of the Company in Delaware and, in conjunction with such reincorporation, a three-for-two stock split of the Company's common stock. All references to the number of shares of common stock and per share amounts have been retroactively restated in the accompanying financial statements to give effect to the reincorporation and stock split. The reincorporation and stock split will be effected prior to the date of the Company's initial public offering. F-24 FOR WIT SOUNDVIEW ONLINE PROSPECTUS ONLY "MEET THE MANAGEMENT" PRESENTATION FOR IMI Prospective investors will be able to log on to a Web site maintained by Wit SoundView's affiliate, Wit Capital Corporation, where a prospectus is available for review. Within designated sections of the prospectus, including the Underwriting Section of the prospectus, an embedded hyperlink click here for "Meet the Management" Presentation will provide exclusive access to the "Meet the Management" Presentation. This presentation highlights selected information contained elsewhere in the prospectus. This presentation does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements and notes to those financial statements, before making an investment decision. VISUAL 1: DISCLAIMER Imagery: Border and Company logo. Visual Text: The "Meet the Management" Presentation is part of our prospectus. This presentation highlights selected information contained elsewhere in this prospectus. This presentation does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements and notes to those financial statements, before making an investment decision. Script: (Ilhan Refioglu) The "Meet the Management" Presentation is part of our prospectus. This presentation highlights selected information contained elsewhere in this prospectus. This presentation does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements and notes to those financial statements, before making an investment decision. VISUAL 2: INTRODUCTION Imagery: Border and Company logo. See Description of Artwork on page 1 of the Registration Statement for a description of the image located on the inside front cover of the prospectus. Script: (Ilhan Refioglu) Welcome to the "Meet the Management" Presentation for IMI. I'm Ilhan Refioglu, President and CEO. I would like to introduce you to Judy Signorino, our Vice President, Finance and Chief Financial Officer. We would like to talk to you about IMI, a leading provider of high performance integrated circuit timing devices and EMI reduction and high performance logic integrated circuits for the computing, communications, and consumer electronics markets. VISUAL 3: INDUSTRY BACKGROUND Imagery: Border and Company logo. See Description of Artwork on page 1 of the Registration Statement for a description of the image located on the inside gate-fold of the prospectus. Visual Text: Title: Industry Background. Diagram with the captions "Computing," "Communications" and "Consumer" as well as photos of the various products under the captions. Box at the bottom with caption, "Increasing demand for high performance electronic systems" Script: (Ilhan Refioglu) (see "Business--Industry Background--Demand for High Performance Electronic Systems") Electronic systems play an increasingly important role in our lives, as evidenced by the growth in personal computing, communications and consumer electronics markets. The growth of these markets has been driven by the demand for, and availability of, electronic systems characterized by ever-improving performance, flexibility, reliability and functionality, as well as decreasing size, cost and power consumption. In addition, the dramatic growth of the Internet has resulted in consumer demand for greater bandwidth and higher speed. These demands have resulted in both the development of new, and the enhancement of existing products such as digital cameras, DVD A-1 players, game consoles, internet appliances, network routers and switches, notebook computers and set-top boxes. Advances in integrated circuits and improvements in semiconductor technology have contributed significantly to the increased performance of, and demand for, these electronic systems. These advances have also enabled the continuing transition from analog to digital systems. VISUAL 4: INDUSTRY BACKGROUND: COMPONENTS OF A DIGITAL SYSTEM Imagery: Border and Company logo. Diagram depicting the components of a digital system that consist of a Processor/Controller, Chip-set logic, Memory, Video, Modem and Audio. Visual Text: Title: Industry Background: Components of a Digital System. Box at the bottom with the caption, "The microprocessor is the brain.... IMI clocks are the Heartbeat!" Script: (Ilhan Refioglu) (see "Business--Industry Background--The Components Responsible for System Performance--The Role of Timing Devices in Electronic Systems") Electronic systems generate and manipulate electrical signals using primarily four types of components. These components include: control integrated circuits, such as microprocessors and controllers, memory integrated circuits, logic integrated circuits, which control the transfering, buffering and routing of data; and timing devices. The components of these electronic systems must continue to increase in performance in order to enable the continued development of higher performance systems. Timing devices enable communication among the components within systems as well as between systems. For proper communication between devices, their input and output signals must be coordinated. Timing devices are often described as providing the "heartbeat" of a system, as they generate the pulse by which all the system's components coordinate their communication. VISUAL 5: INDUSTRY BACKGROUND: THE GROWING IMPORTANCE OF EMI Imagery: Border and Company logo. Cartoon depiction of a system designer between a vice clamp labeled Product Requirements--High EMI on one side and FCC--Low EMI on the other side. Visual Text: Title: Industry Background: The growing importance of EMI. The side of the vice clamp labeled "Product Requirements" has bulleted text--"High Performance, High Speed, Low Cost, Portability" Script: (Ilhan Refioglu) (see "Prospectus Summary, Business--Industry Background--The Growing Importance of EMI") High performance computing, communications and consumer electronics systems operate at high frequencies and, as a result, emit elevated levels of electromagnetic interference, or EMI. Because EMI disrupts the operations of cellular phones, televisions and other communications systems, manufacturers of electronic equipment must reduce EMI to remain in compliance with EMI regulations established by the FCC. Manufacturers have employed a variety of costly and time consuming methods to reduce EMI, such use of shielding material. Using innovative integrated circuits, systems manufacturers can achieve EMI reduction in a timely and cost-effective manner. VISUAL 6: INDUSTRY BACKGROUND: DEMANDS Imagery: Border and Company Logo Visual Text: Title: Industry Background: Demands, Bullets that read: - Flexible and programmable solutions that enable faster time to market - Demand for high performance electronic systems - EMI reduction integrated circuits - Customer responsiveness A-2 Script: (Ilhan Refioglu) (see "Prospectus Summary, Business--Industry Background--Industry Demands") In order to meet the demand for higher performance systems in the computing, communications and consumer electronics markets, systems manufacturers require high performance integrated circuits with programmable feature that allow them to rapidly design and test systems assisting them in meeting their time-to-market and cost objectives. In addition, manufacturers need flexible solutions that reduce the overall size and cost of ownership of timing devices in their systems, while at the same time, effectively handling some of the associated system performance issues. The increasing system-wide EMI emissions that result from higher-frequency integrated circuits have compelled system designers to develop and implement new ways to further reduce these emissions. These factors all increase the need for very high performance timing, EMI reduction and logic circuits with outstanding performance specifications. Integrated circuit vendors are further required to accomplish these tasks in a cost-effective manner that responds flexibly to specific customer needs. VISUAL 7: IMI SOLUTION Imagery: Border and Company Logo. Four Rectangles with text, with an arrow leading to a take-away caption. Visual Text: Title: IMI Solution. The four rectangles will include the following text: Rectangle 1: Unique and Flexible Design Solution, Gate array architecture, prorietary input/output structures, extensive mixed-signal cell library. Rectangle 2: High Performance Product Solutions, Clocks, Zero Delay Buffers, EMI Reduction ICs, High Performance Logic ICs. Rectangle 3:Broad feature set, Dial-a-dB, Dial-a-frequency. Rectangle 4: Customer Responsiveness, Close relationships with customer, Fast-time to market capability Take-away box with, "Leading supplier of Clocks, Zero Delay Buffers and EMI reduction and High Performance Logic ICs" Script (Ilhan Refioglu): (see "Business--The IMI Solution") We believe our gate-array-based architecture, proprietary input/output structures and extensive mixed-signal cell library enable us to deliver flexible, high performance solutions to our customers faster than many of our competitors, which in turn assists our customers in achieving their time-to- market objectives. Our design methodology gives us fast design and prototype cycle times and enables rapid new product introductions. Our product design architectures have been optimized to provide flexibility during the development process while minimizing costs. We manufacture all of our clock products using the most advanced process technology in the timing device industry. This process technology, coupled with our advanced designs, enables us to provide devices that operate at high frequencies are well within industry standards specifications. We offer products with a wide range of features and integration levels to address a broad range of system requirements. Our clock products, for example, now include a variety of programmable features, including incremental frequency selection control, EMI reduction selection and control, and features that can alter device functionality. We develop long term relationships with our customers by working closely with their development engineers and providing quality customer service. We believe our unique fast time-to-market design capability enables us to respond to customer requests more rapidly than our competition. In addition, our production planning organization works closely with customer procurement groups to maintain aggressive product lead times, excellent on time delivery performance and flexible delivery terms. VISUAL 8: IMI STRATEGY Imagery: Border and Company logo. IMI logo in the center of visual. Circles filled with text connected to the logo as a spoke. A-3 Visual Text: Title: IMI strategy. The surrounding circles will include the following captions: Further Expand Market Share; Leverage Core Competencies Across Multiple, High Growth Markets; Further Penetrate Industry Leaders, and Continue to Expand Product Offering. Script: (Ilhan Refioglu) (see "Business--Our Strategy") Our strategy is to continue strengthening our position as an industry leader in the timing and EMI markets and to rapidly expand market share in the high performance logic market. We plan to further expand market share through the continued penetration of existing customers and the expansion of our sales, marketing, and application support organization to acquire new customers. We aim to leverage our core competencies in timing and EMI solutions across the high growth communications and consumer product markets. We intend to extend our leadership in the EMI market to maintain our position as the EMI solution provider of choice. Our strategy is to leverage our proven expertise in producing high performance products to further penetrate leading accounts, such as Cisco and Lucent in the communications market, Apple, Dell and IBM in the computing market and Sanyo and Sony in the consumer market. Additionally, we target industry leaders like AMD, ATI, Intel, nVidia and VIA that set the specifications for future system designs. We work closely with these companies to be adopted into their reference platforms. This enables broad acceptance of our products with leading manufacturers. We currently offer one of the most extensive timing solutions in the industry and more EMI reduction products than any of our competitors. We plan to continue to expand our portfolio by developing new timing, EMI reduction and logic products and to transition products over time to new product families and new manufacturing processes as product performance requirements and process technologies evolve. VISUAL 9: IMI PRODUCTS Imagery: Border and Company logo. Three column table with titles "Product Family," "Number of Products" and "Principal Applications." A-4 Visual Text: Title: IMI Products. The following information is included in this visual:
NUMBER OF PRODUCT FAMILY PRODUCTS PRINCIPAL APPLICATIONS - -------------------------------------------- ---------- ---------------------------- Clocks: Computing............................... 54 desktop computers notebook computers servers and workstations Application Specific.................... 12 digital cameras DVD players minidisc players Peripherals Zero Delay Buffers.......................... 17 memory modules network routers and switches servers and workstations EMI Reduction Integrated Circuits........... 19 digital cameras DVD players Peripherals High Performance Logic Integrated 10 network routers and switches Circuits.................................... servers and workstations
Script: (Ilhan Refioglu) (see "Prospectus Summary, Business--Products) We design, develop and market high performance integrated circuits for the computing, communications, and consumer electronics markets. Our product portfolio includes clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits. We currently offer more than 100 products, of which more than 50% have been introduced during the last 12 months. VISUAL 10: IMI CUSTOMERS Imagery: Border and Company logo. Two vertical rectangles with the titles "Market," and "Customers" Visual Text: Title: IMI Customers. Rectangles include captions listing the following customers: Computing: Apple, Dell, IBM, LG, Matsushita, NEC, Fujitsu Siemens, Sony Communications: Cisco, Harris, Metricom, Motorola Consumer Electronics & Peripherals: Canon, LG, Matsushita, Okidata, Samsung, Sanyo, Sony Script: (Ilhan Refioglu) (see "Business--Customers") We have sold our products to leading original equipment manufacturers in the computing, communications, and consumer electronics markets. We currently sell our products, directly and through distributors and contract manufactures, to more than 60 systems manufacturers. Our customers include Apple, Canon, Cisco, Dell, Hewlett-Packard, IBM, NEC, Panasonic, Pioneer, Sharp, Samsung, Sanyo and Sony. VISUAL 11: IMI COMPETITORS Imagery: Border and Company logo. Two rectangles with heading, "Competitive Factors" and "Competitors" and a caption box at the bottom. Visual Text: Title: IMI Competition. The rectangle with heading "Competitive Factors" has the following bulleted text: - Timeliness of new product introductions A-5 - Product performance, features, functionality and reliability - Service and support - Product pricing - Adoption of emerging industry standards - Brand name - Access to customers - Size and scope of distribution network The rectangle with "Competitors" has the following bulleted text: - Clock and EMI Market - Cypress, Integrated Circuit Systems - Zero Delay Buffers - Cypress, Motorola, Texas Instruments - Logic - Integrated Device Technology, Pericom, Philips and Texas Instruments The take-away box has the caption: "We believe we compete effectively with our competitors" Script: (Ilhan Refioglu) (see "Business--Competition") We believe the principal competitive factors in the markets in which we compete are: timeliness of new product introductions; product performance, features, functionality and reliability; service and support; product pricing; adoption of emerging industry standards; brand name; access to customers; and size and scope of distribution network. In the clock and EMI reduction markets our primary competitors include Cypress Semiconductor and Integrated Circuit Systems. In the zero delay buffer market, our primary competitors include Cypress, Motorola and Texas Instruments. In the logic market, our primary competitors include Integrated Device Technology, Pericom, Philips and Texas Instruments. We believe we compete effectively with respect to these factors with our competitors. And with that, I will turn it over to Judy for an overview of our financial results. Judy.... VISUAL 12: FINANCIAL SUMMARY Imagery: Border and Company logo. Quarterly results of Operations (June 30, 1998--June 30, 2000). Visual Text: Title: Financial Summary. "Quarterly Results of Operations" table. Script: (Judy Signorino) (See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Quarterly Results of Operations"). We were founded in 1972 as a supplier of semi-custom gate-array integrated circuits. In 1991, we entered the timing device market. We introduced our first EMI reduction circuits in 1994, our first zero delay buffers in fiscal 2000, and our initial line of high performance logic chips in fiscal 2001. In 1997, we decided to focus our efforts on establishing a leadership position in the timing device market and discontinued production of semi-custom gate-array integrated circuits. At that time, we also decided to outsource all wafer fabrication to independent foundries and discontinued operation of our own wafer fabrication facility. All fixed assets related to our wafer fabrication facility were sold, and the $1.4 million loss on the transaction was recorded in fiscal 1998. A-6 In December 1997, we recapitalized our company, resulting in a group of investors acquiring a 92% equity interest in our company. The following table sets forth unaudited statement of operations data for each of the nine quarters ended June 30, 2000. This information has been derived from our unaudited financial statements. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto appearing elsewhere in the prospectus. Our quarterly operating results have been affected by seasonal factors. Original equipment manufacturers that purchase our integrated circuits for incorporation into personal computers and consumer electronics typically increase their purchases during the pre-year-end holiday period. As a result, our revenues have historically peaked in the second and third quarter of each fiscal year and declined in the fourth quarter of the fiscal year. We expect these seasonal fluctuations to continue for the foreseeable future. The increases in quarterly revenue from one fiscal year to the next were primarily due to increased unit shipments as the result of new customer design wins. Gross margins in each quarter in fiscal 2000 have improved over the corresponding quarter in fiscal 1999 due to a shift in product mix toward our higher-margin EMI reduction and zero delay buffer integrated circuits and to reductions in per unit manufacturing costs. Gross margins have varied on a sequential quarterly basis due to seasonal revenue levels and quarterly fluctuations in product mix. Research and development expenses increased primarily due to the hiring of additional development personnel and consultants and an increase in prototyping costs. The high expenditures in the quarters ended March 31, 2000 and December 31, 1998 were due to unusually large numbers of prototypes delivered during those quarters. Selling, general and administrative expenses fluctuate primarily as the result of sales commissions, which are based on quarterly revenue. The unusually high expenditures in the quarters ended March 31, 2000 and June 30, 2000 were related to the expansion of our direct international sales force and the hiring of additional applications engineers. This was a summary of our financial performance--now back to Ilhan. VISUAL 13: END OF PRESENTATION Imagery: See Description of Artwork on page 1 of the Registration Statement for a description of the image located on the inside front cover of the prospectus. Script: (Ilhan Refioglu): (Prospectus Summary) We hope that this presentation was helpful in understanding the business model of IMI and the strategy that our management team intends to execute. In conclusion, there exists a growing demand for fast, high-bandwidth electronic systems characterized by ever improving performance, flexibility, reliability and functionality, as well as decreasing size, cost and power consumption. We have developed a compelling product portfolio consisting of clocks, zero delay buffers and EMI reduction and high performance logic integrated circuits to address these markets, as evidenced by our significant design wins with industry leaders such as Compaq, Cisco, Dell and Sony. In addition our timing devices are designed in the Intel reference mobile motherboard. We have also successfully penetrated the digital camera, DVD and minidisc player markets with recent design wins at Sanyo, Sony and Kenwood. We encourage you to refer to the prospectus for additional support and disclosure as well as to take a look at "Risk Factors" in detail. Again, thank you for your interest in IMI. A-7 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares [LOGO] Common Stock ------------------------ PROSPECTUS ------------------------ WIT SOUNDVIEW NEEDHAM & COMPANY, INC. , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all costs and expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee. Securities and Exchange Commission registration fee......... $ 19,127 NASD filing fee............................................. 7,745 Nasdaq National Market application fee...................... 95,000 Blue sky qualification fees and expenses.................... 5,000 Printing and engraving expenses............................. 175,000 Legal fees and expenses..................................... 350,000 Accounting fees and expenses................................ 400,000 Director and officer liability insurance.................... 250,000 Transfer agent and registrar fees........................... 7,500 Miscellaneous expenses...................................... 40,628 ---------- Total................................................... $1,350,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate of Incorporation and Bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant intends to enter into separate indemnification agreements (Exhibit 10.1) with its directors and officers which would require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). The Registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (a) Since March 31, 1997, the Registrant has issued and sold the following unregistered securities: (1) Since March 31, 1997, the Registrant has granted options to purchase an aggregate of 6,918,450 shares of its common stock. (2) On December 16, 1997, the Registrant sold 3,159,128 shares of its mandatorily convertible preferred stock to a group of investors at a purchase price of $4.376 per share. (b) There were no underwriters employed in connection with any of the transactions set forth in Item 15(a). II-1 (c) The issuances described in Item 15(a)(1) were deemed exempt from registration under the Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The issuances described in Item 15(a)(2) were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS.
EXHIBIT NUMBER NAME OF DOCUMENT ------- ---------------- *1.1 Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Registrant 3.2 Amended and Restated Bylaws of the Registrant *3.3 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed after the closing of the offering *4.1 Specimen certificate representing the common stock *5.1 Opinion of Gray Cary Ware & Freidenrich LLP *10.1 Form of Indemnification Agreement between the Registrant and the Registrant's directors and officers 10.2 Standard Industrial Lease dated July 1998 by and between Marin County Employees' Retirement Association and the Registrant 10.3 Sublease dated February 5, 1999 by and between Devcon Microcircuits, Inc. and the Registrant +10.4 License Agreement effective as of August 1, 1995 by and between Lexmark International, Inc. and the Registrant +10.5 Task Order effective on December 1, 1999 by and between International Business Machines Corporation and the Registrant 10.6 Preferred Stock Purchase Agreement dated November 19, 1997 by and among the Registrant and certain of the Registrant's stockholders 10.7 Stockholders' Agreement dated December 16, 1997 by and among the Registrant and certain of Registrant's stockholders 10.8 1997 Equity Compensation Plan *10.9 1995 Stock Option Plan *10.10 2000 Employee Stock Purchase Plan *10.11 Loan Agreement December 16, 1997 by and between Registrant Fleet National Bank *21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Accountants *23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment. + Confidential treatment has been requested as to a portion of this Exhibit. II-2 (b) FINANCIAL STATEMENT SCHEDULES. All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. (1) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) The undersigned Registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Milpitas, State of California, on September 5, 2000. INTERNATIONAL MICROCIRCUITS, INC. By: /s/ ILHAN REFIOGLU ----------------------------------------- Ilhan Refioglu PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Ilhan Refioglu and Judith A. Signorino, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- President, Chief Executive /s/ ILHAN REFIOGLU Officer and Director ------------------------------------------- (PRINCIPAL EXECUTIVE September 5, 2000 Ilhan Refioglu OFFICER) Vice President, Finance and /s/ JUDITH A. SIGNORINO Chief Financial Officer ------------------------------------------- (PRINCIPAL FINANCIAL AND September 5, 2000 Judith A. Signorino ACCOUNTING OFFICER) /s/ MICHAEL C. CHILDS ------------------------------------------- Director September 5, 2000 Michael C. Childs /s/ KURT R. JAGGERS ------------------------------------------- Director September 5, 2000 Kurt R. Jaggers
II-4 INDEX OF EXHIBITS
EXHIBIT NUMBER NAME OF DOCUMENT ------- ---------------- *1.1 Form of Underwriting Agreement 3.1 Amended and Restated Articles of Incorporation of the Registrant 3.2 Amended and Restated Bylaws of the Registrant *3.3 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed after the closing of the offering *4.1 Specimen certificate representing the common stock *5.1 Opinion of Gray Cary Ware & Freidenrich LLP *10.1 Form of Indemnification Agreement between the Registrant and the Registrant's directors and officers 10.2 Standard Industrial Lease dated July 1998 by and between Marin County Employees' Retirement Association and the Registrant 10.3 Sublease dated February 5, 1999 by and between Devcon Microcircuits, Inc. and the Registrant +10.4 License Agreement effective as of August 1, 1995 by and between Lexmark International, Inc. and the Registrant +10.5 Task Order effective on December 1, 1999 by and between International Business Machines Corporation and the Registrant 10.6 Preferred Stock Purchase Agreement dated November 19, 1997 by and among the Registrant and certain of the Registrant's stockholders 10.7 Stockholders' Agreement dated December 16, 1997 by and among the Registrant and certain of Registrant's stockholders 10.8 1997 Equity Compensation Plan *10.9 1995 Stock Option Plan *10.10 2000 Employee Stock Purchase Plan *10.11 Loan Agreement December 16, 1997 by and between Registrant Fleet National Bank *21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Accountants *23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule
- ------------------------ * To be filed by amendment. + Confidential treatment has been requested as to a portion of this Exhibit. EX-3.1 2 a2024700zex-3_1.txt EXHIBIT 3.1 Exhibit 3.1 [STATE OF CALIFORNIA LOGO] SECRETARY OF STATE RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL MICROCIRCUITS, INC. Frank T. Deverse and Patsy J. Deverse hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of International Microcircuits, Inc., a California corporation (the "Corporation" or the "Company"). TWO: The Articles of Incorporation of this corporation are hereby amended and restated to read as follows: Article I The name of the Corporation is International Microcircuits, Inc. (the "Corporation" or the "Company"). Article II The purpose of the 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 Corporations Code. Article III The total number of shares of capital stock which the corporation (the "Corporation") shall have authority to issue is 11,760,000, of which (a) 6,660,000 shares shall be preferred stock, without par value per share ("Preferred Stock"), and (b) 5,100,000 shares shall be common stock, without par value per share. Except as otherwise restricted by these Amended and Restated Articles of Incorporation (these "Articles of Incorporation"), the Corporation is authorized to issue, from time to time, all or any portion of the capital stock of the Corporation which may have been authorized but not issued, to such person or persons and for such lawful consideration as it may deem appropriate, and generally in its absolute discretion to determine the terms and manner of any disposition of such authorized but unissued capital stock. Any and all such shares issued for which the full consideration has been paid or delivered shall be deemed fully paid shares of capital stock, and the holder of such shares shall not be liable for any further call or assessment or any other payment thereon. The voting powers, designations, preferences, privileges and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of each class of capital stock of the Corporation, shall be as provided in this Article III. The Corporation shall not, by amendment of this these Articles of Incorporation or through any Extraordinary Transaction (as defined in Section A.5(a)(ii) or other reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, knowingly or purposefully avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but shall at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights, if any, and other rights of the holders of the Preferred Stock against impairment. A. CONVERTIBLE PREFERRED STOCK 1. DESIGNATION. A total of 3,330,000 shares of the Corporation's Preferred Stock shall be designated as a series known as a series known as Convertible Preferred Stock, without par value per share (the "Convertible Stock"). 2. ELECTION OF DIRECTORS; VOTING. (a) ELECTION OF DIRECTORS. The holders of outstanding shares of Convertible Stock shall, voting together as a separate class, be entitled to elect four (4) Directors of the Corporation. Such Directors shall be the candidates receiving the greatest number of affirmative votes of the outstanding shares of Convertible Stock (the "Convertible Stock Director Designees"). Each holder of Convertible Stock entitled to vote at an election for directors may cumulate the votes to which such holder is entitled, I.E., such holder may cast a total number of votes equal to the number of directors to be elected multiplied by the number of votes to which such holder's shares are entitled, and may cast said total number of votes for one or more candidates in such proportions as such holder thinks fit; PROVIDED, HOWEVER, no holder shall be entitled to so cumulate such holder's votes unless the candidates for which such holder is voting have been placed in nomination prior to the voting and a holder has given notice at the meeting, prior to the vote, of an intention to cumulate votes. The candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Except as may otherwise be provided by law, each holder shall be entitled to one vote for each share held. The election of the Convertible Stock Director Designees by the holders of the Convertible Stock shall occur (i) at the annual meeting of holders of capital stock, (ii) at any special meeting of holders of capital stock, (iii) at any special meeting of holders of Convertible Stock called by holders of a majority of the outstanding shares of Convertible Stock or (iv) by the unanimous written consent of holders of the outstanding shares of Convertible Stock. If at any time when any share of Convertible Stock is outstanding any Convertible Stock Director Designee should cease to be a Director for any reason, the vacancy shall only be filled by the vote or written consent of the holders of the outstanding shares of Convertible Stock, voting together as a separate class, in the manner and on the basis specified above. The holders of outstanding shares of Convertible Stock shall also be entitled to vote for all other Directors of the Corporation together with holders of all other shares of the Corporation's outstanding capital stock entitled to vote thereon, voting as a single class, with each outstanding share entitled to the same number of votes specified in Section A.2(b). The holders of outstanding shares of Convertible Stock, may, in their sole discretion, determine to elect fewer than four (4) Convertible Stock Director Designees from time to time, and during any such period the Board of Directors nonetheless shall be deemed duly constituted. 2 (b) VOTING GENERALLY. The holder of each share of Convertible Stock shall be entitled to the number of votes equal to the largest number of full shares of Common Stock (as defined in Section C of this Article III) into which each share of Convertible Stock could be converted pursuant to Section A.6 hereof (other than by means of Section A.6(b)) on the record date for the vote or for written consent of shareholders, if applicable, multiplied by the number of shares of Convertible Stock held of record by such holder on such date. The holder of each share of Convertible Stock shall be entitled to notice of any shareholders' meeting in accordance with the by-laws of the Corporation and shall vote with holders of the Common Stock, voting together as single class, upon all matters submitted to a vote of shareholders, excluding those matters required to be submitted to a class or series vote pursuant to the terms hereof (including without limitation Section A.8) or by law. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares of Common Stock into which shares of Convertible Stock held by each holder could be converted) shall be rounded to the nearest whole number (with any fraction equal or greater than one-half rounded upward to one and any fraction less than one-half rounded down to zero). 3. DIVIDENDS. The holders of Convertible Stock shall be entitled to receive dividends out of funds legally available therefor at such times and in such amounts as the Board of Directors may determine in its sole discretion; PROVIDED, HOWEVER, that no such dividend may be declared or paid on any shares of Convertible Stock unless at the same time a dividend is declared or paid on all outstanding shares of Common Stock and vice versa, with holders of Convertible Stock and Common Stock sharing in any such dividends as if they constituted a single class of stock and with each holder of a share of Convertible Stock entitled to receive such dividends based on the number of shares of Common Stock into which such share of Convertible Stock is then convertible hereunder. The right to dividends on shares of Convertible Stock shall not be cumulative, and no right shall accrue to holders of Convertible Stock by reason of the fact that dividends on said shares are not declared in any prior period. 4. LIQUIDATION. (a) LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the Corporation and its subsidiaries, whether voluntary or involuntary (a "Liquidation Event"), each holder of outstanding shares of Convertible Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, an amount in cash equal to (i) $4.44 per share of Convertible Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Convertible Stock), plus (ii) any accumulated but unpaid dividends to which such holder of outstanding shares of Convertible Stock is then entitled pursuant to Sections A.3 and A.5(f) hereof (the sum of clauses (i) and (ii) being referred to herein as the "Convertible Base Liquidation Amount"), plus (iii) any interest accrued pursuant to Section A.5(e) hereof to which such holder of Convertible Stock is entitled, if any (the sum of clauses (i), (ii) and (iii) being referred to herein as the "Convertible Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Convertible Liquidation Preference Amount are not paid in full, the holders of the Convertible Stock shall share ratably in any distribution of assets in proportion tot the full respective preferential amounts to which they 3 are entitled; and PROVIDED FURTHER, HOWEVER, that if upon any Liquidation Event the holders of the outstanding shares of Convertible Stock would receive more than the aggregate Convertible Liquidation Preference Amount with respect to such shares in the event all of their shares were converted into Series A Redeemable Preferred Stock (as defined in Section B.1 of this Article III) and Common Stock immediately prior to the record date for distributions in connection with such liquidation event, then each holder of an outstanding share of Convertible Stock shall receive, in lieu of the Convertible Liquidation Preference Amount, an amount equal to such holder's Series A Redeemable Liquidation Preference Amount (as defined in Section B.4) under Section B.4 plus any dividends pursuant to Section A.3 or A.5(f) which are accumulated but unpaid in respect of such share as of the date of such Liquidation Event before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, and thereafter shall share ratably with the holders of Common Stock and any other stock ranking on liquidation junior to the Convertible Stock in the assets available for distribution, with such distributions to be made as if each share of Convertible Stock had been converted into the number of shares of Series A Redeemable Preferred Stock and Common Stock issuable upon the conversion of such holder's shares of Convertible Stock immediately prior to any such Liquidation Event. The provisions of this Section A.4 shall not in any way limit the right of the holders of Convertible Stock to elect to convert their shares of Convertible Stock into Series A Redeemable Preferred Stock and Common Stock pursuant to Section A.6 prior to or in connection with any Liquidation Event. (b) NOTICE. Prior to the occurrence of any Liquidation Event, the Corporation will furnish each holder of Convertible Stock notice in accordance with Section A.9 hereof, together with a certificate prepared by the chief financial officer of the Corporation describing in detail the facts of such Liquidation Event, stating in detail the amount(s) per share of Convertible Stock each holder of Convertible Stock would receive pursuant to the provisions of Section A.4(a) hereof (both with respect to the amount a holder would receive pursuant to clauses (i) and (ii) of Section A.4(a) and the amount a holder would receive pursuant to the second proviso of Section A.4(a)) and stating in detail the facts upon which such amounts were determined. 5. REDEMPTION. (a) REDEMPTION EVENTS. (i) ON OR AFTER DECEMBER 5, 2003. (A) At any time after December 5, 2003, on any one occasion any holder of Convertible Stock may require the Corporation to redeem up to 50% of the outstanding shares of Convertible Stock held by such holder at such time. (B) At any time after December 5, 2004, on any one occasion any holder of Convertible Stock may require the Corporation to redeem up to all of the outstanding shares of Convertible Stock held by such holder at such time. (ii) EXTRAORDINARY TRANSACTIONS. Upon the election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding 4 Convertible Stock in connection with (A) a merger or consolidation of the Corporation with or into another corporation (with respect to which less than a majority of the outstanding voting power of the surviving or consolidated corporation is held by shareholders of the Corporation immediately prior to such event), (B) the sale or transfer of all or substantially all of the properties and assets of the Corporation and its subsidiaries, (C) any purchase by any party (or group of affiliated parties) other than the Investors (as defined in that certain Stock Purchase Agreement by and among the Corporation and the Investors (as defined therein) dated November 19, 1997), of shares of capital stock of the Corporation (either through a negotiated stock purchase or a tender for such shares), the effect of which is that such party (or group of affiliated parties) that did not beneficially own a majority of the voting power of the outstanding shares of capital stock of the Corporation immediately prior to such purchase beneficially owns at least a majority of such voting power immediately after such purchase, (D) the redemption or repurchase of shares representing a majority of the voting power of the outstanding shares of capital stock of the Corporation or (E) a public offering not constituting a "QPO" (as defined in Section A.6(b) below) (each an "Extraordinary Transaction"), then, as a part of and as a condition to the effectiveness of such Extraordinary Transaction, UNLESS the holders of the Convertible Stock shall have elected to convert their shares of Convertible Stock into Series A Redeemable Preferred Stock and Common Stock in accordance with the voluntary conversion provisions of Section A.6 prior to the effective date of such Extraordinary Transaction, redeem all (but not less than all) of the outstanding shares of Convertible Stocks for an amount equal to the Convertible Liquidation Preference Amount, such amount to be payable in cash or, at the election of holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Convertible Stock, in the same form of consideration as is paid to the holders of Common Stock in such Extraordinary Transaction; PROVIDED, HOWEVER, that if upon any Extraordinary Transaction the holders of the outstanding shares of Convertible Stock would receive more than the aggregate Convertible Liquidation Preference Amount in the event their shares were converted into Series A Redeemable Preferred Stock and Common Stock immediately prior to such Extraordinary Transaction, then each holder of Convertible Stock shall receive with respect to each outstanding share of Convertible Stock held by such holder an amount equal to the per share Series A Redeemable Liquidation Preference Amount under Section B.4 plus any dividends pursuant to Section A.3 or A.5(f) which are accumulated but unpaid in respect of such share as of the date of such Extraordinary Transaction before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, payable in cash, and thereafter shall share ratably with the holders of the Common Stock and any other stock ranking on liquidation junior to the Convertible Stock in the proceeds of such Extraordinary Transaction or, as applicable, shall receive from the Corporation an amount equal to the amount per share that would be paid if the shares of Common Stock receivable upon conversation of the Convertible Stock were being acquired in the Extraordinary Transaction at the same price per share as is paid for Common Stock, which excess amount shall be paid in the same form of consideration as is paid to holders of Common Stock, as if each share of Convertible Stock had been converted into the number of shares of Series A Redeemable Preferred Stock and Common Stock issuable upon the conversion of such share of Convertible Stock immediately prior to such Extraordinary Transaction. The foregoing election shall be made by such holders giving the Corporation and each other holder of Convertible Stock not less than five (5) business days prior written notice, which shall set forth the date for such redemption. The provisions of this Section A.5 shall not in any way limit the 5 right of the holders of Convertible Stock to elect to convert their shares into shares of Series A Redeemable Preferred Stock and Common Stock pursuant to Section A.6 prior to or in connection with any Extraordinary Transaction. (b) VALUATION OF DISTRIBUTION SECURITIES. Any securities or other considerable to be delivered to the holders of the Convertible Stock upon any Extraordinary Transaction in accordance with the terms hereof shall be valued as follows: (i) If traded on a nationally recognized securities exchange or inter-dealer quotation system, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the 30-day period ending three (3) business days prior to the closing: (ii) If traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the closing; and (iii) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock, provided that if the Corporation and the holders of sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock are unable to reach agreement, then by independent appraisal by a mutually agreed to investment banker, the fees of which shall be paid by the Corporation. (c) NOTICE BY CORPORATION. Prior to the occurrence of any Extraordinary Transaction, the Corporation will furnish each holder of Convertible Stock notice in accordance with Section A.9 hereof, together with a certificate prepared by the chief financial officer of the Corporation describing in detail all material terms of such Extraordinary Transaction, including without limitation the consideration to be delivered in connection with such Extraordinary Transaction the valuation of the corporation at the time of such extraordinary transaction and the identities of the parties to the Extraordinary Transaction. (d) REDEMPTION DATE: REDEMPTION PRICE. Any holder of Convertible Stock may exercise such holder's right of redemption pursuant to Section A.5(a)(i) by such holder giving the Corporation not less than five (5) business days prior written notice, which notice shall set forth the date of such redemption. Upon the election of the holders of not less than sixty-six and two-thirds percent of the voting power of the outstanding Convertible Stock to cause the Corporation to redeem the Convertible Stock pursuant to Section A.5(a)(ii), all holders of Convertible Stock shall be deemed to have elected to cause the Convertible Stock to be so redeemed. Any date upon which a redemption shall actually occur in accordance with Section A.5(a) shall be referred to as a "Convertible Redemption Date." The redemption price for each share of Convertible Stock redeemed pursuant to this Section A.5 shall be the per share Convertible Liquidation Preference Amount or such greater per share amount as may be payable pursuant to the proviso to Section A.5(a)(ii), if applicable (the "Convertible Redemption Price"). The aggregate Convertible Redemption Price shall be payable in cash in immediately available funds to the respective holders of the Convertible Stock on the Convertible Redemption Date 6 (subject to Section A.5(e)) except to the extent contemplated by the proviso to Section A.5(a)(ii). Until the aggregate Convertible Redemption Price has been paid for all shares of Convertible Stock being redeemed: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation; and (B) except as permitted by Section A.8(h), no shares of capital stock of the corporation (other than the Convertible Stock in accordance with this Section A.5) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (e) REDEMPTION PROHIBITED. If, at a Convertible Redemption Date, the Corporation is prohibited under the General Corporation Law of the State California (the "Corporation Law") from redeeming all shares of Convertible Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Convertible Stock in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under the Corporation Law, subject to the last paragraph of Section A.8. The shares of Convertible Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in this Article III. The Corporation shall take such action as shall be necessary or appropriate to review and promptly remove any impediment to its ability to redeem Convertible Stock, Series A Redeemable Preferred Stock or Common Stock under the circumstances contemplated by this Section A.5(e) or Sections B.5(c) or C.5(c). In the event that the Corporation fails for any reason to redeem shares for which redemption is required pursuant to this Section A.5, including without limitation due to a prohibition of such redemption under the Corporation Law, then during the period from the applicable Convertible Redemption Date through the date on which such shares are redeemed, the applicable convertible Base Liquidation Amount of such shares shall bear interest at the rate of ten percent (10%) per annum, with such interest to accrue daily in arrears and to be compounded annually; PROVIDED, HOWEVER, that in no event shall such interest exceed the maximum permitted rate of interest under applicable law (the "Maximum Permitted Rate"). In the event that fulfillment of any provision hereof results in such rate of interest being in excess of the Maximum Permitted Rate, the obligation to be fulfilled shall automatically be reduced to eliminate such excess; PROVIDED, HOWEVER, that any subsequent increase in the Maximum Permitted Rate shall be retroactively effective to the applicable Redemption Date if permitted by applicable law. (f) DIVIDEND AFTER CONVERTIBLE REDEMPTION DATE. From and after a Convertible Redemption Date, no shares of Convertible Stock subject to redemption shall be entitled to dividends, if any, as contemplated by Section A.3; PROVIDED, HOWEVER, that in the event that shares of Convertible Stock are unable to be redeemed and continue to be outstanding in accordance with Section A.5(e), such shares shall continue to be entitled to dividends and interest thereon as provided in Section A.3 and A.5(e) until the date on which such shares are actually redeemed by the Corporation. (g) SURRENDER OF CERTIFICATES. Upon receipt of the applicable Convertible Preferred Redemption Price by certified check or wire transfer, each holder of shares of Convertible Stock to be redeemed shall surrender the certificate or certificates representing such shares to the Corporation, duly assigned or endorsed for transfer (or accompanied by duly 7 executed stock powers relating thereto), or, in the event the certificate or certificates are lost, stolen or missing, shall deliver an affidavit or agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith (an "Affidavit of Loss") with respect to such certificates at the principal executive office of the Corporation or the office of the transfer agent for the Convertible Stock or such office or offices in the continental United States of an agent for redemption as may from time to time be designated by notice to the holders of Convertible Stock, and each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the holder has exercised its redemption right pursuant to Section A.5(a)(i)(A) or the Corporation is prohibited from redeeming all shares of Convertible Stock as provided in Section A.5(e), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Convertible Stock not so redeemed. 6. CONVERSION. The holders of the Convertible Stock shall have the following conversion rights: (a) AUTOMATIC CONVERSION UPON ELECTION OF HOLDERS. The holders of shares of Convertible Stock shall be entitled, upon the written election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock, without the payment of any additional consideration, (i) immediately prior to and subject to the closing or happening of a Liquidation Event or an Extraordinary Transaction and (ii) at any time after December 5, 1999, to cause all (but not less than all) of the outstanding shares of Convertible Stock to be automatically converted into (i) the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as defined in this Section A.6(a)) per share in effect for the Convertible Stock at the time of conversion into the per share Conversion Value (as defined in this Section A.6(a)) of the Convertible Stock (the "Conversion Shares") and (ii) one (1) fully paid and nonassessable share of Series A Redeemable Preferred Stock. Upon the election to so convert in the manner and on the basis specified in the preceding sentence, all holders of the Convertible Stock shall be deemed to have elected to voluntarily convert all outstanding shares of Convertible Stock pursuant to this Section A.6. Upon the filing and effectiveness of these Articles of Incorporation with the California Secretary of State's office, the "Conversion Price" per share of Convertible Stock shall be $4.44, and the per share "Conversion Value" of Convertible Stock shall be $4.44. The Conversion Price per share of Convertible Stock and the Common Stock Conversion Rate (as defined in this Section A.6(a)) shall be subject to adjustment from time to time as provided in Section A.7 hereof. The number of shares of Common Stock into which a share of Convertible Stock is convertible is hereinafter referred to as the "Common Stock Conversion Rate." The number of shares of Series A Redeemable Preferred Stock into which a share of Convertible Stock is convertible is hereinafter referred to as the "Series A Redeemable Conversion Rate." If the holders of shares of Convertible Stock elect to convert the outstanding shares of Convertible Stock at a time when there are any accumulated but unpaid dividends or other amounts due on or in respect of such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. Upon the election to so convert in the manner and on the basis specified in this Section A.6(a) all holders of the Convertible Preferred Stock shall be deemed to have elected to voluntarily convert all outstanding shares of Convertible Preferred Stock pursuant to this Section A.6(a). 8 (b) AUTOMATIC CONVERSION UPON QPO. Each share of Convertible Stock shall automatically be converted, without the payment of any additional consideration, into shares of Common Stock and Series A Redeemable Preferred Stock as of, and in all cases subject to, the closing of the Corporation's first underwritten offering to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended, provided that (i) such registration statement covers the offer and sale of Common Stock of which the aggregate net proceeds attributable to sales for the account of the Corporation exceed $20,000,000, at a price per share not less than $13.32 (as appropriately adjusted for any stock split, combination, reorganization, recapitalization, stock dividend, or similar event), (ii) such Common Stock is listed for trading on either the New York Stock Exchange or the Nasdaq National Market System and (iii) if a redemption election is made pursuant to Section B.5(a)(i) or (a)(ii), either (A) all outstanding shares of Series A Redeemable Preferred Stock which are outstanding or issuable upon such automatic conversion are redeemed immediately upon and as of the closing of such offering, (B) contemporaneously with such offering cash in an amount sufficient to redeem all outstanding shares of Series A Redeemable Preferred Stock is segregated and irrevocably held by the Corporation for payment to holders of Series A Redeemable Preferred Stock or (C) all outstanding shares of Series A Redeemable Preferred Stock are exchanged for Series A Notes (as defined in Section B.5(a)(i)) (a "QPO" or a "Qualified Public Offering"); PROVIDED that if a closing of a QPO occurs, all outstanding shares of Convertible Stock shall be deemed to have been converted into shares of Common Stock and Series A Redeemable Preferred Stock immediately prior to such closing. Any such conversion shall be at the Common Stock Conversion Rate and Series A Redeemable Conversion Rate in effect upon the closing of a QPO, as applicable. If the holders of shares of Convertible Stock are required to convert the outstanding shares of Convertible Stock pursuant to this Section A.6(b) at a time when there are any declared but unpaid dividends or any amounts due on or in respect of such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. (c) PROCEDURE FOR VOLUNTARY CONVERSION. Upon election to convert pursuant to Section A.6(a), each holder of Convertible Stock shall surrender the certificate or certificates representing its Convertible Stock, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Convertible Stock or such office or offices in the continental United States of any agent for conversion as may from time to time be designated by notice to the holders of the Convertible Stock by the Corporation, or shall deliver an Affidavit of Loss with respect to such certificates. Upon surrender of a certificate representing Convertible Stock for conversion, or delivery of an Affidavit of Loss, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, certificates for the number of shares of Common Stock and Series A Redeemable Preferred Stock to which such holder shall be entitled upon conversion. The issuance of certificates for Common Stock and Series A Redeemable Preferred Stock upon conversion of Convertible Stock will be made without charge to the holders of such shares for any issuance tax in respect thereof or other costs incurred by the Corporation in connection with such conversion and the related issuance of such stock. If a Liquidation Event or conversion of Convertible Stock upon an Extraordinary Transaction or public offering not constituting a QPO occurs, all 9 outstanding shares of Convertible Stock shall be deemed to have been converted into shares of Common Stock and Series A Redeemable Preferred Stock immediately prior thereto, provided that the Corporation shall make appropriate provisions (x) for the Common Stock issued upon such conversion to be treated on the same basis as all other Common Stock in such Liquidation Event, Extraordinary Transaction or public offering not constituting a QPO and (y) for the payment of the Series A Redeemable Liquidation Preference Amount in connection with any Liquidation Event or the redemption of the Series A Redeemable Preferred Stock (issued upon such conversion) upon election of such redemption in connection with any Extraordinary Transaction or public offering not constituting a QPO, if applicable, as provided herein. In the event of any public offering constituting a QPO, the provisions of Section A.5(d) shall apply. (d) PROCEDURE FOR AUTOMATIC CONVERSION. As of, and in all cases subject to, the closing of a QPO (the "Automatic Conversion Date"), all outstanding shares of Convertible Stock shall be converted automatically into shares of Common Stock and Series A Redeemable Preferred Stock at the applicable conversion rates specified in Section A.6(a) and without any further action by the holders of such shares and whether or not the certificates representing such shares of Convertible Stock are surrendered to the Corporation or its transfer agent; PROVIDED, HOWEVER, that all holders of Convertible Stock shall be given prior written notice of the occurrence of a QPO in accordance with Section A.9 hereof. On the Automatic Conversion Date, all rights with respect to the Convertible Stock so converted shall terminate, except any of the rights of the holders thereof upon surrender of their certificate or certificates therefor or delivery of an Affidavit or Loss thereof to receive certificates for the number of shares of Common Stock and Series A Redeemable Preferred Stock into which such Convertible Stock has been converted. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. Upon surrender of such certificates or Affidavit of Loss the Corporation shall issue and deliver to such holder, promptly (and in any event in such time as is sufficient to enable such holder to participate in such QPO) at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock and number of shares of Series A Redeemable Preferred Stock or the Series A Notes into which the shares of the Convertible Stock surrendered were convertible on the Automatic Conversion Date. (e) RESERVATIONS OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock solely for the purpose of effecting the conversion of the shares of Convertible Stock such number of its shares of Common Stock and Series A Redeemable Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Stock; and if at any time the number of authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of Convertible Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock and Series A Redeemable Preferred Stock to such number of shares as shall be sufficient for such purpose. 10 (f) NO CLOSING OF TRANSFER BOOKS. The Corporation shall not close its books against the transfer of shares of Convertible Stock in any manner which would interfere with the timely conversion of any shares of Convertible Stock. 7. ADJUSTMENTS. The Conversion Price in effect from time to time shall be subject to adjustment from and after December 5, 1997 and regardless of whether any shares of Convertible Stock are then issued and outstanding as follows: (a) STOCK DIVIDENDS, SUBDIVIDENDS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or split be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section A.7(a) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of subdivision or combination shall become effective immediately as of the effective date thereof. (b) SALE OF COMMON STOCK. In the event the Corporation shall at any time, or from time to time, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury but excluding up to 994,407 shares of Common Stock (as appropriately adjusted for stock splits, stock dividends and the like) issued to officers, directors or employees of the Corporation or upon the exercise of options or other rights issued to such officers, director or employees pursuant to the stock option plans (the "Excluded Shares"), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares, then, and thereafter successively upon each such issuance, sale or exchange, the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares shall forthwith be reduced to an amount determined by multiplying such Conversion Price by a fraction: (i) the numerator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such additional shares of Common Stock (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at the Conversion Price (prior to adjustment), and (ii) the denominator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such additional shares of Common Stock (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, 11 rights or convertible securities), plus (Y) the number of such additional shares of Common Stock so issued. (c) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time, issue options, warrants or rights to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of (other than any options or warrants for Excluded Shares), for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (i) the numerator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (ii) the denominator of which shall be (X) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Convertible Stock, options, warrants, rights or convertible securities), plus (Y) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (d) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock, changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section A.7(c) hereof), at the time initially granted, issued or sold; PROVIDED, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section A.7 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall 12 previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (e) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Convertible Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Convertible Stock been converted into Common Stock and Series A Redeemable Preferred Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section A.7 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Convertible Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section A.7), then and in each such event the holder of each share of Convertible Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Convertible Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (f) MERGERS AND OTHER REORGANIZATIONS. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section A.7) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Convertible Stock shall thereafter be entitled to receive upon conversion of the Convertible Stock the number of shares of stock or other securities or property of the Corporation or of the successor Corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Convertible Stock after the reorganization, merger, consolidation or 13 sale to the end that the provisions of this Section A.7 (including without limitation provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Convertible Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Convertible Stock. (g) All calculations under this Section A.7 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be. (h) Upon the occurrence of each adjustment or readjustment pursuant to this Section A.7, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Convertible 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 written request at any time of any holder of Convertible Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices before and after such adjustment or readjustment and (iii) the number of shares of Common Stock and Series A Redeemable Preferred Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Convertible Stock. 8. COVENANTS. So long as any shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) shall be outstanding, the Corporation shall not, without first having provided written notice of such proposed action to each holder of outstanding shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) and having obtained the affirmative vote or written consent of the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable), voting as a single class, with each share of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) entitling the holder thereof to one vote per share of Convertible Preferred Stock (or Series A Redeemable Preferred Stock, as applicable) held by such holder: (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets; (b) merge with or into or consolidate with another entity (except into or with a wholly-owned subsidiary of the Corporation with the requisite shareholder approval); (c) acquire any other corporation or business concern, whether by acquisition of assets, capital stock or otherwise, and whether in consideration of the payment of cash, the issuance of capital stock or otherwise, or make any material investment in another business entity; (d) voluntarily dissolve, liquidate or wind up its operations; (e) authorize the issuance of, issue or reserve for issuance, any equity securities (including without limitations options, warrants, convertible or exchangeable securities or rights giving the holder thereof the right to acquire equity securities or any of the foregoing) 14 or otherwise engage in any equity financing, including without limitation in connection with a stock acquisition, but excluding the issuance of stock options and/or restricted stock as contemplated by Section 5.11 of that certain Preferred Stock Purchase Agreement, dated as of November 19, 1997 (the "Purchase Agreement"), by and between the Corporation and certain Investors (as defined therein); (f) declare or make dividend payments on any shares of its Common Stock (as defined in Section C.1) or any other class of its capital stock; (g) create, or obligate itself to create, any class or series of shares having preference over or being on a parity with the Convertible Preferred Stock or the Series A Redeemable Preferred Stock; (h) except as otherwise expressly provided in the Purchase Agreement, that certain Stock Redemption Agreement, dated as of November 19, 1997 (the "Redemption Agreement"), by and between the Corporation and certain other parties named therein, the Option Cancellation Agreement (as defined the Purchase Agreement) or herein, the Corporation will not declare or pay any dividends or make any distributions of cash, property or securities of the Corporation with respect to any shares of its Common Stock or any other class of its capital stock, or directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock; provided. however, that this restriction shall not apply to the repurchase of (x) up to 390,000 shares of Common Stock held by Golden Legacy Limited Partnership, a Nevada limited partnership and (y) shares of Common Stock pursuant to agreements under which the Corporation has the option or obligation to repurchase such shares upon the occurrence of certain events, including the termination of employment, and a right of refusal to acquire shares in the event of certain proposed transfers; (i) enter into any agreement or arrangement or take any other action that eliminates, amends, restricts or otherwise adversely affects the rights of the holders of the Convertible Preferred Stock or the Series A Redeemable Preferred Stock or the Corporation's ability to perform its obligations hereunder; (j) increase the size of the Board of Directors to more than seven (7) members; (k) enter into or be a party to any transaction or agreement, including without limitation any lease or other rental or purchase agreement providing for loans or extensions of credit by or to the Corporation with or for the benefit of any person or entity which is a shareholder, officer or director of the Corporation, a relative by blood or marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except (i) for normal compensation paid to employees of the Corporation in the ordinary course of business and (ii) transactions expressly disclosed in or contemplated by the Purchase Agreement and the exhibits thereto; or (l) make any amendment to Article III of its Articles of Incorporation or make any other amendment to its Articles of Incorporation or any amendment to its By-laws that 15 eliminates, amends or restricts the rights and preferences of or otherwise adversely affects the holders of the Convertible Preferred Stock or the Series A Redeemable Preferred Stock. Further, the Corporation shall not, by amendment of these Articles of Incorporation or through any Extraordinary Transaction or other 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 and each subsidiary of the Corporation but shall at all times in good faith assist in the carrying out of all the provisions of this Article III and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Convertible Preferred Stock and the Series A Redeemable Preferred Stock set forth in this Certificate against impairment. Any successor to the Corporation or any subsidiary of the Corporation shall agree, as a condition to such succession, to carry out and observe the obligations of the Corporation hereunder with respect to the Convertible Preferred Stock and the Series A Redeemable Preferred Stock. 9. NOTICE (a) LIQUIDATION EVENTS, EXTRAORDINARY TRANSACTIONS. ETC. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution or who are entitled to vote at a meeting (or by written consent) in connection with any of the transactions identified in clause (ii) hereof, or (ii) any Liquidation Event (as defined in Section A.4), any Extraordinary Transaction (as defined in Section A.5), any QPO (as defined in Section A.6) or any other public offering becomes reasonably likely to occur, the Corporation shall mail or cause to be mailed by first class mail (postage prepaid) to each holder of Convertible Stock (or each holder of Series A Redeemable Preferred Stock, as applicable) at least forty-five (45) days prior to such record date specified therein or the expected effective date of any such transaction, whichever is earlier, a notice specifying (A) the date of such record date for the purpose of such dividend or distribution or meeting or consent and a description of such dividend or distribution or the action to be taken at such meeting or by such consent, (B) the date on which any such Liquidation Event, Extraordinary Transaction, QPO or other public offering is expected to become effective, and (C) the date on which the books of the Corporation shall close or a record shall be taken with respect to any such event. (b) WAIVER OF NOTICE. The holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock (or Series A Redeemable Preferred Stock, as applicable) may, at any time upon written notice to the Corporation, waive any notice provisions specified herein for the benefit of such holders, and any such waiver shall be binding upon all holders of such securities. (c) GENERAL. In the event that the Corporation provides any notice, report or statement to any holder of Common Stock, the Corporation shall at the same time provide a copy of any such notice, report or statement to each holder of outstanding shares of Convertible Stock (or Series A Redeemable Preferred Stock, as applicable). 16 10. NO REISSUANCE OF CONVERTIBLE STOCK. No share or shares of Convertible Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 11. CONTRACTUAL RIGHTS OF HOLDERS. The various provisions set forth herein for the benefit of the holders of the Convertible Stock and Series A Redeemable Preferred Stock shall be deemed contract rights enforceable by them, including without limitation, one or more actions for specific performance. B. SERIES A REDEEMABLE PREFERRED STOCK 1. DESIGNATION. A total of 3,330,000 shares of the Corporation's Preferred Stock shall be designated as a series known as Series A Redeemable Preferred Stock, without par value per share (the "Series A Redeemable Preferred Stock"). 2. ELECTION OF DIRECTORS: VOTING. (a) ELECTION OF DIRECTORS. The holders of outstanding shares of Series A Redeemable Preferred Stock shall, voting together as a separate class, be entitled to elect one (1) Director. Such Director shall be the candidate receiving the greatest number of affirmative votes (with each holder of Series A Redeemable Preferred Stock entitled to cast one vote for or against each candidate with respect to each share of Series A Redeemable Preferred Stock held by such holder) of the outstanding shares or Series A Redeemable Preferred Stock (the "Series A Redeemable Preferred Stock Director Designee"). The election of the Series A Redeemable Preferred Stock Director Designee by the holders of the Series A Redeemable Preferred Stock shall occur (i) at the annual meeting of holders of capital stock, (ii) at any special meeting of holders of capital stock, (iii) at any special meeting of holders of Series A Redeemable Preferred Stock called by holders of a majority of the outstanding shares of Series A Redeemable Preferred Stock or (iv) by the unanimous written consent of holders of the outstanding shares of Series A Redeemable Preferred Stock. If at any time when any share of Series A Redeemable Preferred Stock is outstanding the Series A Redeemable Preferred Stock Director Designee should cease to be a Director for any reason, the vacancy shall only be filled by the vote or written consent of holders of the outstanding shares of Series A Redeemable Preferred Stock, voting together as a separate class, in the manner and on the basis specified above. (b) VOTING GENERALLY. Except as set forth above with respect to the election of the Series A Redeemable Preferred Stock Director Designee, the holders of Series A Redeemable Preferred Stock shall not be entitled to vote on any matters except to the extent otherwise required under the Corporation Law. 3. DIVIDENDS. The holders of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to receive, out of any funds legally available therefor, cumulative (non-compounding) dividends on the Series A Redeemable Preferred Stock in cash, at the per share rate per annum of six percent (6%) of $3.996 (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock) (a "Series A Redeemable Cumulative Dividend"). Such dividends will accrue quarterly 17 in arrears commencing as of the date of issuance of the Series A Redeemable Preferred Stock and be cumulative, to the extent unpaid, whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. Series A Redeemable Cumulative Dividends shall become due and payable with respect to any share of Series A Redeemable Preferred Stock as provided in Section B.4 and Section B.5. So long as any shares of Series A Redeemable Preferred Stock are outstanding and the Series A Redeemable Cumulative Dividends have not been paid in full in cash: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any Common Stock or other capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock; and (B) except as provided in Section A.8(h), no shares of capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. All numbers relating to the calculation of dividends pursuant to this Section B.3 shall be subject to equitable adjustment in the event of any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the Series A Redeemable Preferred Stock. 4. LIQUIDATION. Upon any Liquidation Event, each holder of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus, or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Series A Redeemable Preferred Stock, an amount in cash equal to the sum of (a) $3.996 per share of Series A Redeemable Preferred Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock), plus (b) any accumulated but unpaid dividends to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled pursuant to Sections B.3 and B.5(d) hereof (the sum of clauses (a) and (b) being referred to herein as the "Series A Redeemable Base Liquidation Amount"), plus (c) any interest accrued pursuant to Section B.5(c) to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled, if any (the sum of clauses (a), (b) and (c) being referred to herein as the "Series A Redeemable Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Series A Redeemable Liquidation Preference Amount are not paid in full, the holders of the Series A Redeemable Preferred Stock shall ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. 5. REDEMPTION. (a) REDEMPTION EVENTS. (i) UPON ELECTION OF HOLDERS UPON A QPO. Upon the election of holder or holders of not less than sixty-six and two-thirds percent of the outstanding Series A Redeemable Preferred Stock, the Corporation shall redeem all (and not less than all, except as set forth in the third sentence of this Section B.5(a)) of the outstanding shares of Series A Redeemable Preferred Stock upon the closing of a QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of Series A Redeemable Preferred 18 Stock written notice not less than five (5) days prior to the closing of a QPO. In the event that the principal underwriter for a QPO shall reasonably and in good faith request in writing, or cause the Corporation to so request in writing, that the holders of Series A Redeemable Preferred Stock waive the holders' right to elect to have such holder's shares of Series A Redeemable Preferred Stock redeemed pursuant to this Section B.5(a)(i) and the holders of sixty-six and two-thirds percent in voting power of the outstanding shares of the Series A Redeemable Preferred Stock agree to so waive such redemption election, then all outstanding shares of Series A Redeemable Preferred Stock shall be exchanged, without the payment of additional consideration, for notes of the Corporation ("Series A Notes") in an aggregate principal amount equal to the aggregate Series A Redemption Price (as defined in Section B.5(b) below), which Series A Notes shall (i) (i) mature on the second anniversary of the effective date of such QPO and (ii) bear interest on the outstanding principal balance thereof at the rate of ten percent (10%) per annum, which interest shall accrue daily in arrears and be paid on the last day of each month, commencing on the last day of the first month following the effective date of such QPO; provided, however, that in no event shall such interest rate exceed the Maximum Permitted Rate. (ii) UPON ELECTION OF CORPORATION UPON A QPO. The Corporation may elect to redeem all (but not less than all, other than pursuant to Section B.5(c) below) of the outstanding shares of Series A Redeemable Preferred Stock at any time upon the closing of a QPO. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to the closing of a QPO. (iii) LAPSE OF TIME. (A) At any time after the later of the first anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section A.6 (other than in connection with an Extraordinary Transaction) and December 5, 2003, on any one occasion any holder of Series A Redeemable Preferred Stock may require the Corporation to redeem up to 50% of the outstanding shares of Series A Redeemable Preferred Stock held by such holder at such time. (B) At any time after the later of the second anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section A.6 (other than in connection with an Extraordinary Transaction) and December 5, 2004, on any one occasion any holder of Series A Redeemable Preferred Stock may require the Corporation to redeem up to all of the outstanding shares of Series A Redeemable Preferred Stock held by such holder at such time. (iv) UPON EXTRAORDINARY TRANSACTIONS. Upon the election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Series A Redeemable Preferred Stock, the Corporation shall redeem all (and not less than all, other than pursuant to Section B.5(c) below) of the outstanding shares of Series A Redeemable Preferred Stock upon the occurrence of an Extraordinary Transaction (as defined in Section A.5) or public offering not constituting a QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of Series A Redeemable Preferred Stock (or 19 Convertible Stock, as applicable) not less than five (5) days prior written notice, which notice shall set forth the date for such redemption. (v) UPON ELECTION OF CORPORATION. (A) At any time after the later of the first anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section A.6 and December 5, 2003, the Corporation may redeem 50% (but not less than 50%) of the outstanding shares of Series A Redeemable Preferred Stock. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to the date for such redemption. (B) At any time after the later of the second anniversary of the date of the conversion of the Convertible Preferred Stock as set forth in Section A.6 and December 5, 2004, the Corporation may redeem all (but not less than all) of the outstanding shares of Series A Redeemable Preferred Stock. The foregoing election shall be made by the Corporation giving each holder of Series A Redeemable Preferred Stock written notice not less than five (5) days prior to such redemption. (b) REDEMPTION DATE; REDEMPTION PRICE. Any holder of Series A Redeemable Preferred Stock may exercise such holder's right of redemption pursuant to Section B.5(a)(iii) by such holder giving the Corporation not less than ten (10) days prior written notice, which notice shall set forth the date for such redemption. Upon the election of the holders of not less than sixty-six and two-thirds percent in voting power of the outstanding Series A Redeemable Preferred Stock to cause the Corporation to redeem the Series A Redeemable Preferred Stock pursuant to Section B. 5(a)(i) or (a)(iv), all holders of Series A Redeemable Preferred Stock shall be deemed to have elected to cause the Series A Redeemable Preferred Stock subject to such election to be so redeemed. Any date upon which a redemption shall actually occur in accordance with Section B.5(a) shall be referred to as a "Series A Redemption Date." The redemption price for each share of Series A Redeemable Preferred Stock redeemed pursuant to this Section B.5 shall be the per share Series A Redeemable Liquidation Preference Amount (the "Series A Redemption Price"). The aggregate Series A Redemption Price shall be payable in cash in immediately available funds on the Series A Redemption Date. Until the aggregate Series A Redemption Price, including any interest thereon, has been paid in cash for all shares of Series A Redeemable Preferred Stock redeemed as of the applicable Series A Redemption Date or Series A Notes have been issued pursuant to Section B.5(a)(i): (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation; and (B) except as provided in Section A.8(h), no shares of capital stock of the Corporation (other than the Series A Redeemable Preferred Stock in accordance with this Section B.5) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (c) REDEMPTION PROHIBITED. If, at a Series A Redemption Date, the Corporation is prohibited under the Corporation Law from redeeming all shares of Series A Redeemable Preferred Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Series A Redeemable Preferred Stock in 20 proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under the Corporation Law, subject to the last paragraph of Section A.8. The shares of Series A Redeemable Preferred Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in this Article III. In the event that the Corporation fails for any reason to redeem shares for which redemption is triggered pursuant to Section B.5 (other than pursuant to the third sentence of Section B. 5(a)(i)), including without limitation due to a prohibition of such redemption under the Corporation Law, then during the period from the applicable Series A Redemption Date through the date on which such shares are redeemed, the applicable Series A Redeemable Base Liquidation Amount of such shares shall bear interest at the rate of ten percent (10%) per annum, with such interest to accrue daily in arrears and to be compounded annually; provided, however, that in no event shall such interest rate exceed the Maximum Permitted Rate. (d) DIVIDEND AFTER REDEMPTION DATE. From and after the closing of a QPO or an Extraordinary Transaction or a public offering not constituting a QPO (in the case of a redemption pursuant to Section B.5(a)(i) or (iv)) or the date specified for redemption in the election notice as set forth in Section B.5(a)(ii) or (v) or Section B.5(b), no shares of Series A Redeemable Preferred Stock subject to redemption shall be entitled to any further dividends pursuant to Section B.3 hereof; PROVIDED, HOWEVER, that in the event that shares of Series A Redeemable Preferred Stock are unable to be redeemed and continue to be outstanding in accordance with Section B.5(c), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections B.3 and B.5(c) until the date on which such shares are actually redeemed by the Corporation. (e) SURRENDER OF CERTIFICATE. Upon receipt of the applicable Series A Redemption Price by certified check or wire transfer or receipt of the Series A Notes pursuant to the third sentence of Section B.5(a)(i), each holder of shares of Series A Redeemable Preferred Stock to be redeemed shall surrender the certificate or certificates representing such shares to the Corporation, duly assigned or endorsed for transfer (or accompanied by duly executed stock powers relating thereto), or shall deliver an Affidavit of Loss with respect to such certificates at the principal executive office of the Corporation or the office of the transfer agent for the Series A Redeemable Preferred Stock or such office or offices in the continental United States of an agent for redemption as may from time to time be designated by notice to the holders of Series A Redeemable Preferred Stock (or the holders of Convertible Stock, as applicable), and each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the holder has exercised its redemption right pursuant to Section B.5(a)(iii)(A) or the Corporation has exercised its right pursuant to Section B.5(a)(v)(A), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Series A Redeemable Preferred Stock not so redeemed. 6. NOTICE. In the event that the Corporation provides or is required to provide notice to any holder of Convertible Stock or Common Stock in accordance with the provisions of these Articles of Incorporation (including the provisions of Sections A.5(c) and A.9) and/or the Corporation's by-laws, the Corporation shall at the same time provide a copy of any such notice to each holder of outstanding shares of Series A Redeemable Preferred Stock. 21 7. NO REISSUANCE OF SERIES A REDEEMABLE PREFERRED STOCK. No share or shares of Series A Redeemable Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion, exchange or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 8. COVENANTS. So long as any shares of Series A Redeemable Preferred Stock shall be outstanding the provisions of Section A.8 shall apply to all shares of Series A Redeemable Preferred Stock as if such shares were shares of Convertible Preferred Stock. C. COMMON STOCK 1. DESIGNATION. A total of 5,100,000 shares of the Corporation's common stock shall be designated as Common Stock, without par value per share (the "Common Stock"). 2. VOTING. (a) ELECTION OF DIRECTION. The holders of Common Stock voting together with the holders of outstanding Convertible Stock as a single class shall be entitled to elect all of the Directors of the Corporation (other than the Directors who are subject to election by the holders of Convertible Stock or Series A Redeemable Preferred Stock as a separate class) for so long as any shares of Convertible Stock or Series A Redeemable Preferred Stock remain outstanding and thereafter shall be entitled to elect all of the Directors of the Corporation. Such Directors shall be the candidates receiving the greatest number of affirmative votes entitled to be cast with votes cast against such candidates and votes withheld having no legal effect. Each holder of Common Stock entitled to vote at an election for directors may cumulate the votes to which such holder is entitled, I.E., such holder may cast a total number of votes equal to the number of directors to be elected multiplied by the number of votes to which such holder's shares are entitled, and may cast said total number of votes for one or more candidates in such proportions as such holder thinks fit; PROVIDED, HOWEVER, no holder shall be entitled to so cumulate such holder's votes unless the candidates for which such holder is voting have been placed in nomination prior to the voting and a holder has given notice at the meeting, prior to the vote, of an intention to cumulate votes. The candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Except as may otherwise be provided by law, each holder shall be entitled to one vote for each share held. The election of such Directors shall occur at the annual meeting of holders of capital stock or at any special meeting called and held in accordance with the by-laws of the Corporation. If a person elected in accordance with the foregoing provisions should cease to be a Director for any reason, the vacancy shall only be filled by the vote of the outstanding shares entitled to vote for such Directors, in the manner and on the basis specified above. (b) OTHER VOTING. The holder of each share of Common Stock shall be entitled to one vote for each such share as determined on the record date for the vote or consent of shareholders and shall vote together with the holders of the Convertible Stock as a single class upon any items submitted to a vote of shareholders, except as otherwise provided herein. 3. DIVIDENDS. Subject to the payment in full of all preferential dividends to which the holders of the Redeemable Preferred Stock are entitled hereunder, the holders of Common Stock 22 shall be entitled to receive dividends out of funds legally available therefor at such times and in such amounts as the Board of Directors may determine in its sole discretion, with holders of Convertible Stock and Common Stock sharing PARI PASSU in such dividends as contemplated by Section A.3. 4. LIQUIDATION. Upon any Liquidation Event, after the payment or provision for payment of all debts and liabilities of the Corporation and all preferential amounts to which the holders of Convertible Stock or Series A Redeemable Preferred Stock, as applicable, are entitled with respect to the distribution of assets in liquidation, the holders of Common Stock (and to the extent applicable under Section A.4(a) Convertible Stock) shall be entitled to share ratably in the remaining assets of the Corporation available for distribution. 5. FRACTIONAL SHARES; UNCERTIFIED SHARES. The Corporation may issue fractional shares (up to five decimal places) of Common Stock and Preferred Stock. Fractional shares shall be entitled to dividends (on a pro rata basis), and the holders of fractional shares shall be entitled to all rights as shareholders of the Corporation to the extent provided herein and under applicable law in respect of such fractional shares. Shares of Common Stock and Preferred Stock, or fractions thereof, may, but need not be. represented by share certificates. Such shares, or fractions thereof, not represented by share certificates (`Uncertified Shares") shall be registered in the stock records book of the Corporation. The Corporation at any time at its sole option may deliver to any registered holder of such shares share certificates to represent Uncertified Shares previously issued (or deemed issued) to such holder. ARTICLE IV (a) The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) The Company is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the Company and its shareholders through bylaw provisions or through agreements with agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the General Corporation Law of California, subject to the limits on such excess indemnification set forth in Section 204 of the General Corporation Law of California. If, after the effective date of this Article, California law is amended in a manner which permits a corporation to limit the monetary or other liability of its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or other persons, in any such case to a greater extent than is permitted on such effective date, the references in this Article to "California Law" shall to that extent be deemed to refer to California law as so amended. (c) Any repeal or modification of this Article shall only be prospective and shall not effect the rights under this Article in effect at the time of the alleged occurrence of any action or omission to act giving rise to liability. THREE: The foregoing amendment and restatement of the articles of incorporation has been duly approved by the Board of Directors of this Corporation. 23 FOUR: The foregoing amendment and restatement of the articles of incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The Corporation has one class of stock outstanding and such class of stock is entitled to vote with respect to the amendment herein set forth. The total number of outstanding shares of common stock of the Corporation is 5,100,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding Common Stock voting as a class. The undersigned, Frank Deverse and Patsy Deverse the Chairman and Chief Executive Officer and Secretary, respectively, of International Microcircuits, Inc., declare under penalty of perjury that the matters set out in the foregoing Articles are true of their own knowledge. Executed at Milpitas, California, on November 12, 1997. /S --------------------------------------------------- Frank Deverse, Chairman and Chief Executive Officer /S --------------------------------------------------- Patsy Deverse, Secretary 24 [STATE OF CALIFORNIA LOGO] SECRETARY OF STATE CERTIFICATE OF CORRECTION OF RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL MICROCIRCUITS, INC Frank T. Deverse and Patsy J. Deverse certify that: 1. They are the Chief Executive Officer and Secretary, respectively, of International Microcircuits, Inc., a California corporation. 2. The name of the corporation filing this certificate is International Microcircuits, Inc. and it is a California corporation. 3. The instrument being corrected is entitled "RESTATED ARTICLES OF INCORPORATION OF INCORPORATION OF INTERNATIONAL MICROCIRCUITS, INC." and said instrument was filed in the office of the Secretary of State of the State of California on December 9, 1997. 4. Paragraph ONE of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "ONE: They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of International Microcircuits, Inc., a California corporation (the "Corporation" or the "Company")." 5. Article III, paragraph one of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "The total number of shares of capital stock which the Corporation shall have authority to issue is 14,160,000 of which (a) 6,660,000 shares shall be preferred stock, without par value per share ("Preferred Stock"), and (b) 7,500,000 shares shall be common stock, without par value per share." 6. Article III, Section A(4)(a) of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "4. LIQUIDATION. (a) LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the Corporation and its subsidiaries, whether voluntary or involuntary (a "Liquidation Event"), each holder of outstanding shares of Convertible Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, an amount in cash equal to (i) $4.376 per share of Convertible Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Convertible Stock), plus (ii) any accumulated but unpaid dividends to which such holder of 1 outstanding shares of Convertible Stock is then entitled pursuant to Sections A.3 and A.5(f) hereof (the sum of clauses (i) and (ii) being referred to herein as the "Convertible Base Liquidation Amount"), plus (iii) any interest accrued pursuant to Section A.5(e) hereof to which such holder of Convertible Stock is entitled, if any (the sum of clauses (i), (ii) and (iii) being referred to herein as the "Convertible Base Liquidation Amount"); plus (iii) any interest accrued pursuant to Section A.5(e) hereof to which such holder of Convertible Stock is entitled, if any (the sum of clauses (i), (ii) and (iii) being referred to herein as the "Convertible Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Convertible Liquidation Preference Amount are not paid in full, the holders of the Convertible Stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled; and PROVIDED FURTHER, HOWEVER, that if upon any Liquidation Event the holders of the outstanding shares of Convertible Stock would receive more than the aggregate Convertible Liquidation Preference Amount with respect to such shares in the event all of their shares were converted into Series A Redeemable Preferred Stock (as defined in Section B. I of this Article III) and Common Stock immediately prior to the record date for distributions in connection with such Liquidation Event, then each holder of an outstanding share of Convertible Stock shall receive, in lieu of the Convertible Liquidation Preference Amount, an amount equal to such holder's Series A Redeemable Liquidation Preference Amount (as defined in Section B.4) under Section B.4 plus any dividends pursuant to Section A.3 or A.5(f) which are accumulated but unpaid in respect of such share as of the date of such Liquidation Event before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Stock, and thereafter shall share ratably with the holders of Common Stock and any other stock ranking on liquidation junior to the Convertible Stock in the assets available for distribution, with such distributions to be made as if each share of Convertible Stock had been converted into the number of shares of Series A Redeemable Preferred Stock and Common Stock issuable upon the conversion of such holder's shares of Convertible Stock immediately prior to any such Liquidation Event. The provisions of this Section A.4 shall not in any way limit the right of the holders of Convertible Stock to elect to convert their shares of Convertible Stock into Series A Redeemable Preferred Stock and Common Stock pursuant to Section A.6 prior to or in connection with any Liquidation Event." 7. Article III, Section A(6)(a) of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "(a) AUTOMATIC CONVERSION UPON ELECTION OF HOLDERS. The holders of shares of Convertible Stock shall be entitled, upon the written election of the holder or holders of not less than sixty-six and two-thirds percent in voting power of the outstanding shares of Convertible Stock, without the payment of any additional consideration. (i) immediately prior to and subject to the closing or happening of a Liquidation Event or an Extraordinary Transaction and (ii) at any time after December 5, 1999, to cause all (but not less than all) of the outstanding shares of Convertible Stock to be automatically converted into (i) the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as defined in this Section A.6(a)) per share in effect for the Convertible Stock at the time of conversion into the per share Conversion Value (as defined in this Section A.6(a)) of the Convertible Stock (the "Conversion Shares") and (ii) one (1) fully paid and nonassessable share of Series A Redeemable Preferred Stock. Upon the election to so convert in the manner and on 2 the basis specified in the preceding sentence, all holders of the Convertible Stock shall be deemed to have elected to voluntarily convert all outstanding shares of Convertible Stock pursuant to this Section A.6. Upon the filing and effectiveness of these Articles of' Incorporation with the California Secretary of State's office, the "Conversion Price" per share of Convertible Stock shall be $4.376, and the per share "Conversion Value" of Convertible Stock shall be $4.376. The Conversion Price per share of Convertible Stock and the Common Stock Conversion Rate (as defined in this Section A.6(a)) shall be subject to adjustment from time to -time as provided in Section A.7 hereof. The number of shares of Common Stock into which a share of a Convertible Stock is convertible is hereinafter referred to as the "Common Stock Conversion Rate." The number of shares of Series A Redeemable Preferred Stock into which a share of Convertible Stock is convertible is hereinafter referred to as the "Series A Redeemable Conversion Rate." If the holders of shares of Convertible Stock elect to convert the outstanding shares of Convertible Stock at a time when there are any accumulated but unpaid dividends or other amount ` s due on or in respect of' such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. Upon the election to so convert in the manner and on the basis specified in this Section A.6(a) all holders of the Convertible Preferred Stock shall be' deemed to have elected to voluntarily convert all outstanding shares of Convertible Preferred Stock pursuant to this Section A.6(a)." 8. Article III, Section A(6)(b) of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "(b) AUTOMATIC CONVERSION UPON QPO. Each share of Convertible Stock shall automatically be converted, without the payment of any additional consideration, into shares of Common Stock and Series A Redeemable Preferred Stock as of, and in all cases subject to, the closing of the Corporation's first underwritten offering to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended, provided that (i) such registration statement covers the offer and sale of Common Stock of which the aggregate net proceeds attributable to sales for the account of the Corporation exceed $20,000,000, at a price per share not less than $13.128 (as appropriately adjusted for any stock split, combination, reorganization, recapitalization, stock dividend, or similar event), (ii) such Common Stock is listed for trading on either the New York Stock Exchange or the Nasdaq National Market System and (iii) if a redemption election is made pursuant to Section B.5(a)(i) or (a)(ii), either (A) all outstanding shares of Series A Redeemable Preferred Stock which are outstanding or issuable upon such automatic conversion are redeemed immediately upon and as of the closing of such offering, (B) contemporaneously with such offering cash in an amount sufficient to redeem all outstanding shares of Series A Redeemable Preferred Stock is segregated and irrevocably held by the Corporation for payment to holders of Series A Redeemable Preferred Stock or (C) all outstanding shares of Series A Redeemable Preferred Stock are exchanged for Series A Notes (as defined in Section B.5(a)(i)) (a "QPO" or a "Qualified Public Offering"); PROVIDED that if a closing of a QPO occurs, all outstanding shares of Convertible Stock shall be deemed to have been converted into shares of Common Stock and Series A Redeemable Preferred Stock immediately prior to such closing. Any such conversion shall be at the Common Stock Conversion Rate and Series A Redeemable Conversion Rate in effect upon the closing of a QPO, as applicable. 3 If. the holders of shares of Convertible Stock are required to convert the outstanding shares of Convertible Stock pursuant to this Section A.6(b) at a time when there are any declared but unpaid dividends or any amounts due on or in respect of such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion." 9. Article III, Section B(3) of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "3. DIVIDENDS. The holders of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to receive, out of any funds legally available therefor, cumulative (non-compounding) dividends on the Series A Redeemable Preferred Stock in cash, at the per share rate per annum of six percent (6%) of $3.9384 (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock) (a "Series A Redeemable Cumulative Dividend"). Such dividends will accrue quarterly in arrears commencing as of the date of issuance of the Series A Redeemable Preferred Stock and be cumulative, to the extent unpaid, whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. Series A Redeemable Cumulative Dividends shall become due and payable with respect to any share of Series A Redeemable Preferred Stock as provided in Section B.4 and Section B.5. So long as any shares of Series A Redeemable Preferred Stock are outstanding and the Series A Redeemable Cumulative Dividends have not been paid in full in cash: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any Common Stock or other capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock; and (B) except as provided in Section A.8(h), no shares of capital stock of the Corporation ranking junior to the Series A Redeemable Preferred Stock shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. All numbers relating to the calculation of dividends pursuant to this Section B.3 shall be subject to equitable adjustment in the event of any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the Series A Redeemable Preferred Stock. 10. Article III, Section B(4) of said Restated Articles of Incorporation, as corrected, should read in its entirety as follows: "4. LIQUIDATION. Upon any Liquidation Event, each holder of outstanding shares of Series A Redeemable Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus, or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Series A Redeemable Preferred Stock, an amount in cash equal to the sum of (a) $3.9384 per share of Series A Redeemable Preferred Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Series A Redeemable Preferred Stock), plus (b) any accumulated but unpaid dividends to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled pursuant to Sections B.3 and B.5(d) hereof (the sum of clauses (a) and (b) being referred to herein as the "Series A Redeemable Base Liquidation 4 Amount"), plus (c) any interest accrued pursuant to Section B.5(c) to which such holder of outstanding shares of Series A Redeemable Preferred Stock is entitled, if any (the sum of clauses (a), (b) and (c) being referred to herein as the "Series A Redeemable Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Series A Redeemable Liquidation Preference Amount are not paid in full, the holders of the Series A Redeemable Preferred Stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. 11. THE RESTATED ARTICLES OF INCORPORATION when corrected as herein specified, will conform in wording to the wording of the RESTATED ARTICLES OF INCORPORATION in the resolutions adopted by the Board of Directors and Shareholders approving the RESTATED ARTICLES OF INCORPORATION. Each of the undersigned declares 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 his own knowledge and that this declaration was executed on December 15, 1997. /S -------------------------------------------------- Frank T. Deverse Title: Chief Executive Officer /S -------------------------------------------------- Patsy J. Deverse Title: Secretary 5 CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL MICROCIRCUITS, INC. The undersigned certify that: 1. They are the President and the Secretary, respectively, of INTERNATIONAL MICROCIRCUITS, INC. a California corporation. 2. Article III, paragraph 1 of the Restated Articles of Incorporation of this corporation is amended to read in full as follows: "The total number of shares of capital stock which the Company shall have authority to issue is 15,100,000 of which (a) 6,600,000 shares shall be preferred stock, without par value per share ("Preferred Stock"), and (b) 8,500,000 shares shall be common stock, without par value per share ("Common Stock"). Upon the amendment of this Article III to read as set forth above, each outstanding share of Common Stock is split into 1.5 shares of Common Stock." 3. The foregoing amendment of Restated Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the corporation is 728,200 shares of Common Stock and 3,159,128 shares of Convertible Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of Convertible Preferred Sock. The undersigned, Ilhan Refioglu and Patrick Pohlen, the President and Secretary, respectively, of International Microcircuits, Inc., 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 at Milpitas, California on February 24, 1998. /S ---------------------------------------- Ilhan Refioglu President /S ---------------------------------------- Patrick A. Pohlen Secretary 1 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTERNATIONAL MICROCIRCUITS, INC. The undersigned certify that: 1. They are the President, Vice President, Finance and Assistant Secretary, respectively, of INTERNATIONAL MICROCIRCUITS, INC., a California Corporation. 2. Article III, paragraph 1 of the Amended and Restated Articles of Incorporation of this corporation is amended to read in full as follows: "The total number of shares of capital stock which the Company shall have authority to issue is 19,350,000 of which (a) 6,600,000 shares shall be preferred stock, without par value per share ("Preferred Stock"), and (b) 12,750,000 shares shall be common stock, without par value per share ("Common Stock"). Upon the amendment of this Article III to read as set forth above, each outstanding share of Common Stock is split into 1.5 shares of Common Stock." 3. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the corporation is 1,985,000 shares of Common Stock and 3,159,128 shares of Convertible Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than a majority of the outstanding shares of Common Stock and Preferred Stock, voting together as a single class. The undersigned, Ilhan Refioglu and Judith Signorino, the President and Vice President, Finance, respectively, of International Microcircuits, Inc., 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 their own knowledge. Executed at Milpitas, California on April 3, 2000. /S -------------------------------------------------- ILHAN REFIOGLU President /S -------------------------------------------------- JUDITH SIGNORINO Vice President, Finance and Assistant Secretary 1 EX-3.2 3 a2024700zex-3_2.txt EX-3.2 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF INTERNATIONAL MICROCIRCUITS, INC. (A CALIFORNIA CORPORATION) TABLE OF CONTENTS
Page ---- ARTICLE I OFFICES................................................................................................2 Section 1. Principal Office.........................................................................2 Section 2. Other Offices............................................................................2 ARTICLE II CORPORATE SEAL........................................................................................2 Section 3. Corporate Seal...........................................................................2 ARTICLE III SHAREHOLDERS' MEETINGS AND VOTING RIGHTS.............................................................2 Section 4. Place of Meetings........................................................................2 Section 5. Annual Meeting...........................................................................2 Section 6. Postponement of Annual Meeting...........................................................3 Section 7. Special Meetings.........................................................................3 Section 8. Notice of Meetings.......................................................................3 Section 9. Manner of Giving Notice..................................................................4 Section 10. Quorum and Transaction of Business.......................................................5 Section 11. Adjournment and Notice of Adjourned Meetings.............................................5 Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes..............................5 Section 13. Action by Written Consent Without a Meeting..............................................6 Section 14. Voting...................................................................................7 Section 15. Persons Entitled to Vote or Consent......................................................7 Section 16. Proxies..................................................................................8 Section 17. Inspectors of Election...................................................................8 ARTICLE IV BOARD OF DIRECTORS....................................................................................9 Section 18. Powers...................................................................................9 Section 19. Number of Directors......................................................................9 Section 20. Election Of Directors, Term, Qualifications..............................................9 Section 21. Resignations.............................................................................9 Section 22. Removal.................................................................................10 Section 23. Vacancies...............................................................................10 Section 24. Regular Meetings........................................................................10 Section 25. Electronic Participation................................................................10 Section 26. Special Meetings........................................................................11 Section 27. Notice of Meetings......................................................................11 Section 28. Place of Meetings.......................................................................11 Section 29. Action by Written Consent Without a Meeting.............................................11 Section 30. Quorum and Transaction of Business......................................................11 Section 31. Adjournment.............................................................................12 Section 32. Organization............................................................................12 Section 33. Compensation............................................................................12 Section 34. Committees..............................................................................12 ARTICLE V OFFICERS..............................................................................................13 Section 35. Officers................................................................................13 -i- TABLE OF CONTENTS (continued) Page ---- Section 36. Appointment.............................................................................13 Section 37. Inability to Act........................................................................13 Section 38. Resignations............................................................................13 Section 39. Removal.................................................................................14 Section 40. Vacancies...............................................................................14 Section 41. Chairman of the Board...................................................................14 Section 42. President...............................................................................14 Section 43. Vice Presidents.........................................................................14 Section 44. Secretary...............................................................................14 Section 45. Chief Financial Officer.................................................................15 Section 46. Compensation............................................................................16 ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS...................................................16 Section 47. Execution of Contracts and Other Instruments............................................16 Section 48. Loans...................................................................................16 Section 49. Bank Accounts...........................................................................16 Section 50. Checks, Drafts, Etc.....................................................................17 ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER..........................................................17 Section 51. Certificate for Shares..................................................................17 Section 52. Transfer on the Books...................................................................17 Section 53. Lost, Destroyed and Stolen Certificates.................................................18 Section 54. Issuance, Transfer and Registration of Shares...........................................18 ARTICLE VII INSPECTION OF CORPORATE-RECORDS.....................................................................18 Section 55. Inspection by Directors.................................................................18 Section 56. Inspection by Shareholders..............................................................18 (a) Inspection of Corporate Records.......................................................18 (b) Inspection of Bylaws..................................................................19 Section 57. Written Form............................................................................19 ARTICLE IX MISCELLANEOUS........................................................................................19 Section 58. Fiscal Year.............................................................................19 Section 59. Annual Report...........................................................................19 Section 60. Record Date.............................................................................20 Section 61. Bylaw Amendments........................................................................20 Section 62. Construction and Definition.............................................................21 ARTICLE X INDEMNIFICATION.......................................................................................21 Section 63. Indemnification of Directors, Officers, Employees And Other Agents......................21 (a) Directors.............................................................................21 (b) Officers, Employees and Other Agents..................................................21 (c) Determination by the Corporation......................................................21 (d) Good Faith............................................................................21 (e) Expenses..............................................................................22 -ii- TABLE OF CONTENTS (continued) Page ---- (f) Enforcement...........................................................................22 (g) Non-Exclusivity of Rights.............................................................23 (h) Survival of Rights....................................................................23 (i) Insurance.............................................................................23 (j) Amendments............................................................................23 (k) Employee Benefit Plans................................................................23 (l) Saving Clause.........................................................................23 (m) Certain Definitions...................................................................23
-iii- AMENDED AND RESTATED BYLAWS OF INTERNATIONAL MICROCIRCUITS, INC. (A CALIFORNIA CORPORATION) ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal executive office of the corporation shall be located at such place as the Board of Directors may from time to time authorize. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. Section 2. OTHER OFFICES. Additional offices of the corporation shall be located at such place or places, within or outside the State of California, as the Board of Directors may from time to time authorize. ARTICLE II CORPORATE SEAL Section 3. CORPORATE SEAL. If the Board of Directors adopts a corporate seal such seal shall have inscribed thereon the name of the corporation and the state and date of its incorporation. If and when a seal is adopted by the Board of Directors, such seal may be engraved, lithographed, printed, stamped, impressed upon, or affixed to any contract, conveyance, certificate for shares, or other instrument executed by the corporation. ARTICLE III SHAREHOLDERS' MEETINGS AND VOTING RIGHTS Section 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal executive office of the corporation, or at any other place, within or outside the State of California, which may be fixed either by the Board of Directors or by the written consent of all persons entitled to vote at such meeting, given either before or after the meeting and filed with the Secretary of the Corporation. Section 5. ANNUAL MEETING. The annual meeting of the shareholders of the corporation shall be held on any date and time which may from time to time be designated by the Board of Directors. At such annual meeting, directors shall be elected and any other business may be transacted which may properly come before the meeting. 1 Section 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the President shall each have authority to hold at an earlier date and/or time, or to postpone to a later date and/or time, the annual meeting of shareholders. Section 7. SPECIAL MEETINGS. (a) Special meetings of the shareholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, the President, or the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. (b) Upon written request to the Chairman of the Board of Directors, the President, any vice president or the Secretary of the corporation by any person or persons (other than the Board of Directors) entitled to call a special meeting of the shareholders, such officer forthwith shall cause notice to be given to the shareholders entitled to vote, that a meeting will be held at a time requested by the person or persons calling the meeting, such time to be not less than thirty-five (35) nor more than sixty (60) days after receipt of such request. If such notice is not given within twenty (20) days after receipt of such request, the person or persons calling the meeting may give notice thereof in the manner provided by law or in these bylaws. Nothing contained in this Section 7 shall be construed as limiting, fixing or affecting the time or date when a meeting of shareholders called by action of the Board of Directors may be held. Section 8. NOTICE OF MEETINGS. Except as otherwise may be required by law and subject to subsection 7(b) above, written notice of each meeting of shareholders shall be given to each shareholder entitled to vote at that meeting (see Section 15 below), by the Secretary, assistant secretary or other person charged with that duty, not less than ten (10) (or, if sent by third class mail, thirty (30)) nor more than sixty (60) days before such meeting. Notice of any meeting of shareholders shall state the date, place and hour of the meeting and, (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted at such meeting; (b) in the case of an annual meeting, the general nature of matters which the Board of Directors, at the time the notice is given, intends to present for action by the shareholders; (c) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the notice to be presented by management for election; and (d) in the case of any meeting, if action is to be taken on any of the following proposals, the general nature of such proposal: (1) a proposal to approve a transaction within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has a direct or indirect financial interest); 2 (2) a proposal to approve a transaction within the provisions of California Corporations Code, Section 902 (relating to amending the Articles of Incorporation of the corporation); (3) a proposal to approve a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization); (4) a proposal to approve a transaction within the provisions of California Corporations Code, Section 1900 (winding up and dissolution); (5) a proposal to approve a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares, if any). At a special meeting, notice of which has been given in accordance with this Section, action may not be taken with respect to business, the general nature of which has not been stated in such notice. At an annual meeting, action may be taken with respect to business stated in the notice of such meeting, given in accordance with this Section, and, subject to subsection 8(d) above, with respect to any other business as may properly come before the meeting. Section 9. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in California Corporations Code Section 605) on the record date for such meeting, third-class mail, or telegraphic or other written communication, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand by the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 9, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice. 3 Section 10. QUORUM AND TRANSACTION OF BUSINESS. (a) At any meeting of the shareholders, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of the majority of shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or by the Articles of Incorporation, and except as provided in subsection (b) below. (b) The shareholders present at a duly called or held meeting of the shareholders at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, provided that any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, no business other than adjournment may be transacted, except as described in subsection (b) above. Section 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of shareholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of shares represented at such meeting either in person or by proxy and entitled to vote at such meeting. In the event any meeting is adjourned, it shall not be necessary to give notice of the time and place of such adjourned meeting pursuant to Sections 8 and 9 of these bylaws; provided that if any of the following three events occur, such notice must be given: (a) announcement of the adjourned meeting's time and place is not made at the original meeting which it continues or (b) such meeting is adjourned for more than forty-five (45) days from the date set for the original meeting or (c) a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. Section 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES. (a) Subject to subsection (b) of this Section, the transactions of any meeting of shareholders, however called and noticed, and wherever held, shall be as valid as though made at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote but not present in person or by proxy signs a written waiver of notice or a consent to holding of the meeting or an approval of the minutes thereof. 4 (b) A waiver of notice, consent to the holding of a meeting or approval of the minutes thereof need not specify the business to be transacted or transacted at nor the purpose of the meeting; provided that in the case of proposals described in subsection (d) of Section 8 of these bylaws, the general nature of such proposals must be described in any such waiver of notice and such proposals can only be approved by waiver of notice, not by consent to holding of the meeting or approval of the minutes. (c) All waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (d) A person's attendance at a meeting shall constitute waiver of notice of and presence at such meeting, except when such person objects at the beginning of the meeting to transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters which are required by law or these bylaws to be in such notice (including those matters described in subsection (d) of Section 8 of these bylaws), but are not so included if such person expressly objects to consideration of such matter or matters at any time during the meeting. Section 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice if written consents setting forth the action so taken are signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors; provided that any vacancy on the Board of Directors (other than a vacancy created by removal) which has not been filled by the board of directors may be filled by the written consent of a majority of outstanding shares entitled to vote for the election of directors. Any written consent may be revoked pursuant to California Corporations Code Section 603(c) prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Such revocation must be in writing and will be effective upon its receipt by the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting to those shareholders entitled to vote on such matters who have not consented thereto in writing. This notice shall be given in the manner specified in Section 9 of these bylaws. In the case of approval of (i) a transaction within the provisions of California Corporations Code, Section 310 (relating to certain transactions in which a director has an interest), (ii) a transaction within the provisions of California Corporations Code, Section 317 (relating to indemnification of agents of the corporation), (iii) a transaction within the provisions of California Corporations Code, Sections 181 and 1201 (relating to reorganization), and (iv) a plan of distribution within the provisions of California Corporations Code, Section 2007 (relating to certain plans providing for distribution not in accordance with the liquidation rights of preferred shares, if any), the 5 notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section 14. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 15 of these bylaws, subject to the provisions of Sections 702 through 704 of the California Corporations Code (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). Voting at any meeting of shareholders need not be by ballot; PROVIDED, HOWEVER, that elections for directors must be by ballot if balloting is demanded by a shareholder at the meeting and before the voting begins. Every person entitled to vote at an election for directors may cumulate the votes to which such person is entitled, I.E., such person may cast a total number of votes equal to the number of directors to be elected multiplied by the number of votes to which such person's shares are entitled, and may cast said total number of votes for one or more candidates in such proportions as such person thinks fit; PROVIDED, HOWEVER, no shareholder shall be entitled to so cumulate such shareholder's votes unless the candidates for which such shareholder is voting have been placed in nomination prior to the voting and a shareholder has given notice at the meeting, prior to the vote, of an intention to cumulate votes. In any election of directors, the candidates receiving the highest number of votes, up to the number of directors to be elected, are elected. Except as may be otherwise provided in the Articles of Incorporation or by law, and subject to the foregoing provisions regarding the cumulation of votes, each shareholder shall be entitled to one vote for each share held. Any shareholder may vote part of such shareholder's shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. No shareholder approval, other than unanimous approval of those entitled to vote will be valid as to proposals described in subsection 8(d) of these bylaws unless the general nature of such business was stated in the notice of meeting or in any written waiver of notice. Section 15. PERSONS ENTITLED TO VOTE OR CONSENT. The Board of Directors may fix a record date pursuant to Section 60 of these bylaws to determine which shareholders are entitled to notice of and to vote at a meeting or consent to corporate actions, as provided in Sections 13 and 14 of these bylaws. Only persons in whose name shares otherwise entitled to vote stand on the stock records of the corporation on such date shall be entitled to vote or consent. If no record date is fixed: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; 6 (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given; (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting; PROVIDED, HOWEVER, that the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. Shares of the corporation held by its subsidiary or subsidiaries (as defined in California Corporations Code, Section 189(b)) are not entitled to vote in any matter. Section 16. PROXIES. Every person entitled to vote or execute consents may do so either in person or by one or more agents authorized to act by a written proxy executed by the person or such person's duly authorized agent and filed with the Secretary of the corporation; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless otherwise provided in the proxy. The manner of execution, suspension, revocation, exercise and effect of proxies is governed by law. Section 17. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint any persons, other than nominees for office, to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or proxy shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; 7 (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE IV BOARD OF DIRECTORS Section 18. POWERS. Subject to the provisions of law or any limitations in the Articles of Incorporation or these bylaws, as to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised, by or under the direction of the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors. Section 19. NUMBER OF DIRECTORS. The authorized number of directors of the corporation shall not be less than a minimum of three (3) nor more than a maximum of five (5) (which maximum number in no case shall be greater than two times said minimum, minus one) and the number of directors presently authorized is three (3). The exact number of directors shall be set within these limits from time to time (a) by approval of the Board of Directors, or (b) by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the written consent of shareholders pursuant to Section 13 hereinabove. Any amendment of these bylaws changing the maximum or minimum number of directors may be adopted only by the affirmative vote of a majority of the outstanding shared entitled to vote; provided, an amendment reducing the minimum number of directors to less than five (5), cannot be adopted if votes cast against its adoption at a meeting or the shares not consenting to it in the case of action by written consent are equal to more than 16-2/3 percent of the outstanding shares entitled to vote. Section 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office either until the expiration of the term for which elected or appointed and until a successor has been elected and qualified, or until his death, resignation or removal. Directors need not be shareholders of the corporation. Section 21. RESIGNATIONS. Any director of the corporation may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation specifies effectiveness at a future time, a successor may be elected 8 pursuant to Section 23 of these bylaws to take office on the date that the resignation becomes effective. Section 22. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal; PROVIDED, HOWEVER, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director's removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director's most recent election were then being elected. Section 23. VACANCIES. A vacancy or vacancies on the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any director, or upon increase in the authorized number of directors or if shareholders fail to elect the full authorized number of directors at an annual meeting of shareholders or if, for whatever reason, there are fewer directors on the Board of Directors, than the full number authorized. Such vacancy or vacancies, other than a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by the written consent of shareholders pursuant to Section 13 hereinabove. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent, other than to fill a vacancy created by removal, requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires the consent of all of the outstanding shares entitled to vote. If, after the filling of any vacancy by the directors, the directors then in office who have been elected by the shareholders constitute less than a majority of the directors then in office, any holder or holders of an aggregate of five percent (5 %) or more of the shares outstanding at that time and having the right to vote for such directors may call a special meeting of shareholders to be held to elect the entire Board of Directors. The term of office of any director shall terminate upon such election of a successor. Section 24. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times, places and dates as fixed in these bylaws or by the Board of Directors; PROVIDED, HOWEVER, that if the date for such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. Regular meetings of the Board of Directors held pursuant to this Section 24 may be held without notice. Section 25. ELECTRONIC PARTICIPATION. So long as permitted by statute, directors may participate in a meeting through any means of communication, including conference telephone, 9 electronic video screen communication, or other communications equipment. Participating in a meeting pursuant to this section constitutes presence in person at that meeting if each participating director is provided the means to communicate with all of the other directors concurrently and (a) the meeting is held by conference telephone or video conferencing or other communications mode enabling participants to determine, through voice or image recognition, that a participant is or is not a director entitled to participate in the meeting or (b) another communications device (such as a computer modem) is used in conjunction with another method (determined in the discretion of the chairperson of the meeting) enabling participants to determine that a participant is or is not a director entitled to participate in the meeting. Such verification method may include use of passwords or similar codes for gaining access to the meeting or encryption and authentication technology approved in the discretion of the chairperson. Section 26. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called by the Chairman of the Board or the President or any vice president or the Secretary of the corporation or any two (2) directors. Section 27. NOTICE OF MEETINGS. Notice of the date, time and place of all meetings of the Board of Directors, other than regular meetings held pursuant to Section 24 above shall be delivered personally, orally or in writing, or by telephone, including a voice messaging system or other system or technology designed to record and communication messages, telegraph, facsimile, electronic mail, or other electronic means to each director, at least forty-eight (48) hours before the meeting, or sent in writing to each director by first-class mail, charges prepaid, at least four (4) days before the meeting. Such notice may be given by the Secretary of the corporation or by the person or persons who called a meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice of such meeting, or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement such director's lack of notice. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 28. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the state which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, designated in the bylaws or by resolution of the Board of Directors. Section 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the authorized number of directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the authorized number of directors present at a meeting 10 duly held at which a quorum is present shall be the act of the Board of Directors, unless the law, the Articles of Incorporation or these bylaws specifically require a greater number. A meeting at which a quorum is initially present may continue to transact business, notwithstanding withdrawal of directors, if any action taken is approved by at least a majority of the number of directors constituting a quorum for such meeting. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting, as provided in Section 31 of these bylaws. Section 31. ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the directors present. If the meeting is adjourned for more than twenty-four (24) hours, notice of such adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 32. ORGANIZATION. The Chairman of the Board shall preside at every meeting of the Board of Directors, if present. If there is no Chairman of the Board or if the Chairman is not present, a Chairman chosen by a majority of the directors present shall act as chairman. The Secretary of the corporation or, in the absence of the Secretary, any person appointed by the Chairman shall act as secretary of the meeting. Section 33. COMPENSATION. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board of Directors. Section 34. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors, by a vote of the majority of authorized directors, may designate one or more directors as alternate members of any committee, to replace any absent member at any meeting of such committee. Any such committee shall have authority to act in the manner and to the extent provided in the resolution of the Board of Directors, and may have all the authority of the Board of Directors in the management of the business and affairs of the corporation, except with respect to: (a) the approval of any action for which shareholders' approval or approval of the outstanding shares also is required by the California Corporations Code; (b) the filling of vacancies on the Board of Directors or any of its committees; (c) the fixing of compensation of directors for serving on the Board of Directors or any of its committees; (d) the adoption, amendment or repeal of these bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; 11 (f) a distribution to shareholders, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of other committees of the Board of Directors or the members thereof. Any committee may from time to time provide by resolution for regular meetings at specified times and places. If the date of such a meeting falls on a legal holiday, then the meeting shall be held at the same time on the next succeeding full business day. No notice of such a meeting need be given. Such regular meetings need not be held if the committee shall so determine at any time before or after the time when such meeting would otherwise have taken place. Special meetings may be called at any time in the same manner and by the same persons as stated in Sections 26 and 27 of these bylaws for meetings of the Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of these bylaws shall apply to committees, committee members and committee meetings as if the words "committee" and "committee member" were substituted for the word "Board of Directors", and "director", respectively, throughout such sections. ARTICLE V OFFICERS Section 35. OFFICERS. The corporation shall have a Chairman of the Board or a President or both, a Secretary, a Chief Financial Officer and such other officers with such titles and duties as the Board of Directors may determine. Any two or more offices may be held by the same person. Section 36. APPOINTMENT. All officers shall be chosen and appointed by the Board of Directors; PROVIDED, HOWEVER, the Board of Directors may empower the chief executive officer of the corporation to appoint such officers, other than Chairman of the Board, President, Secretary or Chief Financial Officer, as the business of the corporation may require. All officers shall serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under a contract of employment. Section 37. INABILITY TO ACT. In the case of absence or inability to act of any officer of the corporation or of any person authorized by these bylaws to act in such officer's place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select, for such period of time as the Board of Directors deems necessary. Section 38. RESIGNATIONS. Any officer may resign at any time upon written notice to the corporation, without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors, unless a different time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it effective unless otherwise specified in such notice. 12 Section 39. REMOVAL. Any officer may be removed from office at any time, with or without cause, but subject to the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of removal has been duly delegated, or, with regard to any officer who has been appointed by the chief executive officer pursuant to Section 36 above, by the chief executive officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. Section 40. VACANCIES. A vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article of the bylaws for initial appointment to such office. Section 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be such an officer, shall, if present, preside at all meetings of the Board of Directors and shall exercise and perform such other powers and duties as may be assigned from time to time by the Board of Directors or prescribed by these bylaws. If no President is appointed, the Chairman of the Board is the general manager and chief executive officer of the corporation, and shall exercise all powers of the President described in Section 42 below. Section 42. PRESIDENT. Subject to such powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall have general supervision, direction, and control over the business and affairs of the corporation, subject to the control of the Board of Directors. The President may sign and execute, in the name of the corporation, any instrument authorized by the Board of Directors, except when the signing and execution thereof shall have been expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the corporation. The President shall have all the general powers and duties of management usually vested in the president of a corporation, and shall have such other powers and duties as may be prescribed from time to time by the Board of Directors or these bylaws. The President shall have discretion to prescribe the duties of other officers and employees of the corporation in a manner not inconsistent with the provisions of these bylaws and the directions of the Board of Directors. Section 43. VICE PRESIDENTS. In the absence or disability of the President, in the event of a vacancy in the office of President, or in the event such officer refuses to act, the Vice President shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the President. If at any such time the corporation has more than one vice president, the duties and powers of the President shall pass to each vice president in order of such vice president's rank as fixed by the Board of Directors or, if the vice presidents are not so ranked, to the vice president designated by the Board of Directors. The vice presidents shall have such other powers and perform such other duties as may be prescribed for them from time to time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws or otherwise pursuant to these bylaws. 13 Section 44. SECRETARY. The Secretary shall: (a) Keep, or cause to be kept, minutes of all meetings of the corporation's shareholders, Board of Directors, and committees of the Board of Directors, if any. Such minutes shall be kept in written form. (b) Keep, or cause to be kept, at the principal executive office of the corporation, or at the office of its transfer agent or registrar, if any, a record of the corporation's shareholders, showing the names and addresses of all shareholders, and the number and classes of shares held by each. Such records shall be kept in written form or any other form capable of being converted into written form. (c) Keep, or cause to be kept, at the principal executive office of the corporation, or if the principal executive office is not in California, at its principal business office in California, an original or copy of these bylaws, as amended. (d) Give, or cause to be given, notice of all meetings of shareholders, directors and committees of the Board of Directors,. as required by law or by these bylaws. (e) Keep the seal of the corporation, if any, in safe custody. (f) Exercise such powers and perform such duties as are usually vested in the office of secretary of a corporation, and exercise such other powers and perform such other duties as may be prescribed from time to time by the Board of Directors or these bylaws. If any assistant secretaries are appointed, the assistant secretary, or one of the assistant secretaries in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant secretary designated by the Board of Directors, in the absence or disability of the Secretary or in the event of such officer's refusal to act or if a vacancy exists in the office of Secretary, shall perform the duties and exercise the powers of the Secretary and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. Section 45. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall: (a) Be responsible for all functions and duties of the treasurer of the corporation. (b) Keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account for the corporation. (c) Receive or be responsible for receipt of all monies due and payable to the corporation from any source whatsoever; have charge and custody of, and be responsible for, all monies and other valuables of the corporation and be responsible for deposit of all such monies in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. 14 (d) Disburse or be responsible for the disbursement of the funds of the corporation as may be ordered by the Board of Directors or a duly appointed and authorized committee of the Board of Directors. (e) Render to the chief executive officer and the Board of Directors a statement of the financial condition of the corporation if called upon to do so. (f) Exercise such powers and perform such duties as are usually vested in the office of chief financial officer of a corporation, and exercise such other powers and perform such other duties as may be pre scribed by the Board of Directors or these bylaws. If any assistant financial officer is appointed, the assistant financial officer, or one of the assistant financial officers, if there are more than one, in the order of their rank as fixed by the Board of Directors or, if they are not so ranked, the assistant financial officer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time pursuant to these bylaws or by the Board of Directors. Section 46. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that such officer is also a director of the corporation. ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS Section 47. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as these bylaws may otherwise provide, the Board of Directors or its duly appointed and authorized committee may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. Except as so authorized or otherwise expressly provided in these bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. Section 48. LOANS. No loans shall be contracted on behalf of the corporation and no negotiable paper shall be issued in its name, unless and except as authorized by the Board of Directors or its duly appointed and authorized committee. When so authorized by the Board of Directors or such committee, any officer or agent of the corporation may effect loans and advances at any time for the corporation from any bank, trust company, or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate or transfer any and all stocks, securities and other property, real or personal, at any time held by the corporation, and to that end endorse, assign and deliver the same as security for the payment of any and all loans, 15 advances, indebtedness, and liabilities of the corporation. Such authorization may be general or confined to specific instances. Section 49. BANK ACCOUNTS. The Board of Directors or its duly appointed and authorized committee from time to time may authorize the opening and keeping of general and/or special bank accounts with such banks, trust companies, or other depositories as may be selected by the Board of Directors, its duly appointed and authorized committee or by any officer or officers, agent or agents, of the corporation to whom such power may be delegated from time to time by the Board of Directors. The Board of Directors or its duly appointed and authorized committee may make such rules and regulations with respect to said bank accounts, not inconsistent with the provisions of these bylaws, as are deemed advisable. Section 50. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, acceptances or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents, of the corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors or its duly appointed and authorized committee. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories may be made, without counter-signature, by the President or any vice president or the Chief Financial Officer or any assistant financial officer or by any other officer or agent of the corporation to whom the Board of Directors or its duly appointed and authorized committee, by resolution, shall have delegated such power or by hand-stamped impression in the name of the corporation. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 51. CERTIFICATE FOR SHARES. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an assistant financial officer or by the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue any shares as only partly paid, the certificate issued to represent such partly paid shares shall have stated thereon the total consideration to be paid for such shares and the amount paid thereon. Section 52. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or transfer agent (if any) of the corporation of a certificate for shares of the corporation duly endorsed, with reasonable assurance that the endorsement is genuine and effective, or accompanied by proper evidence of succession, assignment or authority to transfer and upon compliance with applicable federal and state securities laws and if the corporation has no statutory duty to inquire into 16 adverse claims or has discharged any such duty and if any applicable law relating to the collection of taxes has been complied with, it shall be the duty of the corporation, by its Secretary or transfer agent, to cancel the old certificate, to issue a new certificate to the person entitled thereto and to record the transaction on the books of the corporation. Section 53. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any certificate for shares of the corporation alleged to have been lost, destroyed or stolen shall notify the corporation by making a written affidavit or affirmation of such fact. Upon receipt of said affidavit or affirmation the Board of Directors, or its duly appointed and authorized committee or any officer or officers authorized by the Board so to do, may order the issuance of a new certificate for shares in the place of any certificate previously issued by the corporation and which is alleged to have been lost, destroyed or stolen. However, the Board of Directors or such authorized committee, officer or officers may require the owner of the allegedly lost, destroyed or stolen certificate, or such owner's legal representative, to give the corporation a bond or other adequate security sufficient to indemnify the corporation and its transfer agent and/or registrar, if any, against any claim that may be made against it or them on account of such allegedly lost, destroyed or stolen certificate or the replacement thereof. Said bond or other security shall be in such amount, on such terms and conditions and, in the case of a bond, with such surety or sureties as may be acceptable to the Board of Directors or to its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors to determine the sufficiency thereof. The requirement of a bond or other security may be waived in particular cases at the discretion of the Board of Directors or its duly appointed and authorized committee or any officer or officers authorized by the Board of Directors so to do. Section 54. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of Directors may make such rules and regulations, not inconsistent with law or with these bylaws, as it may deem advisable concerning the issuance, transfer and registration of certificates for shares of the capital stock of the corporation. The Board of Directors may appoint a transfer agent or registrar of transfers, or both, and may require all certificates for shares of the corporation to bear the signature of either or both. ARTICLE VII INSPECTION OF CORPORATE-RECORDS Section 55. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind of the corporation and any of its subsidiaries and to inspect the physical properties of the corporation and any of its subsidiaries. Such inspection may be made by the director in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Section 56. INSPECTION BY SHAREHOLDERS. (a) INSPECTION OF CORPORATE RECORDS. (1) A shareholder or shareholders holding at least five (5%) percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent 17 of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation; or (ii) Obtain from the transfer agent, if any, for the corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (2) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (3) The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and of any committees of the Board of Directors of the corporation and of each of its subsidiaries shall be open to inspection, copying and making extracts upon written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (4) Any inspection, copying, and making of extracts under this subsection (a) may be done in person or by agent or attorney. (b) INSPECTION OF BYLAWS. The original or a copy of these bylaws shall be kept as provided in Section 44 of these bylaws and shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is not in California, and the corporation has no principal business office in the state of California, a current copy of these bylaws shall be furnished to any shareholder upon written request. Section 57. WRITTEN FORM. If any record subject to inspection pursuant to Section 56 above is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. ARTICLE IX MISCELLANEOUS Section 58. FISCAL YEAR. Unless otherwise fixed by resolution of the Board of Directors, the fiscal year of the corporation shall end on the 30th day of June in each calendar year. 18 Section 59. ANNUAL REPORT. (a) Subject to the provisions of Section 59(b) below, the Board of Directors shall cause an annual report to be sent to each shareholder of the corporation in the manner provided in Section 9 of these bylaws not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 shareholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the United States Securities Exchange Act of 1934, that Act shall take precedence. Such report shall be sent to shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the next annual meeting of shareholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the shareholders of the corporation is hereby expressly waived. Section 60. RECORD DATE. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of or to vote at any meeting or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of shares or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall not be more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action or event for the purpose of which it is fixed. If no record date is fixed, the provisions of Section 15 of these bylaws shall apply with respect to notice of meetings, votes, and consents and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolutions relating thereto, or the sixtieth (60th) day prior to the date of such other action or event, whichever is later. Only shareholders of record at the close of business on the record date shall be entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation, by agreement or by law. Section 61. BYLAW AMENDMENTS. Except as otherwise provided by law or Section 19 of these bylaws, these bylaws may be amended or repealed by the Board of Directors or by the affirmative vote of a majority of the outstanding shares entitled to vote, including, if applicable, the affirmative vote of a majority of the outstanding shares of each class or series entitled by law or the Articles of Incorporation to vote as a class or series on the amendment or repeal or adoption of any bylaw or bylaws; PROVIDED, HOWEVER, after issuance of shares, a bylaw specifying 19 or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by approval of the outstanding shares as provided herein. Section 62. CONSTRUCTION AND DEFINITION. Unless the context requires otherwise, the general provisions, rules of construction, and definitions contained in the California Corporations' Code shall govern the construction of these bylaws. Without limiting the foregoing, "shall" is mandatory and "may" is permissive. ARTICLE X INDEMNIFICATION Section 63. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS. The corporation shall indemnify its directors to the fullest extent not prohibited by the California General Corporation Law; PROVIDED, HOWEVER, that the corporation may limit the extent of such indemnification by individual contracts with its directors; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any director in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the board of directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the California General Corporation Law. (b) OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its officers, employees and other agents as set forth in the California General Corporation Law. (c) DETERMINATION BY THE CORPORATION. Promptly after receipt of a request for indemnification hereunder (and in any event within 90 days thereof) a reasonable, good faith determination as to whether indemnification of the director is proper under the circumstances because each director has met the applicable standard of care shall be made by: (1) a majority vote of a quorum consisting of directors who are not parties to such proceeding; (2) if such quorum is not obtainable, by independent legal counsel in a written opinion; or (3) approval or ratification by the affirmative vote of a majority of the shares of this corporation represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) or by written consent of a majority of the outstanding shares entitled to vote; where in each case the shares owned b the person to be indemnified shall not be considered entitled to vote thereon. 20 (d) GOOD FAITH. (1) For purposes of any determination under this bylaw, a director shall be deemed to have acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation and its shareholders, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation whom the director believed to be reliable and competent in the matters presented; (ii) counsel, independent accountants or other persons as to matters which the director believed to be within such person's professional competence; and (iii) a committee of the Board upon which such director does not serve, as to matters within such committee's designated authority, which committee the director believes to merit confidence; so long as, in each case, the director acts without knowledge that would cause such reliance to be unwarranted. (2) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and its shareholders or that he had reasonable cause to believe that his conduct was unlawful. (3) The provisions of this paragraph (d) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the California General Corporation Law. (e) EXPENSES. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any director in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it shall be determined ultimately that such person is not entitled to be indemnified under this bylaw or otherwise. (f) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors under this bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director. Any right to indemnification or advances granted by this bylaw to a director shall be enforceable by or on behalf of the person holding such right in the forum in which the proceeding is or was pending or, if such forum is not available or a determination is made that such forum is not convenient, in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any proceeding in 21 advance of its final disposition when the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the California General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its board of directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the California General Corporation Law, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (g) NON-EXCLUSIVITY OF RIGHTS. To the fullest extent permitted by the corporation's Articles of Incorporation and the California General Corporation Law, the rights conferred on any person by this bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent permitted by the California General Corporation Law and the corporation's Articles of Incorporation. (h) SURVIVAL OF RIGHTS. The rights conferred on any person by this bylaw shall continue as to a person who has ceased to be a director and shall inure to the benefit of the heirs, executors and administrators of such a person. (i) INSURANCE. The corporation, upon approval by the board of directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this bylaw. (j) AMENDMENTS. Any repeal or modification of this bylaw shall only be prospective and shall not affect the rights under this bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (k) EMPLOYEE BENEFIT PLANS. The corporation shall indemnify the directors and officers of the corporation who serve at the request of the corporation as trustees, investment managers or other fiduciaries of employee benefit plans to the fullest extent permitted by the California General Corporation Law. (l) SAVING CLAUSE. If this bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director to the fullest extent permitted by any applicable portion of this bylaw that shall not have been invalidated, or by any other applicable law. 22 (m) CERTAIN DEFINITIONS. For the purposes of this bylaw, the following definitions shall apply: (1) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement and appeal of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative. (2) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding, including expenses of establishing a right to indemnification under this bylaw or any applicable law. (3) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (4) References to a "director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. 23 EX-10.2 4 a2024700zex-10_2.txt EX10-2 Exhibit 10.2 STANDARD INDUSTRIAL LEASE by and between MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION and INTERNATIONAL MICROCIRCUITS, INC. TABLE OF CONTENTS
Page ---- 1. Parties..................................................................................................1 2. Premises and Parking.....................................................................................1 2.1 Premises........................................................................................1 2.2 Vehicle Parking.................................................................................1 2.3 Common Areas - Definitions......................................................................1 3. Term.....................................................................................................2 4. Rent.....................................................................................................3 4.1 Base Rent.......................................................................................3 4.2 Adjustment to Base Rent.........................................................................3 4.3 Operating Expenses..............................................................................3 4.4 Additional Rent.................................................................................6 4.5 Lessee's Share..................................................................................6 5. Security and Letter of Credit............................................................................6 5.1 Security Deposit................................................................................6 5.2 Letter of Credit................................................................................6 6. Use......................................................................................................7 6.1 Use.............................................................................................7 6.2 Compliance with Law.............................................................................7 6.3 Condition of Premises...........................................................................8 7. Maintenance, Repairs and Alterations.....................................................................8 7.1 Lessor's Obligations............................................................................8 7.2 Lessee's Obligations............................................................................8 7.3 Alterations and Additions.......................................................................9 8. Insurance; Indemnity....................................................................................11 8.1 Lessee's Insurance.............................................................................11 8.2 Lessor's Insurance.............................................................................12 8.3 Blanket Policy.................................................................................12 8.4 Insurance Policies.............................................................................12 8.5 Waiver of Subrogation..........................................................................13 8.6 Indemnity......................................................................................13 8.7 Exemption of Lessor from Liability.............................................................14 9. Damage or Destruction...................................................................................14 9.1 Definitions....................................................................................14 9.2 Premises Partial Damage........................................................................14 9.3 Premises Total Destruction.....................................................................15 9.4 Abatement of Rent, Lessee's Remedies...........................................................15 i TABLE OF CONTENTS (continued) Page ---- 9.5 Termination - Advance Payments.................................................................16 9.6 Waiver.........................................................................................16 9.7 Lessee's Property..............................................................................16 9.8 Notice of Damage...............................................................................16 9.9 Replacement Cost...............................................................................16 10. Real Property Taxes.....................................................................................16 10.1 Payment of Taxes...............................................................................16 10.2 Payment of Taxes; Additional Improvements......................................................16 10.3 Definition of "Real Property Taxes."...........................................................16 10.4 Personal Property Taxes........................................................................17 11. Utilities...............................................................................................17 12. Assignment and Subletting...............................................................................17 12.1 Documentation..................................................................................18 12.2 Terms and Conditions...........................................................................18 12.3 Partnership....................................................................................19 12.4 Corporation....................................................................................19 12.5 Lessor's Remedies..............................................................................19 12.6 Permitted Transfers............................................................................19 13. Default; Remedies.......................................................................................20 13.1 Default........................................................................................20 13.2 Remedies.......................................................................................21 13.3 Default by Lessor..............................................................................22 13.4 Late Charges...................................................................................22 13.5 No Relief From Forfeiture After Default........................................................23 14. Condemnation............................................................................................23 15. Broker's Fee............................................................................................23 16. Estoppel Certificate....................................................................................24 17. Lessor's Liability......................................................................................24 18. Severability............................................................................................25 19. Interest on Past-due Obligations........................................................................25 20. Time of Essence.........................................................................................25 21. Incorporation of Prior Agreements; Amendments...........................................................25 22. Notices.................................................................................................25 ii TABLE OF CONTENTS (continued) Page ---- 23. Waivers.................................................................................................26 24. Recording...............................................................................................26 25. Holding Over............................................................................................26 26. Cumulative Remedies.....................................................................................26 27. Covenants and Conditions................................................................................26 28. Binding Effect; Choice of Law...........................................................................26 29. Subordination...........................................................................................26 30. Hazardous Materials.....................................................................................27 30.1 Use of Hazardous Materials.....................................................................27 30.2 Lessee's Indemnification.......................................................................27 30.3 Hazardous Materials Documents..................................................................28 30.4 Notices........................................................................................28 30.5 Definition.....................................................................................28 31. Attorneys' Fees.........................................................................................30 32. Lessor's Access.........................................................................................30 33. Signs...................................................................................................30 34. Merger..................................................................................................31 35. Security Measures.......................................................................................31 36. Easements...............................................................................................31 37. Authority...............................................................................................31 38. Offer...................................................................................................31 39. Interpretation..........................................................................................31 40. Attachments.............................................................................................31 41. Possessory Interest.....................................................................................32 42. Counterparts............................................................................................32
iii STANDARD INDUSTRIAL LEASE 1. PARTIES. This Lease, dated for reference purposes only, as of July _, 1998, is made by and between Marin County Employees' Retirement Association, a political subdivision of the State of California, or its assignee ("Lessor') and International Microcircuits, Inc., a California corporation ("Lessee"). This Lease is entered into concurrently with the Purchase and Sale Agreement by and between Lessee, as seller, and Lessor, as buyer, dated as of May 7, 1998, as amended by the First Amendment to Purchase Agreement dated as of July 2, 1998, and the Assignment of Purchase and Sale Agreement, dated as of July 16, 1998 (collectively, the "Purchase Agreement"). 2. PREMISES AND PARKING. 2.1 PREMISES. Lessor hereby leases to Lessee, and Lessee leases from Lessor, for the term, at the rental, and upon all of the conditions set forth herein, those certain premises commonly known as 525 Los Coches Street, Milpitas, California (the "Premises"), including the building ("Building") located on that certain real property (the "Property") as outlined on Exhibit A attached hereto, including rights to the Common Areas (as hereinafter specified) but not including the roof or the exterior walls of the Building. Lessor and Lessee agree that for purposes of this Lease the interior of the Building contains 38,710 square feet. The Premises do not include any rights to the airspace above the Premises. 2.2 VEHICLE PARKING. Lessee shall be entitled to the use of vehicle parking spaces, unreserved and unassigned, on those portions of the Common Areas designated by Lessor for parking. Said parking spaces shall be used only for parking by vehicles no larger than full size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2.2.1 Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 2.2.2 If Lessee permits or allows any of the prohibited activities described in Section 2.2 of this Lease, then Lessor shall have the right, following reasonable notice to Lessee, in addition to such other reasonable rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost thereof to Lessee, which costs shall be immediately payable upon demand by Lessor as additional rent hereunder. 2.3 COMMON AREAS - DEFINITIONS. The term "Common Areas" is defined as all areas and facilities outside the Building and within the exterior boundary line of the Property on which the Building is located that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of any other lessees of the Property, if any, and their respective employees, suppliers, shippers, customers and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 1 2.3.1 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Common Areas established from time to time by Lessor, subject to the provisions of Section 2.3.2. Under no circumstances shall the right herein granted to Lessee to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated representative, which consent may be revoked at any time. In the event that any unauthorized storage shaft occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the reasonable cost thereof to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3.2 COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable, non-discriminatory, rules and regulations with respect thereto. No such rules and regulations shall materially impair or conflict with the rights of Lessee under this Lease. Lessee agrees to abide by and conform to all such rules and regulations upon reasonable written notice of such rules and regulations, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. 2.3.3 COMMON AREAS - CHANGES. Provided that none of the following shall materially impair or conflict with the rights of Lessee under the Lease, including, but not limited to, Lessee's rights of ingress and egress, Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) to make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways, provided such changes do not reduce the number of available parking spaces; (b) to close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) to designate other land outside the boundaries of the Premises to be a part of the Common Areas; (d) to add additional improvements to the Common Areas; (e) to use the Common Areas while engaged in making additional improvements, repairs or alterations to the Building, or any portion thereof, (f) to do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Premises as Lessor may-deem to be appropriate; and (g) to remove areas from use as Common Areas. 3. TERM. The term of this Lease shall commence on the Closing Date (as defined in the Purchase Agreement) of Lessor's acquisition of the Property pursuant to the terms and conditions of the Purchase Agreement (the "Commencement Date") and ending at midnight on the date which is eighty-four (84) months following the Commencement Date (the "Expiration Date"), unless sooner terminated pursuant to the provisions hereof. The parties agree to execute a certificate confirming the actual Commencement Date and Expiration Date once such dates have been determined in connection with the consummation of the Purchase Agreement. 2 4. RENT. 4.1 BASE RENT. Lessee shall pay to Lessor Fifty-Two Thousand Two Hundred Fifty-Eight and 50/100 Dollars ($52,258.50), as "Base Rent" for the Premises, each month in advance, without offset or deduction, notice or demand, commencing and continuing thereafter on the first (1st) day of each month of the term of this Lease. Base Rent for any period during the term of this Lease which is for less than one month shall be a pro rata portion of the Base Rent for such month. Base Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate from time to time to Lessee in writing. Upon execution of this Lease, Lessee shall deposit into the escrow with North American Title Insurance Company (the "Escrow") Base Rent for the first month of the term of this Lease. 4.2 ADJUSTMENT TO BASE RENT. The Base Rent shall be adjusted on the first anniversary of the Commencement Date and every twelve (12) months thereafter (the "Rental Adjustment Dates"), to reflect any increase in the cost of living from the end of the first year of the term of this Lease or the immediately preceding Rental Adjustment Date for all subsequent adjustments (the "Base Dates"). The adjustment or adjustments, if any, shall be calculated upon the basis of the United States Department of Labor, Bureau of Labor Statistics CONSUMER PRICE INDEX FOR ALL-URBAN CONSUMERS, for San Francisco/Oakland/San Jose (1982-1984 = 100), hereafter referred to as the "Index." The applicable Index for each adjustment made under this Section 4.2 shall be the latest published Index as of the applicable Base Date and the applicable Rental Adjustment Date. On each Rental Adjustment Date, the Base Rent then in effect shall be increased by an amount equal to the Base Rent then in effect multiplied by the percentage increase in the Index during the twelve (12) month period between the Base Date immediately preceding such Rental Adjustment Date and such Rental Adjustment Date. When the adjusted Base Rent is determined upon each Rental Adjustment Date, Lessor shall give Lessee written notice to that effect indicating how the new Base Rent figure was computed in accordance with this Section 4.2. If the Index does not exist on any Rental Adjustment Date in the same format as referred to in this paragraph, Lessor shall substitute in lieu thereof an index reasonably comparable to the Index then published by the Bureau of Labor Statistics, or successor or similar governmental agency, or if no governmental agency then publishes an index, Lessor shall substitute therefor any comparable index then published by a reputable private organization. 4.3 OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Pro Rata Share (as defined in Section 4.5 hereof) of Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: 4.3.1 "Operating Expenses" shall include: (a) All costs and expenses paid or incurred by Landlord for the ownership, operation, maintenance, repair and replacement of structural and non-structural portions and components of the Building and the Common Areas (provided, that if the cost for any replacement of a portion of the Building or the Common Areas would be capitalized under generally accepted accounting principles ("GAAP"), such cost shall be amortized by Lessor at a 3 rate of ten percent (10%) per annum over the useful life of such replacement as reasonably determined by the manufacturer of the replacement or the contractor installing the replacement, and Lessee shall be required to pay only such portion of the cost for the replacement which is amortized during the term of this Lease), including but not limited to: (i) maintaining, cleaning, repairing and resurfacing the roof (including repair of leaks) and the exterior surfaces (including painting) of the Building, (ii) maintaining operating and replacing when necessary HVAC equipment, if Lessor so elects under Section 7.2.1 below, utility facilities and other building service equipment, (iii) complying with all Laws (as hereinafter defined), (iv) operating, maintaining, repairing, cleaning, painting, restripping, paving resurfacing and landscaping the Common Areas, (v) replacement or installation of lighting fixtures, direction or other signs and signals, irrigation systems, trees, shrubs, ground cover and other plant materials and all landscaping the Common Areas, (vi) management fees paid by Lessor with respect to the management of the Building, and (vii) any other service provided by Lessor that is elsewhere in this Lease stated to be an Operating Expense; (b) The cost of the premiums for the insurance policies maintained by Lessor pursuant to Section 8 hereof and all increases in such premiums during the term of this Lease; (c) The amount of the Real Property Taxes to be paid by Lessor pursuant to Section 10.1 hereof; (d) The cost of providing water, gas, electricity, sanitary sewer, storm drain, and other utility services to the Premises which are not paid directly by Lessee; and (e) Deductibles on the liability and property (including flood and earthquake) insurance policies to be maintained by Lessor pursuant to Section 8 hereof. 4.3.2 Notwithstanding anything in Section 4.3.1 to the contrary, the following shall not constitute Operating Expenses for the purposes of this Lease: (a) Legal fees, brokerage commissions, advertising costs and other related costs and expenses incurred in connection with the leasing of the Premises or any portion of the Property; (b) The cost of (i) repair of damage or destruction to the Premises, and (ii) maintenance of the Premises, to the extent such cost is covered by any insurance policy carried by Lessor or any warranty held by Landlord, in connection with the Premises. (c) Lessor's general overhead expenses not related to the Premises, including executive salaries of Lessor above the manager level (this exclusion shall not affect Lessor's right to collect the management fees as Operating Expenses pursuant to Section 4.3.1(a)(v) hereof; (d) Payments of principal or interest on any mortgage or other encumbrance including ground lease payments and points, and commissions and legal fees associated with financing; 4 (e) Depreciation of any portion of the Premises (except as otherwise expressly set forth herein); (f) Interest, penalties or other costs arising out of Lessor's failure to make timely payments of its obligations, unless Lessee fails to pay any amounts due under this Lease; (g) Management fees in any year which are in excess of three percent (3%) of the aggregate rent, operating expenses and other monetary obligations due under all leases on the Building for such year; (h) Costs, fines, or penalties incurred due solely to violations by Lessor of any governmental rule or authority, this Lease or any other lease in the Property, or due solely to Lessor's negligence or willful misconduct; (i) Costs of services sold to any tenant (other than Tenant) or other occupant for which Lessor is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under the lease with that tenant; (j) Costs incurred due solely to Lessor's violation of any terms or conditions of this Lease or any other lease relating to the Building or Property; and (k) Overhead profit increments paid to Lessor's subsidiaries or affiliates for management or other services on or to the building or for supplies or other materials to the extent that the cost of the services, supplies, or materials exceeds the cost that would have been paid had the services, supplies, or materials been provided by unaffiliated parties on a competitive bases. 4.3.3 The inclusion of the improvements, facilities and services set forth in the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Premises already has the same or Lessor has agreed elsewhere in this Lease to provide the same. 4.3.4 Operating Expenses shall be payable by Lessee to Lessor within ten (10) business days after a statement of the actual annual Operating Expenses incurred by Lessor is delivered to Lessee by Lessor. Provided, however, at Lessor's option, Lessor may require Lessee to pay monthly an amount estimated by Lessor from time to time to be one-twelfth (1/12) of Lessor's estimate of the annual Operating Expenses, and the same shall be payable during each calendar year of the Lease term on the same day as the Base Rent is due hereunder. In the event that Lessee is required to pay Lessor's estimate of Operating Expenses as aforesaid, Lessor shall deliver to Lessee within one hundred twenty (120) days after the expiration of each calendar year a statement showing the actual Operating Expenses incurred during the preceding calendar year and the amount of the estimated payments made by Lessee. If Lessee's estimated payments under this Section 4.3.3 during said preceding year exceed the actual Operating Expenses as indicated on said statement, Lessee shall be entitled to credit the amount of such overpayment against Operating Expenses next falling due until such amount is fully credited, or if no such payments shall be due by reason of the expiration of the term of this Lease, the amount of such overpayment shall be paid to Lessee by Lessor within ninety (90) days 5 following the date of expiration of the term of this Lease. If Lessee's estimated payments under this Section 4.3.3 during said preceding calendar year were less than the actual Operating Expenses as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) business days after delivery by Lessor to Lessee of said statement. Within ninety (90) days after receipt of Lessor's statement setting forth actual Operating Expenses and Real Property Taxes (the "Statement"), Lessee shall have the right to audit at Lessor's local offices, at Lessee's expense, Lessor's accounts and records relating to Operating Expenses and Real Property Taxes. Such audit shall be conducted by a certified public accountant approved by Lessor, which approval shall not be unreasonably withheld. If such audit reveals that Lessor has overcharged Lessee, the amount overcharged shall be paid to Lessee within thirty (30) days after the audit is concluded. 4.4 ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including, but not limited to Operating Expenses shall be deemed to be rent. 4.5 LESSEE'S SHARE. "Lessee's Share" shall be one hundred percent (100%) of all Operating Expenses so long as Lessee leases one hundred percent (100%) of the Premises. 5. SECURITY AND LETTER OF CREDIT. 5.1 SECURITY DEPOSIT. Upon execution of this Lease by Lessee, Lessee shall deposit in Escrow for immediate release -to Lessor, the cash sum of Fifty-Two Thousand Two Hundred Fifty-Eight and 50/100 Dollars ($52,258.50), as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, beyond any applicable notice and cure period, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer by reason of Lessee's default. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand deposit with Lessor in cash an amount sufficient to restore said deposit to the full original amount. Lessor shall not be required to keep said deposit separate from its general accounts or to pay interest on said deposit. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied or retained by Lessor pursuant to this Section 5.1, shall be returned to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest under this Lease) at the expiration of the term of this Lease, promptly after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said deposit. 5.2 LETTER OF CREDIT. Upon execution of this Lease by Lessee, Lessee shall post an irrevocable letter of credit (the "Letter of Credit") in the initial amount of Three Hundred Fifty Thousand Dollars ($350,000). The Letter of Credit shall be issued by a financial institution reasonably acceptable to Lessor, shall show Lessor as the account party and shall have a term of not less than six (6) months. The Letter of Credit shall be in the form of Exhibit "C" attached hereto and shall be delivered to Lessor upon execution of this Lease by Lessee. Lessee shall be entitled to have the Letter of Credit returned prior to the expiration date of such Letter of Credit in the event that no Event of Default has occurred during Lessee's tenancy and Lessee has 6 demonstrated to the satisfaction of Lessor that Lessee has maintained a net worth of at least Ten Million Dollars ($10,000,000) for a period of six (6) consecutive months, as evidenced by monthly financial statements including a balance sheet prepared in accordance with generally acceptable accounting principles, consistently applied, during such period as the Letter of Credit is outstanding (with the final financial statement for the sixth month delivered to Lessor to be an audited statement). 5.2.1 The Letter of Credit shall be renewed from time to time during the period that the Letter of Credit must be maintained pursuant to this Section 5.2. Such renewals shall be for a period of not less than six (6) months. The amount of each renewal Letter of Credit shall be equal to the amount required pursuant to this Section 5.2. The term "Letter of Credit" shall, for the purposes of this Lease, include any replacement or renewal Letter of Credit. 5.2.2 Upon issuance of the Letter of Credit to Lessor pursuant to this Section 5.2, Lessor may draw against the Letter of Credit if (a) Lessee is in default of any term, provision, covenant or condition of this Lease provided that Lessor has given written notice to Lessee under the terms of this Lease and the applicable period of cure (if any) under this Lease for such default has expired and the default of Lessee has not been cured, or (b) Lessee shall fail to deliver or cause to be delivered to Lessor any renewal or replacement Letter of Credit required under this Section 5.2 not later than thirty (30) business days prior to the date of expiration of the Letter of Credit then held by Lessor. 6. USE. 6.1 USE. 6.1.1 Subject to applicable laws and covenants, conditions and restrictions of record applicable to the Premises, the Premises shall be used and occupied only for manufacturing, general office, research and development, warehouse and any other legal use which is reasonably comparable or related thereto, and for no other purpose, unless approved in writing by Lessor, which approval shall not be unreasonably withheld or delayed. 6.1.2 Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction, or going out of business, fire or bankruptcy sale upon the Premises without first having obtained Lessor's prior written consent. 6.1.3 Lessee, at Lessee's sole cost and expense, shall obtain and maintain in force during the term of this Lease all permits, Licenses and approvals required or necessary for the conduct of the activities of Lessee on the Premises. 6.2 COMPLIANCE WITH LAW. During the term of this Lease, Lessee shall, at Lessee's expense, promptly comply with all statutes, ordinances, rules, regulations, orders of governmental authorities, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect ("Laws"), whether or not they reflect a change in policy from that now existing, relating to, imposed by reason of or applicable to the condition of the Premises or Lessee's use or occupancy of the Premises, or any alteration, improvement or change made to the Premises by Lessee, including any alterations that might be required solely to bring the Premises in compliance with 7 the Americans with Disabilities Act ("ADA"). Lessee shall not use, nor permit its employees, agents, contractors or invitees to use, the Premises in any manner that will tend to create a waste or a nuisance or shall tend to disturb the occupants of properties adjoining the Premises. Notwithstanding the foregoing, Lessee shall have no obligation to make any improvements or alterations to the Premises in order to comply with Laws unless triggered by Lessee's particular use, occupancy or alterations to the Premises. 6.3 CONDITION OF PREMISES. Lessee currently occupies the Premises and therefore accepts the Premises, the Building, and all improvements thereon, in their "as is" existing condition, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject to all of the foregoing and to all matters known or unknown to Lessee as current occupant of the Premises. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the future suitability of the Premises for the conduct of the Lessee's business or the uses proposed by Lessee. 7. MAINTENANCE, REPAIRS AND ALTERATIONS. 7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of Section 9 (Damage and Destruction) and 14 (Condemnation) and Section 7.2 (Lessee's Obligations), and except to the extent any damage is caused by any negligent or intentional act or omission of Lessee or Lessee's employees, customers, or invitees (which is not covered by insurance carried by Lessor), Lessee shall repair any such damage at Lessee's expense, Lessor shall keep in good condition and repair the structural portion of the exterior walls (other than cleaning or painting of the exterior surface of such exterior walls, which maintenance or painting shall be the responsibility of Lessee), foundations, the roof of the Building, and the Common Areas. The cost and expense of any repairs and replacements made by Lessor shall be reimbursed by Lessee as an Operating Expense. Lessor shall not, however, be obligated to paint the exterior or interior surface of exterior walls nor shall Lessor be required to maintain, repair or replace windows, doors or plate glass of the Premises. Lessor shall have no obligation to make repairs under this Section 7.1 until a reasonable time after receipt of written notice from Lessee of the need for such repairs. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair; provided that if the condition materially interferes with the conduct of Lessee's business and Lessor has not repaired the condition in a timely manner, Lessee may exercise its legal rights and seek an appropriate remedy at law or in equity. Lessor shall not be liable for damages or loss of any kind or nature by reason of Lessor's failure to furnish any such services, except where and to the extent such failure is caused by the sole, active negligence or intentional misconduct of Lessor or the agents, employees, contractors or invitees of Lessor, or the breach of this Lease by Lessor. 7.2 LESSEE'S OBLIGATIONS. 7.2.1 Subject to the provisions of Section 9 (Damage and Destruction) and 14 (Condemnation) and Section 7.1 (Lessor's Obligations), Lessee, at Lessee's expense, 8 shall keep in good order, condition and repair the Premises and every part thereof including, without limiting the generality of the foregoing, all plumbing, heating, ventilating and air conditioning systems serving the Premises (Lessor shall procure and maintain, at Lessee's expense, a ventilating and air conditioning system maintenance contract), electrical and lighting facilities and equipment within or serving the Premises, fixtures, interior walls and interior and exterior surfaces of exterior walls, ceilings, roof membrane, windows, doors, plate glass, and skylights located within the Premises, the parking lots, walkways, driveways, landscaping, fences, signs, and utility installations of the Premises and all parts thereof. Lessor reserves the right to maintain the ventilating and air conditioning system maintenance contract for the heating, ventilating and air conditioning system serving the Premises and, if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the reasonable cost thereof. 7.2.2 If Lessee fails to perform Lessee's obligations under this Section 7.2 or under any other paragraph of this Lease where such failure presents, in Lessor's good faith judgment, an emergency or a default of Lessor's obligations under any loan documents which Lessor is a party, then Lessor may enter upon the Premises, perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair, and the reasonable cost of such performance, together with interest thereon at the rate set forth in Section 19, shall be due and payable as additional rent to Lessor upon demand. 7.2.3 On the last day of the term of this Lease, or on the date of any sooner termination, Lessee shall surrender the Premises to Lessor in clean condition and in as good condition as when received, clean and free of debris, except for ordinary wear and tear, casualty damage (as provided in Section 9), condemnation (as provided in Section 14) and damage due to the negligence or intentional act or omission of Lessor or Lessor's employees, agents or contractors. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by customary and ordinary maintenance practices. On or prior to termination of the Lease, Lessee shall have the right to remove from the Premises any specialized tenant improvements installed by and paid for by Lessee after the Commencement Date, and furniture, furnishings, fixtures, trade fixtures, laboratory equipment, machinery and other personal property of Lessee. Prior to expiration of the term of this Lease or the date of any sooner termination, Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures (including any specialized tenant improvements or laboratory fixtures installed by and paid for by Lessee), furnishings, equipment Alterations (as defined below), Installations (as defined below) and personal property. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave any air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, heating ventilating and air conditioning systems and equipment, and plumbing system and fixtures located on the Premises which Lessee is not permitted to remove under the terms of this Lease in good operating condition and repair. Lessee acknowledges that Lessor has no obligation to provide safety and security devices, services or programs under this Lease and Lessee assumes the full risk of all criminal acts or other losses in, on or about the Premises. 7.3 ALTERATIONS AND ADDITIONS. 7.3.1 Other than as provided in Section 7.3.5, Lessee shall not, without Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed, 9 make any alterations, improvements, additions (collectively, "Alterations"), or Installations in, on or about the Premises. Any Alterations or Installations made by Lessee shall not interfere with the operation of any mechanical apparatus or electrical or plumbing systems in the Building. As used in this Section 7.3 the term "Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, and plumbing. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, payment and performance bonds in an amount equal to one and one-half times the estimated costs of such Alterations or Installations to insure Lessor against any liability for mechanic's and materialmen's liens and to insure payment and performance of the work. Except as expressly permitted in this Section 7.3.1 and in Section 7.3.5, should Lessee make any Alterations or Installations without the prior approval of Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any or all of the same. 7.3.2 Any Alterations or Installations that Lessee desires to make in or about the Premises and which requires the consent of Lessor shall be presented to Lessor in written form for Lessor's approval, with proposed detailed plans and specifications therefor prepared at Lessee's sole cost. Lessor shall have fifteen (15) business days after receipt of Lessee's written request to make an Alteration or Installation in accordance with the preceding sentence to approve or disapprove such Alterations or Installations, and unless Lessor objects within such period, Lessor shall be deemed to have consented. Any consent by Lessor thereto shall be deemed conditioned upon Lessee's acquisition of all permits required to make such Alterations or Installations from all appropriate governmental agencies, the furnishing of copies thereof to Lessor prior to commencement of the work, and the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner, all at Lessee's sole cost. Upon completion of any such Alterations or Installations, Lessee shall, at Lessee's sole cost, immediately deliver to Lessor "as-built" plans and specifications therefor. All construction work required or permitted to be done by Lessee shall be performed by a licensed contractor approved by Lessor, which approval shall not be unreasonably withheld or delayed, and in a prompt, diligent, and good and workmanlike manner. All such construction work shall conform in quality and design with the Premises existing as of the Commencement Date and shall not diminish the value of the Building or the Premises. All such construction work shall be performed in compliance with all applicable Governmental Regulations. Notwithstanding any other provision of this Lease, if any Alterations or Installations (including any restoration work required in connection with the removal of Lessee's specialized tenant improvements and laboratory fixtures and other property at the expiration of the term of this Lease or if the Lease is terminated at Lessor's sole discretion) require upgrades to the Premises or the Common Areas, including without limitation structural upgrades, for earthquakes, sprinklers, ADA requirements, asbestos removal or any other Governmental Regulations' requirements, Lessee shall be required to complete such upgrades at Lessee's sole cost as a condition to installing any such Alterations or Installations. 7.3.3 Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises. Lessee shall give Lessor not less than ten (10) days' written notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand and post a bond in the full amount of such lien, claim 10 or demand, then Lessee shall, at its sole cost and expense, defend itself and Lessor against the same and shall pay and satisfy, any judgment that may be rendered thereon before the enforcement thereof against Lessor or the Premises. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs, upon demand, in participating in such action if Lessor shall decide it is in Lessor's best interest to do so. All work in the Premises performed by or at the request of Lessee shall be performed in compliance with all applicable Laws and covenants, conditions and restrictions of record against the Premises. 7.3.4 Except as set forth below, all Alterations and Installations shall be removed from the Premises by Lessee at the expiration or sooner termination of the term of this Lease at Lessor's sole discretion, unless Lessor requires that the same remain and be surrendered with the Premises pursuant to Section 7.3-1. Notwithstanding the provisions of this Section 7.3.4, Lessee's machinery, trade fixtures, personal property and equipment, including specialized tenant improvements installed by and paid for by Lessee and laboratory fixtures, shall remain the property of Lessee and shall be removed by Lessee subject to the provisions of Section 7.2.3. 7.3.5 Notwithstanding anything to the contrary contained in this Section 7.3, Lessee shall have the right, without obtaining the prior written consent of Lessor, to make interior, non-structural Alterations or Installations in, on, or about the Premises, provided that all such Alterations or Installations made by Lessee during any calendar year shall not have a cost in excess of Twenty-Five Thousand Dollars ($25,000) and do not affect the roof or roof membrane. All such Alterations and Installations shall be subject to all of the requirements of Section 7.3.3 and Section 7.3.4. 8. INSURANCE; INDEMNITY. 8.1 LESSEE'S INSURANCE. 8.1.1 Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability and property damage insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Common Areas. Such insurance shall have limits of liability of not less than Three Million Dollars ($3,000,000.00) per occurrence and shall name Lessor as an additional insured. The policy shall contain broad form contractual liability coverage applicable to Lessee's obligations under the indemnity provision of this Section 8. The limits of said insurance shall not, however, limit the liability of Lessee under this Lease. 8.1.2 Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to Lessees' furniture, fixtures, equipment, inventory and other personal property located in or on the Premises and all Alterations and Installations in or about the Premises made by Lessee, in an amount not less than the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event the Building is located in a designated flood hazard area) special extended perils ("all risk," or "special causes of loss as such terms are used in the insurance industry), earthquake and such other insurance coverages as 11 Lessor from time to time reasonably deems advisable, and shall name Lessor as an additional insured. 8.2 LESSOR'S INSURANCE. 8.2.1 Lessor may obtain and keep in force during the term of this Lease a policy of comprehensive public liability and property damage insurance, insuring Lessor, but not Lessee, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises with limits of liability as determined by Lessor in its sole discretion. It is specifically acknowledged and agreed that all liability insurance required to be provided by Lessee is and shall be considered primary and first to respond, and any liability insurance of Lessor is and shall be considered secondary to such insurance provided by Lessee. In addition to the obligations of Section 8.4 hereof, Lessee shall obtain and provide Lessor with evidence of a primary insurance endorsement indicating that Lessee has obtained such coverage. It is further agreed that the insurance maintained by Lessor pursuant to this Section 8.2.1 shall not be contributory with the insurance maintained by Lessee pursuant to Section 8.1.1. 8.2.2 Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering first party loss or damage to the Building and the other improvements within the Premises, but not Lessee's personal property, fixtures, equipment, Installations or Alterations, in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event the Building is located in a designated flood hazard area and flood insurance is required by a lender having a lien on the Premises) special extended perils ("all risk," or "special" causes of loss as such terms are used in the insurance industry) and such other insurance coverages, including earthquake insurance, as Lessor from time to time reasonably deems advisable so long as it is available at commercially reasonable rates. In addition, Lessor may obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering one hundred percent (100%) of all Base Rent, additional rent (including Operating Expenses) and other sums payable by Lessee under this lease period of one (1) year, with loss payable to Lessor. The amount of the rental value insurance shall be reviewed annually and adjusted to reflect any changes in the amount of the Base Rent or the additional rent. 8.3 BLANKET POLICY. Notwithstanding anything to the contrary contained in this Lease, Lessee's obligation to carry insurance may be satisfied by coverage under a so-called "blanket policy" or policies of insurance, provided that Lessor shall be named as an additional insured per the terms of the Lease, the coverage afforded Lessor shall not be reduced or diminished from that otherwise required by this Lease, and all requirements set forth in this Lease are otherwise satisfied by such blanket policy or policies. 8.4 INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a rating of at least A, or such other rating as may be required by any lender having a lien on the Premises, as set forth in the most current issue of BEST'S INSURANCE REPORTS. Lessee shall not do or permit to be done anything which shall invalidate or render unenforceable any portion of the insurance policies carried by Lessee or by Lessor. Lessee shall deliver to Lessor certificates of insurance or copies of insurance policies evidencing the existence and amounts of 12 insurance required under this Section 8 not less than seven (7) days prior to the Commencement Date of this Lease; provided, however, Lessee shall immediately deliver full copies of insurance policies if Lessor so elects and upon written request. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with certificates of insurance, renewals, "binders" or new policies evidencing the insurance to be maintained by Lessee. If Lessee provides certificates of insurance to evidence the insurance to be maintained by Lessee pursuant to Section 8.1, then within fifteen (15) days after Lessor's written request, Lessee shall deliver to Lessor full copies of the insurance policies. Any failure of Lessor to demand or obtain any certificate, policy or other matter provided for in this Lease shall not constitute a waiver of any kind, and shall not constitute a defense for Lessee under any circumstances. 8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby releases and relieves the other, and waives its right of subrogation against the other, for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the alleged or actual negligence of Lessor, Lessee or their agents, employees contractors and/or invitees, to the extent of the insurance coverage received by the waiving party. Lessee shall give notice to all insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease, and shall obtain from such insurance carriers a waiver of the rights of subrogation. 8.6 INDEMNITY. Except to the extent caused by the sole, active negligence or intentional misconduct of Lessor, Lessee shall indemnify, defend and hold harmless Lessor from and against any and all claims, liabilities, causes of action, judgments and settlements, including attorneys' fees and costs, arising from the Premises, or from the conduct of Lessee's business or from any activity, work or thing done, permitted or suffered by Lessee in, on or about the Premises, the Common Areas or elsewhere, and shall further indemnify and hold harmless Lessor from and against any and all claims, liabilities, causes of action, judgments and settlements, including attorneys' fees and costs, arising from any breach or default in the performance of any obligation to be performed by Lessee under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees. In the event any action or proceeding of any kind is brought against Lessor in connection with any of the foregoing matters, Lessee shall defend the same at Lessee's expense, with counsel reasonably satisfactory to Lessor, and Lessor shall cooperate with Lessee in such defense; provided, however, that Lessor shall have the right to defend itself, at Lessee's expense, with counsel of Lessor's choice and Lessee shall reimburse Lessor for all reasonable fees and costs of defense upon demand. Lessee, as a material part of the consideration to Lessor for the execution of this Lease by Lessor, hereby assumes all risk of damage to property of Lessee or of Lessee's employees, agents, customers and invitees, or injury to persons, in, upon or about the Premises or the Common Areas, arising from any cause whatsoever, except such damage or injury arising from the sole, active negligence or intentional misconduct of Lessor or breach of this Lease by Lessor which is not otherwise attributable to Lessee's actions or emissions. Otherwise, Lessee hereby waives all claims and liabilities whatsoever against Lessor. This indemnity is intended to be as broad as permitted by law. The parties acknowledge that parol or extrinsic evidence of the intent of this provision shall not be admissible in a court of law. 13 8.7 EXEMPTION OF LESSOR FROM LIABILITY. Except for the breach of this Lease by Lessor which is not otherwise attributable to Lessee's actions or omissions and the sole, active negligence or intentional misconduct of Lessor, its agents, employees or contractors, Lessee hereby agrees that Lessor shall not be liable for damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, agents, contractors or invitees, or any other person in or about the Premises, nor shall Lessor be liable for injury to Lessee or Lessee's employees, agents, contractors or invitees, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, heating, ventilating or air conditioning systems or equipment or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee; provided, however, in no event shall Lessor be liable to Lessee, or to Lessee's employees, agents, contractors or invitees, for lost profits or other consequential or speculative losses or damages claimed or incurred by Lessee or by Lessee's employees, agents, contractors or invitees, and Lessee waives and releases all such claims against Lessor for lost profits or other consequential or speculative losses or damages by Lessee and agrees to indemnify Lessor pursuant to Section 8.6 against such claims by Lessee's employees, agents, contractors or invitees. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. 9.1.1 "Premises Partial Damage" shall mean the Premises are damaged or destroyed to the extent that the cost of repair is less than twenty-five percent (25%) of the then replacement cost of the Premises. 9.1.2 "Premises Total Destruction" shall mean the Premises are damaged or destroyed to the extent that the cost of repair is twenty-five percent (25%) or more of the then replacement cost of the Premises. 9.1.3 "Insured Loss" shall mean damage or destruction which was caused by an event covered by the insurance described in Section 8.2.2. The fact that an Insured Loss is subject to a deductible amount shall not make the loss an uninsured loss. 9.1.4 "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees. 9.2 PREMISES PARTIAL DAMAGE. 9.2.1 Insured Loss: If at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of Premises Partial Damage, then Lessor shall, at Lessor's expense, repair such damage to the Premises, but not Lessee's fixtures, equipment, tenant improvements, alterations, improvements, Alterations or Installations, as soon as reasonably possible and this Lease shall continue in full force and effect. 14 9.2.2 Uninsured Loss: If at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage, unless caused by the sole, active negligence or intentional misconduct of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from using the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within sixty (60) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. 9.3 PREMISES TOTAL DESTRUCTION. If at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of Premises Total Destruction, then Lessor may, at Lessor's option, either (i) repair such damage or destruction to the Premises, but not Lessee's fixtures, equipment, tenant improvements, alterations, improvements, Alterations or Installations, as soon as reasonably possible at Lessor's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within sixty (60) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall be canceled and terminated as of the date of the occurrence of such damage. Notwithstanding the foregoing, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classification of Premises Total Destruction, then Lessee may, at Lessee's option, either (i) repair such damage or destruction to the Premises, including Lessee's fixtures, equipment, tenant improvements, alterations, improvements, Alterations or Installations, as soon as reasonably possible at Lessee's expense, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessor within on one hundred and eighty (180) days after the date of occurrence of such damage of Lessee's intention to cancel and terminate this Lease, in which case this Lease shall be canceled and terminated as of the date specified in such notice which date shall be no less than one hundred and eighty (180) days following the date of the occurrence of such damage. 9.4 ABATEMENT OF RENT, LESSEE'S REMEDIES. In the event there is damage to the Premises, the Base Rent and Additional Rent payable hereunder for the period from the date of such damage and during which such damage, repair or restoration continues (or through the date of termination, whichever is applicable) shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired and, provided that Lessor has obtained the rental value insurance to be maintained by Lessor pursuant to Section 8.2.2, such abatement shall be limited to the amount of the proceeds of such rental value insurance actually received by Lessor. Any dispute between Lessor and Lessee as to the degree to which Lessee's use of the Premises is impaired which is not resolved between Lessor and Lessee within fifteen (15) days of the date Lessee makes a claim for such rental abatement to Lessor shall be jointly submitted by Lessor and Lessee to JAMS Endispute ("JAMS"), who shall use a single referee to try such dispute using the then current rules of JAMS. The cost of such arbitration shall be initially borne equally by Lessor and Lessee, but upon a ruling by the referee, the party, whose determination of the degree to which Lessee's use of the Premises is impaired is furthest from that determination of the referee, shall reimburse the other party for all costs of the arbitration. Except for abatement of Base Rent and Additional Rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. 15 9.5 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Section 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor, within 30 days. 9.6 WAIVER. Lessor and Lessee waive the provisions of California Civil Code Sections 1932(2) and 1933(4), and any similar or successor laws or statutes relating to termination of leases in the event of damage or destruction of the leased property, and agree that the rights and obligations of the parties in such event shall be solely governed by the terms of this Lease. 9.7 LESSEE'S PROPERTY. Notwithstanding anything in the Lease to the contrary, Lessor shall have no obligation to rebuild or restore Lessee's trade fixtures, tenant improvements, specialized tenant improvements or laboratory fixtures, equipment, merchandise, or any Alterations or Installations made by Lessee to the Premises. 9.8 NOTICE OF DAMAGE. Lessee shall notify Lessor within five (5) days after the occurrence thereof of any damage to all or any portion of the Premises. In no event shall Lessor have any obligation to repair or restore the Premises pursuant to this Section 9 prior to receipt of notice hereunder. 9.9 REPLACEMENT COST. The reasonable determination in good faith by Lessor of the estimated cost of repair of any damage, or of the replacement cost, shall be conclusive for purposes of this Section 9. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay all Real Property Taxes (as defined in Section 10.3), applicable to the Premises and the Common Areas, subject to reimbursement by Lessee of such Real Property Taxes in accordance with the provisions of Section 4.3, except as otherwise provided in Section 10.2. 10.2 PAYMENT OF TAXES; ADDITIONAL IMPROVEMENTS. Real Property Taxes shall be an Operating Expense payable pursuant to Section 4.3. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under Section 4.3.3 the entirety of any increase in Real Property Taxes assessed by reason of improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 DEFINITION OF "REAL PROPERTY TAXES." As used herein the term "Real Property Taxes" shall include any form of tax, levy or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax imposed on the Premises or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement, benefit or service district, as against any legal or equitable interest of Lessor in the Premises or the Building or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include (a) any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or 16 charge hereinabove included within the definition of "Real Property Taxes," (ii) the nature of which was hereinbefore included within the definition of "Real Property Taxes," (iii) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Premises or which is added to a tax or charge hereinbefore included within the definition of "Real Property Taxes" by reason of such transfer, or (iv) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfer hereof, and (b) any possessory interest or other tax, fee, levy, assessment or charge levied in lieu of any tax, fee, levy, assessment or charge hereinabove included within the definition of "Real Property Taxes" by reason of the tax exempt or other status of Lessor. The term "Real Property Taxes" shall not include any interest or penalties resulting from the failure of Lessor to pay any tax, levy, or assessment, provided that Lessee has timely paid Real Property Taxes as provided in this Section 10, or any inheritance, estate, gift, personal or corporate income (unless in substitution for any other taxes hereinabove included within the definition of "Real Property Taxes"), succession or documentary transfer taxes of Lessor. Any assessments levied against the Premises after the date of this Lease which can be paid over time shall be treated, for the purposes of determining Real Property Taxes, as if Lessor elected to pay such assessments over the longest period allowed by law, and only the amount of such assessments, together with interest at the rate of permitted by law where such assessments are paid over time rather than in a single payment, which is allocable to each calendar year during the term of this Lease shall be included in term "Real Property Taxes." 10.4 PERSONAL PROPERTY TAXES. 10.4.1 Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment, inventory and all other personal property of Lessee located in, on or about the Premises or the Building. When possible, Lessee shall cause said trade fixtures, furnishings, equipment, inventory and all other personal property to be assessed and billed separately from the Real Property Taxes. 10.4.2 If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee's said personal property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's personal property. 11. UTILITIES. Lessee shall contract and pay for all water, gas, heat, light, power, telephone, trash removal and disposal and other utilities and services required by Lessee and supplied to the Premises, together with any taxes or surcharges thereon. Lessor shall have no liability to Lessee for the interruption, discontinuance, reduction, or curtailment of any utility or service provided to the Premises, and any such interruption, discontinuance, reduction or curtailment shall not be grounds for abatement of rent under this Lease. 12. ASSIGNMENT AND SUBLETTING. Lessee shall not assign, transfer, encumber, grant any concession or license or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof (a "Transfer") without, in each case, the prior written consent of Lessor, which consent will not be unreasonably withheld. Notwithstanding the foregoing to the contrary, Lessor shall be entitled to terminate this Lease with respect to all or such portion of the Premises which Lessee 17 proposes to Transfer, except for a permitted Transfer not requiring Lessor's consent as set forth in Section 12.6 hereof, by written notice given to Lessee within thirty (30) days following receipt by Lessor of written notice from Lessee of Lessee's proposal to Transfer; provided, however, that Lessee shall have the right to withdraw its proposal to Transfer and to nullify Lessor's election to terminate by written notice given to Lessor within five (5) days following receipt of Lessor's notice of termination. Any such termination shall be effective thirty (30) days after Lessor's notice of termination. Upon such termination, any prior subleases of portions of the Premises, at the option of the Lessor, shall also concurrently terminate. Notwithstanding the foregoing, Lessor acknowledges that Lessee sublets a portion of the Premises to Devcon, which Lessor hereby approves subject to Lessor's review of documentation pursuant to Section 12.1 and compliance by Lessee with the terms and conditions of this Section 12. 12.1 DOCUMENTATION. Prior to any Transfer, and subject to Section 12.6 below, which Lessee desires to make, Lessee shall provide to Lessor in writing the name and address of the proposed transferee, the balance sheet and income statement (and statement of change in financial condition) of the proposed transferee for the prior three (3) years to the extent available, true and complete copies of all documents relating to Lessee's prospective agreement to Transfer and shall specify all consideration to be received by Lessee for such Transfer in the form of lump sum payments, installments of rent, or otherwise, and such other information as Lessor shall reasonably request in connection with the proposed Transfer within thirty (30) days following receipt by Lessor of Lessee's proposal to Transfer. For purpose of this Section 12.1, the term "consideration" shall include, without limitation, all monies or other consideration of any kind, including, but not limited to, bonus money, and payments (in excess of reasonable book value thereof) for Lessee's assets, fixtures, inventory, accounts, equipment, furniture, general intangibles, and any capital stock or other equity ownership of Lessee. Within fifteen (15) business days after the receipt of such documentation and other information, Lessor shall notify Lessee in writing that Lessor either (a) consents to the proposed Transfer subject to the terms and conditions hereinafter set forth, or (b) refuses such consent. 12.2 TERMS AND CONDITIONS. As a condition to Lessor granting its consent to any Transfer, (a) Lessor may require that Lessor receive fifty percent (50%) of the amount by which all consideration to be received by Lessee in connection with said Transfer, less any reasonable broker's commissions paid by Lessee relating to such Transfer, exceeds the Base Rent payable by Lessee to Lessor for the period of such Transfer (the "Bonus Rent"), (b) Lessor may require that the proposed transferee make all rent payments under the Transfer directly to Lessor, provided Lessor pays to Lessee fifty percent (50%) of any Bonus Rent, (c) Lessee and the proposed transferee must demonstrate to Lessor's reasonable satisfaction that the transferee is financially responsible and capable of performing the obligations imposed under this Lease, (d) that proposed use of the Premises is permitted under the provisions of this Lease, and (e) that the proposed Transfer, or the use of the Premises by the proposed transferee, shall not expose Lessor to any additional liability or risk of loss. Each Transfer agreement to which Lessor has consented shall be an instrument in writing in form satisfactory to Lessor, and shall be executed by both Lessee and the transferee, as the case may be. Each such Transfer agreement shall recite that it is and shall be subject and subordinate to the provisions to this Lease, that the transferee accepts such Transfer and agrees to perform all of the obligations of Lessee hereunder (or in the case of a sublease, to the extent such obligations related to the portion of the Premises subleased), and that the termination of this Lease shall, at Lessor's sole election, constitute a 18 termination of every such Transfer. In the event Lessor shall consent to a Transfer, Lessee shall nonetheless remain primarily liable for all obligations and liabilities of Lessee under this Lease, including but not limited to the payment of rent. No Transfer shall relieve any guarantor, if any, of this Lease. Lessee agrees to reimburse Lessor upon demand for reasonable attorneys' fees and costs incurred by Lessor in connection with the negotiation, review and documentation of any such requested Transfer in an amount not to exceed One Thousand Dollars ($1,000). 12.3 PARTNERSHIP. In the event this Lease is assigned to a partnership, a transfer or transfers, voluntary or involuntary, which in the aggregate consists of a majority interest or any general partner interest in the partnership, or the dissolution of the partnership, shall be deemed a Transfer requiring Lessor's prior written consent. 12.4 CORPORATION. Subject to Section 12.6, if Lessee is a corporation, any dissolution, merger, consolidation, or other reorganization of Lessee, or the transfer, of a controlling percentage of the capital stock of Lessee, or the sale or series of sales within any twelve month period of all or substantially all of Lessee's assets located in, on, or about the Premises, shall be deemed a Transfer. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing twenty-five percent (25%) or more of the total combined voting power of all classes of Lessee's capital stock issued, outstanding and entitled to vote for the election directors. The provisions of this paragraph shall not apply to the transfer of the shares of Lessee through a national securities exchange (as the term is used in the Securities Exchange Act of 1934, as amended), provided that such transfer is not effected for the purpose of obtaining effective control of Lessee or for the purpose of obtaining a controlling percentage of the shares of Lessee. 12.5 LESSOR'S REMEDIES. Except as provided for in Section 12.4 above, any Transfer without Lessor's prior written consent shall at Lessor's election be void, and shall constitute a default under this Lease. The consent by Lessor to any Transfer shall not constitute a waiver of the provisions of this Section 12, including the requirement of Lessor's prior written consent, with respect to any subsequent Transfer. If Lessee shall purport to Transfer, without Lessor's prior written consent or without complying with the provisions of this Section 12, Lessor may collect rent from the person or persons then or thereafter occupying the Premises and apply the net amount collected against the rent reserved in this Lease, but such collection shall not be deemed a waiver of Lessor's rights and remedies under this Section 12, or the acceptance of any such purported transferee, or a release of Lessee from the further performance by Lessee of covenants set forth in this Lease, or a release of any guarantor, if any, of this Lease. 12.6 PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained in this Section 12, Lessee may make a sublease of all or any portion of the Premises, or may make an assignment of this Lease, without Lessor's consent: (a) to a wholly owned or controlled subsidiary or entity; (b) to a corporation or any other entity or person(s) which wholly owns or controls Lessee; (c) to a corporation or any other entity wholly owned or controlled by or which wholly owns or controls a corporation or other entity or person(s) described in the preceding clauses (a) and (b); (d) to any corporation or other entity or person(s) into which Lessee or any corporations, entities or persons described in the preceding clauses (a), (b) and (c) is merged or consolidated, or to which all or substantially all of Lessee's assets or stock or the assets or stock of any of the corporations, entities or person(s) described in such preceding clauses are sold or 19 transferred; provided that the combined tangible net worth and the net income (as determined by using the Net Income Formula defined below) of any such transferee is not less than the tangible net worth and net income (as determined by using the Net Income Formula) of Lessee at the time of execution of this Lease or as it exists immediately prior to any such Transfer, whichever is greater, and such transferee possesses, in Lessor's reasonable judgment, comparable business experience and creditworthiness. Lessee shall give Lessor not less than thirty (30) days' prior written notice of any transaction permitted under this Section 12-6, including the identity of the parties involved, their relationship, the clause of this Section 12.6 which permits such transaction and such other information as Lessor may reasonably request with respect to the requirements of this Section 12.6. No Transfer permitted under this Section 12.6 shall result in the release of Lessee from liability under this Lease. Any Transfer permitted under this Section 12.6 without Lessor's written consent shall be subject to all of the other restrictions contained in this Section 12. For purposes of this Section 12.6, "Net Income Formula" shall mean the same formula for the calculation of net income required by a company in a Form 10Q filing with the Securities and Exchange Commission. 13. DEFAULT; REMEDIES. 13.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a default of this Lease by Lessee (an "Event of Default"): 13.1.1 The vacation for thirty (30) consecutive days or abandonment of the Premises by Lessee. 13.1.2 The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of five (5) business days after written notice thereof from Lessor to Lessee; provided, that, such five (5) business day cure period shall apply only to the first two (2) failures to pay rent occurring during any calendar year and thereafter the cure period for all other failures to pay rent shall be three (3) days. In the event that Lessor serves Lessee with a notice to pay rent or quit pursuant to applicable unlawful detainer statutes, such notice to pay rent or quit shall also constitute the notice required by this paragraph. 13.1.3 Except as otherwise provided in this Lease, the failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in Sections 13.1.1 and 13.1.2 above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable unlawful detainer statutes. 13.1.4 (a) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (b) Lessee becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the 20 same is dismissed within sixty (60) days); (c), the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; (d) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days or the date of any sooner sale of any of such assets; (e) Lessee shall not pay its debts as they become due; (f) Lessee shall be insolvent or (g) Lessee shall become subject to any proceeding in bankruptcy or insolvency. 13.1.5 The failure of Lessee to renew the Letter of Credit within thirty (30) days prior to its expiration date; the failure of the financial institution which has issued the Letter of Credit to honor the Letter of Credit; or the issuance of any notice by the financial institution which as issued the Letter of Credit declaring that the Letter of Credit has been or will be withdrawn or terminated. 13.1.6 The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, or any successor in interest of Lessee, was materially false or misleading. 13.1.7 The failure of Lessee to apply a portion of the sale proceeds from the sale of the Property pursuant to the Purchase Agreement, in the minimum amount of approximately One Million Dollars ($1,000,000) to pay Seller's 1998 tax obligations arising from the sale of the Property. Lessee shall deliver evidence of such payment to Lessor within ten (10) days following payment. 13.2 REMEDIES. Upon an Event of Default, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default; 13.2.1 Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (a) the worth at the time of award of the unpaid rent which had been earned at the time of termination of this Lease; (b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination of the Lease until the time of award exceeds the amount of rental loss that Lessee proves could have been reasonably avoided; (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that Lessee proves could be reasonably avoided; and (d) any other amount necessary to compensate Lessor for all detriment proximately caused by Lessee's default including but not limited to, the cost of recovering possession of the Premises, reasonable expenses of reletting, including renovation 21 and alteration of the Premises, reasonable attorneys' fees, that portion of the leasing commission paid by Lessor pursuant to Section 15 applicable to the unexpired term of this Lease, and any real estate commission incurred in reletting the Premises. As used in Sections 13.2.1(a) and 13.2.1(b), the phrase "worth at the time of award" shall include interest at the rate of ten percent (10%) per annum. As used in Section 13.2.1(c), the phrase "worth at the time of award" shall be computed by discounting such amount by the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). 13.2.2 Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event, Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. No action by Lessor shall be deemed a termination of this Lease except written notice by Lessor delivered to Lessee expressly declaring a termination of this Lease. If Lessor maintains Lessee's right to possession, Lessor may thereafter elect to terminate this Lease. 13.2.3 Terminate this Lease and, in addition to any recoveries Lessor may seek under Section 13.2.1, bring an action to reenter and regain possession of the Premises in the manner provided by the laws of unlawful detainer of the State of California then in effect. 13.2.4 Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the State of California. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event earlier than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust encumbering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of Base Rent, Operating Expenses or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other 22 rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of any of the aforesaid monetary obligations of Lessee, then Base Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding Section 4.1 or any other provision of this Lease to the contrary. 13.5 NO RELIEF FROM FORFEITURE AFTER DEFAULT. Lessee waives all rights of redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, and under any other present or future laws or statutes, in the event Lessee is evicted or Lessor otherwise lawfully takes possession of the Premises by reason of any default by Lessee under this Lease. 14. CONDEMNATION. If the Premises or any portion thereof or the Premises are taken under the power of eminent domain, or sold under the threat of the exercise of said power (collectively, "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than thirty-three and one-third percent (33-1/3%) of the floor area of the Building, or more than thirty-three and one-third percent (33-1/3%) of that portion of the Premises designated as parking for the Building, is taken by condemnation, then either Lessor or Lessee, within ten (10) days after the condemning authority shall have taken possession, may elect to terminate this Lease as of the date the condemning authority takes such possession by written notice given to the other party. If neither Lessor and Lessee so elects to terminate this Lease, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. No reduction of rent shall occur if the only area taken is that which does not have the Premises located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the sole property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures and any property which Lessee is entitled to remove at the expiration of the term under the terms of this Lease, loss of good will, the unamortized book value or cost (whichever is less) of the improvements made to the Premises by Lessee at Lessee's sole cost and expense and relocation costs. In the event that this Lease is not terminated by reason of such condemnation and as permitted by applicable law, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damage required to complete such repair, only with respect to the replacement of its property. Lessor and Lessee waive the provisions of California Code of Civil Procedure Sections 1265.110, 1265.120 and 1265.130, and any similar or successor statutes relating to termination of leases in the event of condemnation, and agree that the rights and obligations of the parties in such event shall be governed by the terms of this Lease. 15. BROKER'S FEE. Lessor and Lessee acknowledge that Grubb & Ellis shall be entitled to a broker's commission pursuant to Section 14 of the Purchase Agreement with respect 23 to the purchase and sale transaction. Except for the foregoing, Lessor and Lessee each warrant and represent to the other that no broker or finder has been engaged or used by Lessor or Lessee in connection with this Lease or the Premises. The warranties and representations contained in this Section 15 shall survive the termination of this Lease. 16. ESTOPPEL CERTIFICATE. 16.1 Each party (as "responding party") shall at any time upon not less than ten (10) business days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by the requesting party and any prospective purchaser or encumbrancer of the Premises or of the business of the requesting party to the extent of the representations contained in such statement. 16.2 At the requesting party's option, the failure to deliver such statement within such time shall be a default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. 16.3 If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser with reasonably satisfactory arrangements to maintain confidentiality. Notwithstanding the foregoing to the contrary, if Lessee is a public company having shares that trade on a national securities exchange, Lessee shall only be required to deliver such financial statements that are otherwise available to the public. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Premises, and in the event of any transfer of such title or interest, the Lessor herein named (and in case of any subsequent transfers, then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed by Lessor under this Lease, provided that any funds held by Lessor or the then transferor at the time of such transfer under the provisions of this Lease shall be delivered to the transferee and that such transferee assumes in full the obligations of the "Lessor" under this Lease which are to be performed from and after the effective date of the transfer. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 24 Notwithstanding any provision of this Lease to the contrary, Lessee agrees that it shall look solely to the estate and property of the Lessor in the Premises (including, but not limited to, any proceeds derived from the sale of the Premises or any portion of the Premises), subject to the prior rights of any mortgagee or holder of a deed of trust encumbering the Premises or any portion thereof and subject to the Lessor's rights under a leasehold interest in the Premises or any part thereof, if any, for the collection of any judgment (or other judicial process) requiring the payment of money by Lessor in the event of any default by Lessor with respect to any of the terms, covenants and conditions of this Lease to be observed or performed by Lessor, and no other asset of Lessor shall be subject to any levy, execution or other process for the satisfaction of Lessee's remedies under this Lease. No officer, director, administrator, employee, agent, or attorney of Lessor shall be personally liable for any default of Lessor under this Lease. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any amount due to Lessor not paid when due shall bear interest at the lesser of a floating rate equal to the "prime" or "reference" rate of Bank of America, N.T. & S.A., in effect from time to time plus two percent (2%), or the maximum rate than allowable by law, from the date such amount is due until such amount is received by Lessor. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee. 20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 21. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in Section 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the terms of this Lease or the condition or use by Lessee of the Premises and Lessee acknowledges that Lessee assumes all responsibilities regarding the Occupational Safety Health Act, the Americans With Disabilities Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease, except as otherwise expressly stated in this Lease. 22. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery, overnight courier, facsimile followed by overnight delivery or certified mail and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to 25 such party or parties at all such addresses as Lessor may from time to time hereafter designate by notice to Lessee. Notice shall be deemed effective upon receipt or refusal of receipt as shown on the return receipt or bill of lading. 23. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach of Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge or such preceding breach at the time of acceptance of such rent. 24. RECORDING. The parties agree to execute a memorandum of lease to be recorded in the county records. 25. HOLDING OVER. If Lessee, with Lessor's consent remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month-to-month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that Base Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Base Rent paid during the last month of the term, and any other sums due hereunder shall be due and payable in the amount and at the time specified in this Lease. If Lessee holds over in the Premises after the expiration or sooner termination of the term of this Lease without the prior written consent of Lessor, Lessee shall be a trespasser, and Lessee shall indemnify, defend, protect and hold harmless Lessor from and against any and all claims for damages by any succeeding tenant as the result of the failure of Lessee to surrender the Premises in the condition required by this Lease upon the expiration or sooner termination of the term of this Lease. 26. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 27. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 28. BINDING EFFECT; CHOICE OF LAW. Subject to any provision hereof restricting assignment or subletting by Lessee and subject to the provisions of Section 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California and any litigation concerning this Lease between the parties hereto shall be initiated in the County of Santa Clara, California. 29. SUBORDINATION. 29.1 This Lease and the rights of Lessee hereunder, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Premises or any portion thereof and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions 26 thereof, provided that Lessee shall have received a reasonably satisfactory nondisturbance agreement from the holder of such senior interest. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default beyond any applicable notice and cure period and so long as Lessee shall pay the rent and observe and perform all of the terms and provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior or superior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior to or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 29.2 Lessee agrees to execute any documents required to effectuate an attornment, a Subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be; provided that any holder of any mortgage, deed of trust or similar security instrument or any ground lessor shall agree in writing that in the event any mortgage, deed of trust or security instrument is foreclosed or a conveyance in lieu of foreclosure is made, or any ground lease or underlying lease terminates, Lessee's quiet enjoyment and possession of the Premises and other rights under this Lease shall not be disturbed so long as Lessee is not in default under the terms and provisions of this Lease beyond any applicable notice and cure period and subject to any standard exclusions to Lessee's rights under the Lease which any holder or any ground lessor may require in such writing provided that such standard exclusions do not expand Lessee's obligations or materially decrease Lessee's rights hereunder. Lessee's failure to execute such documents within ten (10) business days after written demand shall constitute a default by Lessee hereunder without further notice to Lessee. 30. HAZARDOUS MATERIALS. 30.1 USE OF HAZARDOUS MATERIALS. During the term of this Lease, Lessee shall not generate, handle, place, store, or use, or permit (either knowingly or as the result of the negligence of Lessee) the generation, handling, storage, disposal or use of, Hazardous Materials in, on, about, or under the Premises, including without limitation the soils and groundwater thereunder, without Lessor's written consent. Lessee shall not dispose of, discharge or release any Hazardous Materials in, on or about the Premises or any adjoining property, or into the air above, or the ground or groundwater below, the Premises or any adjoining property. Notwithstanding any provision of this Section 30 to the contrary, Lessee shall have the right to store and use reasonable quantities of normal office and cleaning supplies on the Premises. All such office and cleaning supplies shall be stored, used and disposed of in compliance with all laws. 30.2 LESSEE'S INDEMNIFICATION. Lessee hereby indemnifies, and agrees to protect, defend and hold Lessor harmless from and against all liability, costs, claims, judgments, losses, demands, causes of action, proceedings or hearings, including Lessor's reasonable attorneys' fees and court costs, relating to Lessee or its agents, employees, contractors or invitees' generation, handling, placement, discharge, release, storage, disposal, or use of Hazardous Materials on or about the Premises by Lessee or its agents, employees, contractors or invitees during the term of this Lease. Lessee shall reimburse Lessor upon demand for (a) all losses in or reductions to rental income or value of the Premises resulting from the generation, 27 handling, placement, discharge, release, storage, disposal, or use of Hazardous Materials on or about the Premises during the term of this Lease; (b) all costs of cleanup or other alterations to the Premises necessitated by the generation, handling, placement, discharge, release, storage, disposal, or use of Hazardous Materials by Lessee or its agents, employees, contractors or invitees on or about the Premises during the term of this Lease, including but not limited to, all civil and criminal fines, penalties and sanctions, and (c) all , reasonable attorneys fees and court costs incurred by Lessor in connection with the generation, handling, placement, discharge, release, storage, disposal, or use of Hazardous Materials by Lessee or its agents, employees, contractors or invitees on or about the Premises during the term of this Lease. 30.3 HAZARDOUS MATERIALS DOCUMENTS. Prior to the Commencement Date, Lessee shall deliver to Lessor in writing (a) a list of all Hazardous Materials which Lessee proposes to generate, handle, store, dispose of, or otherwise use in, on or about the Premises, including the proposed quantities of each Hazardous Material, the proposed location for the storage of each Hazardous Material and the proposed method for storage and security of each Hazardous Material, (b) copies of all governmental permits, authorizations, approvals and consents required with respect to the proposed generation, handling, storage, or use of Hazardous Materials by Lessee in, on or about the Premises, or the disposal of Hazardous Materials by Lessee, (c) any Hazardous Materials management plan required to be prepared by Lessee with respect to Lessee's generation, handling, storage, or use of Hazardous Materials in, on or about the Premises, or the disposal of Hazardous Materials by Lessee, and (d) the methods proposed by Lessee for the transportation and disposal of Hazardous Materials generated, handled, stored, or used (or the wastes or by-products of Lessee's operations) in, on or about the Premises, including the names, addresses and telephone numbers of all licensed transportation and disposal contractors to be used by Lessee and copies of the contracts between Lessee and such licensed transportation and disposal contractors. Lessee shall give Lessor written notice prior to bringing onto the Premises any Hazardous Materials which are not listed on the list of Hazardous Materials previously provided to and approved in writing by Lessor or prior to increasing the quantity of any Hazardous Materials generated, handled, stored or used in, on or about the Premises. Lessee's shall provide to Lessor updated information regarding Lessee's generation, handling, storage, disposal, and use of Hazardous Materials upon the written request of Lessor, but in all events not less frequently than semi-annually. 30.4 NOTICES. Either party shall promptly after receipt thereof deliver to the other party a copy of any notice received by such party from any governmental agency or entity proposing or threatening remedial action or alleging a violation of any law, rule or regulation relating to the physical or environmental condition of the Premises including, but not limited to, any alleged generation, handling, placement, discharge, release, storage, disposal, or use of Hazardous Materials in, on or about the Premises or any adjoining property. Lessee shall, with the concurrence and reasonable approval of Lessor, perform any and all clean-up, remediation, or other action required by an governmental agency or entity required in connection with the generation, handling, placement, discharge, release, storage, disposal or use of Hazardous Materials by Lessee or its agents, employees, contractors or invitees in, on or about the Premises or any adjoining property. 30.5 DEFINITION. As used herein, the term "Hazardous Materials" means material, waste, chemical, compound, substance, mixture, or byproduct that is identified, 28 defined, designated, listed, restricted or otherwise regulated under Environmental Laws (defined below) as a "hazardous constituent," "hazardous substance," "hazardous material," "extremely hazardous material," "hazardous waste," "acutely hazardous waste," "hazardous waste constituent," "infectious waste," "medical waste," `biohazardous waste," "extremely hazardous waste," "pollutant," "toxic pollutant," or "contaminant," or any other formulation intended to classify substances by reason of properties that are deleterious to the environment, natural resources or public health or safety including without limitation, ignitability, corrosiveness, reactivity, carcinogenicity, toxicity, and reproductive toxicity. The term "Hazardous Material" shall include, without limitation the following: (i) A "Hazardous Substance", "Hazardous Material", "Hazardous Waste", or "Toxic Substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq. or the Solid Waste Disposal Act, 42 U.S.C. Section 6901, et seq., including any regulations promulgated thereunder, as any of the foregoing may be amended; (ii) An "Acutely Hazardous Waste", "Extremely Hazardous Waste", "Hazardous Waste", or "Restricted Hazardous Waste", under Section 25110.02, 25115, 25117 or 25122.7 of the California Health and Safety Code, or is listed pursuant to Section 25140 of the California Health and Safety Code, as any of the foregoing may be amended; (iii) A "Hazardous Material", "Hazardous Substance" or "Hazardous Waste" under Sections 25260, 25281, 25316, 25501, or 25501.1 of the California Health and Safety Code, as any of the foregoing may be amended; (iv) "Oil" or a "Hazardous Substance" under Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, as may be amended, as well as any other hydrocarbonic substance, fraction, distillate or by-product; (v) Any substance or material defined, identified or listed as an "Acutely Hazardous Waste," "Extremely Hazardous Material", "Extremely Hazardous Waste", "Hazardous Constituent", "Hazardous Material", "Hazardous Waste", "Hazardous Waste Constituent", or "Toxic Waste" pursuant to Division 4.5, Chapters 10 or 11 of Title 22 of the California Code of Regulations, as any of the foregoing may be amended; (vi) Any substance or material listed by the State of California as a chemical known by the State to cause cancer or reproductive toxicity pursuant to Section 25249.8 of the California Health and Safety Code, as may be amended; (vii) A "Biohazardous Waste" or "Medical Waste" under Section 117635 or 117690 of the California Health and Safety Code, as may be amended; (viii) Polychlorinated biphenyls, asbestos, and any asbestos containing material; and/or (ix) A substance that, due to its characteristics or interaction with one or more other materials, wastes, chemicals, compounds, substances, mixtures, or byproducts, 29 damages or threatens to damage the environment, natural resources or public health or safety, or is required by any law or public entity to be remediated, including remediation which such law or public entity requires in order for the property to be put to any lawful purpose. As used herein, the term "Environmental Laws" means any applicable foreign, federal, state, or local law, statute, regulation, rule, ordinance, permit, prohibition, restriction, license, order, requirement, agreement, consent, or approval, or any decision, opinion, determination, judgment, directive, decree or order of any executive, administrative or judicial authority at any applicable foreign, federal, state or local level (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources or public health and safety. 31. ATTORNEYS' FEES. In the event of any dispute between the parties arising under this Lease, or the breach of any covenant or condition under this Lease, then the prevailing party shall be entitled to have and recover from the party not so prevailing, the prevailing party's reasonable costs and reasonable attorneys' fees incurred in any dispute, collection or attempted collection, negotiation relative to the obligations contained herein, or action or proceeding brought to enforce this Lease, whether such costs and fees are incurred in taking any action under this Lease or in any judicial proceeding (including appellate proceeding) "Prevailing party" for the purposes of this Section 31 shall include, without limitation, the party who receives from the other party the sums allegedly due, performance of the covenants allegedly breached, consideration substantially equal to that which was demanded, or substantially the relief or consideration sought, whether or not any judicial proceeding is commenced or prosecuted to final judgment, or a party who dismisses a judicial action in return for substantially the performance or relief sought or in the payment of the sums allegedly due. 32. LESSOR'S ACCESS. Upon not less, than twenty-four (24) hours' prior notice to Lessee, except in the event of an emergency in which event no notice shall be required, Lessor and Lessor's agents shall have the right to enter the Premises at all reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, movements or additions to the Premises of which they are part as Lessor may deem reasonably necessary or desirable. Lessor may during the last nine (9) months of the term of this Lease, or during any period that Lessee is in default under this Lease after the giving of any required notice and the lapse of any period of cure provided for in Section 13.1 of this Lease, place on or about the Premises any ordinary "For Sale" or "For Lease" signs. All reasonable activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. In the event of an emergency, Lessor and Lessor's agents shall have the right to enter upon the Premises by any means including, but not limited to, forcible entry. In exercising such right of entry, Lessor shall use reasonable efforts to minimize any interference with the business operations of Lessee on the Premises occasioned by any such entry. 33. SIGNS. Lessee, at its sole cost and expense, shall have the exclusive right to place a sign on the Premises and on the monument sign with Lessor's prior written consent as to content, size and form, which consent shall not be unreasonably withheld or delayed. Under no circumstances shall Lessee place a sign on any roof of the Building. All of Lessee's signs shall comply with the requirements of the covenants, conditions and restrictions of record and the 30 requirements of the City of Sunnyvale, California. All sign(s) shall be removed by Lessee and the Premises restored, at the sole cost and expense of Lessee, upon the expiration or sooner termination of the term of this Lease. 34. MERGER. The voluntary or other surrender of this Lease by Lessee or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 35. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises. Lessee assumes all responsibility for the protection of Lessee, its employees, agents, and invitees and the property of Lessee and of Lessee's employees, agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Premises or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in Section 4.3.1. 36. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not materially interfere with the use or access to of the Premises by Lessee, for a period of more than thirty (30) consecutive days, as permitted under this Lease. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 37. AUTHORITY. If either party is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If either Lessor or Lessee is a corporation, trust or partnership, it shall, concurrently with the execution of this Lease, deliver to the other party hereto satisfactory evidence of such authority. 38. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed and delivered by Lessor and Lessee. 39. INTERPRETATION. This Lease has been reviewed by both parties and their respective legal counsel and this Lease shall be construed as a whole according to its fair meaning, and not strictly for or against either Lessor or Lessee. 40. ATTACHMENTS. Attached to this Lease and made a part hereof is "Exhibit A - The Premises" and "Exhibit C - Letter of Credit." LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE 31 THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY LESSOR OR ITS AGENTS OR EMPLOYEES OR BY THE REAL ESTATE BROKER(S) AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 41. POSSESSORY INTEREST. The parties to this Lease recognize that certain rights to property may create a "possessory interest", as those words are used in California Revenue and Taxation Code. For all purposes of compliance by Lessor with Section 107.6 of the California Revenue and Taxation Code, this recital shall be deemed full compliance by Lessor. All questions of initial determination of possessory interest and valuation of such interest, if any, shall be the responsibility of the County Assessor and the contracting parties hereto. A taxable possessory interest may be created by this Lease, and if created, the party in whom such an interest is vested will be subject to the payment of property taxes levied on such an interest. 42. COUNTERPARTS. This Lease may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute a single agreement. 32 IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be executed by their duly authorized representatives as of the day and year first above written. "LESSOR" MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, a political subdivision of the State of California By: /s/ Norman Klein ---------------------------------------- Its: Retirement Administrator --------------------------------------- LESSOR'S ADDRESS FOR NOTICES AND RENT: - ------------------------------------- 3501 Civic Center Drive, Room 212 San Rafael CA 94903-4189 Attention: Norman Klein Telephone (415) 499-6147 Facsimile (415) 499-3612 with a copy to: Woodmont Realty Advisors, Inc. 1050 Ralston Avenue Belmont, CA 94002 Attention: Robert Rouse Telephone (650) 592-3960 Facsimile (650) 591-4577 and Gray Cary Ware & Freidenrich 400 Hamilton Avenue Palo Alto, California 94301 Attention: Patrick J. McGaraghan, Esq. [SIGNATURES CONTINUED ON NEXT PAGE] 33 "LESSEE": International Microcircuits, Inc. a California corporation By: /s/ I. Retragler ------------------------------- LESSEE'S ADDRESS FOR NOTICES: - ---------------------------- The Premises with a copy to: Cooley Godward LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Attention: Anna B. Pope, Esq. Telephone (650) 843-5000 Facsimile (650) 857-0663 and Fleet National Bank One Federal Street Mail Stop: MA OF D07A Boston, MA 02110 Attention: Matthew M. Glauninger Telephone (617) 346-0029 Facsimile (617) 346-0151 and Hinckley, Allen & Snyder 28 State Street Boston, MA 02109-1775 Attention: Christopher Nelson, Esq. Telephone (617) 345-9000 Facsimile (617) 345-9020 34 EXHIBIT "A" The land referred to herein is situated in the State of California, County of SANTA CLARA, City of MILPITAS, described as follows: PARCEL ONE: PARCEL A, AS SHOWN ON THAT PARCEL MAP FILED FOR RECORD IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA, ON JANUARY 26, 1988, IN BOOK 582 OF MAPS, PAGE(S) 28 AND 29. EXCEPTING THEREFROM ALL MINERALS, OIL, GAS AND OTHER HYDROCARBON SUBSTANCES BELOW A DEPTH OF 500 FEET OF SAID REAL PROPERTY, WITHOUT THE RIGHT OF SURFACE ENTRY AS RESERVED IN THE GRANT DEED FROM SACRAMENTO NORTHERN RAILWAY, A CALIFORNIA CORPORATION, TO A. C. FORTNEY DEVELOPMENT, INC., A CALIFORNIA CORPORATION, RECORDED AUGUST 31,1979 IN BOOK E 762, PAGE 129 OF OFFICIAL RECORDS. PARCEL TWO: AN EASEMENT FOR INGRESS AND EGRESS FOR THE BENEFIT OF SAID PARCEL A, OVER PARCELS 1 AND 2, AS SHOWN ON THE PARCEL MAP FILED FOR RECORD FEBRUARY 2, 1982 IN BOOK 495 OF MAPS, PAGE 49 AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: ALL THAT PORTION OF SAID PARCELS 1 AND 2 LYING WITHIN A STRIP OF LAND, 12.50 FEET IN WIDTH, MEASURED AT RIGHT ANGLES, LYING NORTHERLY OF AND CONTIGUOUS TO THE FOLLOWING DESCRIBED LINE: BEGINNING AT A POINT ON THE GENERAL NORTHERLY BOUNDARY LINE OF SAID PARCEL 3 DISTANT THEREON N. 74 DEG. 30' 00" E., 24.18 FEET FROM THE GENERAL NORTHWESTERLY CORNER OF SAID PARCEL; THENCE, ALONG SAID LINE N. 74 DEG. 30' 00" E. 472.32 FEET, TO THE TERMINUS OF SAID STRIP OF LAND, THE EASTERLY AND WESTERLY TERMINI OF SAID STRIP OF LAND ARE WITHIN LINES BEARING S. 15 DEG. 02' 00" E. AND S. 8 DEG. 59' 35" W. RESPECTIVELY. PARCEL THREE: AN EASEMENT FOR INGRESS AND EGRESS APPURTENANT TO AND FOR THE BENEFIT OF PARCEL A, AS SHOWN ON THE MAP FILED FOR RECORD JANUARY 26, 1988, IN BOOK 582 OF MAPS, PAGE(S) 28 AND 29, OVER THE WESTERLY 15 FEET OF PARCEL B, AS SHOWN ON SAID MAP AND AS DESIGNATED COMMON EASEMENT FOR INGRESS AND EGRESS OF SAID MAP. ASSESSOR'S PARCEL NO. 086-28-052 35 EXHIBIT B Letter of Credit NAME AND ADDRESS OF FINANCIAL INSTITUTION - ----------------------------------------- IRREVOCABLE CREDIT NO. ______________________ DATE OF ISSUE __________________, 19__ APPLICANT: - --------- International Microcircuits, Inc. - ------------------------------------ - ------------------------------------ BENEFICIARY: - ----------- Marin County Employees' Retirement Association 3501 Civic Center Drive, Room 212 San Rafael, CA 94903-4189 AMOUNT OF CREDIT: - ---------------- THREE HUNDRED FIFTY THOUSAND UNITED STATES DOLLARS (US $350,000) - ---------------------------------------------------------------- EXPIRATION DATE: - --------------- _______________________, 19__ (not less than six (6) months from the Date of Issuance) Gentlemen: We hereby authorize you to draw upon Fleet National Bank for the account of International Microcircuits, Inc. ("IMI") in the amount as certified below, up to the aggregate amount of US $350,000 (Three Hundred Fifty Thousand United States Dollars) available by your draft at sight to be accompanied by the following document: A written statement certified under penalty of perjury as true by an officer of Marin County Employees' Retirement Association stating that: (1) Lessee (as defined in the Lease) is in default in payment of Base Rent under that certain Standard Industrial Lease by and between IMI and Marin County Employees' Retirement 36 Association dated as of ___________________, 1998 (the "Lease"), that the applicable period for cure (if any) of such default has expired and that the default of Lessee has not been cured, OR (2) Lessee is in default of any term, provision, covenant or condition of the Lease, that the applicable period for cure (if any) of such default has expired, that the default of Lessee has not been cured, OR (3) IMI has failed to renew or replace this Letter of Credit as required under the provisions of the Lease not less than thirty (30) business days prior to the date of expiration of this Letter of Credit. AND further stating the amount to cure and/or compensate Marin County Employees' Retirement Association for any default of Lessee under the Lease as of the date of the certification. IMI's failure to renew or replace the Letter of Credit pursuant to Paragraph 3 above shall result in the entire amount of the Letter of Credit being paid to Marin County Employees' Retirement Association, as an additional security deposit under the Lease. Partial drawings are permitted. Drafts under this credit must be marked "Drawn under Fleet National Bank Credit No. _______________ dated ____________________ (Date of Letter of Credit) and presented to its office at ______________________________________ (Address of Financial Institution) not later than ____________________, 19__ (Expiration Date of Letter of Credit). This Letter of Credit must accompany any draft and documents presented to us for payment. Unless otherwise expressly stated, this credit is subject to the "Uniform Custom and Practice For Documentary Credits (1983 Revision), International Chamber of Commerce. We hereby undertake that drafts drawn in compliance with the terms of this Credit will be duly honored by us. (Name of Financial Institution --------------------------------------- Authorized Officer --------------------------------------- Authorized Officer 37 EX-10.3 5 a2024700zex-10_3.txt EX 10.3 Exhibit 10.3 SUBLEASE THIS SUBLEASE ("Sublease"), dated February 5, 1999 for reference purposes only, is entered into by and between INTERNATIONAL MICROCIRCUITS, INC., a California corporation ("Sublandlord" or "IMI") and DEVCON CONSTRUCTION, INC., a California corporation, ("Subtenant" or "DEVCON"). RECITALS A. IMI entered into that certain Lease dated as of July __, 1998 ("Master Lease") with the Marin County Employees' Retirement Association, a political subdivision of the State of California, as landlord (hereinafter, the "Master Lessor") for certain premises at 525 Los Coches Street, Milpitas, CA (the "IMI Premises") containing approximately 38,710 square feet (the "Master Lease"). The capitalized terms used but not otherwise defined in this Sublease shall have the meanings assigned to them in the Master Lease. B. IMI and DEVCON were parties to that certain Lease Agreement dated November 17, 1992, as amended by the Lease Amendment #1 For Los Coches Place dated January 28, 1998 (as so amended, the "Original Devcon Lease"). At the time the parties entered into the Original Devcon Lease, IMI was the owner of fee title to the IMI Premises, prior to the sale of the IMI Premises by IMI to Master Lessor. The parties wish to terminate the Original Devcon Lease and to enter into this Sublease. C. IMI desires to sublease a portion of the IMI Premises to DEVCON, and DEVCON desires to sublease a portion of the IMI Premises from IMI on the terms and provisions hereof. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, IMI and DEVCON covenant and agree as follows: AGREEMENT 1. TERMINATION OF ORIGINAL DEVCON LEASE. The parties hereby acknowledge that the Original Devcon Lease is hereby terminated and shall be of no further force or effect. 2. SUBLEASED PREMISES. On and subject to the terms and conditions below, IMI hereby leases to DEVCON, and DEVCON hereby leases from IMI, the premises described in Exhibit A (the "Subleased Premises"). The Subleased Premises contain both office and warehouse space, as shown on the attached Exhibit A (and known respectively as the "Office Space" and the "Warehouse Space"). The Office Space contains approximately 5538 square feet, and the Warehouse Space contains approximately 4224 square feet. 3. TERM. Subject to obtaining the consent of Master Lessor as described below, this Sublease shall commence on March 1, 1999, (the "Commencement Date") and shall expire at 11:59 p.m. on September 30, 2003, unless sooner terminated pursuant to any provision hereof. 4. POSSESSION. If for any reason IMI cannot deliver possession of the Subleased Premises to DEVCON on the Commencement Date, IMI shall not be subject to any liability 1 therefor, nor shall such failure affect the validity of this Sublease or the obligations of DEVCON hereunder or extend the term hereof, unless IMI has not delivered the Subleased Premises to DEVCON on or before March 1, 1999, in which case DEVCON shall have the right thereafter to cancel this Sublease by written notice to IMI given no later than thirty days following such date. Upon such cancellation, IMI shall return all sums deposited by DEVCON with IMI, and neither party shall have any further liability to the other. 5. RENT. (a) BASE RENT. Commencing on the Commencement Date and continuing throughout the term of this Sublease, DEVCON shall pay monthly rent ("Base Rent") to IMI in the amount of $11,977 per month, subject to adjustment on each Rental Adjustment Date (as defined in Section 4.2 of the Master Lease), in accordance with the same formula set forth in Section 4.2 of the Master Lease. (b) PAYMENT OF RENT. Upon execution of this Sublease, DEVCON shall pay to IMI the sum of Twenty-Three Thousand Nine Hundred Fifty-Four Dollars ($23,954.00), constituting payment in advance of the first month's Rent, together with the Security Deposit, as set forth in Section 6 below. Rent shall be payable to IMI in lawful money of the United States, in advance, without prior notice, demand, or offset, on or before the first day of each calendar month during the term hereof. All Rent shall be paid to IMI at the address specified for notice to IMI in Section 13, below. If the Commencement Date does not fall an the first day of a calendar month, Rent for the first month shall be prorated on a daily basis based upon a thirty day calendar month. (c) ABATEMENT. In the event of any casualty or condemnation affecting the Subleased Premises, Base Rent payable by DEVCON shall be abated hereunder in the same proportion, if any, that rent payable by IMI under the Master Lease is abated. (d) RENT CREDIT FOR TENANT IMPROVEMENTS PAID FOR BY DEVCON. DEVCON hereby agrees to construct office tenant improvements (the "Office TIs") in accordance with the terms of this Sublease, the plans and specifications and budget for which shall be subject to the written approval of both IMI and Master Lessor, it being agreed that DEVCON shall spend no less than $110,250 ($50 per square foot for 2205 square feet). Provided that DEVCON has complied with this requirement, DEVCON shall be entitled to deduct from the amount of each installment of Base Rent the amount of $1,837.50 (the "Rent Credit"). The right to such Rent Credit is personal to DEVCON, and shall not be assignable to any person under any circumstances. (e) INDUCEMENT RECAPTURE. DEVCON's right to the Rent Credit, shall be deemed conditioned upon DEVCON's full and faithful performance of all the terms, covenants and conditions of this Sublease. Upon default by DEVCON of its obligations hereunder, any Rent Credit provisions shall be deemed deleted herefrom and any rent or other charge abated or deducted from payments made hereunder shall become immediately due and payable by DEVCON to IMI. 2 6. SECURITY DEPOSIT. Upon execution of this Sublease, DEVCON shall deposit with IMI the sum of Eleven Thousand Nine Hundred Seventy-Seven Dollars ($11,977.00) as a security deposit ("Security Deposit"). If DEVCON fails to pay Rent or other charges when due under this Sublease, or fails to perform any of its other obligations hereunder, IMI may use or apply all or any portion of the Security Deposit for the payment of any Rent or other amount then due hereunder and unpaid, for the payment of any other sum for which IMI may become obligated by reason of DEVCON's default or breach, or for any loss or damage sustained by IMI as a result of DEVCON's default or breach. If IMI so uses any portion of the Security Deposit, DEVCON shall restore the Security Deposit to the full amount originally deposited within thirty (30) days after IMI's written demand. IMI shall not be required to keep the- Security Deposit separate from its general accounts, and shall have no obligation or liability for payment of interest on the Security Deposit. The Security Deposit, or so much thereof as had not theretofore been applied by IMI, shall be returned to DEVCON promptly following the expiration or earlier termination of this Sublease, provided DEVCON has vacated the Subleased Premises. 7. ASSIGNMENT AND SUBLETTING. Except in connection with a Permitted Transfer (defined below), DEVCON may not assign, sublet, transfer, pledge, hypothecate or otherwise encumber the Subleased Premises, in whole or in part, or permit the use or occupancy of the Subleased Premises by anyone other than DEVCON unless IMI has obtained IMI's consent thereto, which shall not be unreasonably withheld, and the consent of Master Lessor. Regardless of IMI's consent, no subletting or assignment shall release DEVCON from its obligations hereunder. Notwithstanding anything to the contrary contained in this Sublease, IMI and DEVCON agree that DEVCON may assign this Sublease or sublet the Subleased Premises, or any portion thereof, without IMI's consent, to any entity which controls, is controlled by, or is under common control with DEVCON, and which has an equal or greater net worth than DEVCON at the time of such transfer or on the date of this Sublease, whichever is greater; (hereinafter each a "Permitted Transfer"). 8. CONDITION OF SUBLEASED PREMISES. DEVCON hereby accepts the Subleased Premises in their "as-is" condition, without any reliance upon any representation or warranty of IMI. 9. USE. DEVCON may use the Subleased Premises only for uses permitted under the Master Lease. 10. PARKING. DEVCON shall have the right to use 30 parking spaces. 11. INCORPORATION OF SUBLEASE. (a) All of the terms and provisions of the Master Lease, except as provided in subsection (b) below, are incorporated into and made a part of this Sublease and the rights and obligations of the parties under the Master Lease are hereby imposed upon the parties hereto with respect to the Subleased Premises, IMI being substituted for the "Master Lessor" in the Master Lease (except as modified by Section 14 below), and DEVCON being substituted for the "Tenant" in the Master Lease. It is further understood that where reference is made in the Master Lease to the "Premises," the same shall mean the Subleased Premises as defined herein; where reference is made to the "Commencement Date," the same shall mean the Commencement Date 3 as defined herein; and where reference is made to "this Lease," the same shall mean this Sublease. (b) The following Sections of the Master Lease are not incorporated herein: Sections 1, 2, 3, 4, 5, 7.1, 8.2, 10, the first sentence of 11, 12, 15, 16.3, 21, 22, 24, 29, 30.3, 36, 40 and 41. (c) DEVCON hereby assumes and agrees to perform for IMI's benefit, during the term of this Sublease, all of IMI's obligations with respect to the Subleased Premises under the Master Lease, except as otherwise provided herein. DEVCON shall not commit or permit to be committed any act or omission which violates any term or condition of the Master Lease. This Sublease shall be subject and subordinate to all of the terms of the Master Lease. 12. INSURANCE. DEVCON shall be responsible for insuring its personal property, tenant improvements and equipment in the amount of their full replacement value and shall maintain comprehensive general liability insurance in the amount of $2,000,000 per occurrence respecting the use and occupancy of the Subleased Premises. Such insurance shall insure the performance by DEVCON of its indemnification obligations hereunder and shall name Master Lessor and IMI as additional insureds. All insurance required under this Sublease shall contain an endorsement requiring thirty (30) days written notice from the insurance company to DEVCON and IMI before cancellation or change in the coverage, insureds or amount of any policy. DEVCON shall provide IMI with certificates of insurance evidencing such coverage prior to the commencement of this Sublease. 13. NOTICES. The addresses specified in the Master Lease for receipt of notices to each of the parties are deleted and replaced with the following: To IMI at: 525 Los Coches Street Milpitas, CA Attn: President With copy to: Cooley Godward LLP 5 Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306 Attn: Anna B. Pope, Esq. To DEVCON at: the Subleased Premises Attn: Chief Financial Officer 14. IMI'S OBLIGATIONS. To the extent that the provision of any services or the performance of any maintenance or any other act respecting the Subleased Premises is the responsibility of Master Lessor (collectively "Master Lessor Obligations"), upon DEVCON's request, IMI shall use its best efforts to cause Master Lessor to perform such Master Lessor Obligations. It is expressly understood that the services and repairs which are incorporated herein by reference, will in fact be furnished by Master Lessor, and not by IMI, except to the extent otherwise provided in the Master Lease. In addition IMI shall not be liable for any 4 maintenance, restoration (following casualty or destruction) or repairs in or to the Subleased Premises, other than its obligation hereunder to use its best efforts to cause Master Lessor to perform its obligations under the Master Lease. 15. EARLY TERMINATION OF SUBLEASE. If, without the fault of IMI, the Sublease should terminate prior to the expiration of this Sublease, IMI shall have no liability to DEVCON on account of such termination. DEVCON shall have the right, upon ninety (90) days prior written notice to IMI, to terminate this Sublease. Upon such termination, DEVCON shall surrender the Subleased Premises, including any and all improvements thereto, to IMI without any reimbursement obligation upon the part of IMI or Master Lessor. 16. CONSENT OF SUBLANDLORD AND MASTER LESSOR. If DEVCON desires to take any action which requires the consent or approval of IMI pursuant to the terms of this Sublease, prior to taking such action, including, without limitation, making any alterations, then, notwithstanding anything to the contrary herein, (a) IMI shall have the same rights of approval or disapproval as Master Lessor has under the Master Lease, and (b) DEVCON shall not take any such action until it obtains the consent of IMI and Master Lessor, as may be required under this Sublease or the Master Lease. This Sublease shall not be effective unless and until any required written consent of the Master Lessor shall have been obtained. 17. BROKERS. Each party hereto represents and warrants that it has dealt with no broker, in connection with this Sublease and the transactions contemplated herein. Each party shall indemnify, protect, defend and hold the other party harmless from all costs and expenses (including reasonable attorneys' fees) arising from or relating to a breach of the foregoing representation and warranty. 18. SURRENDER OF SUBLEASED PREMISES. Upon the expiration or earlier termination of this Sublease, DEVCON shall surrender the Subleased Premises in as good a condition as they were in on the Commencement Date, except for ordinary wear and tear and damage due to casualty not caused by DEVCON, or condemnation. Notwithstanding anything to the contrary herein, DEVCON shall not be required to remove (i) any of the initial tenant improvements constructed by or on behalf of DEVCON, and (ii) any alterations or additions for which DEVCON has obtained Master Lessor's and IMI's consent unless IMI has indicated, at the time of granting such consent, that such removal will be required. 19. NO THIRD PARTY RIGHTS. The benefit of the provisions of this Sublease is expressly limited to IMI and DEVCON and their respective permitted successors and assigns. Under no circumstances will any third party be construed to have any rights as a third party beneficiary with respect to any of said provisions. 20. COUNTERPARTS. This Sublease may be signed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one agreement. 5 IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first written above. SUBLANDLORD SUBTENANT International/Microcircuits, Inc. Devcon Construction, Inc. By: By: ---------------------------------- -------------------------------- Name: Name: -------------------------------- ------------------------------ Title: President Title: President By: By: ---------------------------------- --------------------------------- Name: Name: -------------------------------- ------------------------------- Title: Secretary Title: Secretary 6 CONSENT OF MASTER LESSOR 1 EXHIBIT A SUBLEASED PREMISES 1 EX-10.4 6 a2024700zex-10_4.txt EXHIBIT 10.4 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit 10.4 LICENSE AGREEMENT THIS LICENSE AGREEMENT is effective as of August 1, 1995, by and between Lexmark International, Inc. (Lexmark), a Delaware Corporation, having corporate headquarters at 55 Railroad Ave., Greenwich, CT 06836-2868, and International Microcircuits, Inc. (IMI), having corporate headquarters at Milpitas, California. In consideration of the mutual authorizations and obligations contained herein, the parties contract and agree as follows: SECTION 1: DEFINITIONS 1.1 "Confidentiality Agreement" shall mean the Confidential Disclosure Agreement [*], dated March 25, 1993, between Lexmark and IMI. 1.2 "Price Index" shall mean the monthly U.S. Consumer Price Index -- All - Items most recently published by the United States Department of Labor, Bureau of Labor Statistics as of the last day of any given calendar quarter. 1.3 "Customer" shall mean any third party. 1.4 "Lexmark Technology" shall mean various electromagnetic emission reduction techniques, concepts, ideas, inventions and practices, including know-how and trade secrets, whether patented or unpatented, which were disclosed by Lexmark to IMI in 1993 and the first quarter of 1994. Lexmark Technology shall include any patent claim(s) that cover any of the technology set forth in the previous sentence, which patent claims are included in any pending or future patent application or any issued patent which has been assigned to Lexmark. 1.5 "Licensed Device" shall mean any semiconductor chip that utilizes, embeds, incorporates or embodies any Lexmark Technology or that is made by or for, or sold by IMI under the license set forth in Section 2 below. 1.5.1 "Discrete Licensed Device" shall mean a Licensed Device which performs the function of clock generation and associated clock buffering and switching and which performs no other function whatsoever. 1.6 "Revenue" shall mean the sum total of all amounts invoiced or charged by IMI for the sale, use, transfer or shipment of Licensed Devices to Customers (sales and shipments to Lexmark are not Revenue and are not subject to the royalty) less amounts received for any sales tax and shipping (provided that these amounts are separately billed or separately designated on such invoices). In the event any such amounts are invoiced or charged in currency other than U.S. Dollars, Revenue shall be determined by converting the foreign currency to U.S. Dollars by employing the Currency Exchange Rates set forth in the Wall Street Journal on the last day of the quarterly accounting period in which the Licensed Device was shipped. 1.7 "Unit Price" shall mean the amount invoiced or charged by IMI for the sale, lease or transfer of any single Licensed Device, exclusive of any sales tax and shipping (provided that these amounts are separately billed or separately designated on such invoices). In the event any such amounts are invoiced or charged in currency other than U.S. Dollars, Unit Price shall be determined by converting the foreign currency to U.S. Dollars by employing the Currency Exchange Rates set forth in the Wall Street Journal on the last day of the quarterly accounting period in which the Licensed Device was shipped. 1 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SECTION 2: LICENSE 2.1 Lexmark hereby grants to IMI a royalty-bearing, worldwide, nonexclusive, nonassignable (except as set forth in Section 11.1), non-sublicensable license under Lexmark Technology to make, have made for delivery to IMI, sell or otherwise transfer semiconductor chips (including any associated chip packages) only. SECTION 3: LIMITATIONS NEITHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE. Neither party makes any representation concerning the Lexmark Technology or of the likelihood of success with regard to IMI's attempts to use or implement Lexmark Technology. Each party assumes all of its own risks in implementing the Lexmark Technology. Except for any breach of the express obligation of confidentiality in the Confidentiality Agreement, neither party shall be liable for any consequential, incidental or indirect damages even if that party has been advised of the likelihood of their occurrence. All rights not expressly granted in this Agreement are reserved by Lexmark. Neither party has entered this Agreement in reliance upon any representation that is not set forth herein. SECTION 4: ROYALTIES 4.1 IMI shall pay to Lexmark a royalty equal to [*] of all Revenue relating to any Licensed Device with a Unit Price less than [*]. 4.2 IMI shall pay to Lexmark a royalty of [*] for any Licensed Device with a Unit Price equal to or exceeding [*]. This royalty amount, however, shall be proportionately adjusted at the beginning of each calendar quarter to reflect the percentage increase or decrease, if any, in the Price Index for the immediately previous calendar quarter over the Price Index for the calendar quarter before such immediately previous calendar quarter. Such adjusted royalty amount shall apply to all shipments of Licensed Devices during the quarter in which the adjustment is made. 4.3 Lexmark will not, without extending the same royalty rate to IMI, grant to any other party that is paying aggregate royalty amounts to Lexmark similar to those IMI is paying pursuant to this agreement, a license under Lexmark Technology to make and sell Discrete Licensed Devices with either a Unit Price less than [*] at a royalty rate lower than the royalty rate set forth in Section 4.1 or a Unit Price greater than [*] at a royalty rate lower than the royalty rate set forth in Section 4.2. If Lexmark grants a lower royalty rate for such Discrete Licensed Devices based upon the licensee paying higher aggregate royalty amounts to Lexmark than IMI is paying, Lexmark will offer the same royalty rate to IMI, on the condition that IMI agrees to pay an aggregate royalty amount at least as great as such other licensee and agrees to any unique terms and conditions that are reasonably related to the royalty rate, to which the other licensee has agreed. 2 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SECTION 5: ACCRUALS, AUDITS AND PAYMENT 5.1 Royalties shall accrue on the date IMI ships a Licensed Device to any Customer. 5.2 Royalties shall be reported for quarterly accounting periods ending March 31, June 30, September 30, and December 31 of each year. Within thirty (30) days after the end of each such accounting period, IMI shall furnish to Lexmark Payment in immediately available funds to Lexmark of said royalties and a written report, conforming to "Exhibit A," attested to by either the Corporate Controller or an officer of IMI, which shall show the facts necessary to determine the royalties due during such accounting period and necessary to compute the adjustment required under Section 4.2. In the event no royalties are due, IMI shall so report. All royalty payments shall be in United States dollars. All payments must be remitted to the following address: Lexmark International, Inc. Dept. D33L/Bldg. 032-3 740 New Circle Road N.W. Lexington, KY 40511 Attn: Mark VonderHaar 5.3 IMI shall keep records and books in sufficient detail to permit the determination of royalties payable hereunder, and at the request of Lexmark, will permit independent auditors to examine such records and books as may be required by such auditors (but no more than twice a year) to verify or determine royalties paid or payable under this Agreement. If no request for examination of such records and books for a particular accounting period has been made by Lexmark within three (3) years after the end of said accounting period, the obligation to keep such records and books for said accounting period shall terminate. The cost of each such audit will be borne by Lexmark unless the audit establishes underreporting in excess of five thousand dollars ($5,000.00), in which event IMI will promptly pay such audit cost documented to IMI by Lexmark up to but not exceeding five thousand dollars ($5,000.00) per audit. 5.4 If IMI defaults in the performance of any of its obligations under this Agreement, and such failure is not cured within thirty (30) days after written notice from Lexmark to IMI specifying the nature of the failure, Lexmark shall have the right, in its absolute discretion, to terminate IMI's license and this Agreement. Any expiration or termination of this Agreement will be without prejudice as to any obligation to pay royalties incurred under this Agreement prior to the effective date of such expiration or termination. 5.5 In the event that IMI should delay in the payment of any royalties properly due under this Agreement, then IMI shall be liable for interest on such overdue royalties, commencing on the date such royalties become due and payable, at an annual rate which is the greater of nine percent (9%) or two (2) percentage points higher than the prime interest rate as quoted by the head office Citibank N.A., New York, at the close of banking on such date, or on the first business day thereafter if such date falls on a non-business day. 3 5.6 Under no circumstances will any royalties or other amounts previously paid by IMI under this agreement or any predecessor to this agreement be refundable to IMI or otherwise creditable toward any royalty payments hereunder, except to the extent IMI has made a demonstrable accounting error in calculating its royalties resulting in an overpayment in an accounting period. In such event, IMI shall be permitted, as its sole recourse, to deduct such overpayment from royalties due for subsequent accounting periods until such overpayment is reduced to zero. 5.7 If IMI becomes insolvent or unable to pay bills as they become due, or if any petition in bankruptcy is filed by or against IMI or if a receiver, assignee, or trustee is appointed with regard to IMI, Lexmark may terminate this Agreement and all licenses hereunder immediately without liability. SECTION 6: SALES TO LEXMARK 6.1 In further consideration of the license granted by Lexmark under this Agreement, IMI agrees that it will sell Licensed Devices to Lexmark under the following terms: 6.2 IMI shall sell to Lexmark the Licensed Devices described in Exhibit B for a price not greater than the prices set forth in Exhibit B. 6.3 IMI will reduce the price it charges Lexmark for Licensed Devices to match the lowest price IMI charges any Customer for similar Licensed Devices shipped during the same time period at similar Licensed Device product volumes. In the event IMI sells to any customer any similar Licensed Devices at a lower price based upon higher Licensed Device product volumes, IMI will notify Lexmark and offer Lexmark the opportunity to purchase a similar quantity of Licensed Devices at such lower prices. In addition, in the event IMI charges any Customer that manufactures (or has manufactured) and sells printers, a lower price for any Licensed Device similar to those purchased by Lexmark, that is actually used in such a printer IMI will sell Licensed Devices to Lexmark at the lower price(s) regardless of whether such Customer is purchasing or committing to purchase greater product volumes from IMI. SECTION 7: PATENTS 7.1 Lexmark has applied for patent protection relating to certain aspects of the Lexmark Technology. Lexmark is not required to appeal or contest the denial of any patent application by any governmental authority or to enforce any patent rights it may obtain against any potential, alleged or actual infringers. Lexmark makes no representation or warranty that any aspect of the Lexmark Technology contains any patentable ideas or that licenses from other parties will not be required in order to use the Lexmark Technology commercially. 4 SECTION 8: CONFIDENTIALITY 8.1 All Lexmark Technology disclosed by Lexmark to IMI shall be governed strictly by the Confidentiality Agreement, which is hereby incorporated in this Agreement. IMI may use the confidential information for the additional purpose of designing, developing and producing Licensed Devices. The terms of this Agreement, but not the existence of this Agreement, shall be confidential information. SECTION 9: MARKING 9.1 IMI, if so requested in writing by Lexmark and if space is available on the device, shall legibly mark each Licensed Device covered by a Lexmark patent, in the event one issues, in accordance with 35 U.S.C. 287 or other applicable law. SECTION 10: NOTICES AND OTHER COMMUNICATIONS 10.1 Any notice or other communication required or permitted to be made pursuant to this Agreement shall be made pursuant to the addresses set forth below, or to such other address designated by written notice given to the other party: 10.1.1 In the case of Lexmark: Mark VonderHaar Lexmark International, Inc. Dept. D33L/Bldg. 032-3 740 New Circle Road, NW Lexington, KY 40511-1876 10.1.2 In the case of IMI: Frank Deverse, President International Microcircuits, Inc. 525 Los Coches Street Milpitas, CA 95035 SECTION 11: ASSIGNMENT 11.1 This Agreement shall not be assignable, transferable or divisible by IMI without Lexmark's consent, except, however, that IMI may assign all of its undivided rights under this Agreement to a single successor in interest to, or acquirer of, substantially all of IMI's assets or to a third party purchasing from IMI a business unit that includes the Licensed Devices, provided that such assignee is at least as financially solvent as IMI and such assignee agrees to assume all of IMI's obligations under this Agreement. This Agreement shall inure to the benefit of, and be binding upon, Lexmark, its successors and assigns. 5 SECTION 12: TERM 12.1 The term of this Agreement commences on the date of execution and expires three years after the date of execution unless extended as set forth in the next paragraph. IMI's obligations under Sections 4 (solely as to any royalties accrued prior to expiration or termination), 6 and 8 (as long as applicable) shall survive any expiration or termination of this Agreement. In no event shall any license set forth in this Agreement survive any expiration or termination of this Agreement. 12.2 IMI may elect to extend the term of this Agreement for additional periods of five (5) years by written notification received by Lexmark at least 180 days prior to the expiration of any prior term. The parties may, each in their sole and absolute discretion, elect to renegotiate the royalties for the extended period provided that in no event shall the initial Section 4.2 royalty amount under such an extension exceed $0.15 (fifteen cents) by a percentage greater than the cumulative percentage increase in the Price Index for the first and last quarters of the initial term of this Agreement. All royalty adjustment provisions shall apply during any extended term. 12.3 IMI may elect to terminate this Agreement upon one hundred and eighty (180) days notice to Lexmark. SECTION 13: APPLICABLE LAW AND JURISDICTION 13.1 This Agreement shall be construed and the legal relations created herein between the parties shall be determined in accordance with the substantive law of the Commonwealth of Kentucky. SECTION 14: MISCELLANEOUS 14.1 Any waiver by Lexmark, or failure by Lexmark to take any action, with regard to any instance or instances of failure by IMI to comply with any provision of this Agreement shall not constitute a waiver of any subsequent failure to comply with such provision. In no event shall any acceptance by Lexmark of any royalty payment in an incorrect amount constitute a waiver of Lexmark's right to receive the correct royalty payment. This Agreement will not be binding upon the parties until it has been signed by both parties. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by both parties. This agreement sets forth the entire agreement and understanding between the parties and merges all prior agreements and discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings or representations other than as expressly provided herein. As of the effective date of this Agreement, this Agreement shall supersede in its entirety the Letter Agreement between IMI and Lexmark of September 24, 1993. 14.2 If any court or other tribunal of competent jurisdiction shall adjudge to he invalid or unenforceable any clause, sentence, subparagraph, or article of this Agreement, such judgment or decree shall not effect, impair, invalidate, or nullify the remainder of this Agreement, but the effect thereof shall be confined to the clause, sentence, subparagraph, or article so judged to be invalid. 6 14.3 No amendment or modification of this Agreement, including its attachments, shall be valid or binding upon the parties unless made in writing and executed on behalf of each party by its duly authorized representative. 14.4 In the event of any dispute between the parties, both parties agree to hold at least one meeting between respective executives of the two companies to discuss in detail the substance of the dispute prior to instituting any action relating to the dispute. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed on their behalf as of the date first above written. WITNESS: INTERNATIONAL MICROCIRCUITS, INC. /s/ Timothy J. Hayes BY: /s/ Edmond P. Walsh - ----------------------------- ----------------------------------- NAME: Edmond P. Walsh ---------------------------------- TITLE: IMI Vice President --------------------------------- WITNESS: LEXMARK INTERNATIONAL, INC. /s/ Hazel L. Breaddus BY: /s/ Ronald E. Bingham - ----------------------------- ----------------------------------- NAME: Ronald E. Bingham ---------------------------------- TITLE: Director, Site Operations --------------------------------- 7 EXHIBIT A DATE Mark VonderHaar Lexmark International, Inc. 740 New Circle Road Lexington, KY 40511 Mail Drop: D33L/032-3 Fax# (606) 232-2177 Subj: ROYALTY REPORT A check for $_______________ has been sent herewith by International Microcircuits Inc. as payment for royalties for the calendar quarter ending __________________________. SECTION 4.1 ROYALTIES
- ------------------------- ------------------- -------------------- ---------------------------- ---------------------- Description of Unit Price Quantity Sold Unit Royalty Royalty Payable Device (3.5% of Unit Price) - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- Totals - ------------------------- ------------------- -------------------- ---------------------------- ----------------------
SECTION 4.2 ROYALTIES: Price Index for Quarter Ending _______________: _________________ (Date) Price Index for Previous Quarter Ending _______________: _________________ (Date) Adjusted Unit Royalty Rate for Quarter Ending _______________: _________________ (Date) Unit Royalty Rate for Previous Quarter Ending _______________: _________________ (Date) 8 For Quarter Ending _______________:
- ------------------------- ------------------- -------------------- ---------------------------- ---------------------- Description of Unit Price Quantity Sold Unit Royalty Royalty Payable Device (3.5% of Unit Price) - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- - ------------------------- ------------------- -------------------- ---------------------------- ---------------------- Totals - ------------------------- ------------------- -------------------- ---------------------------- ----------------------
TOTAL ROYALTY: _______________ The foregoing information is accurate and complete. International Microcircuits, Inc. BY: ____________________________________________________________ Signature (Date) NAME:___________________________________________________________ Company Officer TITLE:__________________________________________________________ 9 EXHIBIT B The following table represents the prices which will be charged to Lexmark for the listed IMI parts per Section 6.2:
- ---------------------------------------- -------------------------------------- -------------------------------------- IMI Part Number Lexmark Part Number Price - ---------------------------------------- -------------------------------------- -------------------------------------- SG501 1408057 $2.30 - ---------------------------------------- -------------------------------------- -------------------------------------- SG502 1419461 $2.30 - ---------------------------------------- -------------------------------------- -------------------------------------- SG504 69G3295 $2.30 - ---------------------------------------- -------------------------------------- -------------------------------------- SG508 1321944 $2.30 - ---------------------------------------- -------------------------------------- -------------------------------------- SG522 $2.30 - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- --------------------------------------
10 AMENDMENT 1 (the "Amendment") dated as of August 22, 1996 to the License Agreement dated as of August 1, 1995 between Lexmark International, Inc. and International Microcircuits, Inc. Lexmark International, Inc. ("Lexmark") and International Microcircuits, Inc. ("IMI") hereby amend the aforementioned License Agreement as follows: 1. Delete in its entirety Section 1.1 of the License Agreement and replace it with the following: "1.1 "Confidentiality Agreement" shall mean the Confidential Disclosure Agreements No. [*] and No. [*], dated March 25, 1993 and June 24, 1996, respectively, between Lexmark and IMI." 2. Delete in its entirety Section 1.4 of the License Agreement and replace it with the following: "1.4 "Lexmark Technology" shall mean the various electromagnetic emission reduction techniques, concepts, ideas, inventions and practices, including know-how and trade secrets, whether patented or unpatented, which were disclosed by Lexmark to IMI in 1993, the first quarter of 1994, and in 1996. Lexmark Technology shall include any patent claim(s) that cover, any of the technology set forth in the first sentence, which patent claims are included in any pending or future patent application or any issued patent which has been assigned to Lexmark." 3. Delete in its entirety Section 4.3 of the License Agreement. 4. Delete in its entirety Section 5.4 of the License Agreement and replace it with the following: "5.4 If IMI defaults in the performance of any of its obligations under this Agreement, and such failure is not cured within thirty (30) days after written notice from Lexmark to IMI specifying the nature of the failure, or if IMI makes a late payment for any two of four consecutive quarters, Lexmark shall have the right, its absolute discretion, to terminate IMI's license and this Agreement. Any expiration or termination of this Agreement will be without prejudice as to any obligation to pay royalties incurred under this Agreement prior to the effective date of such expiration or termination." 1 5. Delete in its entirety Section 6.3 of the License Agreement Except as expressly amended and modified hereby, the aforementioned License Agreement is hereby reaffirmed and remains in full force and effect. This Amendment may be executed in one or more counterparts, all of which shall be considered one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed on their behalf as of the date first above written. WITNESS: INTERNATIONAL MICROCIRCUITS, INC. BY: /s/ I. Refioglu - ----------------------------- ----------------------------------- NAME: Ilhan Refioglu --------------------------------- TITLE: President -------------------------------- WITNESS: LEXMARK INTERNATIONAL, INC. /s/ David S. Waldrop BY: /s/ John C. Byrne - ----------------------------- ----------------------------------- NAME: John C. Byrne --------------------------------- TITLE: Mgr, Site Operations --------------------------------- 2 EX-10.5 7 a2024700zex-10_5.txt EXHIBIT 10.5 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit 10.5 Task Order (Task Order # [*]) When signed by the parties below, the following Task Order hereby incorporates by reference the Agreement for Purchase and Sale of Custom Semiconductor Products ("the Agreement"), with the agreement number of X0419, as Task Order [*]. This Task Order is solely governed by the terms and conditions of Agreement Number [*]. This Task Order is for a foundry program in which IBM will build untested 8" wafers using GDS II design data supplied by IMI and as further described in this Task Order. The parties agree that under this Task Order, IBM will process wafer lots through front end manufacturing to "common stock" (also known as front-end-of-the-line or FEOL processing) as "base wafers" and perform subsequent back-end-of-the-line (or BEOL) processing for "personalized wafers." IMI agrees to furnish detailed technical requirements for base and personalized wafers. IBM agrees to process wafers as forecasted and ordered by IMI per the terms of this Task Order. 1.0 TERM OF TASK ORDER: THIS TASK ORDER WILL BE EFFECTIVE ON DECEMBER 1, 1999 AND WILL EXPIRE ON NOVEMBER 30, 2001. 2.0 PRODUCT NAME AND DESCRIPTION: Name: Z Chip Description: Technology: CMOS5SF .35um with OP/BR layer Metal Levels: 3 Deliverables: Untested wafers 3.0 PRODUCT SPECIFICATIONS: Untested wafers manufactured per Customer's GDSII tape and the IBM CMOS5SF process technology (Specification # [*]). Untested wafers will be delivered per the Wafer Acceptance Criteria in Exhibit A-2, attached hereto. 4.0 DELIVERABLE ITEMS: IMI Deliverable Items: -- GDS II Tape in CMOS5SF ground rule format (Specification [*]) -- Specific designs will be provided per forecast in Section 5 and updated monthly. IBM Deliverable Items: -- CMOS 5SF Spice models -- CMOS 5SF Process Ground Rules -- Deliver Prototypes and Product per delivery schedules in Section 10 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5.0 QUARTERLY REVIEWS The parties agree they shall meet at least once every calendar quarter during the term of the Agreement to review the Agreement with respect to pricing, volume commitment, applicable Products and processes, and the scope of manufacturing. In particular, IBM and IMI agree to review yield results and prices on a quarterly basis. The prices in Section 9.0 are based on a wafer target defect density yield of [*]%. Actual wafer yield will be based on the first 3-10 production lots. IBM may adjust prices based on the yield results. 6.0 PURCHASE ORDERS In addition to the information listed in items a-d of section 3 of the Agreement, IMI's purchase orders shall specify whether base wafers for FEOL processing or BEOL processing for personalized wafers. 7.0 PRODUCT DEMAND FORECAST: 12 month rolling forecast.
Year: 1999 Year: 2000 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
8.0 ENGINEERING CHARGES (NRE CHARGES): NRE Charges include the following: 8.1 Full Mask Set (FEOL/BEOL) CMOS 5SF with 3LM and BR: $[*]. The Full Mask Set NRE includes 1. Spice models (CMOS 5SF simulation models) 2. Process Ground Rules (CMOS 5SF ES# [*], dated June 1997) 3. Processing Customer's GDS II tape 4. Mask build 5. One (1) personalization and three (3) Prototype wafers. In the event that IBM is unable to deliver the three (3) Prototype wafers included in the NRE charge, IBM will issue IMI a credit equivalent to one and one-half (1.5) times the Product unit price for each Prototype wafer that IBM fails to deliver. 8.2 BEOL Personalizations (3 levels metal BEOL): [*] (when Customer Delivers the GDS II tape with the Customer run DRC file). [*] for IBM DRC Check (applicable when IMI fails to provide an IBM and IMI approved DRC, with IMI's GDS II tape) [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Once the Customer has purchased and paid for 150 wafers of a personalization design, IBM will provide a [*] discount on the next personalization NRE. The BEOL Personalizations NRE includes: 1. 3LM RIT B Mask Sets 2. One (1) personalization (design) per each BEOL Personalization 3. Three Prototype (3) wafers IBM shall make up to three (3) additional Prototype wafers per personalization available at a price equal to one and one-half (1.5) times the price for production wafers set forth in Section 9.0. Notwithstanding the foregoing, the parties acknowledge that IBM's obligation to make such Prototypes available is conditioned upon, the manufacturing yield of the Prototype lot for any particular personalization. IBM shall invoice IMI for NRE charges upon the earlier of IBM's delivery of the Prototypes or IMI's cancellation of the NRE. 9.0 PRODUCT PRICE: The price for FEOL wafer processing ("FEOL Processing Charge") shall be [*] of the price listed below. The FEOL Processing Charge covers the FEOL portion of wafer processing only. The price for BEOL wafer processing ("BEOL Processing Charge") shall be [*] of the price listed below. The BEOL Processing Charge covers the BEOL portion of wafer processing only. The price for the CMOS 5SF untested wafer with 3LM (the Product) shall be [*] for the term of this Task Order. Minimum Order Quantity ("MOQ") is one (1) lot of twenty-four (24) wafers (base and personalized). For each personalization, however, IMI may place three (3) orders with an MOQ of twelve (12) wafers (one-half lot) during the product life of that personalization. 10.0 MANUFACTURING LEAD TIME (PURCHASE ORDER LEAD TIME): PROTOTYPES: In response to a purchase order for Prototypes per Section 3 of the Agreement, IBM will acknowledge the purchase order with a shipment date based on either the normal turn around time ("NTAT") or the rapid turn around time ("RTAT") listed below. When the purchase order for Prototypes is acknowledged with the NTAT, the Prototype wafer price will be the Product price specified in Section 9.0. Provided that IMI provides IBM twelve (12) calendar days advance notice prior to delivery of its GDS II tape, the following Purchase Order Lead Times will apply to Prototypes: [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. The RTAT Purchase Order Lead Time for the full mask set (FEOL/BEOL) is [*] calendar days from receipt of an IBM and IMI approved DRC, with IMI's GDS II tape by IBM. The NTAT Purchase Order Lead Time for the full mask set (FEOL/BEOL) is [*] calendar days from receipt of an IBM and IMI approved DRC, with IMI's GDS II tape by IBM. The RTAT Purchase Order Lead Time for the personalization (3LM BEOL only) is [*] calendar days from receipt of an IBM and IMI approved DRC, with IMI's GDS II tape by IBM. The NTAT Purchase Order Lead Time for the personalization (3LM BEOL only) is [*] calendar days from receipt of an IBM and IMI approved DRC, with IMI's GDS II tape by IBM. In the event IBM ships a RTAT Prototype more than one (1) day after the shipment date stated in its purchase order acknowledgment, then the charge for such Prototype will be reduced to the price for Products referenced in Section 9. WAFER PRODUCTION: Production Purchase Order Lead Time for Product for the full mask set (FEOL/BEOL) is [*] calendar days. Production Purchase Order Lead Time for Product for personalization (3LM, BEOL only) is [*] calendar days. The above Product Purchase Order Lead Times assume the mask set is complete. The parties agree to review the Production Purchase Order Lead Time on a quarterly basis and to make any adjustments to the Production Purchase Order Lead Time upon mutual agreement. Any such mutual agreement shall be in writing. 11.0 ORDER CHANGES / CANCELLATION CHARGES: In accordance with Section 6 of the Agreement, the following charges will apply to any canceled IMI order or any portion thereof. 11.1 If any purchase order for FEOL processing is canceled after wafer start, IMI shall pay one hundred percent (100%) of the FEOL Processing Charge. 11.2 If any purchase order for BEOL is canceled after the start of wafer personalization, IMI shall pay one hundred percent (100%) of the BEOL Processing Charge. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.0 FEOL WAFER INVENTORY MANAGEMENT Unless otherwise mutually agreed to in writing, IBM may ship FEOL processed base wafers that have been in the base wafer finished goods inventory for one hundred eighty (180) days or more and invoice IMI for the associated base wafer FEOL processing charge. Receipt of payment by IBM for those invoices will be due net thirty (30) days after the date of invoice. 13.0 PRODUCTION END-OF-LIFE NOTICE: IBM will provide IMI with a minimum of eighteen (18) months prior written notification ("End-of-Life Notice") if IBM plans to cease production in a technology or wafer size form factor under this Task Order. IMI must place any and all purchase orders for all base wafers to be discontinued within twelve (12) months of the date IBM issued the End-of-Life Notice and for all personalization wafers to be discontinued within fifteen (15) months of the date IBM issues the End-of-Life Notice. IMI must take delivery of all such discontinued Product within eighteen (18) months of the date IBM issued the End-of-Life Notice. 14.0 RMA PROCEDURES FOR WARRANTY RETURNS The revision of IBM Microelectronics Division's return material authorization ("RMA") procedures applicable at the time IMI returns Product under a warranty claim shall apply. The current revision of the RMA procedures are attached hereto for reference as Exhibit B. 15.0 TASK ORDER TECHNICAL COORDINATORS: IBM Microelectronics IMI 281 Winter Street 525 Los Coches Street Waltham, MA 02154 Milpitas, California 95054 FAX: (781)-642-5909 FAX: (408)-263-6571 Attn: Donna Hohman Attn: Arvinder Chadha 16.0 SHIPPING/BILLING/ORDERING LOCATIONS: Customer's Ship to Location: Customer's Bill to Location: Per purchase orders 525 Los Coches Street Milpitas, California 95054 FAX: (408)-263-6571 Attn: Arvinder Chadha IBM's Ordering Location: International Business Machines Corporation 1055 Joaquin Road Mountain View, CA 94043 Attention: John R. Sepko Fax: 650-694-3096 17.0 WORK-IN-PROGRESS REPORTS Once a week during the term of this Attachment, IBM will provide weekly work-in-progress report ("WIP Report") to IMI in a form determined by IBM. Agreed to and Accepted By: International Business Machines International Microcircuits Corporation Incorporated By: /s/ Peter D. Hansen By: /s/ Arvinder S. Chadha ----------------------------- --------------------------- Authorized Signature Authorized Signature Name: Peter D. Hansen Name: Arvinder Chadha Title: VP North American Sales Title: VP Manufacturing Dated: 12/13/99 Dated: EX-10.6 8 a2024700zex-10_6.txt EX10-6 Exhibit 10.6 INTERNATIONAL MICROCIRCUITS, INC. 3,028,758 Shares of Convertible Participating Preferred Stock ------------------------------ PREFERRED STOCK PURCHASE AGREEMENT ------------------------------ As of November 19, 1997 INTERNATIONAL MICROCIRCUITS, INC. Preferred Stock Purchase Agreement as of November 19, 1997 INDEX
Page ---- SECTION 1. PURCHASE AND SALE OF-PREFERRED SHARES....................................................1 1.1 Description Securities...................................................................1 1.2 Sale and Purchase........................................................................1 1.3 Closing..................................................................................1 SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................1 SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..........................................2 SECTION 4. CONDITIONS OF PURCHASE...................................................................3 4.1 Pre-Closing Transactions.................................................................3 4.2 Satisfaction of Conditions...............................................................4 4.3 Opinion of Counsel.......................................................................4 4.4 Authorization............................................................................4 4.5 Closing of Stock Redemption..............................................................4 4.6 Stockholders' Agreement..................................................................4 4.7 Employment and Non-Competition Agreement.................................................4 4.8 Confidentiality and Non-Competition Agreement............................................5 4.9 Resignations.............................................................................5 4.10 Election of Directors....................................................................5 4.11 All Proceedings Satisfactory.............................................................5 4.12 No Violation or Injunction...............................................................5 4.13 Hart-Scott-Rodino........................................................................5 4.14 Consents and Waivers.....................................................................5 4.15 No Material Adverse Change...............................................................6 4.16 Financial Markets........................................................................6 SECTION 5. COVENANTS OF THE COMPANY.................................................................6 5.1 Financial Stations.......................................................................6 5.2 Budget and Operating Forecast: Inspection...............................................6 5.3 Board Meetings; Indemnification..........................................................7 5.4 Conduct of Business......................................................................7 5.5 Hart-Scott-Rodino Filings................................................................7 5.6 Payment of Taxes, Compliance With Laws, etc..............................................7 5.7 Insurance................................................................................7 5.8 Key Person Insurance.....................................................................8 5.9 Maintenance of Properties................................................................8 5.10 Material Adverse Changes.................................................................8 5.11 Stock Grants.............................................................................8 5.12 Affiliated Transactions..................................................................8 5.13 Managing Underwriter.....................................................................9 i TABLE OF CONTENTS (continued) Page ---- 5.14 Use of Proceeds..........................................................................9 5.15 Enforcement of Rights....................................................................9 5.16 Distributions on, and Redemptions of, Capital Stock......................................9 5.17 Merger, Consolidation, Sale of Assets, Acquisitions and Other Actions....................9 5.18 No Amendments to Articles of Incorporation..............................................10 5.19 Capital Expenditures....................................................................10 5.20 Reincorporation.........................................................................10 5.21 Disclosure Statement....................................................................10 5.22 Additional Information..................................................................11 SECTION 6. TERMINATION.............................................................................11 SECTION 7. GENERAL.................................................................................11 7.1 Amendments Waivers and Consents.........................................................11 7.2 Actions or Consents of Investors........................................................12 7.3 Indemnification From the Company: Expenses.............................................12 7.4 Survival of Representations; Assignability of Rights; No Third Party Beneficiaries......14 7.5 Governing Law...........................................................................14 7.6 Section Headings and Gender.............................................................14 7.7 Counterparts............................................................................14 7.8 Notices and Demands.....................................................................14 7.9 Dispute Resolution......................................................................15 7.10 Remedies; Severability..................................................................15 7.11 Integration.............................................................................15 EXHIBITS Exhibit A - List of Investors Exhibit B - Amended and Restated Articles of Incorporation Exhibit C - Outstanding Capital Stock Exhibit D - Opinion of Cooley Godward LLP Exhibit E - Form of Stockholders' Agreement Exhibit F - Form of Employment and Non-Competition Agreement Exhibit G - Confidentiality and Non-Competition Agreement Exhibit H - Director Indemnification Agreement Exhibit I - Company's 1997 Stock Option and Grant Plan and Forms of Awards SCHEDULES Schedule 4.9 - Resignations Schedule 4.14 - Schedule of Consents and Waivers Schedule 5.11 - Stock Grants Schedule 5.14 - Use of Bank Financing Proceeds
ii PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT made as of this 19th day of November, 1997, by and between INTERNATIONAL MICROCIRCUITS, !NC., a California corporation (the "Company"), and each of the investment partnerships and individuals named in EXHIBIT A hereto (including their assignees as provided in Section 7.4, collectively the "Investors," and each individually an "Investor"). SECTION 1. PURCHASE AND SALE OF-PREFERRED SHARES. 1.1 DESCRIPTION SECURITIES. The Company has authorized the issuance and sale to the Investors of 3,028,758 shares (the "Preferred Shares") of its authorized but unissued Convertible Participating Preferred Stock without par value per share (the "Preferred Stock"), having the rights, preferences and other terms set forth on Exhibit B hereto (the "Preferred Stock Terms" ` ). The Company has authorized and has reserved, and covenants to continue to reserve, a sufficient number of shares of its Common Stock without par value per share (the "Common Stock"), and Redeemable Preferred Stock without par value per share (the "Redeemable Preferred Stock"), to satisfy the rights of conversion of the holders of the Preferred Shares. Any shares of Common Stock and Redeemable Preferred Stock or any successor class of capital stock of the Company hereafter issued or issuable upon conversion of the Preferred Shares are herein referred to as "Conversion Shares," and the Preferred Shares, and the Conversion Shares are herein collectively referred to as the "Securities." 1.2 SALE AND PURCHASE. Subject to the terms and conditions herein, at the Closing (as hereinafter defined), the Company shall issue and sell to each of the Investors, and each Investor shall purchase from the Company, the number of Preferred Shares set forth opposite the name of such Investor in EXHIBIT A hereto for the purchase price of $4.44 for each Preferred Share or $13,447,685.52 in the aggregate. 1.3 CLOSING. A closing (the "Closing") shall take place at the offices of Cooley Godward LLP, Palo Alto, California, together with the closing of the transactions contemplated by the Stock Redemption Agreement of even date (each as hereinafter defined), at 10:00 a.m. on December 15, 1997 or at such other place, of such other time or on such earlier or later date as the parties may agree subject to satisfaction or waiver of all of the conditions set forth herein and therein. At the Closing, the Company shall deliver to each Investor a certificate or certificates representing the Preferred Shares being acquired by such Investor in such Investor's name or in the name of its nominee, against payment of the full purchase price therefor by or on behalf of each Investor to the Company by wire transfer of same day available funds. The day on which the Closing occurs is referred to herein as the "Closing Date." SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to the Investors as of the date hereof and as of the Closing Date as follows: (a) the Company has full corporate authority and power to enter into this Agreement; (b) this Agreement constitutes the valid and binding obligation of the Company enforceable against it in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies (provided, however, that the limitations described in this clause (ii) should not prevent the practical realization of the benefits intended by this Agreement); and (c) the execution, delivery and performance by the Company of this Agreement: (i) does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to the Company, or require the Company to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any material indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which the Company or any of its subsidiaries is a party or by which the property of the Company is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of the Company. The Company hereby further represents and warrants that immediately after the Closing, and after giving effect to each of the transactions contemplated by (i) this Preferred Stock Purchase Agreement (hereinafter this "Agreement"), (ii) the Stock Redemption Agreement dated as of November 19, 1997 (the "Stock Redemption Agreement"), by and between the Company, Frank Deverse (the "Founder") and Golden Legacy, a Nevada limited partnership, (iii) certain Option Exercise and Cancellation Agreements, each dated as of November __, 1997, (each an "Option Cancellation Agreement") by and between the Company and each of the holders (the "Optionholders") of options to purchase shares of the Company's common stock pursuant to which each such optionholder shall have elected to exercise none, some or all of the options held by such person and pursuant to which the remaining options held by such person shall terminate, and (iv) the Stockholders' Agreement dated as of November __, 1997 (the "Stockholders' Agreement"), among the Company, the Investors named therein and the other Stockholders named therein, all of the Company's outstanding capital stock will be owned beneficially and of record as set forth in EXHIBIT C hereto, will be free and clear of any lien, restriction or encumbrance and, except pursuant to the terms of the Stockholders' Agreement, there will be no outstanding options, warrants, rights, commitments, pre-emptive rights or agreements of any kind for the issuance and sale of, or outstanding securities convertible into, any additional shares of any class of the Company's capital stock, except as provided by the terms of the Preferred Shares. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor represents that it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act of 1933, as amended (the "Securities Act"). Each Investor represents to the Company that it is purchasing the Securities for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Each such Investor acknowledges that its respective Securities have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or an exemption from such registration is available. 2 Each of the Investors, hereby further represents, warrants and covenants to the Company and to the Founders as follows: (a) such Investor has full authority and power under its charter, by-laws, governing partnership agreement or comparable document to enter into this Agreement; (b) this Agreement constitutes the valid and binding obligation of such Investor, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies (provided, however, that the limitations described in this clause (ii) should not prevent the practical realization of the benefits intended by this Agreement); and (c) the execution, delivery and performance by such Investor of this Agreement: (i) does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to such Investor, or require such Investor to obtain any approval, consent or waiver of, or to make any filing with, any person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any indenture or loan or credit agreement or any other agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which such Investor is a party or by which the property of such Investor is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of such Investor. SECTION 4. CONDITIONS OF PURCHASE Each Investor's obligation to purchase and pay for its respective Preferred Shares at the Closing- shall be subject to compliance by the Company with its agreements herein contained and to the fulfillment to the Investors' satisfaction on or before the Closing Date of the following conditions: 4.1 PRE-CLOSING TRANSACTIONS The Company shall have completed the following transactions on terms satisfactory to the Investors. (a) the amendment and restatement of the Company's Articles of Incorporation; (b) all outstanding options, warrants, or other securities exercisable for or convertible into shares of the capital stock of the Company shall have been either (i) exercised or converted and/or (ii) canceled pursuant to Option Exercise and Cancellation Agreements between the Company and each of the holders of such option, warrants or other securities; (c) as a result of the option exercises referred to in (b) above, the Optionholders shall have acquired 558,570 shares of Common Stock and all such shares of Common Stock acquired by the Optionholders who acquire shares of Common Stock shall be validly issued, outstanding, fully paid and non-assessable, and each Optionholder shall have signed the Stockholders' Agreement as a Continuing Stockholder (as defined in the Stockholders' Agreement); and (d) the Company shall have paid all legal and accounting fees and related expenses incurred by the Investors in connection with the transactions contemplated by this 3 Agreement, the Stock Redemption Agreement, the Stockholders' Agreement and the Bank Financing Agreement and concurrent or related transactions. 4.2 SATISFACTION OF CONDITIONS. The representations and warranties of the Company contained in this Agreement and in the Stockholders' Agreement and the representations and warranties of the Selling Stockholder (as defined in the Stock Redemption Agreement) contained in the Stock Redemption Agreement shall be true and correct in all material respects on and as of the Closing Date; provided, however, that for the purpose of determining satisfaction of this condition, no effect shall be given to any exception in the representations and warranties relating to materiality, Material Adverse Effect or knowledge of the Selling Stockholder in any of the foregoing agreements; each of the conditions specified in this Section 4 shall have been satisfied or waived in writing; and on the Closing Date a certificate to such effect executed by the Chief Executive Officer of the Company shall be delivered to the Investors. 4.3 OPINION OF COUNSEL. The Investors shall have received an opinion of Cooley Godward LLP substantially in the form attached hereto as EXHIBIT D. 4.4 AUTHORIZATION. The Board of Directors and the stockholders of the Company shall have duly adopted resolutions in form reasonably satisfactory to the Investors and shall have taken all action necessary for the purpose of authorizing the Company to consummate the transactions contemplated by the Stock Redemption Agreement, the Stockholders' Agreement, the Bank Financing Agreement and this Agreement in accordance with the terms thereof and hereof, including without limitation the authorization of the issuance of the Preferred Shares, the filing of an Articles of Incorporation in the form attached hereto as with the Secretary of State for the State of California establishing the Preferred Shares, and the Investors shall have received a duly executed certificate of the Secretary of the Company setting forth a copy of such resolutions and as to such other matters as may. be requested by the Investors together with a copy of the Articles of Incorporation certified by the Secretary of State of the State of California. 4.5 CLOSING OF STOCK REDEMPTION. Concurrently with the closing of the purchase and sale of the Preferred Shares, the Company shall complete the redemption of an aggregate of 4,710,000 shares of Common Stock of the Company from the Founder and Golden Legacy, L.P. in consideration of payments aggregating $24,115,200 pursuant to the Stock Redemption Agreement and all conditions to the closing of the Stock Redemption Agreement shall have been satisfied and shall not have been waived by the Company. 4.6 STOCKHOLDERS' AGREEMENT. The Stockholders' Agreement in the form attached hereto as EXHIBIT E shall have been executed and delivered by the parties hereto and all other parties holding shares of the Company's Common Stock. 4.7 EMPLOYMENT AND NON-COMPETITION AGREEMENT. Ilhan Refioglu, shall have executed and delivered an Employment Agreement in the form of EXHIBIT F hereto. 4 4.8 CONFIDENTIALITY AND NON-COMPETITION AGREEMENT. The Founder shall have entered into a Confidentiality and Non-Competition Agreement in the form attached hereto as EXHIBIT G. 4.9 RESIGNATIONS. The Founder shall have submitted his resignation as Chief Executive Officer effective contemporaneously with the Closing and all of the members of the Company's Board of Directors identified on SCHEDULE 4.9 attached hereto shall have submitted their resignation as members of the Board of Directors effective contemporaneously with the Closing. 4.10 ELECTION OF DIRECTORS. Effective subsequent to the Closing of the transactions contemplated hereby, the Company's Board of Directors shall include Kurt R. Jaggers and Michael C. Child as designees of the Investors pursuant to the terms of the Articles of Incorporation, each of whom shall also be appointed to a three-person Compensation Committee of the Company, and the Company shall have entered into Director Indemnification Agreements with such Directors in the form attached as EXHIBIT H. 4.11 ALL PROCEEDINGS SATISFACTORY. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement and all documents and evidences incident thereto shall be reasonably satisfactory in form and substance to the Investors and the issuance and sale of the Preferred Shares shall be made in compliance with all applicable federal and state laws. 4.12 NO VIOLATION OR INJUNCTION. The consummation of the transactions contemplated by this Agreement, the Stock Redemption Agreement and the transactions contemplated hereby and thereby shall not be in violation of any law or regulation, and shall not be subject to any injunction, stay or restraining order. 4.13 HART-SCOTT-RODINO. All required filings (the "HSR Filings") under the Hart-Scott-Rodino Anti-Trust Improvement Act of 1976, as amended (the "HSR Act"), shall have been completed and all applicable time limitations under such Act shall have expired without a request for further information by the relevant federal authorities under the HSR Act, or in the event of such a request for further information, the expiration of all applicable time limitations under the Act shall have occurred without the objection of such federal authorities. 4.14 CONSENTS AND WAIVERS. The Company and each party to each to the Stock Redemption Agreement, the Stockholders' Agreement and the Bank Financing Agreement shall have obtained all consents or waivers including, without limitation, the consents and waivers identified in SCHEDULE 4.14 hereto necessary to execute this Agreement, the Stock Redemption Agreement, the Stockholders' Agreement and the Bank Financing Agreement and the other agreements and documents contemplated herein, to issue the Securities and to carry out the transactions contemplated hereby and thereby and shall have delivered satisfactory evidence thereof to the Investors. All governmental filings necessary to effectuate the terms of this Agreement, the Securities, the Stock Redemption Agreement, the Stockholders' Agreement, the Bank Financing Agreement and the other agreements and instruments executed and delivered by the Company in connection herewith and therewith shall have been made or taken. 5 4.15 NO MATERIAL ADVERSE CHANGE. Between June 30, 1997 and the Closing Date, there shall have been no material adverse change in the financial condition, properties, assets, liabilities, business, operations or prospects of the Company, whether or not in the ordinary course of business. 4.16 FINANCIAL MARKETS. As of the Closing Date, there shall have not have occurred an aggregate decline of five percent (5 %) or more in the Nasdaq composite index from the level of such index at the close of business on the date of this Agreement. SECTION 5. COVENANTS OF THE COMPANY From and after the Closing the Company (which term shall be deemed to include, for purposes of this Section 5, any subsidiary or subsidiaries of the Company now existing or formed after the date of this Agreement) shall comply with the following covenants except as shall otherwise be expressly agreed pursuant to a written consent or consents executed by Investors holding not less than two-thirds of the shares of Convertible Preferred Stock (or Common Stock, as applicable) held by the Investors as a group, until the closing of a Qualified Public Offering (as defined in the Company's Articles of Incorporation); provided, however, that the Company shall comply with the covenant set forth in Sections 5.5, 5.10, 5.11, 5.12, 5.15, 5.16 and 5.19 below from and after the date hereof.. 5.1 FINANCIAL STATIONS. The Company will maintain a comparative system of accounts in accordance with generally accepted accounting principles, keep full and complete financial records and furnish to the Investors the following reports: (a) within 60 days after the end of each fiscal year, a copy of the consolidated balance sheet of the Company as at the end of such year, together with a consolidated statement of income and retained earnings of the Company for such year, audited and certified by independent public accountants of recognized national standing reasonably satisfactory to the Investors, prepared in accordance with generally accepted accounting principles and practices consistently applied; (b) within 45 days after the end of each quarter commencing with the quarter ending December 31, 1997, a consolidated unaudited balance sheet of the Company as at the end of such quarter and a consolidated unaudited statement of income and retained earnings for the Company for such quarter and for the year to date; (c) within 30 days after the end of each month commencing with the month ending October 31, 1997 a consolidated unaudited balance sheet of the Company as at the end of such month and an unaudited statement of income and retained earnings for the Company for such month and for the year to date, each of the foregoing balance sheets and statements of earnings and retained earnings to set forth in comparative form the corresponding figures for the prior fiscal period and to include a brief written discussion and analysis by management of such annual, quarterly and monthly financial statements; and (d) such other financial information as a two-thirds in interest of the Investors may reasonably request, including without limitation certificates of the principal financial officer of the Company concerning compliance with the covenants of the Company under this Section 5. 5.2 BUDGET AND OPERATING FORECAST: INSPECTION. The Company will prepare and submit to the Board of Directors of the Company a budget for the Company for each fiscal year of the Company at least 30 days prior to the beginning of such fiscal year, together with management's written discussion and analysis of such budget. The budget shall be 6 accepted as the budget for such fiscal year when it has been approved by a majority of the full Board of Directors of the Company and, thereupon, a copy of such budget promptly shall be sent to the Investors. The Company shall review the budget periodically and shall advise the Board of Directors and the Investors of all changes therein and all material deviations therefrom. The Company will, upon reasonable prior notice to the Company, permit authorized representatives of the Investors to visit and inspect any of the properties of the Company and its subsidiaries, including its books of account (and to make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with its officers, administrative employees and independent accountants, all at such reasonable times and as often as may be reasonably requested. 5.3 BOARD MEETINGS; INDEMNIFICATION. The Company will ensure that Meetings of its Board of Directors are held at least four times each year. The Company will pay the nominees of the Investors who serve as directors fees in an amount equal to any fees that are paid to other non-management directors of the Company and will reimburse such Directors for their reasonable travel expenses incurred in connection with attending meetings of the Board of Directors and for their reasonable direct costs associated with any other work on behalf of the Company. 5.4 CONDUCT OF BUSINESS. The Company will continue to engage principally in the business now conducted by the Company or a business or businesses similar thereto or reasonably compatible therewith. The Company will keep in full force and effect its corporate existence and all intellectual property rights useful in its business (except such rights as the Board of Directors has reasonably determined are not material to the Company's continuing operations). 5.5 HART-SCOTT-RODINO FILINGS. The Company shall cooperate with the Investors in connection with all HSR Filings and shall make all HSR Filings required in connection with the transactions contemplated by this Agreement and shall furnish all follow-up information required in connection therewith. 5.6 PAYMENT OF TAXES, COMPLIANCE WITH LAWS, ETC. The Company will pay and discharge all lawful taxes, assessments and governmental charges or levies imposed upon it or upon its income or property before the same shall become in default, as well as all lawful claims for labor, materials and supplies which, if not paid when due, might become a lien or charge upon its property or any part thereof; provided, however, that the Company shall not be required to pay and discharge any such tax, assessment, charge, levy or claim so long as the validity thereof is being contested by the Company in good faith by appropriate proceedings and an adequate reserve therefor has been established on its books. The Company will comply with all applicable laws and regulations in the conduct of its business, including, without limitation, all applicable federal and state securities laws in connection with the issuance of any shares of its capital stock. 5.7 INSURANCE. The Company will keep its insurable properties insured, upon reasonable business terms, by financially sound and reputable insurers against liability, and the perils of casualty, fire and extended coverage in amounts of coverage at least equal to those 7 customarily maintained by companies in the same or similar business as the Company. The Company will also maintain with such insurers insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies engaged in the same or similar business. 5.8 KEY PERSON INSURANCE. The Company will use its best efforts to maintain the coverage under the "key person" term life insurance policy, if any, on the life of Ilhan Refioglu, provided such insurance can be maintained at a commercially reasonable cost to the Company. The Company hereby agrees that such policy shall not be assigned, borrowed against or pledged. 5.9 MAINTENANCE OF PROPERTIES. The Company will maintain all properties used or useful in the conduct of its business in good repair, working order and condition, ordinary wear and tear excepted, as necessary to permit such business to be properly and advantageously conducted. 5.10 MATERIAL ADVERSE CHANGES. The Company will promptly advise the Investors of any event which represents or is reasonably likely to result in a material adverse change in the condition (financial or otherwise), business or prospects of the Company and its subsidiaries, and of each suit or proceeding commenced or threatened against the Company or any of its subsidiaries which, if adversely determined, in the reasonable judgment of the Company, is reasonably likely to have a material adverse effect on the Company and its subsidiaries or their condition (financial or otherwise), business or prospects. 5.11 STOCK GRANTS. The Company and its subsidiaries will not issue stock or grant stock options, warrants, other rights to purchase stock or phantom stock rights in the Company or its subsidiaries to their employees, officers, directors, consultants, advisers or independent contractors except for the future issuance of up to 298,322 shares or options on shares of Common Stock to employees of the Company and issuance of incentive stock options to purchase up to 696,085 shares, in the aggregate, of Common Stock promptly following the Closing to the certain employees of the Company identified in SCHEDULE 5.11 attached hereto (in each case subject to adjustments for stock splits, stock dividends and the like), pursuant to and in accordance with the terms of the Company's 1997 Stock Option and Grant Plan (the "Plan") as in effect on the Closing Date. Copies of the Plan and the related forms of stock option/restricted stock agreements (including vesting terms) are attached hereto as EXHIBIT I. Future options and restricted stock may be granted to such employees, officers, directors, consultants, advisors or independent contractors as the Compensation Committee of the Company or the Board of Directors may determine, at prices determined in good faith by the Compensation Committee or Board of Directors, and otherwise on such terms as the Compensation Committee, or Board of Directors shall determine. The Plan may not be amended, revised or waived after the Closing Date without the consent of two-thirds in interest of the Investors. Any grants of capital stock or options to a Key Executive shall be conditioned-upon the grantee agreeing to be bound by the terms of the Stockholders' Agreement with respect to the shares covered thereby. 5.12 AFFILIATED TRANSACTIONS. All transactions by and between the Company and any of the Founder, or any other officer or key employee of the Company or persons controlling, controlled by, under common control with or otherwise affiliated with the 8 Founder or any officer or key employee, shall be conducted on an arm's-length basis, shall be on terms and conditions no less favorable to the Company than could be obtained from nonrelated persons and shall be approved in advance by the Board of Directors after full disclosure of the terms thereof. 5.13 MANAGING UNDERWRITER. Selection of the managing or lead underwriter for the Company's initial public offering shall be approved by two-thirds-in-interest of the Investors, which approval shall not be unreasonably withheld. 5.14 USE OF PROCEEDS. The Company will use the proceeds from the sale of Preferred Shares and the funding of the Senior Indebtedness under the Bank Financing as provided in SCHEDULE 5.14 hereto. 5.15 ENFORCEMENT OF RIGHTS. The Company will diligently enforce all of its rights, including rights of indemnification, under the Stock Redemption Agreement, the Employment Agreement referred to in Section 4.7 and the Confidentiality and Non-Competition Agreement referred to in Section 4.8. The Company will not effect any transfer of any of the outstanding capital stock of the Company on the stock record books of the Company unless such transfer is made in accordance with the terms of the Stockholders' Agreement. The Company will not waive or release any rights under, consent to the amendment of, or modify, restate or terminate, any such agreement without the written consent of two-thirds-in-interest of the Investors. 5.16 DISTRIBUTIONS ON, AND REDEMPTIONS OF, CAPITAL STOCK. Except as otherwise expressly provided in this Agreement, the Redemption Agreement, the Option Cancellation Agreement or in the Articles of Incorporation, the Company will not declare or pay any dividends or make any distributions of cash, property or securities of the Company with respect to any shares of its Common Stock or any other class of its capital stock, or directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock; provided, however, that this restriction shall not apply to the repurchase of (x) up to 390,000 shares of the Common Stock pursuant to that certain Put Agreement, dated as of November __, 1997, by and among the Company, the Founder and Golden Legacy, L.P. and (y) shares of Common Stock pursuant to agreements under which the Company has the option or obligation to repurchase such shares upon the occurrence of certain events, including termination of employment, and a right of first refusal to acquire shares in the event of certain proposed transfers. Any redemption, repurchase or other acquisition by the Company of any shares of its capital stock shall be made in compliance with all laws, including but not limited to federal and state securities laws. 5.17 MERGER, CONSOLIDATION, SALE OF ASSETS, ACQUISITIONS AND OTHER ACTIONS. The Company will not: (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets, (b) merge with or into or consolidate with another entity (except into or with a wholly-owned subsidiary of the Company with the requisite shareholder approval), (c) acquire any other corporation or business concern, whether by acquisition of assets, capital stock or otherwise, and whether in consideration of the payment of cash, the issuance of capital stock or otherwise, or make any material investment in another business entity, (d) voluntarily liquidate or wind up its operations, 9 (e) authorize the issuance of, issue or reserve for issuance, any equity securities (including without limitation options, warrants, convertible or exchangeable securities or rights giving the holder thereof the right to acquire equity securities or any of the foregoing) or otherwise engage in any equity financing, including without limitation in connection with a stock acquisition, but excluding the issuance of stock options and/or restricted stock as contemplated by Section 5.11, (f) create, or obligate itself to create, any class or series of shares having preference over or being on a parity with the Preferred Shares or the Redeemable Preferred Stock, (g) create, incur, assume, become liable for, or-permit to exist any indebtedness for borrowed money (other than the Senior Debt, as defined below), capital leases, or other similar commitments or obligations, which, for any one such borrowing or series of related borrowings, is in excess of $500,000, or (h) enter into any agreement or arrangement or take any other action that eliminates, amends, restricts or otherwise adversely affects the rights of the holders of the Preferred Shares or the Company's ability to perform its obligations hereunder or under the Amended and Restated Articles of Incorporation or the Stockholders' Agreement; without limitation of the foregoing, the Company shall take all action necessary or appropriate to remove promptly any impediment to the redemption of the Preferred Shares or the Redeemable Preferred Stock as contemplated by the Amended and Restated Articles of Incorporation. For purposes of this Section 5.17, Senior Debt shall mean indebtedness of the Company to any bank, trust company, insurance company or other institutional lender providing financing to the Company. 5.18 NO AMENDMENTS TO ARTICLES OF INCORPORATION. Except as contemplated by Section 5.21 below, the Company will not make any amendment to Article IV of its Articles of Incorporation or make any other amendment to its Articles of Incorporation or any amendment to its By-laws, that eliminates, amends or restricts the rights and preferences of or otherwise adversely affects the holders of the Preferred Stock or the Redeemable Preferred Stock. 5.19 CAPITAL EXPENDITURES. The Company will not, without the prior approval of the Board of Directors of the Company, make any expenditures for fixed or capital assets, or any commitments for such expenditures, exceeding an amount of $100,000 for any one such expenditure or series of related expenditures. 5.20 REINCORPORATION. Promptly after the consummation of the transactions contemplated by the Stock Redemption Agreement, the Bank Financing Agreement and this Agreement, International Microcircuits, Inc., a California corporation, shall consummate a re-incorporating merger with IMI Acquisition Corporation, a Delaware corporation ("IMI Acquisition") pursuant to which IMI Acquisition is the surviving corporation. 5.21 DISCLOSURE STATEMENT. The Company shall prepare and distribute to all Optionholders a disclosure statement (the "Disclosure Statement") setting forth all material information relating to the offer by the Company to redeem all unexercised options held by the Optionholders as of the Closing and relating to the transactions contemplated hereby and by the Stock Redemption Agreement. The information contained in the Disclosure Statement will not, from and after the date the Disclosure Statement (or any amendment or supplement thereto) is first mailed to Optionholders until and including the time of the Closing, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be 10 stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of the Optionholders with respect to the transactions contemplated hereby and, by the Stock Redemption Agreement which shall have become false or misleading. The Selling Stockholders and the Investors shall cooperate with each other, and the Selling Stockholders shall cause the Company to cooperate with the Investors, in the preparation of the Disclosure Statement. The Company shall mail the Disclosure Statement and all required amendments and supplements thereto to the Optionholders at the earliest practicable time and in any event on or prior to November __, 1997. 5.22 ADDITIONAL INFORMATION. The Company shall provide the Investors with the opportunity to ask questions and receive answers concerning the Company as well as the opportunity to obtain any additional information necessary to verify the accuracy of information furnished in connection with the transactions contemplated hereby which the Company possesses or can acquire without unreasonable effort or expense. SECTION 6. TERMINATION 6.1 This Agreement may be terminated at any time prior to the Closing Date as follows: (a) by the mutual written consent of the Company and two-thirds in interest of the Investors (the "Majority Investors"); (b) by either the Company or the Majority Investors if the Stock Redemption Agreement has been terminated; (c) by either the Company or the Majority Investors if the Closing has not occurred on or before the day which is ten (10) business days after the latest to occur of (i) the date on which the Secretary of State of the State of California shall have approved of the Company's Amended and Restated Articles, of Incorporation and such Amended and Restated Articles of Incorporation shall have become effective, (ii) the date on which all conditions to the closing of the transactions contemplated by that certain Loan Agreement by and between the Company and Fleet National Bank, as agent and a lender, and certain other financial institutions named therein shall have been satisfied and (iii)(x) each Optionholder shall have received an Option Cancellation Agreement and the related Disclosure Statement, (y) the period for the acceptance of the offer set forth in the Option Cancellation Agreement shall have expired and (z) the condition to closing set forth in Sections 4.l(b) and 4.l(c) hereof shall have been satisfied; provided, however, that neither party may terminate this Agreement pursuant to this clause (c) if the Closing has not occurred as a result of the failure of such party to perform in all material respects all of its obligations hereunder. SECTION 7. GENERAL 7.1 AMENDMENTS WAIVERS AND CONSENTS. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No provision 11 hereof may be waived otherwise than by a written instrument signed by the parties so waiving such covenant or other provision; provided, however, in the case of the Investors, changes in or additions to, and any consents or waivers given pursuant to, this Agreement may be made, and compliance with any term, covenant, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) by a consent of the Investors in accordance with Section 7.2. Any amendment or waiver effected in accordance with this Section 7.1 shall be binding upon each holder of Preferred Shares or Conversion Shares at the time outstanding, each future holder of all such securities and the Company and each of their assigns. 7.2 ACTIONS OR CONSENTS OF INVESTORS. Any actions required to be taken or consents, approvals, votes or waivers required or contemplated to be given by the Investors shall require a vote of two-thirds-in-interest of the Investors based on their relative holdings of Preferred Shares or Conversion Shares at the relevant time. 7.3 INDEMNIFICATION FROM THE COMPANY: EXPENSES. (a) Without limitation of any other provision of this Agreement, the Company agrees to defend, indemnify and hold the Investors and their affiliates and their respective direct and indirect partners, members, Stockholders, directors, officers, employees and agents and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act of 1934, as amended (the "Exchange Act") (parties receiving the benefit of the indemnification agreement herein shall be referred to collectively as "Indemnified Parties" and individually as an "Indemnified Party") harmless from and against any and all losses, claims, damages, obligations, liens, assessments, judgments, fines, liabilities, and other costs and expenses (including without limitation interest, penalties and any investigation, reasonable, legal and accountant fees and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred) of any kind or nature whatsoever which may be sustained or suffered by any such Indemnified Party, without regard to any investigation by any of the Indemnified Parties, based upon, arising out of, by reason of or otherwise in respect of or in connection with (i) any breach of any covenant or agreement made by the Company in this Agreement or in any agreement or instrument delivered pursuant to or in connection with this Agreement, or of (ii) their status as a securityholder, creditor, director, agent, representative or controlling person of the Company (including, without limitation, any and all Losses under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relates directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto), including without limitation in connection with any third party or governmental action or claim relating to any action taken or omitted to be taken or alleged to have been taken or omitted to have been taken by any Indemnified Party as shareholder, director, agent, representative or controlling person of the Company or otherwise, alleging so-called control person liability or securities law liability; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on (A) an untrue statement or omission or alleged untrue statement or omission in a registration statement or prospectus which is made in reliance on and in conformity with written information furnished to the Company in an instrument duly executed by or on behalf of such Indemnified Party specifically stating that it 12 is for use in the preparation thereof or (B) a knowing and willful violation of the federal securities laws by an Indemnified Party, as finally determined by a court of competent jurisdiction. (b) If the indemnification provided for in Section 7.3(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnified Party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Investors, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Investors in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with any registration of the Company's securities, the relative benefits received by the Company and the Investors shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Investors, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Investors shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Investors and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investors agree that it would not be just and equitable if contribution pursuant to this Section 7.3(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company's securities, in no event shall an Investor be required to contribute any amount under this Section 7.3(b) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Investor or (ii) the proceeds received by such Investor from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) The indemnification and contribution provided for in this Section 6.3 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Parties or any officer, director, partner, employee, agent or controlling person of the Indemnified Parties. (d) The provisions of this Section 7.3 are in addition to and shall supplement those set forth in the Stockholders' Agreement which shall apply in the case of the 13 registration and sale of Registrable Securities held by any of the Investors registered as provided in the Stockholders' Agreement. (e) The Company agrees to pay and hold the Investors harmless against liability for payment of all reasonable out-of-pocket costs and expenses incurred in connection with their ongoing investment in the Company, including without limitation the fees and disbursements of counsel and other professionals and any costs and expenses associated with the performance and enforcement of this Agreement and the agreements, documents and instruments contemplated hereby or executed pursuant hereto. In addition, the Company agrees to pay any and all stamp, transfer and other similar taxes (together in each case with interest and penalties, if any) payable or determined to be payable in connection with the execution and delivery of this Agreement and the issuance of securities hereunder. 7.4 SURVIVAL OF REPRESENTATIONS; ASSIGNABILITY OF RIGHTS; NO THIRD PARTY BENEFICIARIES. All representations, warranties, covenants and agreements of the Company made herein and in the certificates, exhibits and schedules delivered to any Investor in connection herewith (a) are material and shall be deemed to have been relied upon by such Investor, and shall survive the delivery of the Securities and (b) shall bind the Company's successors and assigns, whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investors' successors and assigns and to transferees of the Securities, whether so expressed or not, with any such assignee (and any successive assignee thereof) being deemed an "Investor" for purposes hereof. Nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 7.5 GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of California, without giving effect to conflict of laws principles thereof. 7.6 SECTION HEADINGS AND GENDER. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 7.7 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 7.8 NOTICES AND DEMANDS. Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five (5) days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two (2) days after being sent by overnight delivery providing receipt of delivery, to the addresses shown on the signature page hereof or on EXHIBIT A hereto or at any 14 other address designated by such Investor to the Company; and if to an assignee of an Investor, at its address as designated to the Company and the other Investors in writing. 7.9 DISPUTE RESOLUTION. Except with respect to matters as to which injunctive relief is being sought, any dispute arising out of or relating to this Agreement that has not been settled within thirty (30) days by good faith negotiation between the parties to this Agreement shall be submitted for final and binding arbitration pursuant to the commercial arbitration rules of the American Arbitration Association. Any such arbitration shall be conducted in San Francisco, California. 7.10 REMEDIES; SEVERABILITY. Notwithstanding Section 7.9, it is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other legal or equitable remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 7.11 INTEGRATION. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. [Remainder of Page Intentionally Left Blank] 15 IN WITNESS WHEREOF, the undersigned have executed this Agreement as a sealed instrument as of the day and year first above written. INTERNATIONAL MICROCIRCUITS, INC. By: -------------------------------------- Name: Title: Address: 525 Los Coches Street Milpitas, CA 95035 Fax: (408) 934-0823 Attention: President INVESTORS: TA/ADVENT VIII, L P. By: TA Associates VIII, LLC, its General Partner By: TA Associates, Inc., its Manager ----------------------------------------- Name: Title: Managing Director ADVENT ATLANTIC AND PACIFIC III L.P. By: TA Associates AAP III Partners, its General Partner By: TA Associates, Inc., its General Partner ----------------------------------------- Name: Title: Managing Director TA INVESTORS LLC By: TA Associates, Inc., its Manager ----------------------------------------- Name: Title: Managing Director - -------------------------------- By: EX-10.7 9 a2024700zex-10_7.txt EX10-7 Exhibit 10.7 ================================================================================ STOCKHOLDERS' AGREEMENT By and Among International Microcircuits, Inc., The Continuing Stockholders as defined herein and set forth on the signature pages hereto and The Investors as defined herein and set forth on the signature pages hereto Dated as of December 16 1997 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS............................................................................1 Section 1.1 Construction of Terms..................................................................1 Section 1.2 Terms Not Defined......................................................................1 Section 1.3 Number of Shares of Stock..............................................................1 Section 1.4 Defined Terms..........................................................................1 ARTICLE II REPRESENTATIONS AND WARRANTIES. ...................................................3 Section 2.1 Representations and Warranties of Each Investor........................................3 Section 2.2 Representations and Warranties of the Continuing Stockholders..........................4 Section 2.3 Representations and Warranties of the Company..........................................4 ARTICLE III RESTRICTIONS ON TRANSFER: RIGHT OF LAST REFUSAL; DRAG-ALONG AND TAG-ALONG PROVISIONS....................................................5 Section 3.1 Restrictions on Transfer...............................................................5 Section 3.2 Right of Last Refusal..................................................................5 Section 3.3 Drag-Along Obligations.................................................................7 Section 3.4 Tag-Along Rights.......................................................................8 Section 3.5 Contemporaneous Transfers..............................................................8 Section 3.6 Assignment.............................................................................8 Section 3.7 Prohibited Transfers...................................................................8 ARTICLE IV RIGHTS TO PURCHASE. ..............................................................9 Section 4.1 Right to Participate in Certain Sales of Additional Securities.........................9 Section 4.2 Assignment of Rights..................................................................10 ARTICLE V REGISTRATION RIGHTS. ..................................................10 Section 5.1 Piggyback Registration Rights.........................................................10 Section 5.2 Demand Registration Rights............................................................11 Section 5.3 Form S-3..............................................................................12 Section 5.4 Registrable Shares....................................................................13 Section 5.5 Further Obligations of the Company....................................................13 Section 5.6 Indemnifications; Contribution........................................................15 Section 5.8 Market Stand-Off......................................................................17 Section 5.9 Transfer of Registration Rights.......................................................17 ARTICLE VI MISCELLANEOUS PROVISIONS. ..................................................17 Section 6.1 Survival of Representations and Covenants.............................................17 Section 6.2 Legend on Securities..................................................................18 Section 6.3 Amendment and Waiver..................................................................18 Section 6.4 Notices...............................................................................18 Section 6.5 Headings..............................................................................19 Section 6.6 Counterparts..........................................................................19 Section 6.7 Dispute Resolution....................................................................19 Section 6.8 Remedies; Severability................................................................19 -i- TABLE OF CONTENTS (continued) Section 6.9 Entire Agreement......................................................................20 Section 6.10 Adjustments...........................................................................20 Section 6.11 Law Governing.........................................................................20 Section 6.12 Successors and Assigns................................................................20
Exhibit A Form of Joinder Agreement Exhibit B Amended and Restated Articles of Incorporation -ii- STOCKHOLDERS' AGREEMENT This Stockholders' Agreement is made as of this 16 day of December, 1997 by and among International Microcircuits, Inc., a California corporation (the "Company'), the holders of shares of the Common Stock without par value per share (the "Common Stock"), of the Company identified on the signature pages hereto (collectively the `Continuing Stockholders," and individually a "Continuing Stockholder") and the entities and persons listed under the heading "Investors" on the signature pages hereto (the "Investors"), and any other stockholder or option holder who from time to time becomes party to this Agreement by execution of a Joinder Agreement in substantially the form attached hereto as EXHIBIT A (a "Joinder Agreement"). WITNESSETH WHEREAS, the Continuing Stockholders own shares of the Company's outstanding Common Stock; and WHEREAS, reference is made to the Stock Purchase Agreement, dated as of the date hereof, by and between the Company and the Investors (the "Investment Agreement"), pursuant to which the Investors have purchased or will purchase shares of the Company's Convertible Participating Preferred Stock without par value per share (the "Convertible Preferred Stock," and together with all other classes of preferred stock of the Company, the "Preferred Stock"). NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 CONSTRUCTION OF TERMS. As used herein, the masculine, feminine or neuter gender, and the singular or plural number, shall be deemed to be or to include the other genders or number, as the case may be, whenever the context so indicates or requires. SECTION 1.2 TERMS NOT DEFINED. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Investment Agreement. SECTION 1.3 NUMBER OF SHARES OF STOCK. Whenever any provision of this Agreement calls for any calculation based on a number of shares of capital stock held by a Continuing Stockholder or an Investor, the number of shares deemed to be held by that Continuing Stockholder or Investor shall be the total number of shares of Common Stock, then owned by a Continuing Stockholder or Investor, plus the total number of shares of Common Stock issuable upon conversion of any Preferred Stock or other convertible securities (whether debt or equity) or exercise of any vested options, warrants, subscription or other rights to acquire any shares of the capital stock of the Company then owned by the Continuing Stockholders or the Investors. SECTION 1.4 DEFINED TERMS. The following capitalized terms, as used in this Agreement, shall have the meanings set forth below. An "Affiliate" of any Person means a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the first mentioned Person. A Person shall be deemed to control another Person if such first Person possesses directly or indirectly the power to direct, or cause the direction of, the management and policies of the second Person, whether through the ownership of voting securities, by contract or otherwise. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Common Stock without par value per share, of the Company, as the context requires, and any other common equity securities now or hereafter issued by the Company (but not including the Preferred Stock), and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization). "Conversion Price" shall have the meaning ascribed to such term in the Company's Amended and Restated Articles of Incorporation. "Convertible Preferred Stock" means the Convertible Participating Preferred Stock, without par value per share, of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder. "Independent Third Party" means any person who, immediately prior to the contemplated transaction, does not own in excess of 10% of the Company's Common Stock on a fully-diluted basis, who is not controlling, controlled by or under common control with any such 10% owner of the Company's Common Stock and who is not the spouse or descendent (by birth or adoption) of any such 10% owner of the Company's Common Stock. "Offer Notice" has the meaning specified in Section 3.2(a) "Offeror" has the meaning specified in Section 3.2. "Permitted Transferee" has the meaning specified in Section 3. 1. "Person" means an individual, a corporation, an association, a partnership, an estate, a trust, and any other entity or organization, governmental or otherwise. "Preferred Stock: means the Convertible Participating Preferred Stock and the Redeemable Preferred Stock and any other class of preferred stock, each issued or to be issued in accordance with and subject to the terms of the Amended and Restated Articles of Incorporation of the Company substantially in the form attached hereto as EXHIBIT B (as the same may hereafter be amended, the "Charter"), together with any other shares issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or in replacement or of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization). 2 "Qualified Public Offering" means the first underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock to the public in which the proceeds received by the Company, net of underwriting discounts and commissions, equal or exceed $20 million, at a price per share not less than $13.22 (as appropriately adjusted for any stock split, combination, reorganization, stock dividend or similar event). "Redeemable Preferred Stock means the Company's Redeemable Preferred Stock, without par value per share, issued by the Company. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations promulgated thereunder. "Shares" means the shares of Common Stock, Preferred Stock and any other equity securities now or hereafter issued by the Company, together with any options thereon and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend, stock split or in exchange for or upon conversion of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization). "Transaction Offer" has the meaning specified in Section 3.2. "Transfer" means any direct or indirect transfer, donation, sale, assignment, pledge, hypothecation, grant of a security interest in or other disposal or attempted disposal of all or any portion of a security or of any rights. "Transferred" means the accomplishment of a Transfer, and "Transferee" means the recipient of a Transfer. "Transferring Stockholder" has the meaning specified in Section 3.2. ARTICLE II REPRESENTATIONS AND WARRANTIES. SECTION 2.1 REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR. Each of the Investors, individually and not jointly, hereby represents, warrants and covenants to the Company and to the Continuing Stockholders as follows: (a) such Investor has full authority and power under its charter and by-laws to enter into this Agreement; (b) this Agreement constitutes the valid and binding obligation of such Investor enforceable against it in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies (provided, however, that the limitations described in this clause (ii) should not prevent the practical realization of the benefits intended by this Agreement); and (c) the execution, delivery and performance by such Investor of this Agreement: (i) does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to such Investor, or require such Investor to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any material indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration 3 award to which such Investor is a party or by which the property of such Investor is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of such Investor. SECTION 2.2 REPRESENTATIONS AND WARRANTIES OF THE CONTINUING STOCKHOLDERS. Each of the Continuing Stockholders, individually and not jointly, hereby represents, warrants and covenants to the Company and to the Investors as follows: (a) such Continuing Stockholder has full authority, power and capacity to enter into this Agreement; (b) this Agreement constitutes the valid and binding obligation of such Continuing Stockholder enforceable against him in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (ii) general principles of equity that restrict the availability of equitable remedies (provided, however, that the limitations described in this clause (ii) should not prevent the practical realization of the benefits intended by this Agreement); and (c) the execution, delivery and performance by such Continuing Stockholder of this Agreement: (i) does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to such Continuing Stockholder, or require such Continuing Stockholder to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any material indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which such Continuing Stockholder is a party or by which the property of such Continuing Stockholder is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of such Continuing Stockholder. SECTION 2.3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to the Continuing Stockholders and to the Investors as follows: (a) the Company has full corporate authority and power to enter into this Agreement; (b) this Agreement constitutes the valid and binding obligation of the Company enforceable against it in accordance with its terms except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and (ii) general principles of equity that restrict the availability of equitable remedies (provided, however, that the limitations described in this clause (ii) should not prevent the practical realization of the benefits intended by this Agreement); and (c) the execution, delivery and performance by the Company of this Agreement: (i) does not and will not violate any laws, rules or regulations of the United States or any state or other jurisdiction applicable to the Company, or require the Company to obtain any approval, consent or waiver of, or to make any filing with, any Person that has not been obtained or made; and (ii) does not and will not result in a breach of, constitute a default under, accelerate any obligation under or give rise to a right of termination of any material indenture or loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction, decree, determination or arbitration award to which the Company is a party or by which the property of the Company is bound or affected, or result in the creation or imposition of any mortgage, pledge, lien, security interest or other charge or encumbrance on any of the assets or properties of the Company. 4 ARTICLE III RESTRICTIONS ON TRANSFER: RIGHT OF LAST REFUSAL; DRAG-ALONG AND TAG-ALONG PROVISIONS The following provisions of this Article III shall terminate immediately upon, and shall not apply with respect to, the closing of a Qualified Public Offering. SECTION 3.1 RESTRICTIONS ON TRANSFER. The Common Stock may not be transferred by any Continuing Stockholder at any time on or prior to December 31, 1997. From and after December 31, 1997, each Continuing Stockholder agrees that it or he will not, without the prior written consent of two-thirds-in-interest of the Investors, Transfer all or any portion of the Shares now owned or hereafter acquired by it or him, except in connection with, and strictly in compliance with the conditions of, any of the following: (a) Transfers effected pursuant to Sections 3.2, 3.3 and 3.4, in each case made in accordance with the procedures set forth therein; (b) Transfers by any Continuing Stockholder to his spouse or children, to a trust of which he is the settlor and a trustee for the benefit of his spouse or children, or to an irrevocable trust or family limited partnership, PROVIDED that any such trust does not require or permit distribution of such Shares during the term of this Agreement, and PROVIDED FURTHER that the Transferee shall have entered into an enforceable Joinder Agreement providing that all Shares so Transferred shall continue to be subject to all provisions of this Agreement as if such Shares were still held by such Continuing Stockholder, except that no further Transfer shall thereafter be permitted hereunder except in compliance with Sections 3.2, 3.3 and 3.4; and (c) Transfers upon the death of any Continuing Stockholder to his heirs, executors or administrators or to a trust under his will or Transfers between such Continuing Stockholder and his guardian or conservator, PROVIDED that the Transferee shall have entered into an enforceable Joinder Agreement providing that all Shares so Transferred shall continue to be subject to all provisions of this Agreement as if such Shares were still held by the Continuing Stockholder, except that no further Transfer shall thereafter be permitted hereunder except in compliance with Sections 3.2, 3.3 and 3.4. Any permitted Transferee described in the preceding clauses (b) or (c) shall be referred to herein as a "Permitted Transferee." Notwithstanding anything to the contrary in this Agreement or any failure to execute a Joinder Agreement as contemplated hereby, Permitted Transferees shall take any Shares so Transferred subject to all provisions of this Agreement as if such Shares were still held by the Transferring Continuing Stockholder, whether or not they so agree with the transferor and/or the Company. Without limitation of the foregoing, in connection with any otherwise permitted transfer of shares of capital stock that are restricted shares and are subject to any stock restriction agreement, any transferee of any such shares shall agree in writing to be bound by the terms of any such stock restriction or similar agreement, including, without limitation, any repurchase or similar right contained therein. SECTION 3.2 RIGHT OF LAST REFUSAL. In the event that any of the Continuing Stockholders, including any of their Permitted Transferees, receives a bona fide offer to purchase all or any portion of the Shares held by such person (a "Transaction Offer") from an Independent 5 Third Party (the "Offeror"), such Continuing Stockholder or Permitted Transferee (a "Transferring Stockholder") may Transfer such Shares pursuant to and in accordance with the following provisions of this Section 3.2: (a) Such Transferring Stockholder shall cause the Transaction Offer and all of the terms thereof to be reduced to writing and shall notify each Investor of his wish to accept the Transaction Offer and otherwise comply with the provisions of this Section 3.2 (such notice, the "Offer Notice"). The Transferring Stockholder's Offer Notice shall constitute an irrevocable offer to sell such shares to the Investor on the basis described below at a purchase price equal to the price contained in, and on the same terms and conditions of, the Transaction Offer (except to the extent the provisions of this Section 3.2 apply). The notice shall be accompanied by a true copy of the Transaction Offer (which shall identify the Offeror and all relevant information in connection therewith). (b) Subject to the provisions of Section 3.2(c) below, each Investor shall have the right (the "Right of Last Refusal") to offer to purchase up to that number of Shares covered by the Transaction Offer as shall be equal to the product obtained by multiplying (i) the total number of Shares subject to the Transaction Offer by (ii) a fraction, the numerator of which is the total number of shares of Common Stock owned by such Investor on the date of the Offer Notice on an as converted basis (including for this purpose any shares of Common Stock that may be received upon conversion of any Preferred Stock), and the denominator of which is the total number of Shares of Common Stock, then held by all Investors on the date of the Offer Notice on an as converted basis as provided above, subject to increase as hereinafter provided. The number of Shares that each Investor is entitled to purchase under this Section 3.2 shall be referred to as its "Pro Rata Fraction". Each Investor shall have the right to transfer its right to any Pro Rata Fraction or part thereof with respect to any proposed Transaction Offer to any transferee. In the event an Investor does not wish to purchase or to transfer its right to purchase its Pro Rata Fraction, then any Investors who so elect shall have the right to offer to purchase, on a pro rata basis with any other Investors who so elect, any Pro Rata Fraction not purchased by an Investor or its transferee. Each Investor shall have the right to accept the Transaction Offer by giving notice of such acceptance to the Transferring Stockholder as provided in Section 6.4 within fifteen (15) days after receipt of the Offer Notice, which notice shall indicate the maximum number of Shares subject thereto which the Investor and its transferee(s) are willing to purchase in the event fewer than all Investors elect to purchase their Pro Rata Fractions; provided that the Investors as a group may not exercise the Right of Last Refusal with respect to fewer than all of the Shares which are subject to the Transaction Offer. In the event that the price set forth in the Offer Notice is stated in consideration other than cash or cash equivalents, the Board of Directors of the Company with the agreement of the TA Associates, Inc. as representative of the Investors may determine the fair market value of such consideration, reasonably and in good faith, and shall deliver written notice (the "FMV Notice") to the Transferring Stockholder of such determination not more than fifteen (15) days after receipt of the Transaction Offer. If the Transferring Stockholder does not object to such determination within five (5) days of receipt of the FMV Notice, the Investors may exercise. their Right of Last Refusal by payment of such fair market value in cash or cash equivalents. In the event that the Transferring Stockholder objects to the fair market value determined by TA Associates, the Transferring Stockholder and TA Associates shall negotiate in good faith for a period of ten (10) days to determine a mutually acceptable fair market value for such consideration. If after such ten days, TA Associates and 6 the Transferring Stockholder have not reached agreement as to the fair market value of such consideration, the matter shall be referred to a nationally-recognized accounting firm (the "Accountants") for final determination of the fair market value of such consideration (the "Accountants Determination"), and the Accountants shall make the Accountant Determination not more than fifteen (15) days after receipt of such matter. The Accountant's Determination shall be binding on the Investors and the Transferring Stockholder and shall not be subject to dispute or review. For a period of fifteen (15) days following delivery of the Accountant's Determination, the Investors may exercise their Right of Last Refusal by payment in cash or cash equivalents of the fair market value so determined. The Transferring Stockholder shall notify the Investors promptly following any lapse of the Right of Last Refusal without acceptance thereof or any rejection of the Right of Last Refusal. Upon the expiration of thirty (30) days following later to occur of (i) receipt of the Offer Notice by all Investors and (ii) delivery of the Accountant's Determination to the Transferring Stockholder and to TA Associates, as representation of the Investors, the number of Shares to be purchased by each Investor and transferee shall be determined as follows: (x) there shall first be allocated to each Investor and transferee electing to purchase a number of Shares equal to the lesser of (A) the number of Shares as to which such Investor accepted the Transaction Offer or (B) such Investor's Pro Rata Fraction, and (y) the balance, if any, not allocated under clause (x) above, shall be allocated to those Investors and transferees who accepted the Transaction Offer as to a number of Shares which exceeded their respective Pro Rata Fractions, in each case on a pro rata basis in proportion to the amount of such excess. The closing for any purchase of Shares by the Investors and their transferees hereunder shall take place within thirty (30) days after the later to occur of (i) the first thirty (30) day period following the Investors' receipt of the Offer Notice-and (ii) delivery of the Accountant's Determination to the Transferring Stockholder and to TA Associates, as representation of the Investors at the place and on the date specified by two-thirds-in-interest of the Investors. (c) In the event that the Investors do not elect to exercise the Right of Last Refusal with respect to all of the Shares proposed to be sold, the Investors shall not be entitled to purchase any such Shares and the Transferring Stockholder may sell all such Shares proposed to be sold to the Offeror on the terms and conditions set forth in the Offer Notice. If the Transferring Stockholder's transfer to an Offeror is not consummated in accordance with the terms of the Transaction Offer on or before the day which is ninety (90) days after the expiration of the Right of Last Refusal, the Transaction Offer shall be deemed to lapse, and any Transfers of Shares pursuant to such Transaction Offer shall be deemed to be in violation of the provisions of this Agreement unless the Investors are once again afforded the Right of Last Refusal provided for herein with respect to such Transaction Offer. SECTION 3.3 DRAG-ALONG OBLIGATIONS. (a) In the event that two-thirds-in-interest of the Investors determine to sell or otherwise dispose of all or substantially all of the assets of the Company or all or substantially all of the capital stock of the Company owned by the Investors to any non-Affiliate(s) of the Company or any of the Investors, or to cause the Company to merge with or into or consolidate with any non-Affiliate(s) of the Company or any of the Investors (in each case, the "Buyer") in a bona fide negotiated transaction (a "Sale'), each of the Continuing Stockholders, including any 7 of their respective Permitted Transferees (collectively, the "Non-Investor Stockholders'), shall be obligated to and shall upon the written request of two-thirds-in-interest of the Investors: (i) sell, transfer and deliver, or cause to be sold, transferred and delivered, to the Buyer, his Shares (including for this purpose all of such Non-Investor Stockholder's Shares that presently or as a result of any such transaction may be acquired upon the exercise of options (following the payment of the exercise price therefor)) on substantially the same terms applicable to the Investors (with appropriate adjustments to reflect the conversion of convertible securities, the redemption of redeemable securities and the exercise of exercisable securities as well as the relative preferences and priorities of the Preferred Stock); and (ii) execute and deliver such instruments of conveyance and transfer and take such other action, including voting such Shares in favor of any Sale proposed by the Investors and executing any purchase agreements, merger agreements, indemnity agreements, escrow agreements or related documents, as the Investors or the Buyer may reasonably require in order to carry out the terms and provisions of this Section 3.3. (b) Not less than thirty (30) days prior to the date proposed for the closing of any Sale, the Investors shall give written notice to each Non-Investor Stockholder, setting forth in reasonable detail the name or names of the Buyer, the terms and conditions of the Sale, including the purchase price, and the proposed closing date. SECTION 3.4 TAG-ALONG RIGHTS. In the event that the Investors enter into an agreement (an "Agreement") with one or more third parties (each a "Third Party") (other than another Investor or any affiliate of any Investor) pursuant to which such Third Parties shall purchase all or substantially all of the shares of the Preferred Stock, Common Stock or other equity securities then held by the Investors, such Agreement shall include, as a condition precedent to the Investors' obligations thereunder, provisions requiring such Third Parties to acquire not less than 558,570 shares of Common Stock then held by certain Non-Investor Stockholders identified on SCHEDULE 3.4 attached hereto on terms and conditions substantially similar to those set forth in the Agreement. Not less than thirty (30) days prior to the date proposed for the closing of any such transaction, the Investors shall give written notice to each such Non-Investor Stockholder, setting forth in reasonable detail the name or names of the Buyer, the terms and conditions of the proposed transaction, including the purchase price, and the proposed closing date. SECTION 3.5 CONTEMPORANEOUS TRANSFERS. If two or more Continuing Stockholders (or their Permitted Transferees) propose concurrent Transfers which are subject to this Article III, then the relevant provisions of Section 3.2 shall apply separately to each such proposed Transfer. SECTION 3.6 ASSIGNMENT. Each Investor shall have the right to assign its rights under this Article III in connection with any transaction or series of related transactions involving the transfer of shares of capital stock of the Company to a transferee or two or more transferees that are Affiliates of each other or to any fund managed by or associated with TA Associates, Inc. (each, a "TA Fund"), and upon any such transfer, any such transferee or TA Fund thereupon shall be deemed an "Investor" in connection with its ownership of the Shares Transferred for purposes of this Article III. SECTION 3.7 PROHIBITED TRANSFERS. If any Transfer is made or attempted contrary to the provisions of this Agreement, such purported Transfer shall be void AB INITIO; the Company and 8 the other parties hereto shall have, in addition to any other legal or equitable remedies which they may have, the right to enforce the provisions of this Agreement by actions for specific performance (to the extent permitted by law); and the Company shall have the right to refuse to recognize any Transferee as one of its stockholders for any purpose. Without limitation to the foregoing, each of the Investors and Continuing Stockholders further agrees that the provisions of Section 6.8 shall apply in the event of any violation or threatened violation of this Agreement. ARTICLE IV RIGHTS TO PURCHASE. Notwithstanding anything herein to the contrary, the following provisions of this Article IV shall terminate immediately prior to the closing of a Qualified Public Offering and shall not apply with respect to any Qualified Public Offering. SECTION 4.1 RIGHT TO PARTICIPATE IN CERTAIN SALES OF ADDITIONAL SECURITIES. The Company agrees that it will not sell or issue any shares of capital stock of the Company, or other securities convertible into or exchangeable for capital stock of the Company, or options, warrants or rights carrying any rights to purchase capital stock of the Company unless the Company first submits a written offer to the Investors (including their Permitted Transferees) (collectively, the "Offerees') identifying the terms of the proposed sale (including price, number or aggregate principal amount of securities and all other material terms), and offers to each Investor (including each Permitted Transferee) the opportunity to purchase its Pro Rata Allotment (as hereinafter defined) of the securities (subject to increase for over-allotment if some Investors do not fully exercise their rights) on terms and conditions, including price, not less favorable than those on which the Company proposes to sell such securities to a third party or parties. Each Offeree's "Pro Rata Allotment" of such securities shall be based on the ratio which the shares of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) then owned by it bears to all of the then issued and outstanding shares of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock calculated in each case on a fully-diluted basis giving effect to the conversion of convertible securities and assuming the exercise of all outstanding vested options, in each case as of the date of such written offer. The Company's offer pursuant to this Section 4. 1 shall remain open and irrevocable for a period of 30 days, and the recipients of such offer shall elect to purchase by giving written notice thereof to the Company within such 30-day period, including therein the maximum number of shares or other securities which the Offeree would purchase if other Offerees do not elect to purchase, with the rights of electing Offerees to purchase such additional shares to be based upon the relative holdings of Common Stock (including shares of Common Stock issuable upon conversion of Preferred Stock) of the electing Offerees in the case of over-subscription. Any securities so offered which are not purchased pursuant to such offer may be sold by the Company but only on the terms and conditions set forth in the initial offer, at any time within 120 days following the termination of the above-referenced 30-day period but may not be sold to any other person or on terms and conditions, including price, that are more favorable to the purchaser than those set forth in such offer or after such 120-day period without renewed compliance with this Section 4. 1. Notwithstanding the foregoing, the right to purchase granted under this Article IV shall be inapplicable with respect to any issuance or proposed issuance by the Company of (i) securities issued in connection with the acquisition of another corporation by the Company, 9 whether by merger, purchase of all or substantially all of the assets of such corporation, or otherwise, (ii) up to 994,407 shares (or options to purchase shares) of Common Stock (subject to adjustment in the event of stock splits, stock dividends, recapitalizations and like events) issued or granted to employees, consultants, officers, directors, advisors or independent contractors of the Company or of any Affiliate of the Company pursuant to the Company's 1997 Stock Option and Grant Plan, (iii) securities issued as a result of any stock split, stock dividend, reclassification or reorganization of the Company's capital stock or (iv) Common Stock issued upon conversion of the Convertible Preferred Stock in accordance with the terms of the Company's Amended and Restated Articles of Incorporation. SECTION 4.2 ASSIGNMENT OF RIGHTS. Each Investor (including each Permitted Transferee) shall have to right to assign its rights under this Article IV in connection with any transaction or series of related transactions involving the transfer to one or more transferees that are Affiliates of each other of Shares of capital stock of the Company or to any TA Fund, and upon any such transfer such transferee or TA Fund shall be deemed an Offeree for purposes of Sections 4.1 and 4.2 with the rights set forth in such Sections. ARTICLE V REGISTRATION RIGHTS. The Company's obligation to register shares of Common Stock under this Article V shall terminate seven (7) years following the closing by the Company of its first underwritten public offering pursuant to a registration statement under the Securities Act (an "IPO") or, with respect to Shares held by particular Investors or the Continuing Stockholders (including Permitted Transferees), whenever such shares are no longer Registrable Shares (as defined below). SECTION 5.1 PIGGYBACK REGISTRATION RIGHTS. If at any time or times after the date hereof, the Company shall determine to register any shares of its Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock under the Securities Act (whether in connection with a public offering of securities by the Company (a "primary offering"), a public offering of securities by stockholders (a "secondary offering"), or both, but not in connection with a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Commission under the Securities Act is applicable or a registration effected pursuant to Sections 5.2 or 5.3 hereof), the Company will promptly give written notice thereof to the Investors and the Continuing Stockholders (including for purpose of this Section 5. 1 each Permitted Transferee). In connection with any such registration, if within thirty (30) days after their receipt of such notice (or 10 days in the case of a proposed registration on Form S-3) any Investor or Continuing Stockholder requests in writing the inclusion in such registration of some or all of the Registrable Shares (as hereinafter defined) owned by such Investor or Continuing Stockholder, or into which any Shares held by such Investor or Continuing Stockholder are convertible or exchangeable, the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Shares which such Investors and Continuing Stockholders so request; PROVIDED, HOWEVER, that in the case of an underwritten public offering, if the underwriter determines that a limitation on the number of shares to be underwritten is required, (i) if such registration is the first registered offering of the Company's securities to the public, the underwriter may exclude from such registration and underwriting some or all of the Registrable Shares which would otherwise be underwritten pursuant to the notice described herein, and (ii) if such registration is other than the first 10 registered offering of the sale of the Company's securities to the public, the underwriter may limit the number of Registrable Shares to be included in the registration and underwriting to not less than thirty percent (30%) of the securities included therein (based on aggregate market values). The Company shall advise all Investors and Continuing Stockholders promptly after such determination by the underwriter, and the number of Registrable Shares that may be included in the registration and underwriting shall be allocated among all Investors and Continuing Stockholders requesting registration in proportion, as nearly as practicable, to their respective holdings of Registrable Shares. All expenses of the registration and offering (including the reasonable fees and expenses of one independent counsel for the Investors as a group and the Continuing Stockholders as a group, elected by a majority in interest (based on Registrable Shares proposed to be sold) of the Investors and Continuing Stockholders proposing to sell), shall be borne by the Company, except that the Investors and the Continuing Stockholders shall bear underwriting and selling commissions and transfer taxes attributable to the sale of their Registrable Shares. SECTION 5.2 DEMAND REGISTRATION RIGHTS. If on any two (2) occasions (which occasions shall in no event be less than six months apart from each other) after the earlier of (i) two (2) years after the date of this Agreement or (ii) three (3) months after the closing of the Company's first public offering pursuant to a registration statement under the Securities Act, Investors holding a majority in interest of the Registrable Shares then held by all of the Investors shall notify the Company in writing that it or they intend to offer or cause to be offered for public sale all or any portion of its or their Registrable Shares, the Company will notify all of the Investors and the Continuing Stockholders (including for purposes of this Section 5.2 all Permitted Transferees) of its receipt of such notification from such Investors. If within thirty (30) days after their receipt of such notice, any Investor or Continuing Stockholder requests the inclusion of some or all of the Registrable Shares owned by such Investor or Continuing Stockholder in such registration, the Company will use its best efforts to cause such Registrable Shares so requested (including the Registrable Shares held by the Investor(s) or Continuing Stockholder(s) giving the initial notice of intent to register hereunder) to be registered under the Securities Act in accordance with the terms of this Section 5.2; PROVIDED, HOWEVER, that unless such registration becomes effective, the Investors shall be entitled to require an additional registration pursuant to this Section 5.2; and, PROVIDED FURTHER that if such registration is underwritten and the underwriter determines that a limitation on the number of shares to be underwritten is required, the first shares to be excluded from such registration shall be any shares registered for the benefit of the Company, and thereafter any shares which the Investors and the Continuing Stockholders have requested to be registered shall be limited, to the extent necessary, based upon the respective holdings of Registrable Shares of the Investors and Continuing Stockholders proposing to sell. All expenses of such registrations and offerings (including the reasonable fees and expenses of one independent counsel for the Investors as a group, and the Continuing Stockholders as a group, selected in the manner contemplated by Section 5.1) shall be borne by the Company. The Company may postpone the filing of any registration statement required hereunder for a reasonable period of time, not to exceed 90 days during any twelve-month period, if the Company determines in good faith that such filing would require the disclosure of a material transaction or other matter and the Company determines reasonably and in good faith that such disclosure would have a material adverse effect on the Company or otherwise would 11 not be in the best interest of the Company. The Company shall not be required to cause a registration statement requested pursuant to this Section 5.2 to become effective prior to 90 days following the effective date of a Registration Statement initiated by the Company, if the request for registration has been received by the Company subsequent to the giving of written notice by the Company, made in good faith, to the Investors to the effect that the Company is commencing to prepare a Company-initiated Registration Statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Commission under the Securities Act is applicable); provided, however, that the Company shall use its best efforts to achieve such effectiveness promptly following such 90-day period if the request pursuant to this Section 5.2 has been made prior to the expiration of such 90-day period. If so requested by any Investor or Continuing Stockholder in connection with a registration under this paragraph, the Company shall take such steps as are required to register the Investors' and the Continuing Stockholders' Registrable Shares for sale on a delayed or continuous basis under Rule 415, and also take such steps as are required to keep any registration effective until all of the Investors' and the Continuing Stockholders' Registrable Shares registered thereunder are sold. Notwithstanding the foregoing, the Company shall have no obligation to keep any registration pursuant to this Section 5.2 effective more than 120 days after the initial date of effectiveness of such registration. SECTION 5.3 FORM S-3. If the Company becomes eligible to use Form S-3 under the Securities Act or a comparable successor form, (a) the Company shall use its best efforts to continue to qualify at all times for registration of its capital stock on Form S-3 or such successor form, and (b) holders of Registrable Shares anticipated to have an aggregate sale price (net of underwriting discounts and Commission, if any) in excess of $500,000 shall have the right on one or more occasions to request and have effected the registration of their Shares on Form S-3 or such successor form (such requests shall be in writing and shall state the number of Shares to be disposed of and the intended method of disposition of such Shares by Investor(s) or Continuing Stockholder(s), including for purposes of this Section 5.3 all Permitted Transferees). The Company will use its best efforts to effect promptly the registration of all Shares on Form S-3 or such successor form to the extent requested by such Investor(s) or Continuing Stockholder(s). If so requested by such Investor(s) or Continuing Stockholder(s) in connection with a registration under this Section 5.3, the Company shall take such steps as are required to register such Investor's or Continuing Stockholder's Registrable Shares for sale on a delayed or continuous basis under Rule 415, and to keep such registration effective until all of such Investor's or Continuing Stockholder's Registrable Shares registered thereunder are sold. Notwithstanding the foregoing, the Company shall have no obligation to keep any registration effective more than 120 days after the initial date of effectiveness of such registration. All expenses incurred in connection with a registration requested pursuant to this Section 5.3 (including the reasonable fees and expenses of one independent counsel for the Investors as a group and the Continuing Stockholders as a group, selected in this manner contemplated as of Section 5. 1) shall be borne by the Company. The Company may postpone the filing of any registration statement required hereunder for a reasonable period of time, not to exceed 90 days during any twelve month period, if the Company determines in good faith that such filing would require the disclosure of a material transaction or other matter and the Company determines reasonably and in good faith that such disclosure would have a material adverse effect on the Company or otherwise would not be in the best interest of the Company. The Company shall not be required to cause a Registration Statement requested pursuant to this Section 5.3 to become 12 effective prior to 90 days following the effective date of a Registration Statement initiated by the Investors pursuant to Section 5.2 or by the Company, if the request for registration has been received by the Company subsequent to the giving of written notice by the Company, made in good faith, to the Investors and the Continuing Stockholders to the effect that the Company is commencing to prepare a Company-initiated Registration Statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 or any other similar rule of the Commission under the Securities Act is applicable); PROVIDED, HOWEVER, that the Company shall use its best efforts to achieve such effectiveness promptly following such 90-day period if the request pursuant to this Section 5.3 has been made prior to the expiration of such 90-day period. SECTION 5.4 REGISTRABLE SHARES. For the purposes of this Article V, the term "Registrable Shares" shall mean any shares of Common Stock held by an Investor, Continuing Stockholder or Permitted Transferee or subject to acquisition by an Investor upon conversion of Preferred Stock, including any shares issued by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided, however, that if an Investor owns Preferred Stock that is convertible into Common Stock, the Investor may exercise its registration rights hereunder by converting the shares to be sold publicly into Common Stock as of the closing of the relevant offering and shall not be required to cause such Preferred Stock to be converted to Common Stock until and unless such Closing occurs, it being understood that the Company shall at the request of the relevant Investor effect the reconversion of Common Stock to Preferred Stock if such a conversion occurs notwithstanding the foregoing and a public offering does not close; and provided, further, that any Common Stock that is sold in a registered sale pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder, or that may be sold without restriction as to volume or otherwise pursuant to Rule 144(k) under the Securities Act (as confirmed by an unqualified opinion of counsel to the Company), shall not be deemed Registrable Shares. SECTION 5.5 FURTHER OBLIGATIONS OF THE COMPANY. Whenever, under the provisions of Sections 5.1, 5.2 or 5.3 of this Agreement, the Company is required to register any Registrable Shares, it agrees that it shall also do the following: (a) Use its best efforts to diligently prepare and file with the Commission a registration statement and such amendments, post-effective amendments and supplements to said registration statement and the prospectus used in connection therewith as may be necessary to keep said registration statement effective as contemplated herein and to comply with the provisions of the Securities Act with respect to the sale of securities covered by said registration statement for the period necessary to complete the proposed public offering as provided herein; (b) Furnish to each selling Investor or Continuing Stockholder (including for purposes of this Section 5.4 each Permitted Transferee) such copies of each preliminary and final prospectus and such other documents as such Investor or Continuing Stockholder may reasonably request to facilitate the public offering of its Registrable Shares; (c) Enter into any reasonable underwriting agreement required by the proposed underwriter for the selling Investors or Continuing Stockholders, if any (which 13 underwriter shall be selected by the selling Investors in connection with any registration requested pursuant to Section 5.2); provided, however, that no Continuing Stockholder or Investor shall be required to make any representations or warranties or provide any indemnification other than with respect to its title to the Registrable Shares and any written information provided by it to the Company specifically for use in the Registration Statement, and if the underwriter requires that representations or warranties be made and that indemnification be provided, the Company shall make all such representations and warranties and provide all such indemnities, including, without limitation, in respect of the Company's business, operations and financial information and the disclosures relating thereto in the prospectus; (d) Use its best efforts to register or qualify the securities covered by said registration statement under the securities or "blue-sky" laws of such jurisdictions as any selling Investors or Continuing Stockholders may reasonably request, provided that the Company shall not be required to register or qualify the securities in any jurisdictions which require it to qualify to do business or subject itself to general service of process therein; (e) Immediately notify each selling Investor or Continuing Stockholder, at any time when a prospectus relating to his Registrable Shares is required to be delivered under the Securities Act, of the happening of any event as a result of which such prospectus contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, at the request of any such selling Investor or Continuing Stockholder, prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (f) Cause all such Registrable Shares to be listed on or included in each securities exchange or quotation system on which similar securities issued by the Company are then listed; (g) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make generally available to its stockholders, in each case as soon as practicable, but not later than 30 days after the close of the period covered thereby an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act; (h) Cooperate with each Investor and Continuing Stockholder and each underwriter participating in the disposition of Registrable Shares and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; (i) During the period when the prospectus is required to be delivered under the Securities Act, promptly file all documents required to be filed with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act; (j) Appoint a transfer agent and registrar for all Registrable Shares covered by a Registration Statement not later than the effective date of such Registration Statement; 14 (k) In connection with an underwritten offering, to the extent reasonably requested by the managing underwriter for the offering or the Investors or the Continuing Stockholders, participate in and support customary efforts to sell the securities in the offering, including, without limitation, participating in "road shows"; and (l) Otherwise cooperate with the underwriter or underwriters, the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Shares under this Article V. SECTION 5.6 INDEMNIFICATIONS; CONTRIBUTION. (a) Incident to any registration statement referred to in this Article V, and subject to applicable law, the Company will indemnify and hold harmless each underwriter, each Investor or Continuing Stockholder (including for purposes of this Article V each Permitted Transferee) who offers or sells any such Registrable Shares in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), and directors, officers, employees and agents of any of them (a "Selling Stockholder'), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act") (a "Controlling Person"), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), as the same are incurred to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any violation by the Company of the Securities Act, any state securities or "blue sky" laws or any rule or regulation thereunder in connection with such registration; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Stockholder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Stockholder expressly for use in such registration statement, such Selling Stockholder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees and agents), and each other Selling Stockholder (including its partners (including partners of partners and stockholders of such partners) and directors, officers, employees and agents of any of them), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise to 15 the same extent provided in the immediately preceding sentence. In no event, however, shall the liability of a Selling Stockholder for indemnification under this Section 5.6(a) in its capacity as such exceed the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Selling Stockholder or (ii) the proceeds received by such Selling Stockholder from its sale of Registrable Shares under such registration statement. (b) If the indemnification provided for in Section 5.6(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5.6, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the other Selling Stockholders and the underwriters from the offering of the Registrable Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the other Selling Stockholders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Shares. The relative fault of the Company, the Selling Stockholders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders, and the underwriters agree that it would not be just and equitable if contribution pursuant to this Section 5.6(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Stockholder be required to contribute any amount under this Section 5.6(b) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total Registrable Shares sold under such registration statement which are being sold by such Selling Stockholder or (ii) the proceeds received by such Selling Stockholder from its sale of Registrable Shares under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5.6 shall 16 be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5.6 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties. SECTION 5.7 RULE 144 REQUIREMENTS. If the Company becomes subject to the reporting requirements of either Section 13 or 15(d) of the Exchange Act, the Company will use its best efforts thereafter to file with the Commission such information as is specified under either of said Sections for so long as any of the Investors hold any Registrable Shares; and in such event, the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 under the Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company shall furnish to any holder of Registrable Shares upon request a written statement executed by the Company as to the steps it has taken to comply with the current public information requirement of Rule 144 or such successor rules. SECTION 5.8 MARKET STAND-OFF. Each Investor and Continuing Stockholder agrees, if requested by the Company and an underwriter of Registrable Shares of the Company in connection with the Company's initial public offering, not to sell or otherwise transfer or dispose of any Shares held by it for such period, not to exceed 180 days following the effective date of the relevant registration statement filed under the Securities Act in connection with such initial public offering, as such underwriter shall specify reasonably and in good faith. SECTION 5.9 TRANSFER OF REGISTRATION RIGHTS. The registration rights and related obligations under this Article V of the Investors and Continuing Stockholders with respect to their Registrable Securities may be assigned in connection with any transaction or series of related transactions involving the transfer of shares of capital stock of the Company to one or more Permitted Transferee, other than pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder (subject to adjustments for stock splits, stock dividends and the like and aggregating all contemporaneous transfers), or to any TA Fund, and upon any such transfer such transferee or TA Fund shall be deemed to be included within the definition of an "Investor" or a "Continuing Stockholder" as applicable, for purposes of this Article V with the rights set forth herein. ARTICLE VI MISCELLANEOUS PROVISIONS. SECTION 6.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS. Each of the parties hereto agrees that each representation, warranty, covenant and agreement made by it in this Agreement or in any certificate, instrument or other document delivered pursuant to this Agreement is material, shall be deemed to have been relied upon by the other parties and shall remain operative and in full force and effect after the date hereof regardless of any investigation. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties hereto and their respective successors and permitted assigns to the extent contemplated herein. 17 SECTION 6.2 LEGEND ON SECURITIES. The Company, the Investors and the Continuing Stockholders acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by any of the Investors, Continuing Stockholders or their Permitted Transferees: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT PURSUANT TO (1) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER SUCH ACT OR (2) AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES. THESE SECURITIES ARE ALSO SUBJECT TO THE PROVISIONS OF A CERTAIN STOCKHOLDERS' AGREEMENT, DATED AS OF DECEMBER ____, 1997, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER SET FORTH THEREIN. A COMPLETE AND CORRECT COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE. SECTION 6.3 AMENDMENT AND WAIVER. Any party may waive any provision hereof intended for its benefit in writing. No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to any party hereto at law or in equity or otherwise. This Agreement may be amended with the prior written consent of the Company, two-thirds-in-interest of the Continuing Stockholders (based on the Shares held by the Continuing Stockholders and their Permitted Transferees as a group) and two-thirds-in-interest of the Investors (based on the Shares held by the Investors as a group); PROVIDED, HOWEVER, that any amendment which directly, materially and adversely affects any right specifically granted to a particular Investor or Continuing Stockholder in a manner different than other Investors or Continuing Stockholders shall not be effective unless such Person has consented to that amendment. All actions by the Company hereunder shall be taken by or upon the direction of a majority of the members of the Company's Board of Directors. SECTION 6.4 NOTICES. All notices and other communications provided for herein shall be in writing and shall be deemed to have been duly given, delivered and received (a) if delivered personally or (b) if sent by telex or facsimile, registered or certified mail (return receipt requested) postage prepaid, or by courier guaranteeing next day delivery, in each case to the party to whom it is directed at the following addresses (or at such other address for any party as shall be specified by notice given in accordance with the provisions hereof, provided that notices of a change of address shall be effective only upon receipt thereof). Notices delivered personally shall be effective on the day so delivered, notices sent by registered or certified mail shall be effective three days after mailing, notices sent by telex shall be effective when answered back, notices sent by facsimile shall be effective when receipt is acknowledged, and notices sent by courier guaranteeing next day delivery shall be effective on the earlier of the second business day after timely delivery to the courier or the day of actual delivery by the courier: 18 (a) if to the Company: International Microcircuits, Inc. 525 Los Coches St. Milpitas, California 95035 Fax: (408) 934-0823 Attention: President (b) Frank Deverse 2189 Slaughterhouse Creek Road P.O. Box 484 Glenbrook, NV 89413 Fax: (702) 749-5757 (c) if to the Investors: TA Associates, Inc. 435 Tasso Street, Suite 200 Palo Alto, CA 94301 Fax: (650) 326-4933 (d) if to the Continuing Stockholders: To each Continuing Stockholder at such address as is contained in the stock records of the Company SECTION 6.5 HEADINGS. The Article and Section headings used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 6.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which together shall be deemed to constitute one and the same agreement. SECTION 6.7 DISPUTE RESOLUTION. Except with respect to matters as to which injunctive relief is being sought, any dispute arising out of or relating to this Agreement that has not been settled within thirty (30) days by good faith negotiation between the parties to this Agreement shall be submitted to the American Arbitration Association ("AAA") for final and binding arbitration pursuant to AAA's Commercial Arbitration Rules. Any such arbitration shall be conducted in San Francisco, California. SECTION 6.8 REMEDIES; SEVERABILITY. Notwithstanding Section 6.7, it is specifically understood and agreed that any breach of the provisions of this Agreement by any Person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone 19 will be an inadequate remedy for such breach, and that, in addition to any other legal or equitable remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law) and the Company may refuse to recognize any unauthorized Transferee as one of its stockholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable provisions of this Agreement. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. SECTION 6.9 ENTIRE AGREEMENT. This Agreement, together with the Stock Purchase Agreement and other agreements specifically contemplated hereby and thereby, is intended by the parties as a final expression of their agreement and intended to be complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement and the Stock Purchase Agreement and other agreements contemplated hereby and thereby (including the exhibits hereto and thereto) supersede all prior agreements and understandings between the parties with respect to such subject matter. SECTION 6.10 ADJUSTMENTS. All references to share prices and amounts herein shall be equitably adjusted to reflect stock splits, stock dividends, recapitalizations and similar changes affecting the capital stock of the Company. SECTION 6.11 LAW GOVERNING. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of California (without giving effect to principles of conflicts of law). Each party also waives trial by jury in any action relating to this Agreement. SECTION 6.12 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the parties hereto as contemplated herein, and any successor to the Company by way of merger or otherwise shall specifically agree to be bound by the terms hereof as a condition of such successor. This Agreement may not be assigned by any Continuing Stockholder or Permitted Transferee except as contemplated by Article IV without the prior written consent of two-thirds-in-interest of the Investors, and without such prior written consent any attempted transfer shall be null and void. [Remainder of Page Intentionally Left Blank] 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: International Microcircuits, Inc. s/ ------------------------------------------ By: Its: EX-10.8 10 a2024700zex-10_8.txt EX 10.8 Exhibit 10.8 INTERNATIONAL MICROCIRCUITS, INC. 1997 EQUITY INCENTIVE PLAN ADOPTED NOVEMBER 20,1997 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors of and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase restricted stock, and (v) stock appreciation rights, all as defined below. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors of or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, (ii) stock bonuses or rights to purchase restricted stock granted pursuant to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to Section 8 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 1 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means International Microcircuits, Inc., a California corporation. (f) "Concurrent Stock Appreciation Right" or "Concurrent Right" means a right granted pursuant to subsection 8(b)(2) of the Plan. (g) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that the service of an individual to the Company or any Affiliate of the Company, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Board, or the chief executive officer of the Company may determine, in that party's sole discretion, whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board or the chief executive officer of the Company, including sick leave, military leave, or any other personal leave; or (ii) transfers between the Company, Affiliates or their successors. 2 (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to shareholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of the common stock of the Company determined as follows and in each case in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations. (1) If the common stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Company's common stock) on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable. (2) In the absence of such markets for the common stock, the Fair Market Value shall be determined in good faith by the Board. 3 (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "INDEPENDENT STOCK APPRECIATION RIGHT" or "INDEPENDENT RIGHT" means a right granted pursuant to subsection 8(b)(3) of the Plan. (p) "LISTING DATE" means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange, or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system if such securities exchange or interdealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968. (q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee" for purposes of Rule 16b-3. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (s) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. 4 (t) "OPTION" means a stock option granted pursuant to the Plan. (u) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (v) "OPTIONEE" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time, and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (x) "PLAN" means this 1997 Equity Incentive Plan. (y) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect with respect to the Company at the time of discretion is being exercised regarding the Plan. (z) "SECURITIES ACT" means the Securities Act of 1933, as amended. (aa) "STOCK APPRECIATION RIGHT" means any of the various types of rights which may be granted under Section 8 of the Plan. (bb) "STOCK AWARD" means any right granted under the Plan, including any Option, any stock bonus, any right to purchase restricted stock, and any Stock Appreciation Right. 5 (cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (dd) "TANDEM STOCK APPRECIATION RIGHT" or "TANDEM RIGHT" means a right granted pursuant to subsection 8(b)(1) of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (1) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; whether a person shall be permitted to receive stock upon exercise of an Independent Stock Appreciation Right; and the number of shares with respect to which a Stock Award shall be granted to each such person. (2) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. 6 (3) To amend the Plan or a Stock Award as provided in Section 14. (4) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. (c) The Board may delegate administration of the Plan to a committee of the Board composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee may be, in the discretion of the Board, Non-Employee Directors and/or Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee of two (2) or more Outside Directors any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or such a subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (ii) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate One Million Four Hundred Ninety-One Thousand (1,491,000) shares of the Company's common 7 stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) No person shall be eligible for the grant of an Option or an award to purchase restricted stock if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant, or in the case of a restricted stock purchase award, the purchase price is at least one hundred percent (100%) of the Fair Market Value of such stock at the date of grant. (c) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, no person shall be eligible to be granted Options and Stock Appreciation Rights covering more than Five Hundred Thousand (500,000) shares of the Company's common stock in any twelve (12) month period. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, shall not apply until (i) the earliest of: (A) the first material 8 modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 4; (B) the issuance of all of the shares of common stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted; the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the 9 time the Option is exercised, or (ii) at the discretion of the Board or the Committee, at the time of the grant of the Option, (A) by delivery to the Company of other common stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (c) in any other form of legal consideration that may be acceptable to the Board. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. The person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary but in each case will provide 10 for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period, which shall not be less than thirty (30) days, unless such termination is for cause, specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. An Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director, or Consultant (other dm upon the Optionee's death or disability) would result in liability under Section 16(b) of the Exchange Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day after the last date on which such exercise would result in such liability under Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (other than upon the Optionee's death or disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the 11 term of the Option set forth in the first paragraph of this subsection 6(f), or (ii) the expiration of a period of three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant during which the exercise of the Option would not be in violation of such registration requirements. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period, which in no event shall be less than six (6) months, specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option Agreement after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option as of the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period, which in no event shall be less than six (6) months, specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or 12 her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased shall be subject to a repurchase right in favor of the Company, with the repurchase price to be equal to the original purchase price of the stock, or to any other restriction the Board determines to be appropriate; PROVIDES however, that (i) the right to repurchase at the original purchase price shall lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Option was granted, and (ii) such right shall be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), and (iii) such right shall be exercisable only for cash or cancellation of purchase money indebtedness for the shares. Should the right of repurchase be assigned by the Company, the assignee shall pay the Company cash equal to the difference between the original purchase price and the stock's Fair Market Value if the original purchase price is less than the stock's Fair Market Value. (j) RIGHT OF REPURCHASE. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to repurchase all or any part of the vested shares exercised pursuant to the Option; PROVIDED, HOWEVER, that (i) such repurchase right shall be exercisable only within (A) the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the Optionee (for example, for purposes of satisfying the 13 requirements of Section 1202(c)(3) of the Code (regarding "qualified small business stock")), (ii) such repurchase right shall be exercisable for less than all of the vested shares only with the Optionee's consent, and (iii) such right shall be exercisable only for cash or cancellation of purchase money indebtedness for the shares at a repurchase price equal to the greater of (A) the stock's Fair Market Value at the time of such termination or (B) the original purchase price paid for such shares by the Optionee. Should the right of repurchase be assigned by the Company, the assignee shall pay the Company cash equal to the difference between the original purchase price and the stock's Fair Market Value if the original purchase price is less than the stock's Fair Market Value. (k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a provision whereby the Company may elect, prior to the Listing Date, to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares exercised pursuant to the Option. (l) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board or Committee to make or not to make grants of Options hereunder, the Board or Committee shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionee to a further Option (a "Re-Load Option") in the event the Optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a number of shares equal to the number of shares surrendered as part or all of the exercise price of such Option; (ii) shall have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) shall have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option which is granted to a 10% shareholder (as described in subsection 5(b), shall have an exercise 14 price which is equal to one hundred ten percent (110%) of the Fair Market Value of the stock subject to the Re-Load Option on the date of exercise of the original Option and shall have a term which is no longer than five (5) years. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board or Committee may designate at the time of the grant of the original Option; PROVIDED, HOWEVER, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on exercisability of Incentive Stock Options described in subsection 12(e) of the Plan and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares under subsection 4(a) and the limits on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board or Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK. Each stock bonus or restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus or restricted stock purchase agreements may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus or restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price under each restricted stock purchase Stock Award Agreement shall be such amount as the Board or Committee shall determine and designate in such agreement, but in no event shall the purchase price be less than eighty-five percent (85%) of the stock's Fair Market Value on the date such award is made. 15 Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. Rights under a stock bonus or restricted stock purchase agreement shall be transferable by the grantee only upon such terms and conditions as are set forth in the applicable Stock Award Agreement, as the Board or the Committee shall determine in its discretion, so long as stock awarded under such Stock Award Agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in its discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. The applicable agreement shall provide (i) that the right to repurchase at the original purchase price shall lapse at a minimum rate of twenty percent (20%) per year over five (5) years from the date the Stock Award was granted, and (ii) such right shall be exercisable only (A) within the ninety (90) day period following the termination of employment or the relationship as a Director or Consultant, or (B) such longer period as may be agreed to by the Company and the holder of the Stock Award (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code (regarding "qualified 16 small business stock")), and (iii) such right shall be exercisable only for cash or cancellation of purchase money indebtedness for the shares. (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire, subject to the limitations described in subsection 7(d), any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. STOCK APPRECIATION RIGHTS. (a) The Board or Committee shall have full power and authority, exercisable in its sole discretion, to grant Stock Appreciation Rights under the Plan to Employees or Directors of or Consultants to, the Company or its Affiliates. To exercise any outstanding Stock Appreciation Right, the holder must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such right. Except as provided in subsection 5(c), no limitation shall exist on the aggregate amount of cash payments the Company may make under the Plan in connection with the exercise of a Stock Appreciation Right. (b) Three types of Stock Appreciation Rights shall be authorized for issuance under the Plan: (1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation Rights will be granted appurtenant to an Option, and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. Tandem Stock Appreciation Rights will require the holder to elect between the exercise of the underlying Option for shares of stock and the surrender, in whole or in part, of such Option for an appreciation distribution. The appreciation distribution payable on the exercised Tandem Right shall be in cash (or, if so provided, in an equivalent number of shares of 17 stock based on Fair Market Value on the date of the Option surrender) in an amount up to the excess of (A) the Fair Market Value (on the date of the Option surrender) of the number of shares of stock covered by that portion of the surrendered Option in which the Optionee is vested over (B) the aggregate exercise price payable for such vested shares. (2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be granted appurtenant to an Option and may apply to all or any portion of the shares of stock subject to the underlying Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to the particular Option grant to which it pertains. A Concurrent Right shall be exercised automatically at the same time the underlying Option is exercised with respect to the particular shares of stock to which the Concurrent Right pertains. The appreciation distribution payable on an exercised Concurrent Right shall be in cash (or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Concurrent Right) in an amount equal to such portion as shall be determined by the Board or the Committee at the time of the grant of the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Concurrent Right) of the vested shares of stock purchased under the underlying Option which have Concurrent Rights appurtenant to them over (B) the aggregate exercise price paid for such shares. (3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will be granted independently of any Option and shall, except as specifically set forth in this Section 8, be subject to the same terms and conditions applicable to Nonstatutory Stock Options as set forth in Section 6. They shall be denominated in share equivalents. The appreciation distribution payable on the exercised Independent Right shall be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Independent Right) of a number of shares of Company stock equal to the number of share equivalents in which the holder is vested under such Independent Right, and with respect to which the holder is exercising the Independent Right on such date, over (B) the aggregate Fair Market Value (on the 18 date of the grant of the Independent Right) of such number of shares of Company stock. The appreciation distribution payable on the exercised Independent Right shall be in cash or, if so provided, in an equivalent number of shares of stock based on Fair Market Value on the date of the exercise of the Independent Right. 9. CANCELLATION AND RE-GRANT OF OPTIONS. (a) The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options and/or any Stock Appreciation Rights under the Plan and/or (ii) with the consent of the affected holders of Options and/or Stock Appreciation Rights, the cancellation of any outstanding Options and/or any Stock Appreciation Rights under the Plan and the grant in substitution therefor of new Options and/or Stock Appreciation Rights under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option) or, in the case of a 10% shareholder (as described in subsection 5(b)), not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date. Notwithstanding the foregoing, the Board or the Committee may grant an Option and/or Stock Appreciation Right with an exercise price lower than that set forth above if such Option and/or Stock Appreciation Right is granted as part of a transaction to which section 424(a) of the Code applies. (b) Shares subject to an Option or Stock Appreciation Right canceled under this Section 9 shall continue to be counted against the maximum award of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The repricing of an Option and/or Stock Appreciation Right under this Section 9, resulting in a reduction of the exercise price, shall be deemed to be a cancellation of the original Option and/or Stock Appreciation Right and the grant of a substitute Option and/or Stock Appreciation Right; in the event of such repricing, both the original and the substituted Options and Stock 19 Appreciation Rights shall be counted against the maximum awards of Options and Stock Appreciation Rights permitted to be granted pursuant to subsection 5(c) of the Plan. The provisions of this subsection 9(b) shall be applicable only to the extent required by Section 162(m) of the Code. 10. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 11. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 12. MISCELLANEOUS. (a) Subject to any applicable provisions of the California Corporate Securities Law of 1968 and related regulations relied upon as a condition of issuing securities pursuant to the Plan, the Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to 20 subsection 6(e), 7(d) or 8(b), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), 7(b), or 8(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied ail requirements for exercise of the Stock Award pursuant to its terms. (c) Throughout the term of any Stock Award, the Company shall deliver to the holder of such Stock Award, not later than one hundred twenty (120) days after the close of each of the Company's fiscal years during the term of such Stock Award, a balance sheet and an income statement. This subsection shall not apply (i) after the Listing Date, or (ii) when issuance is limited to key employees whose duties in connection with the Company assure them access to equivalent information. (d) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment of any Employee with or without cause the right of the Company's Board of Directors and/or the Company's shareholders to remove any Director as provided in the Company's By-Laws and the provisions of the California Corporations Code, or the right to terminate the relationship of any Consultant subject to the terms of such Consultant's agreement with the Company or Affiliate. (e) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds 21 one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (f) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (g) To the extent provided by the terms of a Stock Award Agreement the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the 22 Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the common stock of the Company. 13. ADJUSTMENTS UPON CHANGES IN STOCK. (a) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, excluding in each case a capital reorganization in which the sole purpose is to change the state of incorporation of the Company, then: (i) the remaining vesting period for each outstanding Stock Award which is not fully vested shall accelerate by the lesser of (A) two years and (B) the remaining vesting period for such Stock Award; and (ii) on the date of such event, all outstanding Stock Awards which have been exercised terminates, unless provision is made in connection with such event for the assumption by the surviving corporation or acquiring corporation of any outstanding Stock Award or the substitution of similar stock awards. Upon such event, each Optionee shall be permitted to exercise for a period of at least ten (10) days prior to the date of such event all outstanding Stock Awards held by such Optionee which are then exercisable. 14. AMENDMENT OF THE PLAN AND STOCK AWARDS. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 13 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: 23 (1) Increase the number of shares reserved for Stock Awards under the Plan; (2) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (3) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. (e) The Board at any time, and from time to time, may amend the terms of any one or more Stock Award; provided, however, that the rights and obligations under any Stock Award 24 shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 15. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on November 19, 2007, which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan, except with the written consent of the person to whom the Stock Award was granted. 16. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 25 EX-23.1 11 a2024700zex-23_1.txt EX 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The reincorporation in Delaware and three for two stock split as described in Note 12 to the financial statements has not been consummated at September 5, 2000. When it has been consummated, we will be in a position to furnish the following consent: "We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated April 28, 2000, except as to Note 12 which is as of , 2000, relating to the financial statements of International Microcircuits, Inc., which appears in such Prospectus. We also consent to us under the heading "Experts" in such Prospectus." PricewaterhouseCoopers LLP San Jose, California September , 2000" EX-27.1 12 a2024700zex-27_1.txt EX 27.1
5 1,000 YEAR YEAR YEAR 3-MOS 3-MOS MAR-31-1998 MAR-31-1999 MAR-31-2000 MAR-31-2000 MAR-31-2001 MAR-31-1998 MAR-31-1999 MAR-31-2000 JUN-30-1999 JUN-30-2000 0 4,113 4,911 0 4,670 0 0 0 0 0 0 4,129 3,929 0 6,253 0 (149) (239) 0 (262) 0 2,677 2,640 0 2,404 0 13,019 13,955 0 15,520 0 8,748 9,966 0 1,929 0 6,904 7,884 0 0 0 15,105 16,422 0 17,817 0 7,583 8,080 0 9,065 0 0 0 0 0 0 14,225 15,821 0 15,821 0 0 0 0 0 0 2 2 0 3 0 (16,941) (15,355) 0 (14,386) 0 15,105 16,422 0 17,817 34,165 38,998 44,326 10,516 11,507 34,165 38,998 44,326 10,516 11,507 19,926 23,003 24,053 6,009 5,942 35,099 36,185 40,252 9,489 10,275 15,173 13,182 16,199 3,480 4,710 0 0 0 0 0 783 1,098 773 196 160 (3,413) 2,018 3,826 955 869 (1,216) 1,031 2,052 530 652 (2,197) 987 1,774 425 217 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,197 (987) (1,774) (425) (217) (0.17) 0.33 0.47 0.13 0.05 (0.17) 0.01 0.06 0.01 0.00
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