-----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, Qg7rnRD09SXMfR2VenHEiY++e3PbacQUEci8UFQzixE+dCFFJVBeJVGamw6IXgFT LHbNrrNSa8Cac+ZIjzm5Tg== 0000950130-00-003044.txt : 20000523 0000950130-00-003044.hdr.sgml : 20000523 ACCESSION NUMBER: 0000950130-00-003044 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20000522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED CIRCUIT SYSTEMS INC CENTRAL INDEX KEY: 0000874689 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 232000174 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33318 FILM NUMBER: 640774 BUSINESS ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 BUSINESS PHONE: 6106305300 MAIL ADDRESS: STREET 1: 2435 BLVD OF THE GENERALS CITY: NORRISTOWN STATE: PA ZIP: 19403 S-1/A 1 PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 As filed with the Securities and Exchange Commission on May 22, 2000 Registration No. 333-33318 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 --------------- INTEGRATED CIRCUIT SYSTEMS, INC. (Exact name of registrant as specified in its charter) Pennsylvania 3674-100 23-2000174 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) 2435 Boulevard of the Generals Norristown, Pennsylvania 19403 Telephone: (610) 630-5300 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Hock E. Tan President and Chief Executive Officer 2435 Boulevard of the Generals Norristown, Pennsylvania 19403 Telephone: (610) 630-5300 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Lance C. Balk, Esq. Mark C. Smith, Esq. Kirkland & Ellis Skadden, Arps, Slate, Meagher & Flom 153 East 53rd Street LLP New York, New York 10022-4675 Four Times Square Telephone: (212) 446-4800 New York, New York 10036-6572 Telephone: (212) 735-3000 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"), 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 Statement 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 Statement 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, please check the following box. [_] --------------- 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 said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +Information contained in this prospectus is not complete and may be changed. + +We may not sell 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 state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 19, 2000 12,500,000 Shares ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + [LOGO OF ICS] + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Integrated Circuit Systems, Inc. Common Stock -------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $15.00 and $17.00 per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "ICST". The underwriters have an option to purchase a maximum of 1,875,000 additional shares from some of our shareholders to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 8.
Underwriting Proceeds to Price to Discounts and Integrated Circuit Public Commissions Systems, Inc. -------- ------------- ------------------ Per Share.................................. $ $ $ Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Robertson Stephens Lehman Brothers Bear, Stearns & Co. Inc. Pennsylvania Merchant Group The date of this prospectus is , 2000. [Description of cover art: photographs of Integrated Circuit Systems Inc.'s integrated circuits and applications] ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 1 The Offering........................ 4 Risk Factors........................ 8 Use of Proceeds..................... 15 The Reclassification................ 16 Capitalization...................... 17 Dividend Policy..................... 18 Dilution............................ 18 Unaudited Pro Forma Consolidated Financial Data..................... 19 Selected Historical Consolidated Financial Data..................... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28 Industry Overview................... 38
Page ---- Business............................ 40 Management.......................... 47 Principal and Selling Shareholders.. 56 Certain Relationships and Related Transactions....................... 57 Description of Capital Stock........ 59 Description of Indebtedness......... 61 Shares Eligible for Future Sale..... 64 Underwriting........................ 66 Legal Matters....................... 69 Experts............................. 69 Change in Independent Accountants... 69 Where You Can Find More Information........................ 69 Index to Financial Statements....... F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. The industry statistical data presented in this prospectus, except where otherwise noted, have been compiled from industry sources. Although we have not independently verified the data, we believe that the information provided by such industry sources in this prospectus is reliable. In addition, statistical data relating to us presented in this prospectus have been compiled from our internal surveys and schedules, which, while believed by us to be reliable, have not been verified by any independent sources. Dealer Prospectus Delivery Obligation Until , 2000 (25 days after commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this 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. i PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus, including the financial data and related notes, carefully before making an investment decision. This prospectus contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in "Risk Factors" and elsewhere in this prospectus. Unless otherwise stated, the information contained in this prospectus: (1) assumes no exercise of the underwriters' over-allotment option and (2) reflects the reclassification of all of our classes of common stock into a single class of common stock and the 1.6942-for-1 stock split of that single class, which will occur immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. Integrated Circuit Systems, Inc. We are a worldwide leader in the design, development and marketing of silicon timing devices for a number of high-growth application segments. Our silicon timing devices are used in a variety of consumer and business electronics such as personal computers, or PCs, digital cameras, set-top boxes, PC peripherals and DVD players. Our products are also increasingly being used in various communications applications including routers, switches, fiber optics, cable modems and ADSL equipment. Silicon timing devices are integrated circuits that emit timing signals or pulses required to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. All digital devices require a timing signal and those with any degree of complexity require silicon timing devices to time and synchronize their various operations. Growth in our markets is being driven by the rapid pace of infrastructure development for the Internet, the increasing complexity of our customers' end products, and the transition from traditional analog devices to digital technologies. Internet infrastructure expansion is now largely broadband based, requiring higher operating frequencies and more complex digital equipment. This advancement has driven the continued proliferation of technologically complex consumer and business electronic devices that help optimize the Internet experience. In addition, the transition from traditional analog devices to digital devices has led to increasing consumer adoption of digital technologies such as HDTV or DVD players. Our silicon timing devices are well suited to these developments as they operate in analog and digital environments (i.e., mixed-signal) and can manage multiple frequencies, have high programmability and generally require less power than traditional timing products such as crystal oscillators, which are predominantly quartz based timing devices that resonate at a single frequency. We have developed a reputation for engineering excellence and innovative technology in silicon timing design. We pioneered the silicon timing market in 1988, introducing silicon timing devices for video and graphics applications. Since then, we have consistently led the industry with several technical designs, including delivering the first silicon timing device for the PC motherboard in 1990. Our ongoing focus on product innovation has led to the introduction of approximately 424 new products into the marketplace over the past three fiscal years. We are the leading supplier of silicon timing devices to several markets, including PCs and digital set-top boxes, and we are continuing to design and introduce new products for communications equipment companies such as Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel. Over 40% of our current design opportunities are for communications equipment companies. A design opportunity reflects a request from a customer or potential customer for a silicon timing design. In the first six months of fiscal 2000, we converted over 80% of our design opportunities into design wins, which could lead to future production orders. We have developed long-standing and valuable relationships with the majority of leading original equipment manufacturers, or OEMs, of consumer and business electronics and communications equipment. We 1 work closely with these OEMs to develop unique and often proprietary timing, sequencing and synchronization solutions and are closely integrated into their product design and development process. Our top OEM customers include such companies as Asustek, Hughes Networks, Compaq, Dell, IBM, Echostar, Intel, E-Machines, General Instruments and Hewlett Packard. In the PC market, our research and development efforts are aligned with Intel's product and technology road map. Intel made a $13.5 million investment in our company in December 1999. For the 1999 calendar year, we had revenues of approximately $150 million, and over the past three calendar years, we have grown our core revenues at over 25% per year. With continued focus on our core silicon timing devices, our gross profit has grown from $63.5 million, or a 46.3% gross margin, for the 1997 calendar year to $88.2 million, or a 58.8% gross margin, for the 1999 calendar year. Industry Overview As silicon timing devices are critical to the functioning of end-user consumer and business electronics as well as certain communications equipment, we expect the market for our products to experience significant growth. In 1999, the total available market for timing devices, which includes both silicon timing solutions and crystal oscillators, was approximately $2.8 billion. We expect this market to grow 18% per year to over $3.8 billion by 2001. Silicon timing devices represent approximately $378 million, or 14% of the overall timing market, but we expect it to grow to over $850 million, or 23% of this market, by 2001, a growth rate of approximately 50% per year. The accelerated growth for silicon timing devices reflects not only the underlying growth in our end markets, but also the conversion of crystal oscillators to silicon timing devices in our customers' increasingly complex digital products. Business Strategy Our business strategy is to focus on our core silicon timing business and continue to provide customized and high performance products to our expanding and diversified customer base. We have a proprietary development process that allows for the timely customization of our products to a specific application and our fabless operating model allows us to focus on new product development and customer relationships. Our specific strategies include: . Identify and target new market opportunities where there are strong growth prospects and where we can leverage our core silicon timing technologies. . Dominate these new markets by developing multiple application-specific products to meet the needs of our customers and create a leading market position. . Maintain design leadership in core silicon timing technologies through our extensive design library, patents on core technologies and significant investments in research and development. . Expand into new timing markets through select acquisitions of technology and recruitment of personnel that complement our existing expertise. Results for the Three Months Ended April 1, 2000 For the three months ended April 1, 2000, our consolidated revenue was $41.6 million, a 19% increase from the corresponding quarter last year. Our core revenues increased 34% as compared to the same period in the prior year. Sales growth for our silicon timing products reflected an increase in market share, particularly in the PC industry, as well as increased shipments to the communications industry and for digital set-top box applications. Gross margin during the quarter increased to 61% from 58% during the same quarter a year ago, reflecting reduced material costs and a favorable product mix for the quarter. Traditionally, this quarter is our weakest quarter, particularly for PC-related sales. 2 The Recapitalization Through a recapitalization effected in May 1999, Bain Capital, Inc. and its affiliates, an affiliate of The Bear Stearns Companies Inc., or Bear Stearns, and our senior management team acquired securities that represented approximately 98% of our outstanding voting power at such time. We refer to this transaction in this prospectus as the recapitalization. Our senior management team, together with many of our other employees, own common stock and options that together will represent approximately 18% of our common stock on a fully diluted basis following this offering. Such equity ownership represents a significant economic commitment to, and participation in, our continued success. 3 THE OFFERING Common stock offered......................... 12,500,000 shares by Integrated Circuit Systems, Inc.
Common stock to be outstanding after this offering....................... 63,492,905 shares of common stock Use of Proceeds....................... We intend to use the net proceeds of this offering: . to repurchase our outstanding senior subordinated notes and pay prepayment premiums thereon; . to repay all indebtedness outstanding under our senior credit facility; . to pay fees and expenses of this offering; and . for general corporate purposes. Proposed Nasdaq Symbol................ ICST The common stock to be outstanding after this offering is based on shares outstanding as of May 1, 2000 and excludes 1,875,000 shares of common stock that may be issued to cover over-allotments of shares, 8,786,672 shares of common stock issuable upon exercise of outstanding stock options and approximately 6,800,000 additional shares of common stock expected to be reserved for future grants, awards or sale under our 2000 Long Term Equity Incentive Plan or sale under the 2000 Employee Stock Purchase Plan. See "Management--Management Equity Participation." The number of shares of common stock to be outstanding after this offering assumes the conversion of our Series A preferred stock into Class A common stock and Class L common stock and the reclassification of our Class A common stock, Class B common stock and Class L common stock. See "The Reclassification." Risk Factors Investing in our common stock involves substantial risks. See the "Risk Factors" section of this prospectus for a description of some of the risks you should carefully consider before investing in our common stock. Additional Information We were incorporated under the laws of the Commonwealth of Pennsylvania on June 8, 1976. Our principal executive office is located at 2435 Boulevard of the Generals, Norristown, Pennsylvania, 19403, and our telephone number is (610) 630-5300. We maintain a website on the Internet at www.icst.com. Our website and the information it contains shall not be deemed to be part of this prospectus. 4 Summary Historical Consolidated Financial Data (in thousands, except per share data)
Pro Forma (b) ----------------------- Nine Months Fiscal Year Nine Months Fiscal Year Ended (a) Ended Ended Ended ----------------------------- ----------- ----------- ----------- June 28, June 27, July 3, April 1, July 3, April 1, 1997 1998 1999 2000 1999 2000 -------- -------- --------- ----------- ----------- ----------- Statement of Operations Data: Revenue: Core................... $ 63,280 $ 90,622 $ 107,710 $106,801 $107,710 $106,801 Non-core............... 41,079 70,012 31,353 13,710 31,353 13,710 -------- -------- --------- -------- -------- -------- Total revenue........... $104,359 $160,634 $ 139,063 $120,511 $139,063 $120,511 ======== ======== ========= ======== ======== ======== Gross margin............ 45,222 71,775 74,567 71,573 74,567 71,573 Research and development............ 13,521 19,797 21,316 18,062 16,808 18,062 Selling, general and administrative (including goodwill amortization).......... 15,654 19,678 19,794 13,905 18,478 13,155 Special charges (c)..... 11,196 -- 15,051 4,004 -- 4,004 -------- -------- --------- -------- -------- -------- Operating income........ 4,851 32,300 18,406 35,602 39,281 36,352 Interest expense (d).... 63 64 2,955 13,855 96 -- Gain on sale of assets.. -- -- (10,734) -- -- -- Interest and other expense (income), net.. 5,984 (1,984) (2,178) (792) (2,178) (792) -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes.... (1,196) 34,220 28,363 22,539 41,363 37,144 Income tax expense...... 6,314 12,845 5,320 2,213 14,814 8,055 -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations.. (7,510) 21,375 23,043 20,326 $ 26,549 $ 29,089 ======== ======== Loss from discontinued operations (e)......... (909) -- -- -- Gain from extraordinary item, net of tax....... -- -- -- 170 -------- -------- --------- -------- Net income (loss)....... $ (8,419) $ 21,375 $ 23,043 $ 20,496 ======== ======== ========= ======== Net Income Per Common Share: Basic.................. $0.48 $0.52 Diluted................ $0.43 $0.44 Weighted Average Common Shares Outstanding: Basic.................. 55,454 56,036 Diluted................ 61,647 65,889 Other Financial Data: EBITDA (excluding non- recurring charges) (f).................... $ 19,791 $ 36,879 $ 38,422 $ 42,977 $ 43,699 $ 43,727 Gross margin %.......... 43.3% 44.7% 53.6% 59.4% 53.6% 59.4% Cash provided by operating activities... 10,397 22,345 24,450 26,886 Cash provided by (used in) investing activities............. (19,274) (13,490) 20,675 1,731 Cash used in financing activities............. (74) (1,940) (61,180) (6,582) Capital expenditures.... 3,358 8,139 7,694 3,505 Depreciation and amortization........... 3,744 4,579 4,965 3,371 Balance Sheet Data: Cash and cash equivalents............ $ 18,425 $ 25,340 $ 9,285 $ 31,320 Working capital......... 48,260 65,113 26,910 54,425 Total assets............ 90,622 108,009 87,795 105,291 Total debt.............. 1,709 1,523 170,030 150,620 Stockholders' equity (deficit).............. 70,147 89,768 (106,912) (72,736)
See "Notes to Summary Historical Consolidated Financial Data" on the following page. Our fiscal year refers to a fiscal year ending on the Saturday closest to June 30 of such year. Except as otherwise noted, all references throughout this prospectus to number of shares, per share and stock option data have been restated, giving retroactive effect to the stock split and the reclassification. 5 Notes to Summary Historical Consolidated Financial Data (a) Our fiscal year is based upon a 52/53 week operating cycle that ends on the Saturday nearest June 30. All of the fiscal year periods presented represent a 52-week operating cycle, except for fiscal year 1999 which represents 53 weeks. (b) The pro forma statement of operations and net income per share data give pro forma effect to (1) the stock split and the reclassification of our three classes of common stock into a single class, (2) the portion of this offering and the application of the net proceeds therefrom necessary to repurchase 100% of our outstanding senior subordinated notes and to repay our senior credit facility, (3) other pro forma adjustments as summarized in the "Unaudited Pro Forma Consolidated Statement of Operations" shown elsewhere in this prospectus and (4) the dilutive effect of options under the treasury stock method using a market price of $16.00 per share as if each had occurred as of the beginning of the periods presented. See "Unaudited Pro Forma Consolidated Financial Data." (c) Special charges consist of the following:
Year Ended Nine Months ------------------------- Ended June 28, June 27, July 3, April 1, 1997 1998 1999 2000 -------- -------- ------- ----------- (in thousands) Compensation costs(1)................... -- -- $15,051 -- Write-off of in-process research and de- velopment costs(2)..................... 11,196 -- -- -- Litigation settlement(3)................ -- -- -- 4,004 ------- --- ------- ------ $11,196 -- $15,051 $4,004 ======= === ======= ======
- -------------------- (1) In connection with the recapitalization, we recorded a one-time compensation charge of $15.1 million related to the accelerated vesting, cash-out and conversion of employee stock options. (2) We recorded a one-time charge of $11.2 million for this non-deductible (for tax purposes) intangible write-off in connection with our acquisition of MicroClock, Inc. (3) In connection with the establishment of our Arizona design center, we recorded a one-time charge of $4.0 million. (d) On May 11, 1999, we effected the recapitalization. We issued $100.0 million in aggregate principal amount of our senior subordinated notes in connection with the recapitalization and entered into our $95.0 million senior credit facility. As of April 1, 2000, $93.0 million aggregate principal amount of our senior subordinated notes was outstanding, and $57.6 million was outstanding under our senior credit facility. (e) In fiscal 1995, we acquired a 51% majority interest in ARK Logic, Inc., a developer of complex graphic accelerator chips. Subsequently, in fiscal year 1997, we disposed of our majority interest in ARK Logic, Inc. The disposition of ARK Logic, Inc. was accounted for as a discontinued operation. (f) EBITDA represents earnings from continuing operations before interest, taxes, depreciation, amortization, other income and expense and special charges. EBITDA is presented because we believe that it is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to cash flow from operating activities as a measure of liquidity, as an alternative to net income as an indicator of our operating performance, or as an alternative to any other measures of performance in accordance with generally accepted accounting principles. 6 The following table sets forth a reconciliation of income (loss) from continuing operations before income taxes to EBITDA (See notes to "Unaudited Pro Forma Consolidated Statements of Operations" for additional details):
Pro Forma Year Ended As Adjusted --------------------------- ----------------------- Nine Months Year Nine Ended Ended Months Ended June 28, June 27, July 3, April 1, July 3, April 1, 1997 1998 1999 2000 1999 2000 -------- -------- ------- ----------- ------- ------------ (in thousands) Income (loss) from continuing operations, before income taxes.... $ (1,196) $34,220 $28,363 $22,539 $41,363 $37,144 Depreciation and amortization........... 3,744 4,579 4,965 3,371 4,418(1) 3,371 Interest expense........ 63 64 2,955 13,855 96 -- Interest and other expense (income), net.. 5,984 (1,984) (2,178) (792) (2,178) (792) Gain on sale of assets.. -- -- (10,734) -- -- -- Special charges......... 11,196 -- 15,051 4,004 -- 4,004 -------- ------- ------- ------- ------- ------- EBITDA.................. $ 19,791 $36,879 $38,422 $42,977 $43,699 $43,727 ======== ======= ======= ======= ======= =======
- -------------------- (1) Excludes savings from depreciation and amortization of $384 from the sale of our data communications product group and $163 from the sale and lease- back of our Norristown facility. 7 RISK FACTORS You should carefully consider the following factors in addition to the other information set forth in this prospectus in analyzing an investment in the common stock offered hereby. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also inadvertently impact our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, as well as those discussed elsewhere in this prospectus. Fluctuation of Operating Results--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 that relate to our internal operations include: . the need for continual, rapid new product introductions; . changes in our product mix; and . our inability to adjust our fixed costs in the face of any declines in sales. Factors that could cause our operating results to fluctuate that depend on our suppliers and customers include: . the timing of significant product orders, order cancellations and reschedulings; . the availability of production capacity and fluctuations in the manufacturing yields at third parties' facilities that manufacture our devices; and . the cost of raw materials and manufacturing services from our suppliers. Factors that could cause our operating results to fluctuate that are industry risks include: . the cyclical nature of the semiconductor, communications, and consumer and business electronics industries; and . intense competitive pricing pressures. Cyclical Industry--Downturns in the business cycle could reduce the revenues and profitability of our business. The semiconductor, communications, and consumer and business electronics industries are highly cyclical. In 1998, the semiconductor industry experienced a downturn. Our markets may experience other, possibly more severe and prolonged, downturns in the future. We may also experience significant changes in our operating profit margins as a result of variations in sales, changes in product mix, price competition for orders and costs associated with the introduction of new products. The markets for our products depend on continued demand for communications applications and consumer and business electronics. There can be no assurance that these end-user markets will not experience changes in demand that will adversely affect our business. 8 We Depend on Continuous Introduction of New Products Based on the Latest Technology--Our inability to create 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 continually develop new products using the latest and most cost-effective technologies, introduce them in commercial quantities to the marketplace ahead of the competition and have them selected for inclusion in products of leading systems manufacturers. We cannot assure you that we will be able to regularly develop and introduce such new products on a timely basis or that our products, including recently introduced products, will be selected by systems manufacturers for incorporation into their products. Our failure to develop such new products, to have our products available in commercial quantities ahead of competitive products or to have them selected for inclusion in products of systems manufacturers would have a material adverse effect on our results of operations and financial condition. The market for communications applications is characterized by rapidly changing technology and continuing process development. Our future success in the communications applications market depends in part on our ability to design and produce products that meet the changing needs of customers in this market. We can not assure you that we will be able to regularly develop and introduce products that will be selected by communications applications manufacturers for incorporation into their products. Competition--Our business is very competitive and increased competition could adversely affect us. The semiconductor and PC component industries are intensely competitive. Our ability to compete depends heavily upon elements outside our control, such as general economic conditions affecting the semiconductor and PC industries and the introduction of new products and technologies by competitors. Many of our competitors and potential competitors have significant financial, technical, manufacturing and marketing resources. These competitors include major multinational corporations possessing worldwide wafer fabrication and integrated circuit production facilities and diverse, established product lines. Competitors also include emerging companies attempting to obtain a share of the existing market for our current and proposed products. To the extent that our products achieve market acceptance, competitors typically seek to offer competitive products or embark on pricing strategies which, if successful, could have a material adverse effect on our results of operation and financial condition. We Depend on the PC Industry--Our business could be adversely affected by decline in the PC market. A substantial portion of the sales of our products depends largely on sales of PCs and peripherals for PCs. The PC industry is subject to price competition, rapid technological change, evolving standards, short product life cycles and continuous erosion of average selling prices. Should the PC market decline or experience slower growth, then a decline in the order rate for our products could occur. A downturn in the PC market could also affect the financial health of some of our customers, which could affect our ability to collect outstanding accounts receivable from such customers. We Depend on Outside Wafer Foundries and Assemblers--Our inability to obtain wafers and assemblers could seriously affect our operations. We currently depend entirely upon third-party suppliers for the manufacture of the silicon wafers from which our finished integrated circuits are manufactured and for the packaging of finished integrated circuits from silicon wafers. We cannot assure you that we will be able to obtain adequate quantities of processed silicon wafers within a reasonable period of time or at commercially reasonable rates. In the past, the semiconductor industry has 9 experienced disruptions from time to time in the supply of processed silicon wafers due to quality or yield problems or capacity limitations. Virtually all of our wafers are manufactured by three outside foundries. 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. We also rely entirely upon third parties for the assembly of our finished integrated circuits from processed silicon wafers. We currently rely on four assemblers, two of which produce most of our finished integrated circuits. While we believe that there is typically a greater availability of assemblers than silicon wafer foundries, we could nonetheless incur significant delays and expense if one or more of the assemblers upon which we currently rely are unable or unwilling to assemble finished integrated circuits from silicon wafers. International Business Activities--Our business could be adversely affected by changes in political and economic conditions abroad. For the fiscal years 1997, 1998 and 1999, we generated approximately 60.3%, 58.8% and 68.8% of our revenue, respectively, from international markets. These sales were generated primarily from customers in the Pacific Rim region and included sales to foreign corporations, as well as to foreign subsidiaries of U.S. corporations. We estimate that in fiscal year 1999, approximately one-half of our sales in international markets were to foreign subsidiaries of U.S. corporations, with the bulk of them being in Taiwan. In addition, certain of our international sales are to customers in the Pacific Rim region, who in turn sell some of their products to North America, Europe and other non-Asian markets. In addition, two of our wafer suppliers and all of our assemblers are located in the Pacific Rim region. There can be no assurance that the effect of an economic crisis on our suppliers will not impact our wafer supply or assembly operations, or that the effect on our customers in that region will not adversely affect both the demand for our products and the collectibility of our receivables. Our international business activities in general are subject to a variety of potential risks resulting from certain political, economic and other uncertainties including, without limitation, political risks relating to a substantial number of our customers being in Taiwan. Certain aspects of our operations are subject to governmental regulations in the countries in which we do business, including those relating to currency conversion and repatriation, taxation of our earnings and earnings of our personnel, and our use of local employees and suppliers. Our operations are also subject to the risk of changes in laws and policies in the various jurisdictions in which we do business, which may impose restrictions on us. We cannot determine to what extent our future operations and earnings may be affected by new laws, new regulations, changes in or new interpretations of existing laws or regulations or other consequences of doing business outside the U.S. Our activities outside the U.S. are subject to additional risks associated with fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Additionally, worldwide semiconductor pricing is influenced by currency fluctuations and the devaluation of foreign currencies could have a significant impact on the prices of our products if our competitors offer products at significantly lower prices in an effort to maximize cash flows to finance short-term, dollar denominated obligations; such devaluation could also impact the competitive position of our customers in Taiwan and elsewhere, which could impact our sales. Currently, we do not engage in currency hedging activities as all transactions are denominated in U.S. dollars. Risks Related to Future Acquisitions--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. Acquisitions commonly involve 10 certain risks, and we cannot assure you that we will make any acquisitions or that any acquired business will be successfully integrated into our operations or will perform as we expect. Any future acquisitions could involve certain other risks, including the assumption of additional liabilities, potentially dilutive issuances of equity securities 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. We Depend on Patents, Trade Secrets and Proprietary Technology--Our inability to secure our intellectual property could adversely affect our business. We hold several patents as well as copyrights, mask works and trademarks with respect to various products and expect to continue to file applications for them in the future as a means of protecting our technology and market position. In addition, we seek to protect our proprietary information and know- how through the use of trade secrets, confidentiality agreements and other similar security measures. With respect to patents, there can be no assurance that any applications for patent protection will be granted, or, if granted, will offer meaningful protection. Additionally, there can be no assurance that competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our products, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition. Patents covering a variety of semiconductor designs and processes are held by various companies. We have from time to time received, and may in the future receive, communications from third parties claiming that we may be infringing certain of such parties' patents and other intellectual property rights. Any infringement claim or other litigation against or by us could have a material adverse effect on our results of operations and financial condition. Virtually all of our key engineers worked at other companies or at universities and research institutions before joining us. Disputes may arise as to whether technology developed by such engineers was first discovered when they were employed by or associated with other institutions in a manner that would give third parties rights to such technology superior to our rights, if any. Disputes of this nature have occurred in the past, and are expected to continue to arise in the future, and there can be no assurance that we will prevail in these disputes. To the extent that consultants, vendors or other third parties apply technological information independently developed by them or by others to our proposed products, disputes may also arise as to the proprietary rights to such information, which may not be resolved in our favor. We Depend upon Key Management--Our loss of certain key members of management could negatively impact our business prospects. 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. Competition for such personnel is intense, 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. Furthermore, retention of scientific and engineering personnel in our industry typically requires us to present attractive compensation packages, including stock option grants. 11 Product Liability Exposure and Potential Unavailability of Insurance--Some of our products may be subject to product liability claims. Certain of our custom integrated circuits products are sold into medical markets for applications which include blood glucose measurement devices and hearing aids. In certain cases, we have provided or received indemnities with respect to possible third-party claims arising from these products. Although we believe that exposure to third-party claims has been minimized, there can be no assurance that we will not be subject to third-party claims in these or other applications or that any indemnification or insurance available to us will be adequate to protect us from liability. A product liability claim, product recall or other claim, as well as any claims for uninsured liabilities or in excess of insured liabilities, could have a material adverse effect on our results of operations and financial condition. We expect to use a significant portion of the net proceeds of this offering to repay indebtedness and, as a result, we may be unable to meet our future capital and liquidity requirements. We expect to use a significant portion of the net proceeds of this offering to repay indebtedness. As a result, a limited amount of the net proceeds will be available to fund future operations. We expect that our principal sources of funds following this offering will be cash generated from operating activities and, if necessary, borrowings under our new revolving credit facility. We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our current and future financial obligations, as well as to provide funds for our working capital, capital expenditures and other needs for the foreseeable future. No assurance can be given, however, that this will be the case. 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. We cannot assure you of the price at which we will be required to repurchase a portion of our outstanding senior subordinated notes. We intend to use a significant portion of the net proceeds of this offering to repurchase all of our outstanding senior subordinated notes. We have commenced a tender offer to repurchase all of our outstanding senior subordinated notes at a price equal to 117.50% (estimated as of April 26, 2000) of the principal amount thereof. The tender offer is subject to conditions, including the completion of this offering and the valid tender of at least 90% of the outstanding principal amount of our senior subordinated notes. We cannot assure you that any or all of the senior subordinated notes will be purchased pursuant to the tender offer. If we do not complete the tender offer, we expect to redeem up to $28.0 million of the $93.0 million aggregate principal amount of our outstanding senior subordinated notes at a price equal to 111.50% of the principal amount redeemed plus accrued and unpaid interest thereon and purchase the remaining senior subordinated notes through open market purchases, privately negotiated transactions, one or more tender offers or exchange offers or otherwise. We currently do not have a contractual right to redeem the remaining $65.0 million aggregate outstanding principal amount of the senior subordinated notes. We cannot assure you of the price at which we will be required to repurchase our senior subordinated notes if we do not complete the tender offer. Investment funds affiliated with Bain Capital will continue to have significant influence over our business after this offering, and could delay, deter or prevent a change of control or other business combination. Upon completion of this offering, investment funds affiliated with Bain Capital will hold in the aggregate approximately 42.3% of our outstanding common stock. If the underwriters' over-allotment is exercised in full, these funds will hold approximately 39.5% of our outstanding common stock. In addition, one of the directors that will serve on our board following this offering will be a representative of Bain Capital. By virtue of such stock ownership, these investment funds will continue to have a significant influence over all matters submitted to our shareholders, including the election of our directors, and will continue to exercise significant control over 12 our business, policies and affairs. Such 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 shareholders. Provisions of our charter documents and Pennsylvania law could discourage potential acquisition proposals and could delay, deter or prevent a change in control. Provisions of our articles of incorporation and by-laws may inhibit changes in control of our company not approved by our board of directors and would limit the circumstances in which a premium may be paid for the common stock in proposed transactions, or a proxy contest for control of the board may be initiated. These provisions provide for: . the authority of our board of directors to issue, without shareholder approval, preferred stock with such terms as our board of directors determines; . classified board of directors; . a prohibition on shareholder action through written consents; . a requirement that special meetings of shareholders be called only by our chief executive officer or board of directors; and . advance notice requirements for shareholder proposals and nominations. Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988 prohibits certain transactions with a 20% shareholder, an "interested shareholder," for a period of five years after the date any shareholder becomes an interested shareholder unless the interested shareholder's acquisition of 20% or more of the common stock is approved by our board of directors. This provision may discourage potential acquisition proposals and limit the circumstances in which a premium may be paid for our company. You will experience an immediate and significant dilution in the book value of your investment. Because the initial public offering price is substantially higher than the book value per share of common stock, purchasers of the common stock in this offering will be subject to immediate and substantial dilution of $14.74 per share, assuming we price our common stock at the midpoint of the range set forth on the cover of this prospectus. In addition, the total amount of our capital will be less than what it would have been had you and all of our existing shareholders and option holders paid the same amount per share as you will pay in this offering. See "Dilution." Future sales by our existing shareholders could adversely affect the market price of our common stock. Future sales of the shares of common stock held by existing shareholders could have a material adverse effect on the market price of our common stock. Upon completion of this offering, we expect that: . 12,500,000 shares of common stock, or 14,375,000 shares if the underwriters' over-allotment option is exercised in full, sold in this offering will be freely tradeable without restriction under the Securities Act, except any such shares which may be acquired by an "affiliate" of our company; and . 50,992,905 shares of common stock held by our existing shareholders will be eligible for sale into the public market, subject to compliance with the resale volume limitations and other restrictions of Rule 144 under the Securities Act, beginning 180 days after the date of this prospectus. Beginning 180 days after the completion of this offering, the holders of an aggregate of approximately 50,992,905 shares of common stock will have limited rights to require us to register their shares of common stock under the Securities Act at our expense. 13 There may not be an active market for our common stock, making it difficult to sell the stock you purchase. Prior to this offering, there has been no public market for our common stock. We cannot assure you that an active trading market for our common stock will develop or be sustained after the offering. The initial public offering price for our common stock will be determined by negotiations between the underwriters and us. We cannot assure you that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to the offering or that the price of our common stock available in the public market will reflect our actual financial performance. Our stock price could be volatile and could drop unexpectedly following this offering. Historically, stock prices and trading volumes for newly public companies fluctuate widely for a number of reasons, including some reasons that may be unrelated to their businesses or results of operations. This type of market volatility could depress the price of our common stock without regard to our operating performance. In addition, our operating results may be below the expectations of public market analysts or investors. If this were to occur, the market price of our common stock could decrease, perhaps significantly. The forward-looking statements contained in this prospectus are based on our predictions of future performance. As a result, you should not place undue reliance on these forward-looking statements. This prospectus contains forward-looking statements, including, without limitation, statements concerning the conditions in the semiconductor and semiconductor capital equipment industries, our operations, economic performance and financial condition, including in particular statements relating to our business and growth strategy and product development efforts. The words "believe," "expect," "anticipate," "intend" and other similar expressions generally identify forward-looking statements. Potential investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under this "Risk Factors" section and elsewhere in this prospectus and other risks and uncertainties indicated from time to time in our filings with the SEC. Actual results could differ materially from these forward-looking statements. In addition, important factors to consider in evaluating such forward-looking statements include changes in external market factors, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors and various other competitive factors. In light of these risks and uncertainties, there can be no assurance that the matters referred to in the forward-looking statements contained in this prospectus will in fact occur. We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances. 14 USE OF PROCEEDS We estimate that our net proceeds from the sale of 12,500,000 shares of common stock in this offering will be approximately $179.6 million, assuming an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus. We intend to use a significant portion of our net proceeds to repurchase our outstanding senior subordinated notes, to pay the prepayment premiums and accrued and unpaid interest thereon, to repay in full all outstanding obligations under our senior credit facility and to pay fees and expenses of this offering. We will use any remaining net proceeds, if any, for general corporate purposes, including working capital. Pending such uses, we will invest such proceeds in short-term, interest-bearing, investment-grade securities. Our senior subordinated notes due 2009 in the aggregate outstanding principal amount of $93.0 million bear interest at the rate of 11 1/2% per annum. We have commenced a tender offer to repurchase the aggregate outstanding principal amount of our senior subordinated notes at a price equal to 117.50% (estimated as of April 26, 2000) of the principal amount thereof, and as of May 15, 2000 all of the senior subordinated notes have been tendered. The tender offer is subject to conditions, including the completion of this offering and the valid tender of at least 90% of the outstanding principal amount of our senior subordinated notes. If we do not complete the tender offer, we expect to use the net proceeds from this offering to make an offer to redeem up to $28.0 million of the aggregate outstanding principal amount of the senior subordinated notes at a price equal to 111.50% of the principal amount thereof plus accrued and unpaid interest thereon and purchase the remaining senior subordinated notes through open market purchases, privately negotiated transactions, one or more tender offers or exchange offers or otherwise. Approximately 8% of the senior subordinated notes are held by investment funds advised by Sankaty Advisors, Inc., an affiliate of Bain Capital. Our senior credit facility provides for two groups of term loans: term A loans for $30.0 million and term B loans for $40.0 million. The senior credit facility also provides for revolving loans for up to $25.0 million, including letters of credit. As of April 1, 2000, we owed $57.6 million under our senior credit facility. The different loans under the senior credit facility are due as follows: . the revolving loans--May 11, 2004; . the term A loans--2.0% in 2000, 14.0% in 2001, 20.0% in 2002, 28.0% in 2003 and 36.0% in 2004; and . the term B loans--1.0% in each of 2000, 2001, 2002, 2003 and 2004, 40.0% in 2005 and 55.0% in 2006. As of April 1, 2000, the interest rates for outstanding indebtedness under our senior credit facility were: . the term A loans--8.4%; and . the term B loans--9.1%. We will use some of the net proceeds of this offering to repay all outstanding indebtedness under our senior credit facility. We will then terminate the senior credit facility, and after this offering, we intend to enter into a new revolving credit facility to meet our working capital and general corporate needs. Approximately 12% of the indebtedness outstanding under our senior credit facility is owed to an investment fund advised by Sankaty Advisors, Inc., an affiliate of Bain Capital. Approximately 15% of the indebtedness outstanding under our senior credit facility is owed to Credit Suisse First Boston, an affiliate of Credit Suisse First Boston Corporation, one of our underwriters. See "Certain Relationship and Related Transactions." 15 THE RECLASSIFICATION Prior to this offering, we had three classes of common stock, designated as Class A common stock, Class B common stock and Class L common stock. The Class A common stock and Class B common stock were identical, except that the Class B common stock was non-voting and was convertible on a share-for-share basis into Class A common stock at any time so long as, after giving effect to the conversion, the converting Class B common shareholders and their affiliates did not own more than 49.9% of the outstanding shares of Class A common stock. The Class A common stock was also convertible at any time on a share-for-share basis into Class B common stock. The Class L common stock was identical to the Class A common stock and the Class B common stock, except that (1) each share of Class L common stock was entitled to a preferential payment upon any distribution by us to holders of Class A common stock and Class B common stock, whether by dividend, liquidating distribution or otherwise, equal to the original cost of such share ($18.00) plus an amount which accrued on a daily basis at a rate of 9.0% per annum, compounded on a calendar quarter, and (2) the Class L common stock and the Class B common stock were non-voting. This preferential amount is referred to herein as the "Preference Amount." On May 22, 2000, the estimated effective date of this offering, the Preference Amount will be $19.72 per share of Class L common stock issued at the time of the recapitalization. We also had one class of preferred stock, designated Series A preferred stock. The Series A preferred stock had a liquidation preference of $4.00 per share, plus all accrued and unpaid dividends thereon at a rate of 7.5% per annum, and each share was convertible at any time into 0.9 share of Class A common stock and 0.1 share of Class L common stock. Prior to the effectiveness of the registration statement of which this prospectus is a part our articles of incorporation will be amended to provide that: . each share of our Series A preferred stock will be converted into shares of Class A common stock and Class L common stock, as described above; . each share of outstanding Class A common stock and Class B common stock will be reclassified into a single class of common stock on a share-for- share basis; and . each share of outstanding Class L common stock will be reclassified into one share of common stock plus an additional number of shares of common stock determined by dividing the Preference Amount by the value of a share of common stock based on the initial public offering price. The foregoing is referred to in this prospectus as the "reclassification." None of these newly converted shares will be sold at the time of the offering unless the underwriters exercise their option to purchase up to 1,875,000 shares of common stock to cover over-allotments. Assuming an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, a Preference Amount of $19.72 per share on Class L common stock, and an effective date of May 22, 2000 for this offering, an aggregate of 4,636,791 shares of common stock will be issued in exchange for the outstanding shares of Class L common stock in connection with the reclassification (prior to the stock-split). The actual number of shares of common stock that will be issued as a result of the reclassification is subject to change based on the actual offering price and the effectiveness of the registration statement of which this prospectus forms a part. Fractional shares otherwise issuable as a result of the reclassification will be rounded to the nearest whole number. See "Description of Capital Stock." 16 CAPITALIZATION The following table sets forth the cash and cash equivalents and the capitalization of our company as of April 1, 2000, on an actual basis and on an adjusted basis to reflect: (1) the reclassification and a 1.6942-for-1 stock split and (2) the sale by us of 12,500,000 shares of common stock pursuant to this offering and the application of the net proceeds therefrom as described in Note 1 below, assuming an offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus. This table should be read in conjunction with the "Selected Historical Financial Data" included elsewhere in this prospectus.
April 1, 2000 -------------------- Actual As Adjusted ------- ----------- (in millions) Cash and cash equivalents................................. $ 31.3 $ 43.3 ======= ======= Long-term obligations (including current portion): Senior credit facility(1)............................... $ 57.6 -- Senior subordinated notes(1)............................ 93.0 -- Other long-term obligations............................. -- -- ------- ------- Total long-term obligations........................... 150.6 -- Stockholders' equity (deficit): Common stock, $0.01 par value, no shares authorized or issued on an actual basis and 63,492,905 shares issued and outstanding on an as adjusted basis................ -- 0.6 Series A preferred stock, $4.00 par value, 3,367,000 shares authorized, issued and outstanding and no shares authorized, issued and outstanding on an as adjusted basis.................................................. 13.5 -- Class A common stock, $0.01 par value, 52,520,000 shares authorized; 28,425,426 shares issued and outstanding on an actual basis and no shares authorized, issued and outstanding on an as adjusted basis.................... 0.3 -- Class B common stock, $0.01 par value, 52,520,000 shares authorized; 9,577,446 shares issued and outstanding on an actual basis and no shares authorized, issued and outstanding on an as adjusted basis.................... 0.1 -- Class L common stock, $0.01 par value, 6,777,000 shares authorized; 3,997,808 shares issued and outstanding on an actual basis and no shares authorized, issued and outstanding on an as adjusted basis.................... 0.0 -- Additional paid-in capital.............................. 34.6 227.5 Accumulated deficit(2).................................. (120.9) (138.3) Other................................................... (0.3) (0.3) ------- ------- Total stockholders' equity (deficit).................. (72.7) 89.5 ------- ------- Total capitalization.................................. $ 77.9 $ 89.5 ======= =======
- --------------------- (1) The "As Adjusted" amounts assume a portion of the net proceeds are used to (a) repurchase the outstanding aggregate principal amount of our senior subordinated notes at an assumed price of approximately 117.50% (as of April 26, 2000) (plus accrued and unpaid interest thereon) through a tender offer that we have recently commenced; and (b) repay all of the outstanding obligations under our senior credit facility. As of May 15, 2000 all of the senior subordinated notes have been tendered. We currently do not have a contractual right to redeem $65.0 million of the aggregate outstanding principal amount of the senior subordinated notes. A 1.0% increase or decrease in the price required to repurchase the senior subordinated notes would change "As Adjusted Total Capitalization" by $0.9 million. (2) The "As Adjusted" accumulated deficit balance at April 1, 2000 includes an extraordinary charge of $17.4 million (net of tax) relating to (a) a prepayment penalty, totaling $10.2 million (net of tax), associated with the repurchase of the aggregate outstanding principal amount of our senior subordinated notes and (b) the elimination of the deferred financing costs, totaling $7.1 million (net of tax) associated with the repayment of our senior subordinated notes and the retirement of our senior credit facility. 17 DIVIDEND POLICY We have not in the past paid, and do not expect for the foreseeable future to pay, dividends on our common stock. Instead, we anticipate that all of our earnings in the foreseeable future will be used for working capital and other general corporate purposes. The payment of dividends by us to holders of our common stock is prohibited by our senior credit facility and is restricted by our indenture relating to the senior subordinated notes. After this offering, we will enter into a new revolving credit facility that may restrict our ability to pay dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions. DILUTION Our pro forma net tangible book value, as of April 1, 2000, was $(85.6) million, or $(1.68) per share of common stock. Pro forma net tangible book value per share is determined by dividing our tangible net capital by the aggregate number of shares of common stock outstanding, assuming the reclassification had taken place on April 1. For purposes of the foregoing, we calculated our net capital by subtracting our intangible assets and total liabilities from our total assets. After giving effect to (1) the sale of the shares of common stock offered hereby, at an assumed offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, (2) the receipt and application of the net proceeds therefrom as described in "Use of Proceeds," and (3) the net change in our diluted outstanding common stock between January 1, 2000 and May 1, 2000, pro forma net tangible book value as of April 1, 2000 would have been approximately $88.6 million, or $1.40 per share. This represents an immediate increase in pro forma net tangible book value of $3.08 per share to the current shareholders and an immediate dilution in pro forma net tangible book value of $14.60 per share to purchasers of common stock in the offering. The following table illustrates this per share dilution: Initial public offering price per share........................ $16.00 Pro forma net tangible book value per share at April 1, 2000........................................................ $(1.68) Increase per share attributable to new investors............. 3.08 ------ Pro forma net tangible book value per share after this offering...................................................... 1.40 ------ Net tangible book value dilution per share to new investors(1).................................................. $14.60 ======
- --------------------- (1) Dilution is determined by subtracting pro forma net tangible book value per share after the offering from the offering price per share. The following table summarizes, on a pro forma basis, as of May 1, 2000, the number of shares purchased, the total consideration paid (or to be paid) and the average price per share paid (or to be paid) by the existing shareholders and the purchasers of common stock in the offering, at an assumed offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, before deducting the estimated offering expenses and underwriting discounts and commissions:
Shares Purchased Total Consideration ------------------ --------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ------------- ------- ------------- (in millions) Existing shareholders... 50,992,905 80.3% $ 63.3 24.0% $ 0.81 New investors........... 12,500,000 19.7 200.0 76.0 $16.00 ---------- ----- ------ ----- Total................. 63,492,905 100.0% $263.3 100.0% ========== ===== ====== =====
On a pro forma basis, as of May 1, 2000, there were an aggregate of: (1) 8,786,672 shares of common stock issuable upon the exercise of outstanding options granted under our stock plans, of which 373,965 were then exercisable at an exercise price of $2.12 per share; and (2) approximately 6,800,000 additional shares of common stock expected to be reserved for grants, awards or sale under our 2000 Long-Term Equity Incentive Plan or sale under our 2000 Employee Stock Purchase Plan. 18 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The unaudited pro forma consolidated statement of operations for the year ended July 3, 1999 and the nine months ended April 1, 2000 give effect to (1) the stock split and the reclassification and (2) the consummation of this offering and the application of the net proceeds therefrom, as described under "Use of Proceeds" and (3) the adjustments described in the accompanying notes as if each had occurred on June 28, 1998. The unaudited pro forma consolidated balance sheet as of April 1, 2000 gives pro forma effect to (1) the stock split and the reclassification, (2) the consummation of this offering and the application of the net proceeds therefrom as described in this prospectus and (3) the adjustments described in the accompanying notes. The unaudited pro forma consolidated financial data are provided for informational purposes only and are not necessarily indicative of the results of our operations or financial position had the transactions assumed therein occurred, nor are they necessarily indicative of the results of operations which may be expected to occur in the future. Furthermore, the unaudited pro forma consolidated financial data are based upon assumptions that we believe are reasonable and should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. The unaudited pro forma consolidated statements of operations do not reflect extraordinary losses on the early extinguishments of debt resulting from the write-off of debt issuance costs and the incurrence of prepayment penalties (including accrued interest and related fees and expenses) in connection with the prepayment of debt upon completion of the offering estimated at $11.9 million and $17.0 million, respectively. The unaudited pro forma consolidated balance sheet, however, does reflect such charges and the related tax benefits of $4.8 million and $6.8 million, respectively. 19 INTEGRATED CIRCUIT SYSTEMS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS Nine Months Ended April 1, 2000 (in thousands, except per share data)
Historical Adjustments Pro Forma ---------- ----------- --------- Revenue..................................... $120,511 $120,511 Cost of sales............................... 48,938 48,938 -------- -------- Gross margin.............................. 71,573 71,573 Expenses: Research and development.................. 18,062 18,062 Selling, general and administrative....... 17,159 17,159 Management fee............................ 750 (750)(a) -- -------- ------- -------- Operating income........................ 35,602 750 36,352 Interest expense............................ 13,855 (13,855)(b) -- Interest and other income................... (792) (792) -------- ------- -------- Pretax income from continuing operations and before extraordinary items........... 22,539 14,605 37,144 Income tax expense...................... 2,213 5,842 (g) 8,055 -------- ------- -------- Income from continuing operations before extraordinary items........................ $ 20,326 $ 8,763 $ 29,089 ======== ======= ======== Net income per common share (h): Basic..................................... $ 0.52 ======== Diluted................................... $ 0.44 ======== Weighted average common shares outstanding: Basic..................................... 56,036 ======== Diluted................................... 65,889 ========
See "Notes to Unaudited Pro Forma Consolidated Statement of Operations." 20 INTEGRATED CIRCUIT SYSTEMS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For Fiscal Year Ended July 3, 1999 (in thousands, except per share data)
Historical Adjustments Pro Forma ---------- ----------- --------- Revenue.................................... $139,063 $139,063 Cost of sales.............................. 64,496 64,496 -------- -------- Gross margin............................. 74,567 74,567 Expenses: Research and development................. 21,316 (4,508)(c) 16,808 Selling, general and administrative...... 19,794 (413)(d) 18,478 (903)(e) Compensation costs....................... 15,051 (15,051)(f) -- -------- ------- -------- Operating income....................... 18,406 20,875 39,281 Interest expense........................... 2,955 (2,859)(b) 96 Interest and other income.................. (2,178) (2,178) (Gain) on sale of assets................... (10,734) 10,734(c) -- -------- ------- -------- Income before income taxes from continuing operations................... 28,363 13,000 41,363 Income tax expense..................... 5,320 9,494(g) 14,814 -------- ------- -------- Income from continuing operations before extraordinary items....................... $ 23,043 $ 3,506 $ 26,549 ======== ======= ======== Net income per common share(h): Basic.................................... $ 0.48 ======== Diluted.................................. $ 0.43 ======== Weighted average common shares outstanding: Basic.................................... 55,454 ======== Diluted.................................. 61,647 ========
See "Notes to Unaudited Pro Forma Consolidated Statement of Operations" on the following page. 21 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (a) Reflects elimination of management fees incurred in connection with our management agreements with each of Bain Capital and Bear Stearns which will be terminated in connection with this offering by mutual consent of the parties. We will pay an aggregate fee of $2.7 million to terminate these agreements. Such termination fees have not been reflected in our pro forma consolidated statement of operations. (b) Reflects the decrease in interest expense in connection with the use of net proceeds from the offering to repurchase our senior subordinated notes and repay our senior credit facility. (c) On February 18, 1999, we sold certain intellectual property and equipment of our non-core data communications product group to 3Com Corporation for approximately $16.0 million in cash, resulting in a $10.7 million non- taxable gain. Because we retain the right to sell certain of our existing and next generation transceiver products, no adjustments have been made to eliminate the historical revenue of non-core data communications product group, which was approximately $7.5 million in the nine months ended April 1, 2000 and $15.2 million in fiscal 1999. The adjustment reflects the impact on income from operations resulting from the sale of the assets of our non-core data communications product group, as summarized in the table below: Research and development costs, net.................................. $4,244 Sublease rental income............................................... 264 ------ Impact on income from operations..................................... $4,508 ======
(d) On April 13, 1999, we sold our corporate headquarters located in Norristown, PA. Concurrent with the sale, we entered into an operating lease arrangement for the property with the buyer. The adjustment reflects the impact on income from operations resulting from the sale and leaseback of the facility, as summarized in the table below: Operating lease payments............................................. $(576) Building depreciation................................................ 163 ----- Impact on income from operations..................................... $(413) =====
(e) The pro forma adjustment represents non-recurring investment banking, legal and other fees incurred in connection with the recapitalization and proxy contest relating to our February 1, 1999 shareholder meeting. (f) In fiscal 1999, we recorded a $15.1 million charge related to the accelerated vesting, cash-out and conversion of employee stock options that occurred upon the consummation of the recapitalization. (g) Represents the income tax adjustments required to result in a pro forma income tax provision based on: (i) our historical tax provision using historical tax amounts and (ii) the direct tax effect of the pro forma adjustments described above at an estimated 40% effective tax rate. (h) Pro forma net income per share and weighted average shares outstanding have been adjusted to reflect the reclassification of all classes of common stock into one class of common stock and reflects the 1.6942-to-1 stock- split that will occur as of the pricing date of this offering. In addition, shares being sold in this offering have been included in weighted average shares outstanding because the proceeds will be used to repay outstanding indebtedness. 22 INTEGRATED CIRCUIT SYSTEMS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET April 1, 2000 (in thousands)
Historical Adjustments Pro Forma ---------- ----------- --------- ASSETS: Current assets: Cash and cash equivalents............. $ 31,320 $ 179,600 (a) $ 43,323 (150,597)(a) (17,000)(b) Marketable securities................. 278 278 Accounts receivable, net.............. 18,389 18,389 Inventories, net...................... 8,829 8,829 Prepaid expenses and other current assets............................... 12,529 12,529 Prepaid income taxes.................. -- 6,745 (e) 6,745 Deferred income taxes................. 8,209 8,209 --------- --------- --------- Total current assets................ 79,554 18,748 98,302 --------- --------- --------- Property and equipment, net ............ 12,335 12,335 Debt issue costs, net................... 11,947 (11,947)(c) -- Other assets............................ 1,455 1,455 --------- --------- --------- $ 105,291 $ 6,801 $112,092 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): Current liabilities: Current portion of long term obligations.......................... $ 23 $ 23 Accounts payable...................... 11,093 11,093 Income tax payable.................... 4,834 (6,800)(b) (4,779)(c) 6,745 (e) -- Accrued expenses and other............ 9,179 9,179 --------- --------- --------- Total current liabilities........... 25,129 (4,834) 20,295 --------- --------- --------- Senior credit facility.................. 57,597 (57,597)(a) -- Senior subordinated notes............... 93,000 (93,000)(a) -- Deferred income taxes................... 928 928 Other liabilities....................... 1,373 1,373 --------- --------- --------- Total liabilities................... 178,027 $(155,431) 22,596 --------- --------- --------- Stockholders' equity (deficit) New common stock...................... -- 635 (a) 635 Series A preferred stock.............. 13,467 (13,467)(d) -- Class A common stock.................. 285 (285)(d) -- Class B common stock.................. 96 (96)(d) -- Class L common stock.................. 40 (40)(d) -- Additional paid in capital............ 34,579 178,965 (a) 227,432 13,888 (d) Accumulated deficit................... (120,923) (10,200)(b) (138,291) (7,168)(c) Notes receivable...................... (280) (280) --------- --------- --------- Total stockholders' equity (deficit).... (72,736) 162,232 89,496 --------- --------- --------- $ 105,291 $ 6,801 $ 112,092 ========= ========= =========
See "Notes to Unaudited Pro Forma Consolidated Balance Sheet" on the following page. 23 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET April 1, 2000 (a) Reflects our sale of 12,500,000 shares of common stock generating gross proceeds of $200.0 million and the use of the estimated net proceeds of $179.6 million, net of the estimated underwriting discount and the offering expenses totaling $20.4 million, to (i) repurchase our senior subordinated notes, (ii) repay our senior credit facility and (iii) pay prepayment premiums (including accrued interest and related fees and expenses) of $17.0 million related to our senior subordinated notes. See "Use of Proceeds" and "Description of Indebtedness." (b) Reflects the prepayment premiums of $17.0 million, before $6.8 million of related income tax benefit (at a 40% effective tax rate), on our senior subordinated notes resulting from the repayment of the debt in connection with the offering. (c) Represents the write-off of $11.9 million in deferred financing costs, before $4.8 million of related income tax benefit (at a 40% effective tax rate), resulting in an extraordinary loss of $7.1 million in connection with the paydown of outstanding debt in connection with the offering. Amounts will differ based on the effective date of the offering. (d) Adjusted to give effect to the stock split and the reclassification. (e) Reclass the income tax benefit to prepaid income taxes. 24 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. Our selected historical consolidated statements of operations data for the fiscal years ended July 3, 1999, June 27, 1998, June 28, 1997 and the selected historical consolidated balance sheet data as of July 3, 1999 and June 27, 1998 were derived from our historical consolidated financial statements that were audited by KPMG LLP, whose report appears elsewhere in this prospectus. Our selected historical statements of operations data for the fiscal years ended June 29, 1996 and June 30, 1995 and the selected historical balance sheet data as of June 28, 1997, June 29, 1996 and June 30, 1995 were derived from our audited financial statements that are not included in this prospectus. Our selected historical consolidated statements of operations for the nine months ended March 27, 1999 and April 1, 2000, and the selected historical balance sheet data as of March 27, 1999, and April 1, 2000, were derived from our unaudited interim consolidated financial statements that appear elsewhere in this prospectus. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of the Financial Condition and Results of Operations" and the Consolidated Financial Statements and the notes accompanying them included elsewhere in this prospectus.
Year Ended(a) Nine Months Ended ------------------------------------------------- ------------------- June 30, June 29, June 28, June 27, July 3, March 27, April 1, 1995 1996 1997 1998 1999 1999 2000 -------- -------- -------- -------- --------- --------- -------- (in thousands, except per share data) Statement of Operations Data: Revenue: Core................... $56,844 $52,714 $ 63,280 $ 90,622 $ 107,710 $ 78,612 $106,801 Non-core............... 40,901 38,616 41,079 70,012 31,353 24,383 13,710 ------- ------- -------- -------- --------- -------- -------- Total revenue.......... $97,745 $91,330 $104,359 $160,634 $ 139,063 $102,995 $120,511 ======= ======= ======== ======== ========= ======== ======== Gross margin............ 52,096 36,482 45,222 71,775 74,567 52,820 71,573 Research and development............ 10,995 10,547 13,521 19,797 21,316 16,435 18,062 Selling, general and administrative......... 20,450 18,653 15,654 19,678 19,794 15,086 13,905 Special charges (b)..... 7,428 3,257 11,196 -- 15,051 -- 4,004 ------- ------- -------- -------- --------- -------- -------- Income from operations.. 13,223 4,025 4,851 32,300 18,406 21,299 35,602 Interest expense (c).... 715 403 63 64 2,955 78 13,855 Gain on sale of assets.. -- -- -- -- (10,734) (10,580) -- Interest and other expense (income), net.. (1,126) (2,390) 5,984 (1,984) (2,178) (1,917) (792) ------- ------- -------- -------- --------- -------- -------- Income (loss) from continuing operations before income taxes.... 13,634 6,012 (1,196) 34,220 28,363 33,718 22,539 Income tax expense...... 5,151 1,376 6,314 12,845 5,320 8,547 2,213 ------- ------- -------- -------- --------- -------- -------- Income (loss) from continuing operations.. 8,483 4,636 (7,510) 21,375 23,043 25,171 20,326 Loss from discontinued operations (d)......... (3,560) (721) (909) -- -- -- -- Gain from extraordinary item................... -- -- -- -- -- -- 170 ------- ------- -------- -------- --------- -------- -------- Net income (loss)....... $ 4,923 $ 3,915 $ (8,419) $ 21,375 $ 23,043 $ 25,171 $ 20,496 ======= ======= ======== ======== ========= ======== ======== Diluted income per share (e).................... $ 0.26 $ 0.20 $ (0.43) $ 0.96 $ 0.86 $ 1.19 $ 0.41 Weighted average shares outstanding (diluted) (e).......... 18,712 19,639 19,439 22,264 26,278 21,111 43,104 Other Financial Data: EBITDA (excluding non- recurring charges) (f)........... $23,690 $10,411 $ 19,791 $ 36,879 $ 38,422 $ 24,904 $ 42,977 Gross margin %.......... 53.3% 39.9% 43.3% 44.7% 53.6% 51.3% 59.4% Cash provided by operating activities... 16,019 11,476 10,397 22,345 24,450 23,993 26,886 Cash provided by (used in) investing activities............. (8,792) 6,109 (19,274) (13,490) 20,675 (2,662) 1,731 Cash provided by (used in) financing activities............. (1,468) 3,145 (74) (1,940) (61,180) (2,288) (6,582) Capital expenditures.... 3,508 4,390 3,358 8,139 7,694 6,618 3,505 Depreciation and amortization........... 3,039 3,129 3,744 4,579 4,965 3,605 3,371 Balance Sheet Data: Cash and cash equivalents............ $ 9,960 $27,376 $ 18,425 $ 25,340 $ 9,285 $ 44,383 $ 31,320 Working capital......... 45,470 48,023 48,260 65,113 26,910 82,823 54,425 Total assets............ 77,691 87,570 90,622 108,009 87,795 132,007 105,291 Total debt.............. 3,774 4,063 1,709 1,523 170,030 1,411 150,620 Stockholders' equity (deficit).............. 62,484 69,164 70,147 89,768 (106,912) 114,197 (72,736)
See "Notes to Selected Historical Consolidated Financial Data" on the following page. 25 Notes to Selected Historical Consolidated Financial Data (in thousands) (a) Our fiscal year is based upon a 52/53 week operating cycle that ends on the Saturday nearest June 30. All of the fiscal year periods presented represent a 52-week operating cycle, except for fiscal year 1999 which represents 53 weeks. (b) Special charges consist of the following:
Year Ended Nine Months Ended ------------------------------------------ ------------------ June June 30, June 29, 28, June 27, July 3, March 27, April 1, 1995 1996 1997 1998 1999 1999 2000 -------- -------- ------- -------- ------- --------- -------- Compensation cost(1).... -- -- -- -- $15,051 -- -- Change in business strategy(2)............ 3,822 -- -- -- -- -- -- Discontinued product lines(2)............... 3,606 -- -- -- -- -- -- Facility closings(3).... -- 1,757 -- -- -- -- -- Write-off of in-process research and development costs(3)(4)............ -- 1,500 11,196 -- -- -- -- Litigation settlement(5).......... -- -- -- -- -- -- 4,004 ------ ------ ------- --- ------- --- ------ $7,428 $3,257 $11,196 -- $15,051 -- $4,004 ====== ====== ======= === ======= === ======
- --------------------- (1) In connection with the recapitalization, the Company recorded a one-time compensation charge of $15.1 million related to the accelerated vesting, cash-out and conversion of employee stock options. (2) We recorded charges of $3.8 million and $3.6 million in connection with the severance and other exit costs associated with the redirection of our multimedia strategy and the transfer of our test operations to offshore subcontractors. (3) We recorded a one-time charge of $1.8 million for a facility closing and a $1.5 million charge for the non-deductible intangible write-off incurred in connection with the acquisition of Value Media. (4) We recorded a one-time charge of $11.2 million for the non-deductible intangible write-off incurred in connection with our acquisition of MicroClock, Inc. (5) In connection with the establishment of our Arizona design center, we recorded a one-time charge of $4.0 million. (c) On May 11, 1999, we effected the recapitalization. We issued $100.0 million in aggregate principal amount of our senior subordinated notes in connection with the recapitalization and entered into our $95.0 million senior credit facility. As of April 1, 2000, $93.0 million aggregate principal amount of our senior subordinated notes was outstanding, and $57.6 million was outstanding under our senior credit facility. (d) In fiscal 1995, we acquired a 51% majority interest in ARK Logic, Inc., a developer of complex graphic accelerator chips. Subsequently, in fiscal year 1997, we disposed of our majority interest in ARK Logic, Inc. The disposition of ARK Logic, Inc. was accounted for as a discontinued operation and all periods prior to the disposition have been restated to reflect this presentation. (e) Diluted income per share and weighted average shares outstanding-diluted have been adjusted to reflect the 1.6942-to-1 common stock-split that will occur as of the pricing date of this offering. (f) EBITDA represents earnings from continuing operations before interest, taxes, depreciation, amortization, other income and expense and special charges. EBITDA is presented because we believe that it is frequently used by security analysts in the evaluation of companies. However, EBITDA should not be considered as an alternative to cash flow from operating activities as a measure of liquidity, as an alternative to net income, as an indicator of our operating performance, or as an alternative to any other measures of performance in accordance with generally accepted accounting principles. 26 The following table sets forth a reconciliation of income (loss) from continuing operations before income taxes to EBITDA (See notes to "Unaudited Pro Forma Consolidated Statements of Operations" for additional details):
Year Ended Nine Months Ended --------------------------------------------- ------------------ June June June 30, 29, June 28, 27, July 3, March 27, April 1, 1995 1996 1997 1998 1999 1999 2000 ------- ------- -------- ------- -------- --------- -------- Income (loss) from continuing operations, before income taxes.... $13,634 $ 6,012 $ (1,196) $34,220 $ 28,363 $33,718 $22,539 Depreciation and amortization........... 3,039 3,129 3,744 4,579 4,965 3,605 3,371 Interest expense........ 715 403 63 64 2,955 78 13,855 Interest and other expense (income), net.. (1,126) (2,390) 5,984 (1,984) (2,178) (1,917) (792) Gain on sale of assets.. -- -- -- -- (10,734) (10,580) -- Special charges......... 7,428 3,257 11,196 -- 15,051 -- 4,004 ------- ------- -------- ------- -------- ------- ------- EBITDA.................. $23,690 $10,411 $ 19,791 $36,879 $ 38,422 $24,904 $42,977 ======= ======= ======== ======= ======== ======= =======
27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a worldwide leader in the design, development and marketing of silicon timing devices for a number of high-growth application segments. Our silicon timing devices are used in a variety of consumer and business electronics such as personal computers, or PCs, digital cameras, set-top boxes, PC peripherals and DVD players. Our products are increasingly being used in various communications applications including routers, switches, fiber optics, cable modems and ADSL equipment. Silicon timing devices are integrated circuits that emit timing signals or pulses required to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. All digital devices require a timing signal and those with any degree of complexity require silicon timing devices to time and synchronize their various operations. We currently operate through two product groups: our core silicon timing business, which includes products sold to the consumer and business electronics and communications equipment industries, and our non-core business, which includes integrated circuits called transceivers used primarily to receive and transmit electronic data between PCs in networking applications and custom mixed-signal integrated circuits that combine analog and digital technology. While our core silicon timing business continues to grow, we expect that the contribution from our non-core business will decline over time. Substantially all of our research and development investment, as well as our marketing and sales efforts, are focused, and will continue to focus, on our core silicon timing business. Prices for our products are predominantly a function of their position in the product life cycle, design complexity, competitive environment, the price of alternative solutions such as crystal oscillators and overall market demand. We recognize revenue upon shipment, and substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. After this offering and the use of the proceeds as previously described, we expect an increase in our effective income tax rate from 18.8% for fiscal 1999 and 9.8% for the first nine months of fiscal 2000. Had this offering occurred at the beginning of our fiscal year, we estimate that our effective tax rate for the nine six months of fiscal 2000 would have been 19.2% due to the elimination of interest expense. Our tax rate reflects the revenue we recognize through our testing facility in Singapore. Because of this investment in Singapore, we have been granted a tax holiday through 2003, which reduces our overall tax expense. We intend to apply for an extension of this tax holiday when it expires. We incurred, in connection with a recently settled lawsuit involving the establishment of our Phoenix Design Center, an additional charge of approximately $0.9 million. We do not anticipate any further charges for this settlement. We expect to incur in the fourth quarter of fiscal 2000 a non- recurring extraordinary charge for early debt extinguishment of approximately $17.4 million, net of tax, relating primarily to the premium on the redemption and repurchase of our senior subordinated notes and the elimination of deferred financing costs associated with the repayment of our senior subordinated notes and the retirement of our senior credit facility. 28 Recent Developments and Outlook Our results for the three months ended April 1, 2000, the third quarter of fiscal 2000, are summarized below and are compared to the quarter ended March 27, 1999:
Three Months Ended ---------------------- March 27, April 1, 1999 2000 --------- -------- (dollars in millions) Revenue: Core................................................. $27.6 $37.0 Non-core............................................. 7.4 4.6 ----- ----- Total Revenue........................................ $35.0 $41.6 ===== ===== Gross Margin.......................................... 20.4 25.5 Gross Margin %........................................ 58.3% 61.4% Operating Profit...................................... $ 9.6 $13.0 Operating Margin %.................................... 27.3% 31.3%
Our revenue for the third quarter of fiscal 2000 was $41.6 million, an 18.9% increase over the corresponding quarter in fiscal 1999. Our core revenues increased 34.0% over the corresponding quarter in 1999, and increased as a proportion of total revenues to 88.9% from 78.9% over this period. The growth in our core revenues reflected an increase in market share for our silicon timing products in the PC industry, as well as sharply increased sales to the communications industry and digital set-top box applications. Gross margin increased from $20.4 million in the third quarter of fiscal 1999 to $25.5 million in the third quarter of fiscal 2000, an increase of 25.0%. The trend to higher margin products and material cost reductions increased gross margin as a percentage of sales to 61.3% from 58.3% in the similar period a year ago. We believe that a number of current initiatives and recent product introductions will make an increasing contribution to our financial performance throughout the next 12 to 18 months. Some of these initiatives are highlighted below. . We have introduced a broad product family for the communications industry, where growth and new broadband technologies are being driven by the rapid pace of Internet infrastructure development. We have numerous new design wins at communication OEMs including Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel. . We are currently involved in the design of silicon timing devices for the next generation of PC motherboards. We are well positioned to deliver significant volume for the Intel's Solano(R) and AMD's K7 motherboards this year. In particular, our new generation silicon timing devices under development are targeted for the Timna and Willamette processors, both of which are planned for mass production in calendar 2001. . Since 1998 we have increased revenues from silicon timing devices for digital set-top boxes and have developed substantial market share in this rapidly growing market. As conversion into digital set-top box applications accelerates, we have seen rapid growth in revenues from set-top box OEMs such as Hughes, General Instruments and Scientific Atlanta. . We continue to realize cost savings, particularly in our manufacturing and assembly processes. These cost savings have helped to improve our gross margin from 58.3% during the three months ended March 27, 1999 to 61.4% in the three months ended April 1, 2000. 29 Company History and Significant Transactions We were founded in 1976 as a mixed-signal (analog/digital) circuit design house, and we pioneered the silicon timing market in 1988, introducing products for video and graphics applications. The Recapitalization In the recapitalization on May 11, 1999, affiliates of Bain Capital, an affiliate of Bear Stearns and Co., Inc. and certain members of management made an aggregate equity investment in our company of approximately $50 million as part of agreements to redeem and purchase all of our outstanding shares of common stock and vested options for consideration (including fees and expenses) totaling $294.4 million. Sale of Certain Assets from our Non-Core Business On February 18, 1999, we sold certain intellectual property and equipment of our non-core data communications business to 3Com Corporation for $16.0 million in cash. We decided to reduce our ongoing investment in this business in order to focus on our core silicon timing business. We believe our core product groups will continue to experience stronger growth and higher margins, as well as represent a more favorable risk profile than our non-core business. Most importantly, we believe we have several competitive advantages in our core product groups which will enable us to sustain our leadership positions in these markets. The sale of certain assets from our non-core business benefits us by permanently eliminating certain costs associated with research and development while at the same time allowing us to retain the right to sell certain of our existing transceiver products over their remaining product life cycles. While revenue from this product group will decline over the next few years, this sale allows us to optimize this product group's cost structure and profit contribution while these products continue to be sold. Quarterly Results The following table sets forth the unaudited historical quarterly revenue, gross margins and gross profit percentage for our core and non-core product groups:
Fiscal Year --------------------------------------------------------------------------- 1998 1999 2000 -------------------------- -------------------------- ------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (dollars in millions) Revenue: Core.................. $22.8 $25.1 $23.3 $19.4 $24.1 $26.9 $27.6 $29.1 $32.4 $37.4 $37.0 Non-core.............. 15.8 17.9 20.2 16.1 8.1 8.9 7.4 7.0 5.4 3.7 4.6 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total............... $38.6 $43.0 $43.5 $35.5 $32.2 $35.8 $35.0 $36.1 $37.8 $41.1 $41.6 Gross Margin: Core.................. $10.2 $12.1 $11.2 $ 8.5 $11.0 $13.2 $16.5 $17.9 $18.8 $21.9 $22.7 Non-core.............. 7.3 7.5 8.4 6.6 3.9 4.3 3.9 3.9 3.2 2.1 2.8 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total............... $17.5 $19.6 $19.6 $15.1 $14.9 $17.5 $20.4 $21.8 $22.0 $24.0 $25.5 Gross Margin %: Core.................. 44.7% 48.2% 48.1% 43.8% 45.6% 49.1% 59.8% 61.5% 58.0% 58.6% 61.4% Non-core.............. 46.2 41.9 41.6 41.0 48.1 48.3 52.7 55.7 59.3 56.8 60.9 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total............... 45.3% 45.6% 45.1% 42.5% 46.3% 48.9% 58.3% 60.4% 58.2% 58.4% 61.3%
Growth in our business is being driven by our core silicon timing business. Recent successes in the consumer and business electronics market, particularly with our PC motherboards and digital set-top boxes, as well as our emerging presence in communications equipment products, have helped drive this growth. Our gross margin improvement in fiscal 1999 reflects our increasing volumes, sales of higher margin products, cost savings at our third party fabrication and assembly facilities and savings achieved by taking our testing procedures in-house at our Singapore testing facility. 30 Results of Operations The following table sets forth statement of operations line items as a percentage of total revenue for the periods indicated and should be read in conjunction with the Consolidated Financial Statements and notes thereto.
Year Ended Nine Months Ended -------------------------- ------------------ June 28, June 27, July 3, March 27, April 1, 1997 1998 1999 1999 2000 -------- -------- ------- --------- -------- (expressed as a percentage of total revenue) Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% Core.......................... 60.6 56.4 77.5 76.3 88.6 Non-core...................... 39.4 43.6 22.5 23.7 11.4 Gross margin.................... 43.3 44.7 53.6 51.3 59.4 Research and development expense........................ 13.0 12.3 15.3 16.0 15.0 Selling, general and administrative expense......... 15.0 12.3 14.3 14.6 11.6 Non-recurring special charge.... 10.6 -- 10.8 -- 3.3 ----- ----- ----- ----- ----- Operating income................ 4.7 20.1 13.2 20.7 29.5 Other expense (income).......... 5.8 (1.2) (1.6) (1.8) (0.7) Gain on sale of DataCom......... -- -- (7.7) (10.3) -- Interest expense................ 0.1 -- 2.1 0.1 11.5 ----- ----- ----- ----- ----- Income (loss) before income taxes from continuing operations..................... (1.2) 21.3 20.4 32.7 18.7 Income tax expense.............. (6.0) (8.0) (3.8) (6.5) (1.8) ----- ----- ----- ----- ----- Income (loss) from continuing operations..................... (7.2) 13.3 16.6 24.4 16.9 Loss from discontinued operations..................... (0.9) -- -- -- -- Extraordinary item.............. -- -- -- -- 0.1 ----- ----- ----- ----- ----- Net income (loss)............... (8.1)% 13.3% 16.6% 24.4% 17.0% ===== ===== ===== ===== =====
Nine Months Ended April 1, 2000, as Compared to Nine Months Ended March 27, 1999 Total revenue for the nine months ended April 1, 2000, increased by $17.5 million to $120.5 million as compared to the similar period in the previous year. The increase is primarily due to the increase in revenue generated by our core silicon timing business. The core silicon timing revenue increased by $28.2 million to $106.8 million for the nine months ended April 1, 2000, as compared to the prior year period. The increase is principally attributable to strong demand from PC motherboard and set-top box products. We were successful in the sale of products to the communications equipment industry. Core revenue contributed approximately 88.6% of consolidated revenue for the nine months of fiscal 2000, which represented an increase from 76.3% for the prior year period. Non-core revenue decreased by $10.7 million to $13.7 million for the nine months ended April 1, 2000, as compared to the prior year period. Non-core revenue represented approximately 11.4% of total revenue in the nine months of fiscal year 2000, as compared to 23.7% in the prior year period. This is primarily due to shifting the focus to the core silicon timing business. We sold intellectual property and equipment of its non-core business to 3Com Corporation on February 18, 1999, and continue to sell and support existing and next generation Fast Ethernet transceiver products. Foreign revenue (which includes shipments of integrated circuits to foreign companies as well as offshore subsidiaries of US multinational companies) was 70.3% of total revenue for the nine months of fiscal 2000 as compared to 69.0% of total revenue in the prior year period. While the percentage increase reflected growing sales to the Pacific Rim markets, certain of our international sales were to customers in the Pacific Rim which in turn sold some of their products to North America, Europe and other non-Asian markets. 31 Despite an increase in total revenues, cost of sales decreased $1.3 million to $48.9 million for the nine months ended April 1, 2000, as compared to the prior year period, due to material cost savings in the manufacturing processes, cost savings from our in-house testing and favorable product mix trends. Cost of sales as a percentage of total revenue was 40.6% for the first nine months of fiscal 2000 as compared to 48.7% in the prior year period. Research and development, or R&D, expense increased $1.7 million to $18.1 million for the first nine months of fiscal 2000 from $16.4 million in the prior year period. As a percentage of revenue, research and development decreased to 15.0% as compared to 16.0% in the nine months of fiscal 1999. Continued emphasis on R&D has contributed to the increase in expense with greater spending in research and development for the core silicon timing business. This increase is slightly offset by the decreased expenses for the non-core business. This increased expense represented a lower percentage of revenue due to the significant increase in sales during fiscal 2000. Selling, general and administrative expense increased $2.8 million to $17.9 million for the nine months of fiscal 2000 as compared to the prior year period. The increase is primarily due to a $2.3 million payment in connection with a recently settled lawsuit involving the establishment of our Phoenix design center. As a party to a consulting agreement with both Bain Capital and Bear Stearns, we incurred a management fee for the nine months ended April 1, 2000 equal to $0.8 million, or 0.6% of revenue. There was no management fee in the prior year period. As a percentage of total revenue, selling, general and administrative expenses increased to 15.4% of revenue as compared to 14.6% in the prior year period. Goodwill amortization remained flat at $0.2 million for both periods presented. In dollar terms, operating income was $35.6 million in the nine months of fiscal 2000 compared to $21.3 million in the prior year period. Expressed as a percentage of revenue, operating income was 29.5% and 20.7% in the nine months of fiscal 2000 and the prior year period, respectively. Interest and other income was $0.7 million for the nine months ended April 1, 2000 and $12.5 million in the prior year period. Interest income decreased as a result of lower cash balances available for investing. Interest expense was $13.9 million in the nine months of fiscal 2000 and $0.1 million in the nine months of fiscal 1999. The increase in interest expense is attributable to the financing obtained in connection with our May 1999 recapitalization. Gain on the early retirement of bonds, net of taxes, was $0.2 million for the nine months of fiscal 2000. There was no gain on retirement of bonds during the prior year period. Our effective income tax rate was 9.8% for the nine months of fiscal 2000 as compared to 25.3% in the prior year period. The decrease in the tax rate is primarily attributable to the tax benefits of our Singapore operations and additional interest expense. As our Singapore facility becomes more profitable, it causes our consolidated tax rate to decrease due to Singapore's tax holiday, in which operating income is not taxable for five years ending in fiscal 2003. Fiscal Year 1999 as compared to Fiscal Year 1998 We achieved revenue of $139.1 million in fiscal year 1999, as compared to $160.6 million in fiscal year 1998. This decrease in fiscal year 1999 revenue was attributable to a decrease in revenue from the non-core product lines. Our core component revenue increased $17.1 million to $107.7 million for fiscal year 1999 as compared to the prior year. The increase is attributable to strong demand from PC motherboard OEM customers. 32 Core products contributed approximately 77.5% and 56.4% of total revenue in fiscal years 1999 and 1998, respectively. In fiscal 1999 we were involved in the design of frequency timing generators, or FTGs, a form of silicon timing device, for the next generation of PC motherboards. In particular, our FTGs are being used for the Pentium(R) III (high-end motherboard), Whitney (sub-$1,000 PC motherboard) and Mobile BX (new notebook motherboard) platforms, all of which were released in calendar 1999. We continue to develop products for our existing clients and expand into high performance timing solutions supporting networking, communication, workstation and server applications. Our non-core component revenue represented approximately 22.5% of total revenue in fiscal year 1999, as compared to 43.6% in fiscal year 1998. This is due to the decreased market share from network system suppliers of the single chip 10/100-Mb transceivers. In fiscal year 1998, we shifted our focus away from the transceiver market to our core business. We sold certain intellectual property and equipment of our non-core business to 3Com Corporation on February 18, 1999, but will still continue to sell and support existing and the next generation Fast Ethernet transceiver products. Foreign revenue, which resulted primarily from sales to offshore customers was 68.8% and 58.8% of total revenue in fiscal years 1999 and 1998, respectively. While the percentage increase reflected growing sales to the Pacific Rim markets, certain of our international sales were to customers in the Pacific Rim region who in turn sold some of their products to North America, Europe and other non-Asian markets. Our sales are denominated in U.S. dollars. Cost of sales as a percentage of total revenue was 46.4% in fiscal year 1999, as compared to 55.3% in fiscal year 1998. We have continued to realize material cost savings in the manufacturing processes. We have received price reductions from their subcontractors and are also realizing savings from our internal testing site in Singapore. These cost savings and favorable product mix trends have helped to improve our gross margin. Research and development expense expressed as a percentage of revenue was 15.3% in fiscal year 1999, as compared to 12.3% in fiscal year 1998. In dollar terms, research and development spending increased 7.7% from fiscal year 1998 to 1999. The increase is attributable to a compensation charge of $1.3 million arising from the modifications of stock options owned by certain employees affected by the sale of assets to 3Com. As a result of the sale of assets to 3Com, we expect that there will be savings in research and development expenses, which will be offset by additional expenses incurred to support our expansion into high performance clocking solutions supporting networking, communication, workstation and server applications. Selling, general and administration expense was 14.3% and 12.3% of total revenues in fiscal years 1999 and 1998, respectively. In monetary terms, expenses have increased 0.6% from fiscal year 1998 to fiscal year 1999. The increase from 1998 to 1999 represents increased charges for the proxy contest relating to our annual shareholders' meeting. We were faced with a proxy contest that was waged by our former Chief Executive Officer. As a result of the proxy contest, we incurred mailing, legal and printing costs of approximately $0.8 million for our annual meeting, in excess of those historically incurred for routine and annual shareholders' meetings, during both the second and third quarters of fiscal year 1999. This was offset by the decrease in variable selling expenses as a result of decreased revenues. In connection with the recapitalization, we recorded a compensation charge of $15.1 million related to the accelerated vesting, cash-out and conversion of employee stock options. Expressed as a percentage of revenue, operating income was 13.2% and 20.1% in fiscal years 1999 and 1998, respectively. In dollar terms, operating income was $18.4 million in fiscal year 1999 compared to $32.3 million in fiscal year 1998. Fiscal year 1999 includes a special charge of $15.1 million relating to the vesting of outstanding options arising from the recapitalization. Accordingly, operating income before special charges was 24.0% of revenue in fiscal year 1999 as compared to 20.1% in fiscal year 1998. 33 In the third quarter of fiscal year 1999, we sold intellectual property and engineering hardware and software from our non-core product line to 3Com Corporation for $16.0 million in cash. We recognized $10.7 million as the gain on the sale. Interest and other income was $2.2 million in fiscal year 1999 and $2.0 million in fiscal year 1998. Interest income increased as a result of higher cash balances available for investing. Interest expense was $3.0 million in fiscal year 1999 and $0.1 million in fiscal year 1998. The increase in interest expense is attributable to the financing obtained in connection with the recapitalization. After adjusting for minority interest and equity investment, our effective tax rate related to income from continuing operations was 18.8% and 37.5% for fiscal years 1999 and 1998, respectively. The effective tax rate for fiscal years 1999 and 1998 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years. The significant decrease from fiscal years 1998 to 1999 is the result of the profitability of the Singapore operations being larger than the domestic operations. We do not currently calculate deferred taxes on our investment in our Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If we were to record deferred taxes on our investment, the amount would be a $4.3 million liability. Fiscal year 1999 reflects a net income of $23.0 million as compared to a net income of $21.4 million for fiscal year 1998. Excluding special charges, however, net income for fiscal year 1999 would have been $32.8 million. The changes in income are disclosed in the previous paragraphs. Fiscal Year 1998 as compared to Fiscal Year 1997 We achieved revenue of $160.6 million and $104.4 million in fiscal years 1998 and 1997, respectively. Our core component revenue increased $27.3 million to $90.6 million for fiscal year 1998 as compared to the prior year. The acquisition of MicroClock, Inc. in the third quarter of fiscal year 1997 accounted for $14.1 million of the increase with the remaining amount attributable to strong demand from PC motherboard OEM customers. The acquisition of MicroClock, Inc. allowed us to penetrate the market for silicon timing devices outside of our existing PC customer base. Core silicon timing devices contributed approximately 56.4% and 60.6% of total revenue in fiscal years 1998 and 1997, respectively. Although the silicon timing markets for motherboard and PC peripheral applications are expected to continue to be major sources of revenue, we intend to increase our presence in non-PC applications which comprised approximately 6% of total silicon timing component revenue in fiscal year 1997. Our non-core component revenue represented approximately 43.6% in fiscal year 1998 and 39.4% of total revenue in fiscal year 1997. Increases in fiscal year 1998 revenue were due to increased penetration of our transceiver products within network system suppliers and revived demand for PC video graphics products. In fiscal year 1999, we shifted our focus away from the non-core transceiver market to our silicon timing device product group. We sold certain intellectual property and equipment of our non-core product group to 3Com Corporation on February 18, 1999, but still continue to sell and support existing and next generation Fast Ethernet transceiver products. As a result of the merger of Turtle Beach and Voyetra, Turtle Beach was de- consolidated commencing November 30, 1996. Our 35% share of net losses at Voyetra was recorded under the equity method of accounting during the remainder of fiscal year 1997. Revenues were 6.5% of total revenue in fiscal year 1997. During the fourth quarter of fiscal year 1997, we determined that, due to significant events and changes in circumstances, it was probable that our investment in Voyetra would not be recoverable. Accordingly, we recorded an impairment loss of approximately $7.1 million on our investment in Voyetra in the fourth quarter of 1997. 34 Foreign revenue, which resulted primarily from sales to offshore customers, was 58.8% and 60.3% of total revenue in fiscal years 1998 and 1997, respectively. The decrease in fiscal year 1998 reflected a substantial increase of transceiver shipments in North America. Certain of our international sales were to customers in the Pacific Rim who in turn sold some of their products to North America, Europe and other non-Asian markets. Our sales are denominated in U.S. dollars. Cost of sales consists of costs related to the purchase of processed wafers, assembly and testing services provided by third-party suppliers, as well as costs arising from in-house product testing, shipping, quality control and manufacturing support operations. Cost of sales as a percentage of total revenue was 55.3% in fiscal year 1998 and 56.7% in fiscal year 1997. The decrease in cost of sales in fiscal year 1998 reflected reduced material costs, conversion to in-house testing in Singapore and favorable product mix trends. These cost savings have helped to improve our gross margin. Research and development expense expressed as a percentage of revenue was 12.3% in fiscal year 1998, as compared to 13.0% in fiscal year 1997. In dollar terms, research and development spending increased 46.4% from fiscal year 1997 to 1998, primarily as a result of the hiring of additional engineering personnel, investment in new design tools and increased activity related to new product development and enhancement programs for existing standards products. Selling, general and administration expense was 12.3% and 15.0% of total revenues in fiscal years 1998 and 1997, respectively. In monetary terms, expenses increased 28.6% from fiscal year 1997 to fiscal year 1998. The increase from fiscal year 1997 to fiscal year 1998 primarily represents increases in variable costs associated with revenue growth, including $0.5 million for bad debt reserves. Fiscal year 1997 included a special charge of $11.2 million as a result of the write-off of in-process research and development costs arising from the acquisition of MicroClock. Expressed as a percentage of revenue, operating income was 20.1% and 4.7% in fiscal years 1998 and 1997, respectively. In dollar terms, operating income was $32.3 million in fiscal year 1998 as compared $4.9 million in fiscal year 1997. Fiscal year 1997 includes a special charge of $11.2 million as a result of the write-off of in-process research and development costs arising from the acquisition of MicroClock. Accordingly, operating income before special charges was 20.1% of revenue in fiscal year 1998, as compared to 15.3% in fiscal year 1997. Interest and other income was $2.0 million in fiscal year 1998 as compared to $1.8 million in fiscal year 1997. Interest income increased as yields on our investments improved. Interest expense was $0.1 million in fiscal year 1998 and in fiscal year 1997. Interest related to the PIDA loan on the Valley Forge building. After adjusting for minority interest and equity investment, our effective tax rate related to income from continuing operations was 37.5% and 95.8% for fiscal years 1998 and 1997, respectively. The effective tax rate for fiscal year 1998 reflects the tax-exempt status of our Singapore operation, which has been given pioneer status, or exemption of taxes on non-passive income for five years. The effective tax rate for fiscal year 1997 includes $11.2 million for the non-deductible intangible write-off related to the acquisition of MicroClock, Inc. and a $7.1 million capital loss for the impairment of the Voyetra investment. Fiscal year 1998 reflects a net income of $21.4 million as compared to a loss of $8.4 million for fiscal year 1997. Excluding special charges, equity investment related charges and minority interest, however, net income for fiscal year 1997 was $10.6 million. The changes in income are disclosed in the previous paragraphs. 35 Discontinued Operations During the third quarter of fiscal year 1997, we implemented a plan, with approval of the Board of Directors, to dispose of our majority interest in our subsidiary, ARK Logic, within a 12-month period. Unlike our core business of developing mixed-signal components, ARK Logic uses different design tools and technology to engineer complex digital circuits. Accordingly, we have presented ARK Logic as discontinued operations and all prior periods have been restated to reflect this presentation. We recorded a charge of $1.5 million in the third quarter of fiscal year 1997, including severance and other exit costs. Subsequently, on June 17, 1997, we sold approximately 80% of our holdings in ARK Logic to Vision 2000 Ventures, Ltd. for which a gain of $2.4 million, including the reversal of severance and facility termination accruals, was recorded. Our remaining ownership interest in ARK Logic of approximately 11% was written off in the fourth quarter of fiscal year 1997. Liquidity and Capital Resources At April 1, 2000, our principal sources of liquidity included cash and investments of $31.6 million as compared to the July 3, 1999 balance of $9.6 million. Net cash provided by operating activities was $26.9 million in the first nine months of fiscal 2000, as compared to $24.0 million in the prior year period. The cash provided by operating activities in the first nine months of fiscal 2000 consisted mainly of earnings before interest, taxes, depreciation and amortization expenses, or EBITDA, of $43.0 million offset by changes in operating assets of $2.0 million, interest payments of $9.9 million and income tax payments of $1.0 million. EBITDA increased $18.1 million over the same period in 1999 primarily due to the increases in gross margin, as discussed above. Our days sales outstanding decreased from 49 days in fiscal 1999 to 40 days in fiscal 2000, while inventory turns increased from 7.28 times in fiscal 1999 to 7.40 times in the first nine months of fiscal 2000. Purchases for property and equipment were $3.5 million in the first nine months of fiscal 2000 as compared to $6.6 million in the prior year period. The decrease is primarily due to our relocation into our new facility in San Jose during the second quarter of fiscal 1999. Purchases of property and equipment during fiscal 2000 in the amount of $1.3 million were invested in the start-up of our new Arizona facility. In the third quarter of 2000, Chartered Semiconductor PTE repaid $4.3 million, extinguishing the balance outstanding for the purchase commitment made during fiscal 1997 and 1998. The purchase commitment made during fiscal 1999 ends December 31, 2000, and accordingly, the remaining balance of $10.2 million is recorded as a current asset. We purchased $2.0 million of our senior subordinated notes below par in September, resulting in a gain of $36,000 net of income taxes, and $5.0 million below par in November, resulting in a gain of $134,000 net of income taxes. In the first nine months of fiscal 2000, we have paid $12.4 million in principal on our long term debt (term A and B loans), as well as $9.9 million in interest during the first nine months of fiscal year 2000. Certain of the our loan agreements require the maintenance of specified financial ratios and impose financial limitations. At April 1, 2000, we were in compliance with the senior credit facility covenants. Immediately following this offering, we will repay all outstanding obligations under our senior credit facility and terminate it, and we intend to enter into a new revolving credit facility. The new revolving credit facility will be used for working capital and general corporate purposes. We believe that the net proceeds from this offering, together with funds expected to be generated from our operations and borrowings under our new revolving credit facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, we may need to raise additional funds in future periods to fund our operations and potential acquisitions, if any. Any such additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and results of operations. If additional funds were raised through the issuance of equity securities or convertible debt securities, the percentage of ownership of our shareholders would be reduced. Furthermore, such equity securities or convertible debt securities might have rights, preferences or privileges senior to our common stock. 36 Inflation Inflation has not had a significant impact on our results of operations. Year 2000 Computer systems and software must accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many software and computer systems that accepted only two digit entries needed to be upgraded in order to accept date beginning January 1, 2000. To date, we have not experienced any date-related problems with our software. In addition, we have not been made aware of, nor have we experienced, date related problems with any third-party software. In addition, we do not believe that we will incur material costs in the future because of date related problems. New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. We will adopt the requirements of this statement in our first fiscal quarter in fiscal year 2001. Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exposures. Our sales are denominated in U.S. dollars, accordingly, we do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows. Interest Rate Risk. Because our obligations under our senior credit facility bear interest at variable rates, our results of operations are sensitive to changes in prevailing interest rates. We currently do not engage in interest rate hedging activities. We manage our interest rate risk by keeping variable rate instruments at less than 50% of total debt instruments. 37 INDUSTRY OVERVIEW Overview Semiconductors, also referred to as integrated circuits, are the basic building blocks used to create an increasing variety of electronic products and systems. Since the invention of the transistor in 1948, continuous improvements in semiconductor process and design technologies have led to smaller, more complex and more reliable devices at a lower cost per function. The two basic functional technologies for semiconductor products are analog and digital. Analog (or linear) devices monitor, amplify or transform analog signals. Analog signals vary continuously over a wide range of values. Analog circuits provide a critical interface between electronic systems and a variety of real- world phenomena such as sound, light, temperature, pressure, weight and speed. Digital devices perform binary arithmetic functions on data represented by a series of on/off states mathematically represented by "1s" and "0s". Historically, the digital integrated circuit market has been primarily focused on the fast growing markets for computing and information technology systems. Increasing demands for high-throughput computing and networking in recent years have led to drastic improvements in digital device performance. An example of these improvements is subsequent generations of ever-faster microprocessors that power personal computers. Electronic systems continuously translate analog signals into digital data and digital data into analog signals. Mixed-signal integrated circuits combine analog and digital circuitry on the same chip to process both analog signals and digital data. Historically, analog and digital circuitry has been developed separately given the technical difficulties associated with combining analog and digital circuitry onto a single integrated circuit. As a result, system manufacturers have generally addressed mixed-signal requirements using printed circuit boards containing many separate analog and digital circuits acquired from multiple suppliers. However, in an effort to improve performance, decrease system size and reduce costs, system designers are increasingly requiring the integration of both analog and digital functions onto a single chip. Silicon Timing Devices Every microprocessor and, in fact, all electronic devices must incorporate a means to time and synchronize their various operations. Silicon timing devices are mixed-signal integrated circuits, usually on a single chip that, like miniature "clocks," emit timing signals or pulses used to sequence and synchronize electronic operations. Growth in our markets is being driven by the rapid pace of infrastructure development for the Internet, the increasing complexity of our customers' end products, and the transition from traditional analog devices to digital technologies. Internet infrastructure expansion is now largely broadband based, requiring higher operating frequencies and more complex digital equipment. This advancement has driven the continued proliferation of technologically complex consumer and business electronic devices that help optimize the Internet experience. In addition, the transition from traditional analog devices to digital devices has led to increasing consumer adoption of digital technologies such as HDTV or DVD players. Our silicon timing devices are well suited to these developments as they operate in analog and digital environments (i.e., mixed-signal) and can manage multiple frequencies, have high programmability and generally require less power than traditional timing products such as crystal oscillators, which are predominantly quartz based crystals that resonate at a single frequency. Silicon timing devices are an indispensable part of the electronic world as they ensure the smooth flow of data along crowded electronic pathways by integrating and sequencing multiple functions within complex systems. As each new generation of electronic devices becomes faster, adds more functions and accommodates more peripheral equipment, the task of designing "clocks" to control, sequence and synchronize their 38 operations grows more complex and critical. Silicon timing devices perform critical timing control, sequence and synchronization functions for a wide variety of application markets, including: (1) computing systems, such as PCs, workstations, Internet appliances, disk drives and printers; (2) digital multimedia electronics, such as set-top boxes, DVDs, digital cameras and game machines; (3) Internet backbone equipment, such as switches, routers and framers; (4) Internet access equipment, such as cable and ADSL modems; and (5) network systems, such as servers and storage devices. The timing device market, including crystal oscillators, was approximately $2.8 billion in 1999. Given the growth in electronics, communications and the Internet, industry sources expect this market to grow to over $3.8 billion by 2001, an 18% per year growth rate. We expect, however, that silicon timing devices will grow at a much faster rate. In 1999, the total market for silicon timing devices was approximately $378 million, or 14% of the total market for timing devices, and is expected to grow to over $850 million, or 23% of the total market, by 2001, a growth rate of approximately 50% per year. Growth tends to be driven by the continued conversion of analog devices to digital systems and the increasing complexity of our customers' products, particularly given the demands of the Internet for bandwidth and speed. Silicon timing devices emerged through the design of frequency timing generators, or FTGs, predominantly for PCs. This began in 1990, when we designed the first FTG for a PC, and gathered momentum when our design was used with the Intel(R) Pentium(R) processor in 1993. In 1999, the worldwide market for silicon timing devices for PC FTGs, including notebook computers, was approximately $150 million, and we estimate that we have a 55% market share. Industry sources estimate that this market will grow to approximately $212 million by 2001, a 19% per annum growth rate. This growth is being driven by two primary factors: (1) growth in the global PC market resulting largely from the advent of the inexpensive (sub-$1,000) PC and the increasing popularity of the Internet, and (2) the increasing number of FTGs per PC motherboard, known as clock density. Industry sources estimate that clock density will continue to increase from current levels. The causes of increasing clock density include: (a) higher microprocessor speeds requiring the separation of frequencies onto multiple clocks to function efficiently; (b) increasing CPU power and functions requiring more frequencies; and (c) the ongoing growth of peripheral applications. Historically, the silicon timing market and the market for FTGs for PC motherboards, in particular, have provided stable average prices and consistent margins. This market is less susceptible to downward pricing pressures and commoditization as silicon timing devices are specifically tailored to certain architectures and are highly sophisticated and differentiated products. Given their customized and specialized nature, individual silicon timing device products tend to be produced in small volume. We believe silicon timing devices have limited technological substitution risk. There are numerous technological, cost and design barriers that limit the functional integration of silicon timing devices into other chips such as: . Yield issues: The defect rate of silicon timing devices would adversely impact the production yield of more expensive chips; . Performance issues: Noise from the microprocessor would materially degrade the tight performance requirements of silicon timing devices; . Customized nature of silicon timing devices: Silicon timing devices are specifically tailored for memory type, microprocessor speed, and architecture. Supporting all configurations significantly increases cost and complexity; . Unique design issues: The complexity of silicon timing device designs could negatively affect the product time-to-market due to design and debug time; . Technological barriers: The analog component of a mixed-signal integrated circuit does not operate efficiently at the low voltage levels of high speed digital cores; and . Pin count restraint: Additional timing signal functions would add several "input/output" pins to a chip adding significant packaging and die costs as well as exacerbating severe space constraints. 39 BUSINESS We are a worldwide leader in the design, development and marketing of silicon timing devices for a number of high-growth application segments. Our products are used in a variety of computing systems (e.g., PCs, workstations, Internet appliances, disk drives and printers) and digital multimedia electronic devices (e.g., set-top boxes, DVDs, digital cameras and game machines). We are also increasingly designing and producing silicon timing devices for Internet backbone equipment (e.g., switches, routers and framers), Internet access equipment (e.g., cable and ADSL modems) and network systems (e.g., servers and storage devices). Silicon timing devices are integrated circuits that emit timing signals or pulses required to sequence and synchronize electronic operations to ensure that information is interpreted at the right time and speed. All digital devices require a timing signal and those with any degree of complexity require silicon timing devices to time and synchronize their various operations. We have developed a reputation for engineering excellence and innovative technology in silicon timing design. We pioneered the silicon timing market in 1988, introducing silicon timing devices for video and graphics applications. Since then, we have consistently led the industry with several technical designs, including delivering the first silicon timing device for the PC motherboard in 1990. Our ongoing focus on product innovation has led to the introduction of approximately 424 new products into the marketplace over the past three fiscal years. We are the leading supplier of silicon timing devices to several markets, including PCs and digital set-top boxes, and we are continuing to design new products for communications equipment companies such as Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel. Over 40% of our current design opportunities are for communications equipment companies. A design opportunity reflects a request from a customer or potential customer for a silicon timing device. In the first six months of fiscal 2000, we converted over 80% of our design opportunities into design wins, which could lead to future production orders. We have developed long-standing and valuable relationships with the majority of leading original equipment manufacturers, or OEMs, of consumer and business and communications equipment electronics. We work closely with these OEMs to develop unique and proprietary timing, sequencing and synchronization solutions and are closely integrated into their product design and development process. Our top OEM customers include such companies as Asustek, Hughes Networks, Compaq, Dell, IBM, Echostar, Intel, E-Machines, General Instruments and Hewlett Packard. Competitive Strengths Worldwide Leadership Position. We pioneered the market for silicon timing devices in 1988, shipped the first standard silicon timing device for desktop PC motherboards in 1990, and we believe we were the first to meet Intel's silicon timing device specifications for its Pentium(R) microprocessor series in 1993. We believe that we currently hold the leadership position in the largest market for silicon timing devices within desktop PC and notebook motherboards, with an estimated worldwide market share of 55%. In addition, we believe we have leadership positions in other markets for silicon timing devices, including set-top boxes and disk drives. Defensible Technology and Design Expertise. For over twenty years, we have developed libraries of proprietary and patented mixed-signal integrated circuit designs and have invested in extensive computer-aided design and engineering resources specifically designed to support the increasing complexity and customized nature of silicon timing devices. Our focus on product innovation and leading technology has resulted in the introduction of approximately 424 new products into the marketplace over the past three fiscal years. We work closely with OEMs to develop unique timing, sequencing and synchronization solutions and are highly integrated into their product design and development. As device attributes and system speeds continue to increase, silicon timing device designs become more complex. As a result, our combination of analog and digital expertise is an important core competency and a significant barrier to entry. 40 Industry First Designs . 1988--First to develop frequency timing generator . 1993--First to develop silicon timing for Pentium(R) motherboard . 1996--First to develop Fast Ethernet transceiver . 1997--First to incorporate EMI reduction into motherboard clocks . 1998--First to develop 1 gigahertz fiber channel clocks . 1998--First to develop pixel clock for flat panel displays . 1999--First to develop 3.3 volt multiple VCXO in set-top box industry . 2000--First to develop fully programmable clock for PCs Superior Product Performance and Attributes. We believe that we have the leading position in key timing performance measures. Industry research suggests that the technical capabilities of our products are, on average, superior to those of our major competitors. The combination of these performance attributes allows our products to operate faster than those of our competitors and improves overall system performance. Industry sources measured the products of the major competitors across five performance criteria including jitter (error in signal shape), skew (error in signal repetition), number of frequencies, breadth of products and EMI (electromagnetic interference). We ranked first in 4 of the 5 categories and second in the fifth.
No. of Company Jitter Skew Frequencies Breadth EMI ------- ------ ---- ----------- ------- --- Integrated Circuit Systems.................. 1 1 1 1 2 Cypress..................................... 2 2 2 2 1 IMI......................................... 3 3 3 3 3
Low Cost Provider. We believe that we are one of the lowest cost producers of silicon timing devices because of our ability to leverage research and development costs over a broad product line, our close relationship with suppliers and our position as one of the largest providers to the silicon timing device market. In addition, we use third-party manufacturers to supply silicon wafers and assemble our products. Therefore, we do not incur the significant fixed costs of building, operating and upgrading a wafer foundry or assembly house. As a result of our leadership position, extensive product portfolio and highly variable cost structure, we are able to offer a compelling value proposition to customers of high performance, quality products at competitive prices. Superior Time-to-Market Capabilities. Minimizing the time new products take to reach the market is an important purchase criterion for our customers who are increasingly trying to improve inventory and supply chain management to meet rapidly growing demand forecasts. We believe that our close relationships with leading third-party manufacturers, in-house testing capabilities, leading design expertise, large platform of existing designs, and close involvement with customer design teams allow us to anticipate customers' needs and provide faster product solutions than other competitors. Several examples illustrate our competitive advantage in this area. First, we developed the first chip in the industry whose timing signals can be pre-set from 1 to 160 MHZ by the user without additional external devices, software or programmers, thereby eliminating the high cost and long lead times associated with certain customized silicon timing devices. Second, we established our own testing and quality assurance facility in Singapore near a major third-party manufacturer in order to shorten delivery times to customer assembly facilities. Third, we have developed unique relationships with certain third-party manufacturers to store work-in-process chips (i.e., wafer banks) that are ready to be finished in half the normal production time upon order. Finally, we have a substantial portfolio of designs or building blocks from which we can draw upon to develop customized solutions quickly. We believe that the resulting time-to-market is substantially less than those of our competitors, thereby creating a significant competitive advantage with OEM customers. 41 Broad and Diversified Product Line. We have a broad product line consisting of unique, customized solutions for a wide variety of application and customer segments, including consumer electronics, communications systems, medical devices and computer systems. Our ability to provide OEM customers with silicon timing technology and design expertise across their entire product line (e.g., desktop PCs, mobile PCs, servers and workstations) is a significant competitive advantage. For example, we have the ability to produce an unusually wide range of frequencies for our customers, from 66.6 megahertz silicon timing devices for older generation motherboard systems to 133 megahertz silicon timing devices for new generation Intel(R) Pentium(R) III processors to 460 megahertz silicon timing devices for very high performance workstations. In addition, our wide breadth of products helps to diversify our revenue base so that we are not dependent on the success of any single product. In fact, for the year ended July 3, 1999, the average product represented less than $300,000 of revenue. We believe that our broad and diversified product line will continue to provide significant value for our customers and enable us to expand our leadership position. Blue Chip Customer Base. We have long-standing and valuable relationships with most of the major OEMs of personal computers, peripherals and communications equipment. Certain systems architects, including Intel, Texas Instruments and Broadcom, reference our frequency timing components on their data sheets. We are closely integrated with the design teams of our system manufacturer customers and often are afforded the opportunity to solve their timing requirements early in their development cycle. The risk and cost to OEMs of certifying new vendors, our worldwide leadership position and continuing product innovation all provide significant competitive advantages and switching barriers versus smaller competitors. Experienced Management Team with Significant Equity Ownership. We are led by a team of eleven senior managers who average nearly eight years of experience with us and collectively possess over 200 years of experience in the semiconductor industry. Our management has demonstrated its ability to develop leading market share positions in several application segments, develop innovative core technology and achieve strong financial performance. After the offering, the senior management team and many other employees will own new common stock and options together representing up to approximately 18% of our common stock on a fully-diluted basis. Business Strategy Our business strategy is to focus on our core silicon timing business and provide customized and increasingly complex products to our expanding and diversified customer base. We have developed a set of strong design systems and business processes that have enabled us to achieve a leading market position and a strong track record of profitable growth. We intend to continue this business strategy and strengthen our competitive position through the following initiatives: . Identify and target new market opportunities where there are strong growth prospects and where we can leverage our core silicon timing technologies. Just as we targeted the PC industry in the early 1990s, we have identified several other high-growth markets where we can market our silicon timing devices. These industries are being driven by the Internet and its users' demand for speed and bandwidth. Many of our customers are designing equipment to meet this need, and we already have several design wins on their existing and next generation products. . Dominate these new markets by developing multiple application specific products to meet the needs of our customers and create a leading market position. Many of our customers require unique or customized timing solutions for their products. Over the last three years, we have introduced more than 424 new products, and we continue to leverage our extensive library of designs and key process patents to meet these needs. . Maintain design leadership in core silicon timing technologies through our exclusive design library, patents on core technologies and significant investments in research and development. We believe that our strong market share is a function of our ability to continue to produce new designs within 42 short time-to-market requirements. We have led the industry with many technical designs, including delivering one of the first silicon timing device for the Intel(R) Pentium(R) processor in 1993 and the Digital Alpha microprocessor in 1994. We are currently involved in the design of new and existing products for applications which only recently began using silicon timing devices, such as Internet access equipment (e.g., cable and ADSL modems), Internet backbone equipment (e.g., switches, routers and framers) and network systems (e.g., servers and storage devices). We are also involved in the next generation of our long- standing existing product portfolio for consumer and business electronics such as PCs and digital set-top boxes. . Expand into new timing markets through select acquisitions of technology and recruitment of personnel that complement our existing expertise. In 1997, we acquired Microclock, which allowed us to expand our silicon timing product portfolio outside the PC market. In 1999, we recruited a group of engineers for our Arizona design facility, which allowed us to penetrate several communications companies with our reference designs. We will continue to make similar investments when they can be done cost effectively and are consistent with our overall business strategy. Product Overview Silicon Timing Devices. Our silicon timing devices product group represents our core business. We supply a broad line of products for use in the consumer and business electronics industries and increasingly supply products for the communications equipment industry. These silicon timing devices control multiple processes by providing and synchronizing the timing of the computer system, including signals from the microprocessor, video screen, graphics controller, memory, keyboard, disk drives and communication ports. Individual silicon timing products are used in a variety of application markets, including: (1) computing systems, such as PCs, workstations, Internet appliances, disk drives and printers; (2) digital multimedia electronics, such as set-top boxes, DVDs, digital cameras and game machines; (3) Internet backbone equipment, such as switches, routers and framers; (4) Internet access equipment, such as cable and ADSL modems; and (5) network systems, such as servers and storage devices. The timing requirements of these products have traditionally been served by crystal oscillators. Crystal oscillators are components manufactured from quartz that resonate at a single set frequency. In situations where a single silicon timing device can replace multiple crystal oscillators, silicon timing devices have emerged as both more cost- effective and technologically superior solutions to the crystal-based standard. We view the $2.4 billion crystal-based oscillator market as a future growth opportunity, as our silicon timing device products provide viable alternatives to the present crystal-based standard. Several application segments are leading the conversion from crystal oscillators to silicon timing devices, including set-top boxes, complex communications equipment and mass storage systems. Custom Mixed-Signal and Data Communications. This product group represents our non-core business. Our custom mixed-signal (analog and digital) integrated circuit products are customized to the specific requirements of a broad range of customers and applications. Custom mixed-signal products are used in medical, consumer and industrial applications such as glucose measurement devices, hearing aids, burglar alarm systems and caller ID boxes. These products are typically sold through development and product contracts of five years or more, which generally provide a minimum purchase commitment by the customer. Our data communications product group includes a portfolio of transceiver integrated circuits that transmit and receive electronic data between various PC systems. Our transceivers are utilized in a wide variety of networking protocols, including Fast Ethernet, Asynchronous Transfer Mode and SONET applications. Our flagship product, the ICS1890, was the industry's first single-chip integrated circuit transceiver for the Fast Ethernet protocol. On February 18, 1999, we sold certain intellectual property and equipment of our non-core data communications product group to 3Com Corporation for $16.0 million in cash. We decided to reduce our ongoing investment in this product group in order to focus on our core silicon timing product group. 43 The sale of certain assets of our non-core product group benefits us by permanently eliminating certain fixed costs associated with research and development while at the same time allowing us to retain the right to sell certain of our existing transceiver products over their remaining product life cycles. While revenue from this product group will eventually decline over the next few years, the sale allows us to optimize this product group's cost structure and profit contribution while these products continue to be sold. We believe our core product groups will continue to experience stronger growth and higher margins, as well as represent a more favorable risk profile than our non-core product group. Most importantly, we believe we have several competitive advantages in our core product groups which will enable us to sustain our leadership positions in these relevant markets. Manufacturing Relationships We qualify and utilize third-party suppliers for the manufacture of silicon wafers. All of our wafers currently are manufactured by outside suppliers, two of which supply the substantial majority of our wafers. These manufactured wafers are packaged at two primary assemblers. We agree with our suppliers on production schedules based on order backlog and demand forecasts for the approaching three month period. Top Suppliers
Length of Relationship ------------ Wafer Fabs: Chartered Semiconductor......................................... 5 years United Microelectronics Corporation............................. 13 years Assemblers: Amkor/Anam International........................................ 18 years AMT............................................................. 9 years Orient Semiconductor............................................ 5 years ChipPAC......................................................... 1 year
During the fourth quarter of fiscal year 1997, we set up a test and drop- ship facility in Singapore's Kolam Ayer Industrial Park to achieve faster delivery of our products to customers throughout the Pacific Rim region. The Singapore facility handles wafer probe and final testing for over 95% of our silicon timing products. The facility began testing devices in the first quarter of fiscal year 1998 and shipments began in the second quarter of fiscal year 1998. Sales Support and Customers We market our products through a direct sales force that manages a worldwide network of independent sales representatives and distributors. We direct our sales efforts through our offices in Norristown (PA), San Jose (CA), Houston (TX) and Taipei (Taiwan). We believe that our customers' purchase decisions are based on performance, time-to-market, service and cost. Many customers have long relationships with us based on our success in meeting these criteria. We believe that our ability to rapidly respond to changes in demand for new or modified designs with consistent high quality is a major factor in our success at sustaining customer relationships. Reflecting these strong relationships, we are currently in the process of developing the next generation of timing devices to support the leading systems architects in personal computing and Internet services, as well as the communications broadband technologies. 44 We currently have more than 400 customers, with no single customer accounting for 10% or more of our revenue in the fiscal year ended July 3, 1999 other than Maxtek Technology, which accounted for 12% of our fiscal year 1999 total revenue. We do not consider Maxtek Technology a single customer because they purchase our products to distribute to numerous OEMs. Top OEM Customers in Each Product Area
Custom Mixed- Communications Infrastructure Consumer and Business Electronics Signal and Data Communications - ----------------------------- --------------------------------- ------------------------------ Cisco Asustek Hewlett Packard Samsung Hughes Networks Xircom Scientific Atlanta Compaq Fujitsu Nortel Networks Dell Newbridge Intergraph IBM Lucent Hitachi Echostar Microtouch Marconi Intel Lifescan Hitachi E-Machines KDI Seiko-Epson General Instrument GE SGI Gateway Cochlear
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. Research and development efforts concentrate on the design and development of new leading-edge products for our markets and the continual enhancement of our design capabilities. Over the last three fiscal years, we have developed and introduced to market approximately 424 new products. For over twenty years, 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 customized nature of FTGs and silicon timing devices. Investments in research and development were approximately $13.5 million, $19.8 million and $21.3 million in fiscal years 1997, 1998 and 1999, respectively. Such expenses typically include costs for engineering personnel, prototype and wafer mask costs, and investment in design tools and support overhead related to new and existing product development. As of April 1, 2000, our research and development staff comprised 86 people. We will continue to invest in research and new product development within our core product group. We believe our ability to consistently develop and market new generations of silicon timing devices has become a key competitive advantage and has contributed significantly to our leading market share. Patents/Trademarks We hold several patents, as well as copyrights, mask works and trademarks with respect to our various products and expect to continue to file applications for additional intellectual property rights in the future as a means of protecting our technology and market position. These patents generally have a 17-year life and begin expiring in fiscal year 2009. In addition, we seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other security measures. To augment product feature sets or accelerate development schedules, we also license certain technologies. We do not consider any single patent or license to be material to our business. In certain instances, we have performed design services for OEM customers pursuant to an agreement by which we provide certain of our intellectual property rights with the final product to our customers. Such transfers are also not deemed material to our business. See "Risk Factors--We Depend on Patents, Trade Secrets and Proprietary Technology." 45 Employees As of April 1, 2000, we had 258 full-time employees, 86 of whom were engaged in research and development, 25 in sales, 17 in marketing and technical support, 36 in finance and administration and 94 in manufacturing support and operations. We have incentive programs to retain our key research and development staff. After this offering, the senior management team and many other employees will own new common stock and options, together representing up to approximately 18% of our common stock on a fully-diluted basis. Facilities Our corporate headquarters, covering 61,000 square feet, is located in Norristown, Pennsylvania. We purchased this property in September 1992. On January 18, 1999, we entered into an agreement of sale with BET Investments III, L.P. to sell the land and property of our Norristown location for $5.5 million. The sale transaction was completed on April 13, 1999. On January 29, 1999, we signed a lease with BET Investments IV, L.P., the assignee of BET Investments III, L.P., to lease back the Norristown building for a term of eight years commencing upon the closing of the sale, with monthly rent beginning at approximately $51,000 for the first year and progressively increasing each year to approximately $63,000 in the eighth year. We also have a renewal option of three or more years after the initial eight-year term. We opened a 10,000 square foot design facility in Tempe, Arizona in January 2000. The lease term for this facility is five years with annual lease payments of $111,600, increasing $2,400 each year during the term of the lease. We utilize a sales office located in Taipei, Taiwan, which consists of 1,300 square feet of office space leased pursuant to an agreement which expires in November 2000. We also utilize a facility located in Singapore for testing, warehousing, sales and administration, which consists of 16,000 square feet of space leased pursuant to an agreement which expires in August 2000. In November 1998, we relocated our San Jose operations to a new facility in San Jose with 70,000 square feet of office space pursuant to a new lease agreement which will expire in December 2008. We believe that this new facility is adequate to meet our requirements going forward. Legal Proceedings From time to time, various inquiries, potential claims and charges and litigation are made, asserted or commenced by or against us, principally arising from or related to contractual relations and possible patent infringement. We believe that any of these claims currently pending, individually and in the aggregate, have been adequately reserved and will not have any material adverse effect on our consolidated financial position or results of operations, although no assurance can be made in this regard. 46 MANAGEMENT Directors and Executive Officers The following table sets forth certain information about our directors and the executive officers.
Name Age Position ---- --- -------- Chief Executive Officer, President and Hock E. Tan.......................... 48 Director Vice President and Chief Financial Justine F. Lien...................... 37 Officer Lewis C. Eggebrecht.................. 56 Vice President and Chief Scientist Henry I. Boreen...................... 73 Director David Dominik........................ 44 Director Michael A. Krupka.................... 35 Director Prescott Ashe........................ 33 Director John Howard.......................... 48 Director
Hock E. Tan began serving as Chief Executive Officer and President after the recapitalization in May 11, 1999. Mr. Tan joined us in August 1994 and was appointed as Senior Vice President and Chief Financial Officer in February 1995. In April 1996, Mr. Tan was appointed to the additional post of Chief Operating Officer. Before joining our company, Mr. Tan was Vice President of Finance of Commodore International, Ltd. from 1992 to 1994. Mr. Tan has served as Managing Director of Pacven Investment, Ltd. from 1988 to 1992 and was Managing Director of Hume Industries (M) Ltd. from 1983 to 1988. His career also includes senior financial positions with PepsiCo, Inc. and General Motors Corporation. Mr. Tan holds an M.B.A. from Harvard Business School and an M.S. in Mechanical Engineering from Massachusetts Institute of Technology. Justine F. Lien was appointed Chief Financial Officer after the recapitalization on May 11, 1999 and has been with us since 1993. She has held titles including Director of Finance and Administration and Assistant Treasurer. Prior to joining us, Ms. Lien was employed by Smith Industries in various finance capacities. Ms. Lien holds a B.A. degree in Accounting and Economics from Immaculata College and is a Certified Management Accountant. Lewis C. Eggebrecht was appointed Vice President and Chief Scientist in 1998 and possesses over 30 years of experience in the integrated circuit and personal computer industries. Prior to his employment with us, Mr. Eggebrecht was Chief Architect for the Multimedia Products Group at Philips Semiconductor from 1996 to 1998. Mr. Eggebrecht was a senior engineer at S3 in 1996 and was a Vice President and Chief Scientist at our company from 1994 to 1996. Mr. Eggebrecht also held senior engineering positions at Commodore International, Franklin Computer and IBM. Mr. Eggebrecht holds numerous patents and industry awards and has authored over 25 articles for a variety of technical publications. Mr. Eggebrecht holds a B.S.E.E. degree from the Michigan Technological University and has accomplished advanced degree work at the University of Minnesota. Henry I. Boreen has been a director since December 1984 and chairman of the board of directors since April 1995. He served as Interim Chief Executive officer from March 1998 through October 1998. Since 1984, Mr. Boreen has been a principal of HIB International. From 1989 to January 1998, Mr. Boreen has also served as chairman of AM Communications, Inc., a manufacturer of telecommunications equipment. Mr. Boreen has over 35 years of experience in the integrated circuits industry and was the founder and chairman of Solid State Scientific, a semiconductor manufacturer. David Dominik is a co-founder and managing director of Convergence Capital Group and a special limited partner of Bain Capital, Inc. He was a managing director of Bain Capital, Inc. from 1990 until March 2000. Previously, Mr. Dominik was a general partner of Zero Stage Capital, a venture capital firm focused on early-stage companies, and assistant to the chairman of Genzyme Corporation, a biotechnology firm. From 1982 to 1984, he worked as a management consultant at Bain & Company. Mr. Dominik also serves as a director of ChipPAC, Inc., DDi Corp. and OneSource. 47 Michael A. Krupka joined Bain Capital in 1991 and has been a Managing Director since 1997. Prior to joining Bain Capital, Mr. Krupka spent several years as a management consultant at Bain & Company where he focused on technology and technology-related companies. In addition, he has served in several senior operating roles at Bain Capital portfolio companies. Mr. Krupka currently serves on the board of directors of Sealy Corporation. Prescott Ashe is a co-founder and managing director of Convergence Capital Group. He was a principal at Bain Capital, Inc. from June 1998 until March 2000. He was an associate at Bain Capital, Inc. from 1992 until 1998. Prior to that, he was an analyst at Bain Capital, Inc. and a consultant at Bain & Company. Mr. Ashe also serves as a director of ChipPAC, Inc., DDi Corp. and SMTC Corporation. John D. Howard joined Bear Stearns in March of 1997 to develop and build its Merchant Banking business. He is a Senior Managing Director of Bear Stearns and Head of Merchant Banking. Prior to joining Bear Stearns, Mr. Howard founded Gryphon Capital Partners, a private investment firm. From 1990 to 1996, he was co-Chief Executive Officer of Vestar Capital Partners, Inc., a private investment firm specializing in management buyouts. In addition, Mr. Howard was a Senior Vice President and partner of Wesray Capital Corporation, one of the foremost private equity sponsors and a pioneer of leveraged buyouts, from 1985 to 1990. Formerly, Mr. Howard was a Vice President in the mergers and acquisitions group of Bear Stearns. Upon completion of the offering, we expect to appoint at least two additional independent directors. Compensation of Directors Directors serving on the board of directors are currently not entitled to receive any compensation for serving on the board. Directors are reimbursed for their out-of-pocket expenses incurred in connection with such services. Following this offering, directors who are not employees of our company or who are not otherwise affiliated with us or our principal shareholders will receive compensation that is commensurate with arrangements offered to directors of companies that are similar to our company. Compensation arrangements for independent directors established by our board could be in the form of cash payments and/or option grants. 48 Executive Compensation Summary Compensation Table The following table sets forth, for the fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997, the compensation paid to those persons who were, at any time during fiscal year 1999, our chief executive officer and our next most highly compensated executive officers whose total annual salary and bonus was in excess of $100,000 for fiscal year 1999.
Long-Term Compensation ------------------------- Annual Compensation Securities ---------------------- Underlying All Other Fiscal Salary Bonus Options/SARS Compensation Year ($) ($)(1) (#) ($)(2) ------ ------- ------- ------------ ------------ Hock E. Tan(3)............... 1999 232,565 70,560 1,195,206 107,340 Chief Executive Officer and President 1998 209,997 168,000 -- 5,254 (since May 1999) 1997 166,273 112,660 84,710 5,182 Justine F. Lien(4)........... 1999 103,931 39,403 525,202 45,457 Chief Financial Officer 1998 89,803 38,610 6,777 5,158 (since May 1999) 1997 84,437 26,052 31,766 6,271 Lewis C. Eggebrecht.......... 1999 180,560 80,490 677,680 64,214 Vice President and Chief Scientist 1998 78,923 84,857 169,420 454 Henry I. Boreen(5)........... 1999 72,262 26,880 64,380 364 Chief Executive Officer 1998 66,923 -- 98,264 -- (May 1998--November 1998) 1997 96,923 40,020 127,065 -- Rudolf S. Gassner(6)......... 1999 74,031 -- 359,170 14,788 Chairman of the Board (January 1999--May 1999)
- -------- (1) Includes cash bonuses for services rendered in the applicable fiscal year. (2) Includes amounts contributed by the Company (i) under the Company's 401(k) Plan as follows: Mr. Tan--$4,750 for 1999, $4,750 for 1998 and $4,750 for 1997; Mr. Eggebrecht--$3,821 for 1999 and $0 for 1998; and Ms. Lien--$5,245 in 1999, $4,931 in 1998 and $6,057 in 1997; (ii) for premiums for a life insurance policy as follows: Mr. Tan--$504 for 1999, $504 for 1998, and $432 for 1997; Mr. Eggebrecht--$454 for 1999 and $454 for 1998; and Ms. Lien--$252 for 1999, $227 for 1998 and $214 for 1997; (iii) for deferred compensation agreements as follows: Mr. Tan--$102,086 for 1999, Ms. Lien-- $39,960 and Mr. Eggebrecht--$59,940 for 1999; (iv) for car allowance for Mr. Gassner--$7,938; and (v) for lawyer fees for Mr. Gassner--$6,850. (3) Mr. Tan was appointed Chief Executive Officer and President at the close of the recapitalization on May 11, 1999. (4) Ms. Lien was appointed Chief Financial Officer effective May 11, 1999. (5) Mr. Boreen resigned as Chief Executive Officer effective December 31, 1998. (6) Effective January 1999, Mr. Gassner was elected chairman of the board of directors and assigned the responsibilities of chief executive officer. Mr. Gassner's employment terminated pursuant to the terms of his employment agreement at the close of the recapitalization on May 11, 1999. 49 The following table sets forth the option grants during the fiscal year ended July 3, 1999 for the individuals named in the Summary Compensation table after giving effect to the reclassification and the 1.6942-for-1 stock split, assuming an offering price of $16.00 per share and an effective date of May 22, 2000. Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Individual Grants Rates of Stock - ----------------------------------------------------------------------------- Price % of Total Appreciation Options Exercise Grant for Option Granted to or Base Date Term Options Employees in Price Market Expiration -------------- Name Granted Fiscal Year ($/SH) Price($) Date 5%($) 10%($) ---- --------- ------------ -------- -------- ---------- ------ ------- Hock E. Tan............. 389,534(1) 3.3% 0.0260 0.1299 05/11/09 72,278 121,082 43,282(1) 0.4% 2.1249 10.6243 05/11/09 57,839 146,575 508,260(2) 4.3% 0.1299 0.1299 05/11/09 41,507 105,187 254,130(2) 2.2% 1.7530 0.1299 05/11/09 -- -- Justine F. Lien......... 152,478(1) 1.3% 0.0260 0.1299 05/11/09 28,292 47,396 16,942(1) 0.1% 2.1249 10.6243 05/11/09 22,640 57,375 225,893(2) 1.9% 0.1299 0.1299 05/11/09 18,448 46,750 112,947(2) 1.0% 1.7530 0.1299 05/11/09 -- -- 16,942(3) 0.1% 7.4886 7.4886 08/03/03 -- -- Lewis C. Eggebrecht..... 228,717(1) 2.0% 0.0260 0.1299 05/11/09 42,438 71,094 25,413(1) 0.2% 2.1249 10.6243 05/11/09 33,960 86,062 33,884(3) 0.3% 7.4886 7.4886 08/03/03 -- -- 282,367(2) 2.4% 0.1299 0.1299 05/11/09 23,060 58,437 141,183(2) 1.2% 1.7530 0.1299 05/11/09 -- -- Henry I. Boreen......... 50,826(3) 0.4% 5.8655 5.8655 09/11/03 -- -- 13,554(3) 0.1% 10.8456 10.8456 02/02/04 -- -- Rudolf S. Gassner....... 359,170(3) 3.1% 8.1896 8.1896 11/03/03 -- --
- --------------------- (1) In-the-money options granted in exchange for the rollover of options outstanding at the time of the recapitalization. (2) Granted under the Company's 1999 Stock Option Plan. Grants under the 1999 Stock Option Plan may not be comparable to previous plans due to the recapitalization of the Company. (3) Granted under the Company's 1997 Equity Compensation Plan. In connection with the recapitalization we paid the holders the following amounts with respect to the cancellation of such options: Mr. Eggebrecht--$171,250; Mr. Boreen--$362,375; and Mr. Gassner--$1,297,248. 50 The following table sets forth information concerning stock option exercises during our last year and options outstanding at the end of the last year after giving effect to the reclassification and the 1.6942-for-1 stock split, assuming an offering price of $16.00 per share and an effective date of May 22, 2000. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Fiscal Year End Options at (#) FY-End ($) Shares Value --------------- -------------------- Acquired on Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable ---- ------------ ---------- --------------- -------------------- Hock E. Tan............. 169,420 $1,021,875 432,816/762,390 6,822,958/11,686,727 Justine F. Lien......... 54,743 $ 281,039 169,420/338,840 2,663,818/5,194,100 Lewis C. Eggebrecht..... 76,239 $ 341,563 254,130/423,550 4,006,133/6,492,627 Henry I. Boreen......... 149,090 $ 621,750 0/0 0/0 Rudolf S. Gassner....... 398,137 $1,726,625 0/0 0/0
Executive Employment and Severance Arrangements As a part of the recapitalization, we entered into an employment agreement with Hock E. Tan, as CEO and President with a base salary of $250,000 per year. In addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to 120% of his base salary based upon our attaining certain performance targets established annually by the board of directors. During his term of employment, Bain Capital has agreed to nominate and vote for Mr. Tan to serve as a member of the board of directors. Qualified 401(k) and Profit Sharing Plan We maintain a qualified 401(k) and profit sharing plan. Employees are permitted to contribute up to 12% of their annual compensation. Under the plan, we make matching contributions equal to 150% of the first 1% contributed, 125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the fourth 1% contributed and 50% of the next 2% contributed up to a maximum of 6% of annual compensation, subject to the IRS limits. The amounts we contributed and charged to expense were $0.5 million in both fiscal years 1999 and 1998 and $0.3 million in fiscal year 1997. Deferred Compensation Arrangements As part of the recapitalization, we entered into deferred compensation arrangements with certain members of our senior management team. The arrangements expire on May 11, 2009, at which time we will pay the executives the entire deferred compensation amount regardless of their employment status at our company. If a sale of our company occurs prior to the expiration of the arrangements, the executives will receive the full benefit amount at that date. On the date of this offering, the executives will receive 50% of the benefit under these arrangements, and the remaining 50% will be paid on the first anniversary of this offering. The amount of deferred compensation as of April 1, 2000 was $0.5 million. Management Equity Participation The Recapitalization. Some of the shares of our existing common stock held by some members of management before the recapitalization were converted into shares of our new common stock after the recapitalization. In addition, some of the existing stock options held by some of the members of our 51 management before the recapitalization were converted into options to purchase shares of our new common stock after the recapitalization and deferred compensation agreements. Fifteen members of management participated in the rollover of common stock and stock options, including Messrs. Henry I. Boreen, Hock E. Tan and Lewis C. Eggebrecht. These members of management invested an aggregate of $9.8 million in the recapitalization, consisting primarily of the fair value of certain common stock and vested stock options. 1999 Stock Option Plans. In order to provide additional financial incentives to certain of our executives and other key employees, in May 1999 we adopted the 1999 Stock Option Plan, or the "1999 Plan" under which we will periodically grant options to purchase our new common stock. These options will vest upon the fulfillment of certain conditions, the passage of a specified period of time and our achievement of certain performance goals, as determined by our board of directors. All of the unvested options of any terminated employee will expire upon termination, and the exercise period of all vested options will be reduced to sixty days following the date of termination. We and certain investors have the right to repurchase shares of our common stock issued upon the exercise of options granted under the 1999 Plan if any employee ceases to be employed by us. Following this offering, the senior management team and many other employees will own common stock and options, together representing approximately 18% of our common stock on a fully-diluted basis. No future grants will be made under the 1999 Plan upon the effectiveness of the 2000 Plan. 2000 Long-Term Equity Incentive Plan. Prior to the closing of the offering, we will adopt the 2000 Long-Term Equity Incentive Plan. The equity incentive plan provides for grants of stock options, stock appreciation rights, restricted stock and performance awards. Directors, officers and other employees of our company and its subsidiaries and persons who engage in services for us are eligible for grants under the plan. The purpose of the equity incentive plan is to provide these individuals with incentives to maximize shareholder value and otherwise contribute to our success and to enable us to attract, retain and reward the best available persons for positions of responsibility. Approximately 6,300,000 shares of common stock after this offering will be available for issuance under the equity incentive plan, subject to adjustment in the event of a reorganization, stock split, merger or similar change in our corporate structure or the outstanding shares of common stock. In the event of any of these occurrences, we may make any adjustments we consider appropriate to, among other things, the number and kind of shares, options or other property available for issuance under the equity incentive plan or covered by grants previously made under the plan. The shares available for issuance under the equity incentive plan may be, in whole or in part, authorized and unissued or held as treasury shares. The compensation committee of our board of directors will administer the equity incentive plan. Our board also has the authority to administer the plan and to take all actions that the compensation committee is otherwise authorized to take under the plan. The following is a summary of the material terms of the equity incentive plan, but does not include all of the provisions of the plan. For further information about the plan, we refer you to the equity incentive plan, which we have filed as an exhibit to the registration statement of which this prospectus is a part. Directors, officers and employees of our company and its subsidiaries, as well as other individuals performing significant services for us, or to whom we have extended an offer of employment, will be eligible to receive grants under the equity incentive plan. However, only employees may receive grants of incentive stock options. In each case, the compensation committee will select the actual grantees. As of April 1, 2000, there were approximately 190 employees expected to be eligible to participate in the equity incentive plan. Under the equity incentive plan, the compensation committee or the board may award grants of incentive stock options conforming to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, or the "Internal Revenue Code," and other, non-qualified stock options. The compensation committee may not, however, award to any one person in any calendar year options to purchase common stock equal to more than 10% of the total number of shares authorized under the plan, and it may not award incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000, determined at the time of grant. 52 The compensation committee will determine the exercise price of any option in its discretion. However, the exercise price of an incentive option may not be less than 100% of the fair market value of a share of common stock on the date of grant, and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our company's voting power may not be less than 110% of such fair market value on such date. Unless the compensation committee determines otherwise, the exercise price of any option may be paid in any of the following ways: . in cash, . by delivery of shares of common stock with a fair market value equal to the exercise price, . by simultaneous sale through a broker of shares of common stock acquired upon exercise, and/or . by having us withhold shares of common stock otherwise issuable upon exercise. If a participant elects to deliver or withhold shares of common stock in payment of any part of an option's exercise price, the compensation committee may in its discretion grant the participant a "reload option." The reload option entitles its holder to purchase a number of shares of common stock equal to the number so delivered or withheld. The reload option may also include, if the compensation committee chooses, the right to purchase a number of shares of common stock equal to the number delivered or withheld in satisfaction of any tax withholding requirements of our company in connection with the exercise of the original option. The terms of each reload option will be the same as those of the original exercised option, except that the grant date will be the date of exercise of the original option, and the exercise price will be the fair market value of the common stock on the date of exercise. The compensation committee will determine the term of each option in its discretion. However, no term may exceed ten years from the date of grant or, in the case of an incentive option granted to a person who owns stock constituting more than 10% of the voting power of our company, five years from the date of grant. In addition, all options under the equity incentive plan, whether or not then exercisable, generally cease vesting when a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, our company or its subsidiaries. Options generally expire 30 days after the date of cessation of service, so long as the grantee does not compete with us during the 30-day period. In the event of death, disability or retirement, a grantee's vested options will remain exercisable for up to 90 days after the date of retirement, while his or her unvested options may become fully vested and exercisable in the discretion of the compensation committee. Upon termination for cause, all options will terminate immediately. And if there is a change in control of our company and a grantee is terminated from service with our company and its subsidiaries within one year thereafter, all options will become fully vested and exercisable and remain so for up to one year after the date of termination. In addition, the compensation committee has the authority to grant options that will become fully vested and exercisable automatically upon a change in control of our company, whether or not the grantee is subsequently terminated. The compensation committee may grant stock appreciation rights, or SARs, alone or in tandem with stock options, subject to the terms and conditions it determines under the equity incentive plan. SARs granted in tandem with options become exercisable only when, to the extent and on the conditions that the related options are exercisable, and they expire at the same time the related options expire. The exercise of an option results in the immediate forfeiture of any related SAR to the extent the option is exercised, and the exercise of an SAR results in the immediate forfeiture of any related option to the extent the SAR is exercised. Upon exercise of an SAR, the grantee will receive an amount in cash and/or shares of common stock or other securities equal to the difference between the fair market value of a share of common stock on the date of exercise and the exercise price of the SAR or, in the case of an SAR granted in tandem with options, of the option to which the SAR relates, multiplied by the number of shares as to which the SAR is exercised. 53 Under the equity incentive plan, the compensation committee may award restricted stock subject to the conditions and restrictions, and for the duration, which will generally be at least six months, that it determines in its discretion. A grantee will be required to pay to us at least the aggregate par value of any shares of restricted stock within ten days of the date of grant, unless the shares are treasury shares. Unless the compensation committee determines otherwise, upon death, disability or termination of employment or service, all of a grantee's restricted stock as to which the applicable restrictions have not lapsed will be forfeited immediately. Under the equity incentive plan, the compensation committee may grant performance awards contingent upon achievement by the grantee, our company and/or its subsidiaries or divisions of set goals and objectives regarding specified performance criteria, such as return on equity, over a specified performance cycle, as designated by the compensation committee. Performance awards may include specific dollar-value target awards, performance units, the value of which is established by the compensation committee at the time of grant, and/or performance shares, the value of which is equal to the fair market value of a share of common stock on the date of grant. The value of a performance award may be fixed or fluctuate on the basis of specified performance criteria. A performance award may be paid out in cash and/or shares of common stock or other securities. Unless the compensation committee determines otherwise, if a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, our company and its subsidiaries prior to completion of a performance cycle, because of termination within one year after a change in control of our company or due to death, disability or retirement, the grantee will receive the portion of the performance award payable to him or her based on achievement of the applicable performance criteria over the elapsed portion of the performance cycle. If termination of employment or service occurs for any other reason prior to completion of a performance cycle, the grantee will become ineligible to receive any portion of a performance award. The terms and conditions of each award made under the equity incentive plan, including vesting requirements, will be set forth consistent with the plan in a written agreement with the grantee. Except in limited circumstances, no award under the equity incentive plan may vest and become exercisable within six months of the date of grant, unless the compensation committee determines otherwise. Unless the compensation committee determines otherwise, a participant may elect to deliver shares of common stock, or to have us withhold shares of common stock otherwise issuable upon exercise of an option or SAR or upon grant or vesting of restricted stock, in order to satisfy our withholding obligations in connection with any such exercise, grant or vesting. Unless the compensation committee determines otherwise, no award made under the equity incentive plan will be transferable other than by will or the laws of descent and distribution or to a grantee's family member by gift or a qualified domestic relations order, and each award may be exercised only by the grantee, his or her qualified family member transferee, or his or her executor, administrator, guardian, or legal representative. The board may amend or terminate the equity incentive plan in its discretion, except that no amendment will become effective without prior approval of our shareholders if such approval is necessary for continued compliance with the performance-based compensation exception of Section 162(m) of the Internal Revenue Code or any stock exchange listing requirements. Furthermore, any termination may not materially and adversely affect any outstanding rights or obligations under the equity incentive plan without the affected participant's consent. If not previously terminated by the board, the equity incentive plan will terminate on the tenth anniversary of its adoption. The Revenue Reconciliation Act of 1993 limits the annual deduction a publicly held company may take for compensation paid to its chief executive officer or any of its four other highest compensated officers in excess of $1,000,000 per year, excluding for this purpose compensation that is "performance-based" within the meaning of Internal Revenue Code Section 162(m). We intend that compensation realized upon the exercise of 54 an option or SAR granted under the plan be regarded as "performance-based" under Section 162(m) and that such compensation be deductible without regard to the limits imposed by Section 162(m) on compensation that is not "performance- based." Compensation paid under the equity incentive plan will not qualify as performance-based except to the extent paid pursuant to grants made under the plan following the approval of the plan by our shareholders in accordance with Internal Revenue Code Section 162(m)(4)(c) and the related Treasury Regulations, and except to the extent that certain other requirements are satisfied. However, based on a special rule contained in regulations issued under Section 162(m), the $1 million deduction limitation described above should not apply to any options, SARs or restricted stock granted, or cash- based compensation paid, under the equity incentive plan prior to our annual meeting of shareholders in the calendar year following the close of the third year calendar year after this offering. Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan, or the "Stock Purchase Plan," will be adopted by our board of directors and our shareholders prior to the completion of this offering. The Stock Purchase Plan will be established to give employees desiring to do so a convenient means of purchasing shares of common stock through payroll deductions or lump sum cash payments. The Stock Purchase Plan provides an incentive to participate by permitting purchases at a discounted price. We believe that ownership of stock by employees will foster greater employee interest in the success, growth and development of our Company. Compensation Committee Interlocks and Insider Participation Currently, our board of directors does not have a compensation committee. Consequently, the entire board of directors participates in deliberations concerning executive officer compensation. Mr. Tan is a member of the board of directors and is our President and Chief Executive Officer. Mr. Boreen is a member of the board of directors and is a former officer of the Company. Mr. Gassner was a member of the board of directors and an officer of the Company prior to the recapitalization. On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a board member, for consulting services. The agreement provides for us to pay Mr. Boreen $350,000 per year in monthly installments. This consulting agreement will be terminated by mutual consent of the parties in connection with this offering, and we will use some of the proceeds of this offering to pay Mr. Boreen a fee of $350,000. Committees of the Board of Directors Upon the closing of this offering, the board of directors will have an audit committee and a compensation committee. The audit committee will report to the board regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management's procedures and policies relative to the adequacy of our internal accounting controls. Upon the completion of the initial public offering, the audit committee will consist of a majority of directors not otherwise affiliated with us. The compensation committee of the board of directors will review and make recommendations to the board regarding our compensation policies and all forms of compensation to be provided to our executive officers. In addition, the compensation committee will review bonus and stock compensation arrangements for all of our other employees. Upon the completion of the initial public offering, the compensation committee will consist of at least two nonemployee directors (as defined in Rule 16b-3 under the Exchange Act), and we expect to appoint at least two additional independent directors. 55 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information, as of May 1, 2000, regarding the beneficial ownership of shares of the single class of common stock that will be outstanding after the reclassification and the 1.6942-for-1 stock split, assuming an offering price of $16.00 per share and an effective date of May 22, 2000, by each person or entity known by us to own more than 5% of any class of outstanding voting securities, by each of our directors, named executive officers and directors and executive officers as a group. The actual number of shares of common stock to be issued to each holder of Class L common stock in the reclassification is subject to change based on the changes to the initial public offering price and the completion of this offering. See "The Reclassification." Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934. Unless otherwise noted, to our knowledge, each of the following shareholders has sole voting and investment power as to the shares shown. Several of our shareholders have granted the underwriters an option to purchase up to 1,875,000 shares of common stock to cover over-allotments, if any.
Shares Beneficially Owned* Shares Beneficially Owned* Prior to the Offering After the Offering ------------------------------ ------------------------------ Shares Offered in Name and Address Number Percent Number Percent Over-allotment ---------------- ---------------- ------------- ---------------- ------------- ----------------- Principal Shareholders: Bain Capital Funds(1)... 26,865,286 52.7% 26,865,286 42.3% 1,237,169 c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116 The Bear Stearns Companies Inc.......... 8,955,097 17.6% 8,955,097 14.1% 412,390 245 Park Avenue New York, New York 10167 Intel Corporation....... 6,082,669 11.9% 6,082,669 9.6% -- 2200 Mission College Boulevard Santa Clara, California 95052 Integrated Circuit Systems................ 454,378 ** 454,378 ** 20,924 Equity Investors, L.L.C. (2) 11 Madison Avenue New York, New York 10010 Randolph Street Partners............... 272,626 ** 272,626 ** 12,555 200 East Randolph Drive Chicago, Illinois 60601 Directors and Executive Officers: Henry I. Boreen......... 4,168,476 8.1% 4,168,476 6.5% 191,962 Hock E. Tan(3).......... 924,791 1.8% 924,791 1.4% -- Justine F. Lien(4)...... 265,384 ** 265,384 ** -- Lewis C. Eggebrecht(5).. 376,899 ** 376,899 ** -- Michael A. Krupka(6).... 7,109,711 13.9% 7,109,711 11.2% 327,355 David Dominik(6)........ 7,109,711 13.9% 7,109,711 11.2% 327,355 Prescott Ashe(7)........ 7,109,711 13.9% 7,109,711 11.2% 327,355 John Howard(8).......... 8,955,097 17.6% 8,955,097 14.1% 412,390 Directors and executive officers as a group (8 persons)............ 21,800,356 41.6% 21,800,356 33.6% 931,707
- ------------------- * The number of shares of common stock outstanding on May 1, 2000 after giving effect to the reclassification and the stock-split with respect to a person of group includes (a) shares of common stock outstanding on such date and (b) all options that are currently exercisable or will become exercisable within 60 days of May 1, 2000 by any such person or group. ** represents less than 1% (1) Includes shares of common stock owned by Bain Capital Fund VI, L.P. ("Fund VI"), BCIP Associates II ("BCIP II"), BCIP Trust Associates II ("BCIP Trust II"), BCIP Associates II-B ("BCIP II-B"), BCIP Trust Associates II-B ("BCIP Trust II-B"), BCIP Associates II-C ("BCIP II-C" and, collectively with BCIP II, BCIP Trust II, BCIP Trust II-B and BCIP II-B, the "BCIPs"), and PEP Investment PTY Ltd. ("PEP"). The BCIPs, PEP and Fund VI are collectively referred to as the "Bain Capital Funds." (2) An affiliate of Credit Suisse First Boston Corporation. (3) Includes 190,601 shares of common stock issuable upon exercise of options. (4) Includes 84,212 shares of common stock issuable upon exercise of options. (5) Includes 105,889 shares of common stock issuable upon exercise of options. (6) Mr. Krupka is a Managing Director of Bain Capital, Inc., which is the managing general partner of each of the BCIPs and has voting and investment power with respect to the shares owned by PEP. In addition, (i) Messrs. Krupka and Dominik (or affiliated entities) are general partners of BCIP Trust II, BCIP Trust II-B, BCIP II and/or BCIP II-B, and (ii) Bain Investors VI is a general partner of BCIP II-C. Accordingly, each of Mr. Krupka and Mr. Dominik may be deemed to beneficially own some or all of the shares owned by the Bain Capital Funds. Each of Mr. Krupka and Mr. Dominik disclaims beneficial ownership of any such shares. (7) Mr. Ashe (or an affiliated entity) is a principal of Bain Capital, Inc. and is a general partner of BCIP Trust II, BCIP Trust II-B, BCIP II and/or BCIP II-B. Accordingly, Mr. Ashe may be deemed to beneficially own some or all of the shares owned by BCIP II, BCIP II-B, BCIP Trust and BCIP Trust II-B. Mr. Ashe disclaims beneficial ownership of any shares. (8) Mr. Howard is a Senior Managing Director of Bear, Stearns & Co. Inc. Accordingly, Mr. Howard may be deemed to beneficially own some or all of the shares owned by The Bear Stearns Companies Inc. Mr. Howard disclaims beneficial ownership of any such shares. 56 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Recapitalization In the recapitalization, affiliates of Bain Capital, an affiliate of Bear Stearns and certain members of management made an aggregate equity investment in our company of approximately $50 million as part of an agreement to redeem and purchase all of our outstanding shares of common stock and vested options for consideration (including fees and expenses) totaling $294.4 million. Shareholders Agreement, Voting Agreement and Other Agreements In connection with the recapitalization, we, each of Bain Capital and Bear Stearns and all of our other equity holders have entered into agreements that, among other things, provide for tag-along rights, drag-along rights, registration rights, restrictions on the transfer of shares and certain preemptive rights. The shareholders agreement provides that in certain circumstances various specified actions, including among others, major corporate transactions such as acquisitions, divestitures, financings, recapitalizations and mergers, as well as other actions such as hiring and firing senior managers, setting management compensation and establishing capital and operating budgets and business plans, require the approval of a majority of the shares of common stock held by Bain Capital. Pursuant to a voting agreement, our board of directors is comprised of three representatives designated by Bain Capital, one representative designated by Bear Stearns, our chief executive officer so long as he is employed by us as chief executive officer and Mr. Boreen so long as he owns at least 50% of the common stock he owns at the closing of the recapitalization. Advisory Agreements In connection with the recapitalization, we entered into an advisory agreement with each of Bain Capital and Bear Stearns pursuant to which they agreed to provide financial advisory and consulting services. In exchange for such services, Bain Capital and Bear Stearns were entitled to an aggregate annual shareholder advisory fee of $1 million and their out-of-pocket expenses. Each advisory agreement will be terminated by mutual consent of the parties in connection with this offering, and we will use some of the proceeds of this offering to pay Bain Capital and Bear Stearns a fee of $2.0 million and $0.7 million, respectively. Each advisory agreement includes customary indemnification provisions in favor of each of Bain Capital and Bear Stearns. During fiscal year 1999, the Company paid Bain Capital and Bear Stearns and its affiliates fees of $3.4 million and $4.9 million, respectively. Loans to Executive Officers On May 11, 1999, certain members of the management team entered into stock purchase agreements. In exchange for the purchase of Class A common shares and Class L common shares, the executives delivered to us a promissory note. The notes accrue interest at 8% per annum and mature on May 11, 2006. The executives may prepay the notes at any time, in full or increments of $1,000. If the executives receive a bonus from us, the executives have the obligation to prepay their notes in an amount equal to 50% of the amount of such bonus, net of the amount of any customary withholding taxes and such amount paid to us. The total amount outstanding as of April 1, 2000 was $0.3 million, of which $0.2 million was owed by Mr. Tan. Consulting Agreement On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a board member, for consulting services. The agreement provides for us to pay Mr. Boreen $350,000 per year in monthly installments. The consulting agreement will be terminated by mutual consent of the parties in connection with this offering, and we will use some of the proceeds of this offering to pay Mr. Boreen a fee of $350,000. Senior Subordinated Notes and Senior Credit Facility Sankaty High Yield Asset Partners, L.P., and Brant Point CBO 1999-1 Ltd., affiliates of Bain Capital, will receive a portion of the net proceeds of this offering from the redemption and repurchase of the senior 57 subordinated notes and Great Point CLO 1999-1 Ltd., also an affiliate of Bain Capital, will receive a portion of the net proceeds of the offering from the repayment of some of our indebtedness under our senior credit facility. Orders Placed with Affiliate of Major Shareholders Investment funds associated with Bain Capital are also shareholders of ChipPAC, Inc., one of our production vendors. Our orders to ChipPAC totaled approximately $3.5 million in fiscal 2000 and were on market terms. Interests of Experts and Underwriters Randolph Street Partners owns 272,626 shares of common stock acquired in the recapitalization. In connection therewith, Randolph Street Partners entered into the stockholders agreement and is considered part of the Bain Group under the stock agreements and the registration agreement. Some partners of Kirkland & Ellis are partners in Randolph Street Partners. Some partners of Skadden, Arps, Slate, Meagher and Flom LLP, counsel to the underwriters, are members in a limited liability company that is an investor in one of the Bain Capital funds. Kirkland & Ellis has provided legal services to our company and to Bain Capital from time to time and expects to continue to do so in the foreseeable future. ICST Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., one of the underwriters of this offering, owns 8,955,097 shares of common stock acquired in the recapitalization and will receive some of the proceeds of this offering as a selling shareholder. Integrated Circuit Systems Equity Investors, L.L.C., an affiliate of Credit Suisse First Boston Corporation, one of the underwriters of this offering, owns 454,378 shares of common stock acquired in the recapitalization and will receive some of the proceeds of this offering as a selling shareholder. Credit Suisse First Boston, an affiliate of Credit Suisse First Boston Corporation, as a lender under our senior credit facility, will receive a portion of the proceeds of this offering used to repay our outstanding indebtedness under our senior credit facility. 58 DESCRIPTION OF CAPITAL STOCK General Matters Upon completion of this offering, the total amount of our authorized capital stock will consist of 300,000,000 shares of common stock and 5,000,000 shares of preferred stock. After giving effect to this offering, assuming an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus and a Preference Amount of $19.72 per share on Class L common stock, we will have 63,492,905 shares of common stock and no other shares of any series of preferred stock outstanding. As of April 1, 2000, we had 34 shareholders of record with respect to our three classes of common stock and one shareholder of record with respect to our Series A preferred stock. The following summary of provisions of our capital stock describes all material provisions of, but does not purport to be complete and is subject to, and qualified in its entirety by, our restated certificate of incorporation and our amended and restated by-laws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable law. The restated certificate and by-laws contain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of our company unless such takeover or change in control is approved by our board of directors. Common Stock The issued and outstanding shares of common stock are, and the shares of common stock to be issued by us in connection with the offering will be, validly issued, fully paid and nonassessable. Subject to the prior rights of the holders of any series of preferred stock, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at such time and in such amounts as the board of directors may from time to time determine. See "Dividend Policy." The shares of common stock are not convertible and the holders thereof have no preemptive or subscription rights to purchase any of our securities. Upon liquidation, dissolution or winding up of our company, the holders of common stock are entitled to receive pro rata our assets which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of any series of preferred stock then outstanding. Each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of shareholders. There is no cumulative voting. Except as otherwise required by law or the restated certificate, the holders of common stock vote together as a single class on all matters submitted to a vote of shareholders. The common stock will be included on the Nasdaq National Market under the symbol "ICST." Preferred Stock Our board of directors may, without further action by our shareholders, from time to time, direct the issuance of shares of preferred stock in a series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of our company before any payment is made to the holders of shares of common stock. The issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, the board of directors, without shareholder approval, may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of common stock. There are no other shares of preferred stock outstanding, and we have no present intention to issue any additional shares of preferred stock. 59 Other Provisions of the Restated Articles of Incorporation and By-laws The restated articles of incorporation provide for the board to be divided into two classes, as nearly equal in number as possible, serving staggered terms. Approximately one-half of the board will be elected each year. The provision for a classified board could prevent a party who acquires control of a majority of the outstanding voting stock from obtaining control of the board until the second annual shareholders meeting following the date the acquiror obtains the controlling stock interest. The classified board provision could have the effect of discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of our company and could increase the likelihood that incumbent directors will retain their positions. The restated articles of incorporation provides that shareholder action can be taken only at an annual or special meeting of shareholders and cannot be taken by written consent in lieu of a meeting. The restated articles of incorporation and the by-laws provide that, except as otherwise required by law, special meetings of the shareholders can only be called pursuant to a resolution adopted by a majority of the board of directors or by our chief executive officer. Shareholders will not be permitted to call a special meeting or to require the board to call a special meeting. The by-laws establish an advance notice procedure for shareholder proposals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to the board. Shareholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board or by a shareholder who was shareholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given to our secretary timely written notice, in proper form, of such shareholder's intention to bring that business before the meeting. Although the by-laws do not give the board the power to approve or disapprove shareholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the by-laws may have the effect of precluding the conduct of business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of our company. Provisions of Pennsylvania Law Governing Business Combinations Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988 prohibits, subject to certain exceptions, a "business combination" with a shareholder or group of shareholders (and certain affiliates and associates of such shareholders) from beneficially owning more than 20% of the voting power of a public corporation, an "interested shareholder," for a five-year period following the date on which the holder became an interested shareholder unless the interested shareholder's acquisition of 20% or more of the common stock is approved by our board of directors. This provision may discourage open market purchases of our stock or a non-negotiated tender or exchange offer for our stock and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transaction. Under Section 1715 of the Pennsylvania Business Corporation Law, our directors are not required to regard the interests of the shareholders as being dominant or controlling in considering our best interests. The directors may consider, to the extent they deem appropriate, such factors as: . the effects of any action upon any group affected by such action, including our shareholders, employees, suppliers, customers and creditors, and communities in which we have stores, offices or other establishments; . our short-term and long-term interests, including benefits that may accrue to us from our long-term plans and the possibility that these interests may be best served by our continued independence; . the resources, intent and conduct of any person seeking to acquire control of us; and . all other pertinent factors. 60 Section 1715 further provides that any act of our board of directors, a committee of the board or an individual director relating to or affecting an acquisition or potential or proposed acquisition of control to which a majority of our disinterested directors have assented will be presumed to satisfy the standard of care set forth in the Pennsylvania Business Corporation Law, unless it is proven by clear and convincing evidence that our disinterested directors did not consent to such act in good faith after reasonable investigation. As a result of this and the other provisions of Section 1715, our directors are provided with broad discretion with respect to actions that may be taken in response to acquisitions or proposed acquisitions of corporate control. Section 1715 may discourage open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transaction. As a result, Section 1715 may have a depressive effect on the price of our common stock. Limitations on Liability and Indemnification of Officers and Directors The restated articles limit the liability of directors to the fullest extent permitted by the Pennsylvania Business Corporation Law. In addition, the restated articles provide that we will indemnify our directors and officers to the fullest extent permitted by such law. We expect to enter into indemnification agreements with our current directors and executive officers prior to the completion of the offering and expect to enter into a similar agreement with any new directors or executive officers. Transfer Agent and Registrar The transfer agent and registrar for our common stock is StockTrans Inc. DESCRIPTION OF INDEBTEDNESS Senior Credit Facility The senior credit facility provides for two groups of term loans: the term A loans for $30.0 million and the term B loans for $40.0 million. The senior credit facility also provides for revolving loans for up to $25.0 million, including letters of credit. Subject to certain restrictions, we may use the senior credit facility in the future for our working capital and general corporate purposes. In connection with this offering, we will repay all outstanding indebtedness under our senior credit facility and terminate it. We then intend to enter into a new revolving credit facility to support our working capital and general corporate needs. Senior Subordinated Notes The senior subordinated notes were issued pursuant to an indenture, dated as of May 11, 1999, by and between us, certain of our subsidiaries, and Chase Manhattan Trust Company, National Association, as trustee. The senior subordinated notes are limited in aggregate principal amount to $100,000,000 and will mature on May 15, 2009. Interest on the senior subordinated notes accrues at the rate of 11 1/2% per annum and is payable semiannually in cash on each May 15 and November 15, to the persons who are registered holders of the senior subordinated notes at the close of business on the May 1 and November 1, respectively, immediately preceding the applicable interest payment date. The senior subordinated notes are not entitled to the benefit of any mandatory sinking fund. The senior subordinated notes are general obligations of ours and are subordinated in right of payment to all of our current and future senior debt. The subordinated notes rank pari passu in right of payment with all other senior unsecured obligations of our company. The senior subordinated notes are redeemable, at our option, in whole at any time or in part from time to time, on and after May 15, 2004, upon not less than 30 nor more than 60 days' notice, at the following 61 redemption prices, expressed as percentages of the principal amount thereof, if redeemed during the twelve- month period commencing on May 15 of the year set forth below, plus, in each case, accrued interest to the date of redemption:
Year Percentage ---- ---------- 2004.............................. 105.750% 2005.............................. 103.833% 2006.............................. 101.916% 2007 and thereafter............... 100.000%
At any time, or from time to time, on or prior to May 15, 2002, we may, at our option, use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of senior subordinated notes originally issued at a redemption price equal to 111.50% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of such redemption; provided that at least $65.0 million aggregate principal amount of senior subordinated notes originally issued remains outstanding immediately after any such redemption. The indenture provides that, upon the occurrence of a change of control, each holder will have the right to require that we purchase all or a portion of such senior subordinated notes, at a purchase price equal to 101% of the principal amount thereof plus accrued interest thereon to the date of purchase. The term "change of control" is defined under the indenture to include one or more of the following events: . any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of our assets to any person or group of related persons, together with any affiliates thereof; . the approval by the holders of our capital stock of any plan or proposal for the liquidation or dissolution of our company (whether or not otherwise in compliance with the provisions of the indenture); . any person or group of related person, other than Bain Capital and Bear Stearns or their respective related parties, shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by our issued and outstanding capital stock; or . the first day within any two-year period on which a majority of the members of the board of directors are not continuing directors. The following events are defined in the indenture as "events of default": . the failure to pay interest on any senior subordinated notes and such default continues for a period of 30 days; . the failure to pay the principal on any senior subordinated notes; . a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after we receive written notice specifying the default; . the failure to pay at final stated maturity the principal amount of any of our indebtedness or any restricted subsidiary of ours and such failure continues for a period of 10 days or more, if the aggregate principal amount of such indebtedness, together with the principal amount of any other such indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $7.5 million or more at any time; 62 . one or more judgments in an aggregate amount in excess of $7.5 million shall have been rendered against us or any of our significant subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; . except as permitted by the indenture, any note guarantee of one of our significant subsidiaries shall be held in any judicial proceeding to be unenforceable, invalid, or shall cease for any reason to be in full force and effect or any of our subsidiary guarantors shall deny or disaffirm its obligations under its note guarantee; and . events of bankruptcy affecting us or any of our significant subsidiaries. The indenture contains covenants for the benefit of the holders of the senior subordinated notes that, among other things, limit our ability and any of our restricted subsidiaries to: . enter into transactions with affiliates; . pay dividends or make other restricted payments; . consummate asset sales; . incur indebtedness that is senior in right of payment to the senior subordinated notes; . incur liens; . impose restrictions on the ability of a subsidiary to pay dividends or make payments to us and our subsidiaries; . merge or consolidate with any other person; or . sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The foregoing summary of the material provisions of our senior credit facility and the indenture is qualified in its entirety by reference to all of the provisions of the senior credit facility and the indenture, respectively, previously filed with the SEC. See "Where You Can Find More Information." 63 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there was no market for our common stock. We can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. Sale of Restricted Shares Upon completion of this offering, we will have, assuming an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus and a Preference Amount of $19.72 per share on Class L common stock, 63,492,905 shares of common stock outstanding. In addition, upon the completion of this offering, 2,011,770 shares of common stock are issuable upon the exercise of currently exercisable outstanding stock options. Of the shares outstanding after the offering, 12,500,000 shares of common stock, or 14,375,000 shares if the underwriters' over-allotment is exercised in full, are freely tradeable without restriction under the Securities Act, except for any such shares which may be held or acquired by an "affiliate" of our company, as that term is defined in Rule 144 promulgated under the Securities Act, which shares will be subject to the volume limitations and other restrictions of Rule 144 described below. An aggregate of 50,992,905 shares of common stock held by our existing shareholders upon completion of the offering will be "restricted securities," as that phrase is defined in Rule 144, and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from such registration, including among others, the exemptions provided by Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, if a period of at least one year has elapsed since the later of the date the "restricted securities" were acquired from us or the date they were acquired from an affiliate, then the holder of such restricted securities, including an affiliate, is entitled to sell in the public market a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the common stock or the average weekly reported volume of trading of the common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. The holder may only sell such shares through "brokers' transactions" or in transactions directly with a "market maker," as such terms are defined in Rule 144. Sales under Rule 144 are also subject to requirements regarding providing notice of such sales and the availability of current public information concerning us. Affiliates may sell shares not constituting restricted securities in accordance with the foregoing volume limitations and other requirements but without regard to the one-year holding period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from us or the date they were acquired from an Affiliate, as applicable, a holder of such restricted securities who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares in the public market without regard to the volume limitations and other restrictions described above. Securities issued in reliance on Rule 701, such as shares of common stock acquired upon exercise of options granted under our stock plans, are also restricted and, beginning 90 days after the effective date of this prospectus, may be sold by shareholders other than our affiliates, subject only to the manner of sale provisions of Rule 144, and by affiliates under Rule 144 without compliance with its one-year holding period requirement. Options We intend to file registration statements on Form S-8 under the Securities Act to register approximately 15,600,000 shares of common stock issuable under our stock plans. These registration statements are expected to be filed within six months of the effective date of the registration statement of which this prospectus is a part and will be effective upon filing. Shares issued upon the exercise of stock options after the effective date of the Form S-8 registration statements will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to Affiliates and the lock-up agreements described below. 64 Lock-Up Agreements Our officers and directors and substantially all of the holders of our common stock have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, 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 common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. Registration Agreement Pursuant to the recapitalization, our company, Bain Capital, Bear Stearns, and our other equity holders entered into a registration agreement (as amended on December 23, 1999). Under the registration agreement, prior to an initial public offering, the holders of a majority of the Class A common stock have the right, and, at any time after an initial public offering, the holders of a majority of the registrable securities owned by Bain Capital, Bear Stearns or Intel, subject to conditions, to require us to register any or all of their shares of common stock under the Securities Act on Form S-1, a "Long-Form Registration." The holders of a majority of the Bain registrable securities have the right to request three Long-Form Registrations, and the holders of a majority of the Bear Stearns registrable securities and the Intel registrable securities have the right to request one Long-Form Registration, in each case, at our expense. The holders of a majority of the Bain registrable securities, the Bear Stearns registrable securities and the Intel registrable securities have the right to require us to register any or all of their shares of common stock under the Securities Act on Form S-2 or Form S-3, a "Short-Form Registration," on an unlimited number of, and three, occasions, respectively, at our expense. We are not required, however, to effect any Short-Form Registration requested by the holders of a majority of the Bear Stearns registrable securities or the holders of a majority of the Intel registrable securities within six months after the effective date of a prior demand registration. We may postpone the filing of such registration for up to 90 days if we and the holders of a majority of the registrable securities requesting registration agree that such a registration would reasonably be expected to have an adverse effect on any proposal or plan by us or any of our subsidiaries to engage in an acquisition, merger or similar transaction. In addition, all holders of registrable securities are entitled to request the inclusion of any shares of common stock subject to the registration agreement in any registration statement at our expense whenever we propose to register any of our securities under the Securities Act. Such right to request inclusion of shares is not permitted: . in connection with a public offering, unless any holders of registrable securities are permitted to participate in the public offering; . pursuant to a demand registration; or . pursuant to a registration on Form S-4 or S-8. In connection with all such registrations, we have agreed to indemnify all holders of registrable securities against liabilities set forth in the registration agreement, including liabilities under the Securities Act. In addition, all the parties to the registration agreement have agreed not to make any public sales of their registrable securities for 180 days after the effective date of any registration statement. Beginning 180 days after the completion of the offering, the holders of an aggregate of 50,992,905 shares of common stock, assuming an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, and a Preference Amount of $19.72 per share on Class L common stock, will have limited rights to require us to register their shares of common stock under the Securities Act at our expense. 65 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement, dated , 2000, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc., Lehman Brothers Inc., Bear, Stearns & Co. Inc. and Pennsylvania Merchant Group are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- ---------- Credit Suisse First Boston Corporation.......................... FleetBoston Robertson Stephens Inc.............................. Lehman Brothers Inc............................................. Bear, Stearns & Co. Inc......................................... Pennsylvania Merchant Group..................................... ---------- Total......................................................... 12,500,000 ==========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock 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 of common stock may be terminated. Several of our shareholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 1,875,000 additional shares from them at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock 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 initial 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 and the selling shareholders will pay.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-Allotment Over-Allotment Over-Allotment Over-Allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us................... $ $ $ $ Expenses payable by us.. $ $ $ $ Underwriting Discounts and Commissions paid by selling shareholders......... $ $ $ $ Expenses payable by selling shareholders... $ $ $ $
Bear, Stearns & Co. Inc., one of our underwriters, is an affiliate of our company. The offering, therefore, is being conducted in accordance with the applicable provisions of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public offering price of the shares of common stock not be higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, FleetBoston Robertson Stephens, Inc. is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public offering price of the shares of common stock is no higher than recommended by FleetBoston Robertson Stephens, Inc. 66 Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc. and Pennsylvania Merchant Group and their respective affiliates have performed and expect to continue to perform financial advisory and investment and commercial banking services for us for which they have received and will receive customary compensation. We intend to use a portion of the net proceeds to repay in full all outstanding obligations under our senior credit facility. Credit Suisse First Boston, an affiliate of Credit Suisse First Boston Corporation, is a lender and the administrative agent under the senior credit facility and will receive some of the proceeds of this offering used to repay our outstanding indebtedness under our senior credit facility. In addition, Credit Suisse First Boston Corporation and Bear, Stearns & Co. Inc. were the initial purchasers in the offering of our senior subordinated notes. Integtrated Circuit Systems Equity Investors, L.L.C., an affiliate of Credit Suisse First Boston Corporation and ICST Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., each own common stock of the company and each is a selling shareholder in the offering. John D. Howard, a director of our company, is a senior managing director of Bear, Stearns & Co. Inc. We have agreed 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 Securities Act relating to, any shares of common stock or securities convertible into or exchangeable or exercisable for any of our common stock, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. Our officers and directors and substantially all of the holders of our common stock have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, 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 common stock, whether any such aforementioned transaction is to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price up to 625,000 shares of common stock for employees, directors and certain 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 such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. We have applied to list the shares of common stock on The Nasdaq Stock Market's National Market under the symbol "ICST." Prior to this offering, there has been no public market for our common stock. The initial public offering price for the common stock will be negotiated among us, the selling shareholders and the representatives. Among the principal factors to be considered in determining the initial public offering price will be: .market conditions for initial public offerings .the history of and prospects for our business .our past and present operations .our past and present earnings and current financial position 67 .an assessment of our management .the market of securities of companies in businesses similar to ours .the general condition of the securities markets. There can be no assurance that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to the offering or that an active trading market will develop and continue after the offering. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . 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 common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic form will be available on the web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. 68 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Pepper Hamilton LLP, Philadelphia, Pennsylvania, and certain other matters will be passed upon for us by Kirkland & Ellis (a partnership that includes professional corporations), New York, New York. Some partners of Kirkland & Ellis are partners in Randolph Street Partners, which owns 272,626 shares of common stock. Some legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Kirkland & Ellis and Skadden, Arps, Slate, Meagher & Flom LLP have, from time to time, represented, and may continue to represent, some of the underwriters in connection with various legal matters and Bain Capital and some of their affiliates (including our company) in connection with legal matters. EXPERTS The consolidated financial statements and schedule of our company and its subsidiaries as of July 3, 1999 and June 27, 1998, and for each of the fiscal years in the three-year period ended July 3, 1999 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of KPMG LLP as experts in accounting and auditing. CHANGE IN INDEPENDENT ACCOUNTANTS Effective August 10, 1999, we dismissed KPMG LLP as our independent accountants. Concurrent with such dismissal, we engaged PricewaterhouseCoopers LLP as our independent accountants. The decision to dismiss KPMG LLP as our independent accountants was approved by our board of directors. The reports of KPMG LLP on our consolidated financial statements for each of the fiscal years in the three year period ended July 3, 1999 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. In connection with the audits of our consolidated financial statements for each of the fiscal years in the three year period ended July 3, 1999, and through August 10, 1999, there were no disagreements between us and KPMG LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of KPMG LLP, would have caused them to make reference to the matter in their reports. WHERE YOU CAN FIND MORE INFORMATION We are currently subject to the informational requirements of the Exchange Act, and in accordance therewith we are required to file periodic reports and other information with the SEC. The reports and other information filed by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC as described below. We have filed with the SEC a registration statement on Form S-1 (the "Registration Statement," which term shall encompass all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, with respect to the shares of common stock offered hereby. This prospectus, which constitutes part of the Registration Statement, does not contain all the information set forth in the Registration Statement, parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock offered hereby, reference is made to the Registration Statement. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such 69 contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the document or matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including the exhibits thereto, can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 (telephone number: 1-800- SEC-0330), at the Regional Offices of the SEC at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of such site is http://www.sec.gov. We intend to furnish our shareholders with annual reports containing financial statements audited by an independent accounting firm, and to make available quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 70 INDEX TO FINANCIAL STATEMENTS Consolidated Annual Financial Statements: Independent Auditors' Report............................................ F-2 Consolidated Balance Sheets as of July 3, 1999, and June 27, 1998....... F-3 Consolidated Statements of Operations for the years ended July 3, 1999, June 27, 1998, and June 28, 1997.......................................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) as of July 3, 1999, June 27, 1998, and June 28, 1997................................. F-5 Consolidated Statements of Cash Flows for the years ended July 3, 1999, June 27, 1998, and June 28, 1997.......................................................... F-6 Notes to Consolidated Financial Statements.............................. F-7 Consolidated Interim Financial Statements: Consolidated Balance Sheets as of April 1, 2000 (unaudited) and July 3, 1999................................................................... F-37 Consolidated Statements of Operations for the three and nine months ended April 1, 2000 and March 27, 1999 (unaudited)............................................. F-38 Consolidated Statements of Cash Flows for the nine months ended April 1, 2000 and March 27, 1999 (unaudited)............................................. F-39 Notes to Consolidated Financial Statements.............................. F-40
F-1 When the stock-split referred to in Note 24 of the Notes to the Consolidated Financial Statements has been consummated, we will be in a position to render the following report. /s/ KPMG LLP INDEPENDENT AUDITORS' REPORT The Board of Directors Integrated Circuit Systems, Inc.: We have audited the accompanying consolidated balance sheets of Integrated Circuit Systems, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended July 3, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Integrated Circuit Systems, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended July 3, 1999, in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania August 4, 1999, except as to Note 24, which is as of March 27, 2000 F-2 INTEGRATED CIRCUIT SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
July 3, June 27, 1999 1998 --------- -------- ASSETS Current Assets: Cash and cash equivalents............................... $ 9,285 $ 25,340 Marketable securities................................... 288 16,480 Accounts receivable, net................................ 18,120 20,335 Inventory, net.......................................... 8,736 12,839 Deferred income taxes................................... 8,644 2,069 Prepaid income taxes.................................... -- 1,067 Prepaid assets.......................................... 797 590 Other assets............................................ 523 2,043 Current portion of deposit on purchase contracts........ 3,973 -- --------- -------- Total current assets.................................. 50,366 80,763 Property and equipment, net............................... 12,127 17,884 Deferred financing costs, net............................. 12,767 -- Deposits on purchase contracts............................ 11,348 7,864 Other assets.............................................. 1,187 1,498 --------- -------- Total assets.......................................... $ 87,795 $108,009 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current portion of long-term debt....................... $ 1,030 $ 143 Accounts payable........................................ 10,258 11,047 Accrued salaries and bonuses............................ 2,056 1,788 Accrued expenses and other current liabilities.......... 5,639 2,672 Income taxes payable.................................... 4,473 -- --------- -------- Total current liabilities............................. 23,456 15,650 Long-term debt, less current portion...................... 169,000 1,380 Deferred income taxes..................................... 789 1,211 Other liabilities......................................... 1,462 -- --------- -------- Total liabilities..................................... 194,707 18,241 --------- -------- Commitments and contingencies (See Notes 4, 5, 11 and 21) Shareholders' Equity (Deficit): Preferred stock, authorized 5,000 shares, none issued... -- -- Common stock, no par value, authorized 84,710: issued 22,192 shares as of June 27, 1998...................... -- 56,604 Class A common stock, $0.01 par, authorized 45,743; issued and outstanding 26,452 shares................... 264 -- Class B common stock, $0.01 par, authorized 11,859; issued and outstanding 9,577 shares.................... 96 -- Class L common stock, $0.01 par, authorized 5,083; issued and outstanding 4,003 shares.................... 40 -- Additional paid in capital.............................. 34,556 -- Less treasury stock, at cost (1,311 shares at June 27, 1998).................................................. -- (16,742) (Accumulated deficit)/retained earnings................. (141,413) 49,906 Notes receivable (see Note 19).......................... (455) -- --------- -------- Total shareholders' equity (deficit).................. (106,912) 89,768 --------- -------- Total liabilities and shareholders' equity (deficit).. $ 87,795 $108,009 ========= ========
See accompanying notes to consolidated financial statements. F-3 INTEGRATED CIRCUIT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended ---------------------------- July 3, June 27, June 28, 1999 1998 1997 -------- -------- -------- Revenue.......................................... $139,063 $160,634 $104,359 Cost and expenses: Cost of sales.................................. 64,496 88,859 59,137 Research and development....................... 21,316 19,797 13,521 Selling, general and administrative............ 19,560 19,444 15,118 Special charges: Compensation costs (see Note 15)............. 15,051 -- -- Write-off of in-process research and development costs........................... -- -- 11,196 Goodwill amortization.......................... 234 234 536 -------- -------- -------- Operating income............................. 18,406 32,300 4,851 Gain on sale of assets (see Note 3).............. (10,734) -- -- Interest and other income........................ (2,178) (1,984) (1,800) Interest expense................................. 2,955 64 63 Impairment in equity investment.................. -- -- 7,072 Minority interest................................ -- -- (154) Equity loss of investee.......................... -- -- 866 -------- -------- -------- Income (loss) before income taxes from continuing operations......................... 28,363 34,220 (1,196) Income tax expense............................... 5,320 12,845 6,314 -------- -------- -------- Income (loss) from continuing operations....... 23,043 21,375 (7,510) -------- -------- -------- Discontinued operations: Loss from operations........................... -- -- (1,773) Gain on disposal............................... -- -- 864 -------- -------- -------- Loss from discontinued operations................ -- -- (909) -------- -------- -------- Net income (loss)................................ $ 23,043 $ 21,375 $ (8,419) ======== ======== ======== Basic income (loss) per share: Income (loss) from continuing operations......... $ 0.87 $ 1.02 $ (0.38) Loss from discontinued operations................ -- -- (0.09) Gain on disposal................................. -- -- 0.04 -------- -------- -------- $ 0.87 $ 1.02 $ (0.43) ======== ======== ======== Diluted income (loss) per share: Income (loss) from continuing operations......... $ 0.86 $ 0.96 $ (0.38) Loss from discontinued operations................ -- -- (0.09) Gain on disposal................................. -- -- 0.04 -------- -------- -------- $ 0.86 $ 0.96 $ (0.43) ======== ======== ======== Weighted average shares outstanding--basic....... 25,812 20,912 19,439 ======== ======== ======== Weighted average shares outstanding--diluted..... 26,277 22,264 19,439 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 INTEGRATED CIRCUIT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (in thousands)
Notes Receivable Common Common From Additional Stock Stock Class A Class A Class B Class B Class L Class L Certain Paid-In Treasury Treasury Shares Amount Shares Amounts Shares Amounts Shares Amounts Management Capital Stock Shares ------- -------- ------- ------- ------- ------- ------- ------- ---------- ---------- -------- -------- Balance at June 29, 1996......... 19,295 $ 32,674 -- $-- -- $-- -- $-- $ -- $ -- $ (460) (35) Shares issued upon exercise of stock options... 1,789 10,807 -- -- -- -- -- -- -- -- -- -- Tax benefits related to stock options......... -- 2,039 -- -- -- -- -- -- -- -- -- -- Purchase of common stock.... -- -- -- -- -- -- -- -- -- -- (10,466) (792) Acquisition of MicroClock, Inc............. -- 34 -- -- -- -- -- -- -- -- 7,966 609 Sale of Galaxy Power........... -- -- -- -- -- -- -- -- -- -- (789) (68) Subsidiaries equity transactions.... -- (188) -- -- -- -- -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- ------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- ----- Balance at June 28, 1997......... 21,084 45,366 -- -- -- -- -- -- -- -- (3,749) (286) Shares issued upon exercise of stock options... 1,108 7,014 -- -- -- -- -- -- -- -- -- -- Tax benefits related to stock options......... -- 4,224 -- -- -- -- -- -- -- -- -- -- Purchase of common stock.... -- -- -- -- -- -- -- -- -- -- (12,993) (488) Net income...... -- -- -- -- -- -- -- -- -- -- -- -- ------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- ----- Balance at June 27, 1998......... 22,192 56,604 -- -- -- -- -- -- -- -- (16,742) (774) Shares issued upon exercise of stock options... 159 1,105 -- -- -- -- -- -- -- -- -- -- Tax benefits related to stock options......... -- 234 -- -- -- -- -- -- -- -- -- -- Purchase of common stock.... -- -- -- -- -- -- -- -- -- -- (3,016) (229) Recapitalization.. (13,193) (57,943) 15,613 156 5,653 57 2,363 24 (455) 34,719 19,758 1,003 Effect of stock split........... (9,158) -- 10,839 108 3,924 39 1,640 16 -- (163) -- -- Net income...... -- -- -- -- -- -- -- -- -- -- -- -- ------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- ----- Balance at July 3, 1999.......... -- $ -- 26,452 $264 9,577 $ 96 4,003 $ 40 $(455) $34,556 $ -- -- ======= ======== ====== ==== ===== ==== ===== ==== ===== ======= ======== ===== (Accumulated Total Deficit/) Shareholders' Retained Equity Earnings (Deficit) ------------ ------------- Balance at June 29, 1996......... $ 36,950 $ 69,164 Shares issued upon exercise of stock options... -- 10,807 Tax benefits related to stock options......... -- 2,039 Purchase of common stock.... -- (10,466) Acquisition of MicroClock, Inc............. -- 8,000 Sale of Galaxy Power........... -- (789) Subsidiaries equity transactions.... -- (188) Net loss........ (8,419) (8,419) ------------ ------------- Balance at June 28, 1997......... 28,531 70,148 Shares issued upon exercise of stock options... -- 7,014 Tax benefits related to stock options......... -- 4,224 Purchase of common stock.... -- (12,993) Net income...... 21,375 21,375 ------------ ------------- Balance at June 27, 1998......... 49,906 89,768 Shares issued upon exercise of stock options... -- 1,105 Tax benefits related to stock options......... -- 234 Purchase of common stock.... -- (3,016) Recapitalization.. (214,362) (218,046) Effect of stock split........... -- -- Net income...... 23,043 23,043 ------------ ------------- Balance at July 3, 1999.......... $(141,413) $(106,912) ============ =============
See accompanying notes to consolidated financial statements. F-5 INTEGRATED CIRCUIT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended ----------------------------- July 3, June 27, June 28, 1999 1998 1997 --------- -------- -------- Cash flows from operating activities: Net income (loss).............................. $ 23,043 $ 21,375 $ (8,419) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................. 4,965 4,579 3,744 Amortization of deferred finance charge........ 203 -- -- Amortization of bond premiums.................. (78) (2) (85) Minority interest and charges related to equity investment.................................... -- -- 7,492 (Gain) loss on sale of assets.................. (10,374) 633 (356) Purchase of trading securities................. (23,313) (12,930) (834) Sale of trading securities..................... 23,669 11,911 845 Loss from discontinued operations.............. -- -- 909 Deferred income taxes.......................... (6,995) (712) 1,541 Write-off of in-process research & development costs......................................... -- -- 11,196 Stock compensation............................. -- -- 84 Accounts receivable............................ 2,215 355 (8,808) Inventory...................................... 4,103 703 2 Other assets, net.............................. 794 (235) (686) Accounts payable, accrued expenses and other liabilities................................... 678 81 3,480 Income taxes payable........................... 5,540 (3,413) 292 --------- -------- -------- Net cash provided by operating activities..... 24,450 22,345 10,397 --------- -------- -------- Cash flows from investing activities: Capital expenditures........................... (7,694) (8,139) (3,358) Proceeds from sale of fixed assets............. 200 10 107 Proceeds from sale of Datacom.................. 16,000 -- -- Proceeds from sale of building................. 3,801 -- -- Proceeds from sales of marketable securities... 18,450 1,358 -- Proceeds from sale of discontinued operations.. -- -- 1,925 Proceeds from maturities of marketable securities.................................... 29,347 21,069 10,499 Purchases of marketable securities............. (31,973) (30,499) (18,371) Deposits on purchase contracts, net............ (12,000) (2,000) (6,000) Refunds on purchase contracts.................. 4,544 4,711 1,998 Investment in subsidiary, net of cash acquired...................................... -- -- (6,074) --------- -------- -------- Net cash provided by (used in) investing activities................................... 20,675 (13,490) (19,274) --------- -------- -------- Cash flows from financing activities: Net borrowings (repayments) under line of credit agreement.............................. -- -- (2,315) Repayments of long-term debt................... (114) (186) (138) Proceeds from exercise of stock options........ 1,105 7,015 10,807 Tax benefit of stock option exercise........... 234 4,224 2,038 Proceeds from long-term debt................... 170,030 -- -- Recapitalization............................... (247,104) -- -- Investment from equity investors............... 30,655 -- -- Deferred financing charges..................... (12,970) -- -- Purchase of treasury stock..................... (3,016) (12,993) (10,466) --------- -------- -------- Net cash used in financing activities......... (61,180) (1,940) (74) --------- -------- -------- Net increase (decrease) in cash................. (16,055) 6,915 (8,951) Cash and cash equivalents: Beginning of year.............................. 25,340 18,425 27,376 --------- -------- -------- End of year.................................... $ 9,285 $ 25,340 $ 18,425 ========= ======== ======== Supplemental disclosures of cash information: Cash payments during the period for: Interest....................................... $ 151 $ 65 $ 58 ========= ======== ======== Income taxes................................... $ 6,408 $ 11,840 $ 2,336 ========= ======== ========
See accompanying notes to consolidated financial statements. F-6 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Consolidation Policy The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after elimination of all significant intercompany accounts and transactions. Reporting Periods In fiscal year 1996 the Company changed its fiscal year to a 52/53 week operating cycle that ends on the Saturday nearest June 30. Fiscal year 1999 represents a 53-week operating cycle. Fiscal years 1998 and 1997 represent a 52-week operating cycles. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at July 3, 1999 consist of cash, overnight retail repurchase agreements (collateralized by U.S. Treasury obligations), money market funds and commercial paper. Marketable Securities Marketable securities at July 3, 1999 consist of debt securities. Under Statement No. 115, the Company classifies all of its debt securities as held to maturity, which are recorded at amortized cost. In prior years, the Company's equity securities were classified as trading securities and unrealized holding gains and losses are included in earnings. Trading Securities were carried at the present market value, with realized gains or losses recorded in interest income on the statement of operations. As a result of the restrictions imposed by the senior credit facility (see Note 10), the Company no longer invests in equity securities. Inventory Inventory is stated at the lower of standard cost, which approximates actual cost (FIFO basis) or market. Property, Plant and Equipment Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Machinery and equipment........................................ 3 to 10 years Furniture and fixtures......................................... 5 to 10 years
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Deferred Financing Costs Costs incurred in connection with the issuance of the senior credit facility and the senior subordinated notes (see Note 10), which are amortized over the average term of the related debt instruments, approximately 8 years at July 3, 1999. Accumulated amortization was $0.2 million as of July 3, 1999. F-7 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Goodwill The purchase price in excess of the fair value of net assets acquired is amortized on a straight-line basis over 7 years. Accumulated amortization was $0.5 million and $0.3 million as of July 3, 1999 and June 27, 1998, respectively. Goodwill is recorded in other assets on the consolidated balance sheet. Carrying Value of Long-Term Assets In accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of," the Company periodically evaluates the carrying value of long-term assets when events and circumstances warrant such review. The carrying value of a long lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is separately identifiable and is less than the carrying value. In that event a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined by reference to quoted market prices, if available, or the utilization of certain valuation techniques such as using the anticipated cash flows discounted at a rate commensurate with the risk involved. See Note 3 for a discussion of an impairment charge recognized on the Voyetra Technologies Inc. ("Voyetra") investment, which was recorded in the fourth quarter of fiscal year 1997. Revenue Recognition Product sales are recognized as revenue upon shipment to the customer. The Company offers a right of return to certain customers. Allowances are established to provide for estimated returns at the time of sale. The Company recognizes sales to these customers, in accordance with the criteria of FASB No. 48, at the time of the sale based on the following: the selling price is fixed at the date of sale, the buyer is obligated to pay the Company, title of the property transfers at the Company's loading dock, the buyer has economic substance apart from the Company, the Company does not have further obligations to assist the buyer in the resale of the product and the returns can be reasonably estimated at the time of sale. Concentration of Credit Risk The Company sells its products primarily to original equipment manufacturers and distributors in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Concentrations of credit risk with respect to trade accounts receivable from specific customers is limited due to the large number of customers, however, there is a substantial concentration in the personal computer industry. Refer to Note 18 for geographic information. Income Taxes Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109. The Company files a consolidated federal tax return with its 80% or more owned subsidiaries, which included Turtle Beach for the first five months of fiscal year 1997. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, revenues and expense, and the disclosure of contingent assets and liabilities at F-8 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the date of the financial statements. In addition, they affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions. Accounting for Stock-based Compensation The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and continues to apply APB 25 and related interpretation in accounting for its stock options to employees and directors. Refer to Note 15 for pro forma disclosures. Reclassification of Accounts Certain reclassifications have been made to conform prior year's balances to the current year presentation. Other Comprehensive Income The Company's reported net income (loss) for all periods presented is the same as it's comprehensive income or loss since there were no items of other comprehensive income or loss for any of the periods covered by these financial statements. New Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities," which defers effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt the requirements of this statement in fiscal 2001. (2) Acquisitions/Mergers On May 11, 1999, the Company merged with ICS Merger Corp., a transitory merger company formed and wholly owned by certain affiliates of Bain Capital Inc. and Bear, Stearns and Company Inc. (the "Equity Investors"). The following events, which collectively are referred to as our recapitalization, provided the consideration for the redemption and purchase of the Company's outstanding shares of common stock and vested options, together with the redemption and purchase of our outstanding shares of common stock and vested options, together with the payment of fees and expenses, totaling $294.4 million that took place on May 11, 1999: --An equity investment of $30.6 million made by the Equity Investors and certain other investors in ICS Merger Corp.; --Direct purchases by Bain Capital of our common stock from certain existing shareholders for $9.6 million; --A rollover and new equity investment by certain members of our senior management team of $9.8 million, consisting primarily of: --Certain existing common stock ($6.6 million) that was converted into our new common stock after the merger; and --Certain existing stock options that were converted into new stock options after the merger ($2.2 million) and deferred compensation agreements ($0.5 million); --Purchases of new common stock ($0.5 million) in exchange for promissory notes; F-9 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) --Borrowing of $70.0 million in term loans and $3.9 million under a $25.0 million revolving line of credit; --The offering of $100.0 million in senior subordinated notes (the "Notes"); and --The use of cash on-hand of $70.5 million. The merger was approved by the Company's previous board of directors and the board of directors of ICS Merger Corp., and was also approved by the previous shareholders at a meeting held on May 10, 1999. Since the recapitalization, the Company's common stock is no longer traded on the Nasdaq National Market or any exchange, price quotations are no longer available and the registration of the Company's common stock under the Securities Exchange Act of 1934 has been terminated. On February 28, 1997, the Company acquired all the capital stock of MicroClock, Inc. ("MicroClock"), a producer of clock synthesizer integrated circuits for multimedia applications, for approximately $16.4 million, consisting of $6.4 million in cash and 1,030,928 shares of ICS common stock. The Company's shares exchanged in the transaction were restricted from sale for one year, therefore, the shares were valued at a 20% discount from the closing price on the date of issuance based on an independent valuation. The acquisition was accounted for under the purchase method of accounting and resulted in a charge of $11.2 million related to the write-off of in-process research and development costs and the recording of goodwill of $1.7 million, which is being amortized over 7 years. In determining the write-off of in- process research and development expenses, MicroClock was valued as a whole, and then the portion of the value attributable to technology, which had not reached technical and/or commercial feasibility, was identified. This was determined to be in-process research and development, and the residual portion of the purchase consideration after assigning values to the net tangible assets and in-process research and development was recorded as goodwill. The method used in making the determination was the discounted probable future cash flows on a product by product basis. The assumptions used in the appraisal were: three-year net cash flow on a product with no material changes from historical pricing, margins and expense levels. The amount attributable to goodwill was included as an amortizable item on the Company's balance sheet, and the amount attributable to in-process research and development was written off as not being sufficiently evolved to be commercialized or to readily ascertain the future commercial value of the same as of the date of acquisition. Revenues and results of operations of MicroClock were not significant to the Company's consolidated statement of operations for the year ended June 28, 1997, and accordingly, pro forma information as if the transaction had occurred on June 29, 1996, has not been presented. The in-process research and development projects included applications such as communications, desktop, notebook, set-top boxes and oscillators. These projects enabled the Company to reach a customer base in which it had not been able to reach, penetrate a new market with the consumer electronics applications and offered additional future returns. The risks associated with their timely completion included technical issues relating to the projects, ability to retain its employee base after the merger and ability to obtain project materials from third party vendors. Management assigned approximately 87% of MicroClock's total product value to the in-process research and development projects at the time of acquisition. The Company has spent an additional $885,000 on these projects and had taken six months to complete these projects. The Company used its working capital to fund the completion of these projects. On November 29, 1996 the Company signed an Agreement and Plan of Merger, (the "Merger Agreement") to sell its approximately 87% interest in Turtle Beach Systems, Inc. ("Turtle Beach") to Voyetra F-10 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) in exchange for an approximately 35% equity interest in Voyetra. Voyetra is a supplier of music and audio software. No gain or loss was initially recorded on this transaction. The Company's proportionate share of underlying equity in Voyetra was approximately $3.5 million. The excess of the Company's carrying value over their proportionate share of underlying equity was approximately $4.3 million. Subsequent to the transaction, the Company accounted for its investment in Voyetra under the equity method of accounting. In connection with the merger, the Company also entered into a Revolving Credit Agreement and Note Arrangement (the "Revolving Credit Agreement") with Voyetra, pursuant to which the Company agreed to make loans to Voyetra up to an aggregate of $3.5 million, subject to certain covenants. The Company recorded an impairment loss on this investment in the fourth quarter of fiscal year 1997. (See Dispositions/Impairment Note 3). (3) Dispositions/Impairment In the third quarter of fiscal year 1999, the Company sold intellectual property and engineering hardware and software related to its data communications product line to 3Com Corporation for approximately $16.0 million in cash, resulting in a gain of approximately $10.7 million. Under the agreement, the Company will have certain licensing and technical support rights, and will continue to sell and support its existing and prospective fast ethernet transceiver product family to current and new customers. During the fourth quarter of fiscal year 1997, the Company determined that significant events and changes in circumstances had occurred subsequent to the Voyetra transaction that indicated it was probable that its investment in Voyetra would not be recoverable. In the opinion of the Company's management, Voyetra was experiencing an adverse shift in the fundamentals of its business, which resulted in deteriorating gross profit margins and a substantial increase in operating losses. In addition, during the fourth quarter of fiscal year 1997, the Company notified Voyetra that they had violated certain covenants and were in default under the Revolving Credit Agreement. As such, the Company concluded that it was under no obligation to provide financing under the Revolving Credit Agreement. As a result of these significant events in the fourth quarter of fiscal year 1997, management of the Company estimated that the undiscounted cash flows anticipated for Voyetra would not be sufficient to recover the carrying value of the Company's investment and a write-down to fair value was required. Consequently, in the fourth quarter of fiscal year 1997, the Company recorded an impairment loss of $7.1 million on its investment in Voyetra, which is included in the Statement of Operations as Impairment in equity investment. In the second quarter of fiscal year 1998, Voyetra filed a complaint in the Supreme Court of the State of New York against the Company. At the end of the second quarter, the Company and Voyetra reached a settlement. Voyetra released the Company from all claims and all obligations with respect to the Voyetra/Turtle Beach merger agreement in exchange for assumption of certain liabilities of Turtle Beach, a $200,000 cash payment and return of Voyetra stock held by the Company. During fiscal year 1998, the Company settled these obligations and returned the Voyetra stock. During the third quarter of fiscal year 1997, the Company implemented a plan, with approval by the Board of Directors, to dispose of its majority interest in its subsidiary, ARK Logic, within a 12-month period. Accordingly, the Company presented ARK Logic as a discontinued operations. In connection with these events, the Company recorded a charge of $1.5 million in the third quarter fiscal year 1997, including severance and facility termination costs. Subsequently, the Company sold approximately 80% of its holdings in ARK Logic to Vision 2000 Ventures, Ltd. ("Vision 2000") for which a gain of $0.9 million, including the reversal of severance and facility termination accruals, was recorded. The sale and purchase agreement required 20% of the sales price to be held in escrow for two years. The Company received the escrow amount plus interest $0.5 million in June 1999. The amounts from discontinued operations are not tax effected, as ARK Logic was not consolidated for tax purposes and ARK Logic has net operating loss carryforwards, for which no tax benefits had been recorded by the Company. Revenues from ARK Logic for fiscal years 1997 and 1996 were $1.8 million and $10.2 million, respectively. F-11 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In the first quarter of fiscal year 1997, the Company sold its Galaxy Power, Inc. subsidiary, which owned the assets related to the battery charge controller product line, for $0.8 million to Edward H. Arnold, former Chairman and CEO of the Company. The purchase consideration was satisfied by reacquisition of 115,861 shares of the Company's stock held by Arnold and was based on a valuation made by an independent appraiser. (4) Purchase Commitments During fiscal year 1998, under an existing wafer supply contract with Chartered Semiconductor PTE ("CSM"), the Company advanced the final $2.0 million installment of its deposit with CSM whereby CSM would supply an agreed minimum quarterly quantity of wafers April 1996 through June 2002 at specified prices. This non-interest bearing deposit is recorded as a long-term asset under the caption "Deposits on purchase contract" and will be progressively repaid from January 1, 1998, as wafers are purchased. On October 7, 1998, the Company assumed a third party's wafer purchase contract with CSM. The agreement required the Company to advance $12.0 million as part of a mutual commitment for CSM to supply and the company to purchase an agreed upon minimum quarterly quantity of wafers over a twenty-seven month period from October 1, 1998 to December 31, 2000. The agreement requires CSM to refund the deposit to the Company in progressive quarterly installments based upon the volume of purchases made by the Company, and it is contractually required for all of the deposit to be returned. On October 21, 1998, the Company funded the $12.0 million required by this agreement. As of July 3, 1999, CSM has repaid $6.7 million of the Company's deposit. As of July 3, 1999 and June 27, 1998 amounts on deposit with CSM were $15.3 million and $7.9 million respectively. The Company had previously entered into a similar agreement with American Microsystems, Inc., ("AMI") by which it placed a $5.5 million deposit, which has been progressively repaid as wafer purchases were made. The Company received $2.6 million from AMI in fiscal 1998 extinguishing the balance of any outstanding deposit at AMI. The following table summarizes activity relating to the purchase commitment from CSM (in thousands): Balance 6/28/97..................................................... $ 8,000 Deposits made..................................................... 2,000 Payments received................................................. (2,136) ------- Balance 6/27/98..................................................... 7,864 Deposits made..................................................... 12,000 Payments received................................................. (4,543) ------- Balance 7/03/99..................................................... 15,321 Less: current portion............................................. 3,973 ------- Long term portion of deposit...................................... $11,348 =======
(5) Other Agreements In fiscal year 1998, the Company entered into a non-transferable and non- exclusive license with Philips Electronics to the Company to use their technical information for data transmission systems. In consideration of the licenses and rights granted, the Company, during fiscal year 1999 and fiscal year 1998, has expensed and paid approximately $0.5 million in royalty fees and expects to continue to make ongoing payments. The expense is included in the Company's cost of sales amount on the Statement of Operations. In fiscal year 1999, the Company entered into a non-exclusive and non- revocable license with PhaseLink Laboratories to use of their technical data. In return, in July 1999, the Company paid a one-time fee of $200,000, which will be amortized over the useful life of the technology (5 years). F-12 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (6) Marketable Securities The Company invests in debt securities, which are classified as held to maturity. The estimated fair value of each investment approximates the cost, and therefore, there were no unrealized gains or losses as of July 3, 1999 and June 27, 1998. Historically, the Company invested in equity securities, which were classified as trading securities and recorded at market value. The Company recorded unrealized losses of approximately $0.1 million in the statement of operations for fiscal year 1998 and $0 for fiscal year 1999. Proceeds from the sale or maturity of the investments were $71.5 million and $34.3 million in fiscal year 1999 and fiscal year 1998, respectively. All investments are due within 90 days and therefore, are classified as cash and cash equivalents at July 3, 1999. As a result of the restrictions imposed by the senior credit facility (see Note 10), the Company no longer invests in equity securities. (7) Accounts Receivable The components of accounts receivable are as follows (in thousands):
June July 3, 27, 1999 1998 ------- ------- Accounts receivable........................................ $20,270 $22,128 Less: reserves for returns and doubtful accounts........... (2,150) (1,793) ------- ------- $18,120 $20,335 ======= =======
(8) Inventory The components of inventories are as follows (in thousands):
June July 3, 27, 1999 1998 ------- ------- Work-in-process............................................ $ 8,211 $ 6,370 Finished parts............................................. 5,665 9,829 Less: obsolescence reserve................................. (5,140) (3,360) ------- ------- Inventory, net............................................. $ 8,736 $12,839 ======= =======
(9) Property and Equipment Property and equipment consists of the following (in thousands):
July 3, June 27, 1999 1998 -------- -------- Land and building........................................ $ -- $ 5,562 Machinery and equipment.................................. 17,377 25,918 Furniture and fixtures................................... 2,036 1,630 Leasehold improvements................................... 3,735 308 -------- -------- 23,148 33,418 Less: accumulated depreciation and amortization.......... (11,021) (15,534) -------- -------- Property and equipment, net.............................. $ 12,127 $ 17,884 ======== ========
Depreciation and amortization expense related to property and equipment was $4.7 million, $4.3 million and $3.3 million in 1999, 1998 and 1997, respectively. F-13 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (10) Debt On May 10, 1999, the shareholders of the Company voted to approve the management-led buyout, which was completed on May 11, 1999. In connection with the recapitalization, the Company obtained financing consisting of: $100.0 million of senior subordinated notes (the "Notes"), term A loans for $30.0 million and the term B loans for $40.0 million and $3.9 million from a revolving credit facility. The term loans and revolving credit facility combined make up the Senior Credit Facility. The term A loan is payable over varying quarterly installments beginning September 30, 1999 through May 11, 2004. The term B loan is payable in varying quarterly installments beginning September 30, 1999 through May 11, 2006. The revolving loans can be repaid without paying a premium or penalty, other than payment of breakage costs and reimbursement of the lenders' actual re- employment costs under certain circumstances through May 30, 2004. The revolving credit facility permits total availability of $25.0 million. At the Company's option, the interest rates under the senior credit facility will be either (1) the base rate, which is the higher of the prime lending rate or 0.5% in excess of the Federal funds effective rate, plus a margin or (2) adjusted LIBOR plus a margin. The margins of the different loans under the senior credit facility will initially be set and then will vary according to a pricing grid based upon the consolidated leverage ratio as follows: the initial margin on the term A loan and revolving loans will be 2.0% over the base rate or 3.0% over adjusted LIBOR, and then on each of the term A and revolving loans the margins will range from 1.75%-0.75% for base rate or from 2.75%-1.75% for adjusted LIBOR; and the initial margin on the term B loan will be 2.5% over the base rate or 3.5% over adjusted LIBOR, and then on the term B loans the margins will range from 2.25%-2.00% for base rate or from 3.25%-3.00% for adjusted LIBOR. The $100.0 million of senior subordinated notes are due May 15, 2009. Interest on the notes will accrue at the rate of 11.5% per annum and will be payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 1999, to holders of record on the immediately preceding May 1 and November 1. Except in the case of certain equity offerings by the Company and certain kinds of changes of control, the Company can not choose to redeem the Notes until May 15, 2004. At anytime before May 15, 2002, the Company can choose to redeem up to 35% of the outstanding Notes with money that the Company raises in one or more equity offerings, as long as the Company's pays 111.5% of the principal amount of the Notes plus accrued interest and at least $65.0 million of the Notes originally issued remain outstanding afterwards. All of the Company's domestic subsidiaries guarantee the Notes with unconditional guarantees of payment that will rank below their senior indebtedness, but will rank equal to their other senior subordinated indebtedness in right of payment. The Notes contain covenants that limit what the Company may do, such as paying dividends, incurring additional indebtedness, transferring or selling assets and consolidating, merging or selling all or substantially all of the Company's assets of subsidiaries. Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial limitations. At July 3, 1999, the Company was in compliance with its senior credit facility covenants. The debt is secured by substantially all assets from the Company and its domestic subsidiaries. On April 13, 1999, the Company sold the land and building at the Company's Norristown location to BET Investments III, L.P., a Pennsylvania limited partnership. The purchase price for the property was $3.9 million and included the buyer's assumption of the Company's PIDA loan. BET Investments III, L.P. assigned its right to purchase the building to BET Investments IV, L.P., a Pennsylvania limited Partnership on January 29, 1999. The Company signed a lease with BET Investments IV L.P., to lease back the Norristown property for a term of eight years, which went into effect upon closing of the sale of the property by the Company. The Company leased back the entire building with monthly rent beginning at approximately $51,000 for the first year and progressively increasing each year to approximately $63,000 in the eighth year. The Company also has a F-14 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) renewal option of three more years subsequent to the initial eight-year term. The Company recorded a $0.9 million deferred gain from this transaction. The Company will recognize the gain over the original term of the lease. In fiscal year 1999, the Company received $0.2 million in sublease income from this property. Senior debt consisted of the following (in thousands):
July 3, June 27, 1999 1998 -------- -------- Term A loans payable in varying installments through 2004 at LIBOR plus 3 (8.295% at July 3, 1999)................ $ 27,500 $ -- Term A loans payable in varying installments through 2004 at LIBOR plus 3 (8.1% at July 3, 1999).................. 2,500 -- Term B loans payable in varying installments through 2006 at LIBOR plus 3.5 (8.795% at July 3, 1999).............. 37,500 -- Term B loans payable in varying installments through 2006 at LIBOR plus 3.5 (8.6% at July 3, 1999)................ 2,500 -- 11.5% exchangeable subordinated debentures due 2009...... 100,000 -- PIDA second mortgage, payable in monthly installments, interest at 2%.......................................... -- 1,503 Lease obligations and other.............................. 30 20 -------- ------ 170,030 1,523 Less current portion..................................... 1,030 143 -------- ------ Long-term debt, less current portion..................... $169,000 $1,380 ======== ======
Aggregate annual maturities of long-term debt as of July 3, 1999 (in thousands): 2000................................................................ $ 1,030 2001................................................................ 4,600 2002................................................................ 6,400 2003................................................................ 8,800 2004................................................................ 11,200 2005 and beyond..................................................... 138,000 -------- $170,030 ========
(11) Lease Obligations The Company leases certain of its facilities under operating lease agreements, some of which have renewal options. Rental expense under operating lease agreements, net of sublease income, was $0.9 million, $0.6 million and $0.3 million in 1999, 1998 and 1997, respectively. F-15 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum lease commitments under the Company's operating leases are as follows as of July 3, 1999 (in thousands): 2000................................................................. $ 2,277 2001................................................................. 2,048 2002................................................................. 2,002 2003................................................................. 2,004 2004 and after....................................................... 10,770 ------- $19,101 =======
(12) Fair Value of Financial Instruments Estimated fair value of financial instruments is provided in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents, accounts receivable and accounts payable--The carrying amounts of these items approximate their fair values at July 3, 1999 due to the short-term maturities of these instruments. Marketable securities--The estimated fair value of each held to maturity investment approximates the amortized cost and as such no unrealized gain or loss has been recorded. Long-term debt--Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues for which quoted market prices are not available. The carrying value of this item is not materially different from its fair value on July 3, 1999. (13) Income Taxes The provision for income taxes consists of the following (in thousands):
Year Ended -------------------------- June July 3, 27, June 28, 1999 1998 1997 ------- ------- -------- Current tax expense: Federal......................................... $10,549 $11,685 $4,248 State........................................... 1,571 1,837 525 Foreign......................................... 195 35 -- ------- ------- ------ Total current................................. $12,315 $13,557 $4,773 ------- ------- ------ Deferred tax expense (benefit): Federal......................................... $(6,907) $ (627) $1,299 State........................................... (88) (85) 242 ------- ------- ------ Total deferred................................ (6,995) (712) 1,541 ------- ------- ------ Total income tax expense...................... $ 5,320 $12,845 $6,314 ======= ======= ======
F-16 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
Year Ended ------------------------- July 3, June 27, June 28, 1999 1998 1997 ------- -------- -------- Deferred tax assets: Accounts receivable allowances...................... $ 759 $ 664 $ 171 Inventory valuation................................. 1,843 1,208 744 Disqualified disposition exercises of options....... 6,141 -- -- Net operating loss carry forward.................... 195 195 195 Capital loss carry forward.......................... 1,894 2,137 2,136 Basis in equity investment.......................... -- 692 692 Accrued expenses and other.......................... 529 318 291 ------- ------ ------ Gross deferred tax assets......................... 11,361 5,214 4,229 Less: valuation allowance......................... 2,717 3,145 3,090 ------- ------ ------ Deferred tax asset.................................. 8,644 2,069 1,139 Deferred tax liabilities: Depreciation........................................ 501 1,018 899 Other............................................... 288 193 94 ------- ------ ------ Deferred tax liabilities.......................... 789 1,211 993 ------- ------ ------ Net deferred tax asset................................ $ 7,855 $ 858 $ 146 ======= ====== ======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, potential limitations with respect to the utilization of loss carry forwards, and tax planning strategies in making this assessment. Based upon the projections for future taxable income over the periods which deferred tax assets are deductible and the potential limitations of loss and credit carry forwards, management believes it is more likely than not the Company will realize these deductible differences, net of existing valuation allowances (both federal and state) at July 3, 1999. The Company periodically reassesses and re-evaluates the status of its recorded deferred tax assets. F-17 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The actual tax expense differs from the "expected" tax expense computed by applying the statutory Federal corporate income tax rate of 35% in all fiscal years to income before income taxes as follows (in thousands):
Year Ended --------------------------- July 3, June 27, June 28, 1999 1998 1997 ------- -------- -------- Computed expected tax expense (benefit)........ $ 9,927 $11,977 $ (736) State taxes (net of federal income tax benefit)...................................... 964 1,248 228 Effect of lower foreign tax rates.............. (3,086) (1,012) -- Capital contribution........................... -- 346 -- Tax-exempt interest and dividends.............. -- (13) (29) In-process research and development write-off.. -- -- 3,904 Loss in equity investments..................... -- -- 2,778 Loss from discontinued operations.............. -- -- 318 Gain from sale of Galaxy Power................. -- -- (174) Utilization of capital loss carryforwards...... (3,233) -- -- Intangible amortization........................ 185 82 -- Other.......................................... 563 217 25 ------- ------- ------ $ 5,320 $12,845 $6,314 ======= ======= ======
As of July 3, 1999, the Company has state operating loss carry forwards of approximately $3.0 million expiring through 2008. The Company also has a capital loss carry forward of approximately $4.9 million expiring in 2003. The Company does not currently calculate deferred taxes on its investment in its Singapore operations, as all undistributed earnings are permanently reinvested back into the Singapore facility. If the Company were to record deferred taxes on its investment, the amount would be a $4.3 million liability. (14) Employee Benefit Plans The Company has a bonus plan, which covers permanent full-time employees with at least six months of service. Bonuses under this plan are based on the Company achieving specified revenue and profit objectives and on individuals meeting specified performance objectives. Amounts charged to expense for the plan were $3.9 million, $3.6 million and $1.9 million in fiscal years 1999, 1998 and 1997, respectively. The Company has a 401(k) employee savings plan, which provides for contributions to be held in trust by corporate fiduciaries. Employees are permitted to contribute up to 12 percent of their annual compensation. Under the plan, the Company makes matching contributions equal to 150% of the first 1% contributed, 125% of the second 1% contributed, 100% of the third 1% contributed, 75% of the fourth 1% contributed and 50% of the next 2% up to a maximum of 6 percent of annual compensation, subject to IRS limits. The amounts contributed by the Company and charged to expense were $0.5 in fiscal year 1999, $0.5 million in fiscal year 1998, and $0.3 million in fiscal year 1997. (15) Stock Option Plans Non-qualified stock options are granted at prices not less than the fair market value at the date of grant, as determined by directors of the Company, and become exercisable as determined by the Company's stock option committee, generally over five years. Options can be granted for terms of up to ten years. Incentive stock options have also previously been granted at fair market value. F-18 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pre-Recapitalization The Company had various stock option plans (the "Plans") under which key employees and non-employee directors and consultants were granted incentive stock options and non-qualified options. The Company's 1997 Equity Compensation Plan ("the 1997 Plan") was approved, ratified and adopted by shareholders at the Shareholders' Meeting on October 23, 1997. Stock option transactions pre-recapitalization during fiscal years 1999, 1998 and 1997 are summarized as follows (in thousands, except price per share):
Options Available Weighted For Grant Under Options Average Plans The Plans Outstanding Exercise Price ----- ----------------- ----------- -------------- Balance June 29, 1996.......... 517 4,181 $6.27 Shares reserved.............. 508 -- -- Granted...................... (1,638) 1,638 7.21 Exercised.................... -- (1,784) 6.04 Terminated................... 679 (679) 6.54 ------ ------ ----- Balance June 28, 1997.......... 66 3,356 $6.84 Additional shares reserved... 3,388 -- -- Granted...................... (715) 715 13.92 Exercised.................... -- (1,086) 6.33 Terminated................... 683 (681) 8.39 ------ ------ ----- Balance June 27, 1998.......... 3,422 2,304 $8.74 Additional shares reserved... -- -- -- Granted...................... (1,166) 1,166 7.91 Exercised.................... -- (2,912) 7.56 Cancelled.................... (2,814) -- 9.96 Terminated................... 558 (558) 13.17 ------ ------ ----- Balance July 3, 1999........... 0 0 $ 0 ====== ====== =====
During fiscal years 1998 and 1997, 1.02 million stock options were granted to employees outside the plans described above at weighted exercise price of $10.13, the fair market value at grant date, for terms of five years. Such options are non-qualified and are not included in the above table but are included in SFAS No. 123 pro forma disclosure that appears below. Post-Recapitalization The above plans were replaced on May 11, 1999. The 1999 Stock Option Plan ("the 1999 Plan") was approved, ratified and adopted at this time. These options vest over five years and expire in May 11, 2009. F-19 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock option transactions post-recapitalization during fiscal 1999 are summarized as follows (in thousands, except price per share):
Options Available Weighted For Grant Under Options Average 1999 Plans The Plans Outstanding Exercise Price ---------- ----------------- ----------- -------------- Common A Shares: Balance June 27, 1998........... -- -- $ -- Shares reserved............... 11,070 -- -- Granted....................... (10,328) 10,328 0.54 Terminated.................... 47 (47) 0.67 ------- ------ ----- Balance July 3, 1999............ 789 10,281 $0.54 ======= ====== ===== Common L Shares: Balance June 27, 1998........... -- -- $ -- Shares reserved............... 232 -- -- Granted....................... (232) 232 2.12 Terminated.................... -- -- -- ------- ------ ----- Balance July 3, 1999............ -- 232 $2.12 ======= ====== =====
As of July 3, 1999, options for 2.4 million shares were exercisable at weighted average exercise prices ranging from $0.026 to $2.12 at an aggregate exercise price of $0.3 million. Income tax benefits attributable to non- qualified stock options exercised and disqualifying dispositions of incentive stock options are credited to equity when realized.
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------------------- Outstanding Weighted Average Exercisable Range of as of Remaining Weighted Average as of Weighted Average Exercise Price 07/3/1999 Contractual Life Exercise Price 07/3/1999 Exercise Price -------------- ----------- ---------------- ---------------- ----------- ---------------- $0.05--$0.21............ 7,551 9.9 $0.10 2,091 $0.02 $1.70--$1.91............ 2,729 9.9 $1.75 -- $ -- $1.91--$2.12............ 232 9.9 $2.12 232 $2.12 ------ --- ----- ----- ----- 10,512 9.9 $0.57 2,323 $0.24 ====== === ===== ===== =====
The Company applies APB 25 and related interpretations in accounting for stock option plans. In connection with the recapitalization, the Company recorded a compensation charge of $15.1 million relating to the acceleration of the vesting period of employee outstanding stock options under the Company's previous option plans. Had compensation cost been recognized consistent with SFAS No. 123, the Company's consolidated net earnings (loss) and earnings (loss) per share would have been as follows (in thousands except per share data):
1999 1998 1997 -------- -------- -------- Net income (loss) as reported.................. $ 23,043 $ 21,375 $ (8,419) Pro forma...................................... 19,449 16,868 (10,405) Net income (loss) per diluted share as reported...................................... 0.86 0.96 (0.43) Pro forma diluted net income (loss) per share.. 0.43 0.76 (0.54)
The per share weighted-average fair value of stock options issued by the Company was $1.30, $8.72, and $3.88 for fiscal years 1999, 1998 and 1997 respectively. F-20 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following assumptions were used by the Company to determine the fair value of stock options granted using the Black-Scholes option-pricing model:
1999 1998 1997 ------------- ------------ ------------- Dividend yield.................. 0% 0% 0% Expected volatility............. Minimal value 60-81% 60-65% Average expected option life.... 5 years 4 years 4 years Risk-free interest rate......... 6.0% 5.34% to 6.4% 5.34% to 6.71%
Pro forma net income (loss) reflects only options granted in fiscal years 1999, 1998 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No.123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over an option's vesting period, and compensation cost for options granted prior to July 1, 1995 is not considered. (16) Net Income (Loss) Per Share The Company had adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires the Company to report 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 that contingently convert into Common Stock upon certain events, and diluted net income (loss) per share, which is based on the weighted average number of common shares outstanding and diluted potential common shares outstanding. Class A Stock, Class B Stock and Class L Stock share ratably in the net income (loss) remaining after giving effect to the 9% yield on Class L Stock. Net income (loss) for year ended July 3, 1999 used in the net income (loss) per share calculation represents the income (loss) attributable to the weighted average number of shares of Class A Stock, Class B Stock and Common Stock outstanding after giving effect to the 9% yield on Class L Stock. The following tables set forth the computation of net income (numerator) and shares (denominator) for earnings per share:
Year Ended ------------------------- July 3, June 27, June 28, 1999 1998 1997 ------- -------- -------- Numerator (in thousands): Net Income (loss)................................... $23,043 $21,375 $(8,419) Less: Income attributable to Class L Stock.......... 530 -- -- ------- ------- ------- $22,513 $21,375 $(8,419) ======= ======= ======= Denominator (in thousands): Common Stock........................................ 20,690 20,912 19,439 Class A Stock....................................... 3,758 -- -- Class B Stock....................................... 1,364 -- -- ------- ------- ------- Weighted average shares outstanding used for basic income per share................................... 25,812 20,912 19,439 Common Stock Options................................ 465 1,352 -- ------- ------- ------- Weighted average shares outstanding used for diluted income per share................................... 26,277 22,264 19,439 ======= ======= =======
(17) Stockholders' Equity The shares of Class A common stock entitle the holder to one vote per share on all matters to be voted upon by shareholders. The Class B common stock and Class L common stock are non-voting. The Class L common stock is identical to the Class A common stock and Class B common stock except that the Class L F-21 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) common stock will be entitled preference over the Class A common stock and the Class B common stock, with respect to any distribution to holders of our common stock, equal to the original cost of such share ($10.62) plus an amount which accrues at a rate of 9% per annum, compounded quarterly. The Class L common stock is convertible into Class A common stock upon an initial public offering. Class A common stock is convertible into Class B common stock at any time, and Class B common stock is convertible into Class A common stock at any time so long as after giving effect to the conversion the converting Class B common stock holders and their affiliates do not own more than 49.9% of the outstanding shares of Class A common stock. (18) Business Segment and Geographic Information The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which became effective for fiscal year 1999. The Company adopted the requirements of this statement in fiscal year 1999. Revenue and long-lived assets by the Company's geographic locations are as follows:
Revenues by Geographic Location ---------------------------- 1999 1998 1997 -------- -------- -------- North America.................................. $ 46,702 $ 71,473 $ 48,100 Asia Pacific................................... 35,228 37,619 20,149 Europe......................................... 5,636 9,311 11,132 Taiwan......................................... 51,497 42,231 24,978 -------- -------- -------- $139,063 $160,634 $104,359 ======== ======== ======== Long-Lived Assets ---------------------------- 1999 1998 1997 -------- -------- -------- United States.................................. $ 9,099 $ 15,742 $ 13,692 Singapore...................................... 3,944 2,846 412 Elimination of Intercompany.................... (916) (704) -- -------- -------- -------- $ 12,127 $ 17,884 $ 14,104 ======== ======== ========
The Company has two reportable segments, core products and non-core products. The core segment represents parts that synchronize the timing signals in electronic devices. The non-core products included data communication transceivers and custom components. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates the performance of these two segments based on their contribution to operating income, excluding non-recurring gains or losses. The Company's reportable segments are strategic product lines that differ in nature and have different end uses, as such these product lines are managed and reported to the chief operating decision maker separately. Core products are standard application specific products that are sold into a variety of applications. The Company's average selling prices tend to be stable, gross margins are higher than commodity products, and the volumes higher than the non-core segment. Two types of products characterize the non- core segment. Data communications are transceivers used in network applications. The custom parts are for different applications using varied technologies. Each component in the custom product line is developed specifically for one customer for their specific application. F-22 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue, operating profit, depreciation and amortization and capital expenditures by business segment were as follows:
Business Segment Net Revenue ----------------------------- 1999 1998 1997 --------- -------- -------- Core......................................... $ 107,710 $ 90,622 $ 63,280 Non-core..................................... 31,353 70,012 41,079 --------- -------- -------- Total net revenues......................... $ 139,063 $160,634 $104,359 ========= ======== ======== Business Segment Profit (Loss) ----------------------------- 1999 1998 1997 --------- -------- -------- Core......................................... $ 22,783 $ 11,733 $ (1,835) Non-core..................................... 10,674 20,567 6,686 Special charge............................... (15,051) -- -- --------- -------- -------- Total operating profit..................... 18,406 32,300 4,851 Reconciliation to statements of operations: Gain on sale of Datacom...................... 10,734 -- -- Interest and other income.................... 2,178 1,984 1,800 Interest expense............................. (2,955) (64) (63) Impairment on equity investment.............. -- -- (7,072) Minority interest............................ -- -- 154 Equity loss of investee...................... -- -- (866) --------- -------- -------- Net income (loss) before income taxes...... $ 28,363 $ 34,220 $ (1,196) ========= ======== ========
The Company does not allocate items below operating income to specific segments. The core and non-core profit is calculated as revenues less cost of sales, research and development and selling, general and administrative expenses for that segment. In addition, the Company does not allocate most of its assets to specific segments, with the exception of certain property and equipment, and accordingly has not presented a breakdown of assets by segments.
Business Segment Depreciation/Amortization -------------------------- 1999 1998 1997 -------- -------- -------- Core............................................ $ 1,595 $ 1,494 $ 1,269 Non-core........................................ 326 529 478 Corporate and other............................. 3,044 2,556 1,997 -------- -------- -------- Total consolidated depreciation and amortization................................. $ 4,965 $ 4,579 $ 3,744 ======== ======== ======== Business Segment Capital Expenditures -------------------------- 1999 1998 1997 -------- -------- -------- Core............................................ $ 1,029 $ 1,509 $ 418 Non-core........................................ 279 760 299 Corporate and other............................. 6,386 5,870 2,641 -------- -------- -------- Total consolidated capital expenditures....... $ 7,694 $ 8,139 $ 3,358 ======== ======== ========
F-23 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (19) Related Party Transactions On May 11, 1999, the Company entered into an advisory agreement with Bain Capital Inc., a shareholder, for consulting services. The agreement provides for the Company to pay Bain Capital Inc. $750,000 per year plus any reasonable out of pocket expenses on a quarterly basis. The term of this agreement ends May 11, 2009. In connection with the merger and recapitalization, the Company paid $3.4 million to Bain Capital. On May 11, 1999, the Company entered into an advisory agreement with Bear, Stearns & Co. Inc., a shareholder, for consulting services. The agreement provides for the Company to pay Bear, Stearns & Co. Inc. $250,000 per year plus any reasonable out of pocket expenses on a quarterly basis. The term of this agreement ends May 11, 2009. In connection with the merger and recapitalization, the Company paid $4.9 million to Bear, Stearns & Co. On May 11, 1999, certain members of our senior management team entered into deferred compensation agreements with the Company. The agreements expire on May 11, 2009 upon which time the Company will pay the executives the entire deferred compensation regardless of their employment status at the Company. If a sale of the Company is consummated prior to expiration of the agreements, the executives will receive full benefit amount at that date. If there is a consummation of a Qualified Initial Public Offering ("QIPO date") prior to expiration the executive will receive 50% of the benefit on that date and the remaining 50% is payable on the date one year after the QIPO date. The amount of deferred compensation as of July 3, 1999 was $0.5 million. On May 11, 1999, the Company entered into an employment agreement with Hock E. Tan, as CEO and President with a base salary of $250,000 per year. In addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to 120% of his base salary based upon the Company attaining certain performance targets established annually by the board of directors. On May 11, 1999, certain members of the management team entered into stock purchase agreements. In exchange for the purchase of Class A common shares and Class L common shares the executives delivered to the Company a promissory note. The notes accrue interest at 8% per annum and mature on May 11, 2006. The executives may prepay the notes at any time, in whole or increments of $1,000. If the executives receive a bonus from the Company, the executives have the obligation to pay the Company an amount equal to 50% of the amount of such bonus, net of the amount of any customary withholding taxes and such amount paid to the Company shall first reduce accrued interest and any remaining amount paid to the Company shall reduce the principal amount. The outstanding amounts as of July 3, 1999 was $0.5 million. On May 11, 1999, the Company entered into a consulting agreement with Henry Boreen, a board member, for consulting services. The agreement provides for the Company to pay Mr. Boreen $350,000 per year in monthly installments. The term of the consulting agreement ends on May 11, 2002. The Company previously entered into an employment agreement with Henry Boreen on May 6, 1998 to serve as the Company's interim CEO until September 11, 1998. Mr. Boreen's base compensation was $10,000 per month, plus a grant of 84,710 stock options at an exercise price at fair market price at date of grant, which immediately vested. On September 14, 1998, the Company made an amendment to this agreement to extend the term to December 31, 1998. The amendment also increased Mr. Boreen's base compensation to $12,000 per month plus a grant of 50,826 stock options at an exercise price of fair value at the date of grant. Those options vested immediately. Also, in the first quarter of fiscal year 1997, the Company and Henry I. Boreen, Chairman of the Board, entered into an employment agreement as Interim Chief Executive Officer. For his services in this F-24 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) capacity, Mr. Boreen received a grant of 127,065 stock options at an exercise price of $6.13 per share which was equal to the closing price on the date of grant, and which option had a term of ten years and became exercisable in monthly installments over the six month period following the date of grant. On January 11, 1999, the Company entered into an employment agreement with Rudolf Gassner as the Company's Chairman of the Board. The employment period was for one year commencing on January 1, 1999. Mr. Gassner's responsibilities included finding a suitable candidate to serve as the Company's Chief Executive Officer, and management of day-to-day operations of the Company until a suitable Chief Executive Officer is secured. The agreement provided for the Company to pay Mr. Gassner a salary at a monthly rate of $12,000 during the employment term. Mr. Gassner was also entitled to participate in the Company's incentive compensation plan. This agreement terminated May 11, 1999. On November 3, 1998, the Company granted Mr. Gassner an option to purchase 189,750 shares of the Company's common stock at $8.19 per share, equal to fair market value on the grant date. The options vest and become exercisable on a cumulative basis at a rate of 13,554 shares per month commencing on November 30, 1998, with vesting on December 31, 1999. On November 3, 1998 the Company granted Mr. Gassner an option to purchase an additional 169,420 shares of the Company's common stock at $8.19, the fair market value on the grant date. These options vest and become exercisable on a cumulative basis at the rate of 33,884 shares per year commencing on the first anniversary of the grant date, with full vesting on November 3, 2003, and earlier vesting in full in the event the price of the Company's common stock exceeds $11.80 for 10 consecutive trading days. This agreement terminated May 11, 1999. In the third quarter of fiscal 1998, the Company entered into a severance agreement with Stavro Prodromou, the former President and Chief Executive Officer. Dr. Prodromou received $135,000 in cash severance and health benefits at the time of his departure, and was granted up to a one-year period to exercise 211,775 of his stock options. His remaining options were canceled. On May 11, 1998, each non-employee director entered into a consulting agreement with the Company for management consulting services. The term of each of the consulting agreement ended on December 31, 1998, and to the extent service (not to exceed ten days per month) of any such director were to be retained, he would receive cash compensation of $2,000 per day. There were no expenses incurred under this agreement in fiscal year 1999. In the first quarter of fiscal year 1997, the Company and David Sear, the former President and Chief Executive Officer, entered into a severance agreement. The Company recorded a charge of $0.3 million in connection with this agreement. (20) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries The Company conducts substantially all of its business through its domestic and foreign subsidiaries. On May 11, 1999, the Company issued $100.0 million principal amount of Notes bearing interest at a rate of 11.5%. The proceeds from the issuance of the Notes together with borrowings under a senior credit facility were used to pay transaction costs associated with the recapitalization of the Company and fund a portion of the cash consideration payable in connection with the merger. Presented below is condensed consolidating financial information for Integrated Circuit Systems, Inc., which includes the activities of the guarantor subsidiaries and the wholly owned foreign subsidiary (the "Non- Guarantor Subsidiary") as of July 3, 1999 and June 27, 1998 and for the fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997. The condensed consolidating financial information has been presented to show the nature of the assets held, results of operations and cash flows of the Parent Company, Guarantor subsidiaries F-25 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and the Non-Guarantor subsidiary assuming the guarantee structure of the Notes was in effect as the beginning of the periods presented. Separate financial statements for Guarantor Subsidiaries are not presented based on management's determination that they would not provide additional information that is material to investors. The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. In addition, corporate interest has not been allocated to the subsidiaries. F-26 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET July 3, 1999 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------ ----------- ------------ Assets: Cash and cash equivalents............ $ 3,034 $ 2,661 $ 3,590 $ -- $ 9,285 Accounts receivable, net.................... 12,730 -- 5,390 -- 18,120 Inventory............... 3,033 3,419 2,284 -- 8,736 Other current assets.... 10,858 2,938 429 -- 14,225 Property and equipment, net.................... 1,261 7,838 3,944 (916) 12,127 Deferred financing charges................ 12,767 -- -- -- 12,767 Investment in subsidiaries........... 58,828 -- -- (58,828) -- Intercompany receivables............ 5,920 45,238 -- (51,158) -- Other assets............ 6,433 1,152 4,950 -- 12,535 --------- ------- ------- --------- --------- Total assets.......... $ 114,864 $63,246 $20,587 $(110,902) $ 87,795 ========= ======= ======= ========= ========= Liabilities and shareholders' equity (deficit): Current liabilities, exclusive of debt...... $ 5,715 $14,811 $ 1,900 $ -- $ 22,426 Current portion of long- term debt.............. 1,000 30 -- -- 1,030 Long-term debt less current................ 169,000 -- -- -- 169,000 Other non-current liabilities............ 1,648 603 -- -- 2,251 Intercompany payable.... 44,413 968 5,777 (51,158) -- Shareholders' equity (deficit).............. (106,912) 46,834 12,910 (59,744) (106,912) --------- ------- ------- --------- --------- Total liabilities and shareholders' equity (deficit)............ $ 114,864 $63,246 $20,587 $(110,902) $ 87,795 ========= ======= ======= ========= =========
F-27 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET June 27, 1998 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------ ----------- ------------ Assets: Cash and cash equivalents............ $ 4,573 $ 16,413 $ 4,354 $ -- $ 25,340 Accounts receivable, net.................... 17,242 -- 3,093 -- 20,335 Inventory............... 4,320 5,741 2,778 -- 12,839 Other current assets.... 2,237 18,814 131 1,067 22,249 Property and equipment, net.................... 11,804 3,938 2,846 (704) 17,884 Investment in subsidiaries........... 90,591 -- -- (90,591) -- Intercompany receivables............ 16,057 3,677 -- (19,734) -- Other assets............ 7,975 1,387 -- -- 9,362 -------- -------- ------- --------- -------- Total assets.......... $154,799 $ 49,970 $13,202 $(109,962) $108,009 ======== ======== ======= ========= ======== Liabilities and shareholders' equity (deficit): Current liabilities, exclusive of debt...... $ (1,016) $ 13,525 $ 2,830 $ 168 $ 15,507 Current portion of long- term debt.............. 123 20 -- -- 143 Other non-current liabilities............ 2,138 453 -- -- 2,591 Intercompany payable.... 63,786 (51,717) 6,775 (18,844) -- Shareholders' equity (deficit).............. 89,768 87,689 3,597 (91,286) 89,768 -------- -------- ------- --------- -------- Total liabilities and shareholders' equity (deficit)............ $154,799 $ 49,970 $13,202 $(109,962) $108,009 ======== ======== ======= ========= ========
F-28 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended July 3, 1999 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------ ----------- ------------ Revenues................ $ 29,653 $89,936 $36,771 $(17,297) $139,063 Cost of sales........... 11,188 47,240 20,129 (14,061) 64,496 Research and development............ 4,588 11,934 2,813 1,981 21,316 Selling, general and administrative......... 12,950 7,513 4,675 (5,344) 19,794 Compensation costs...... 15,051 -- -- -- 15,051 -------- ------- ------- -------- -------- Operating income (loss)................. (14,124) 23,249 9,154 127 18,406 Sale of Datacom......... (7,734) (3,000) -- -- (10,734) Other (income) expense.. 1,224 (3,381) (232) 211 (2,178) Interest expense........ 2,934 3 18 -- 2,955 -------- ------- ------- -------- -------- Income (loss) before income taxes........... (10,548) 29,627 9,368 (84) 28,363 Income tax expense (benefit).............. (6,032) 11,159 56 137 5,320 -------- ------- ------- -------- -------- Net income (loss)..... $ (4,516) $18,468 $ 9,312 $ (221) $ 23,043 ======== ======= ======= ======== ========
F-29 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended June 27, 1998 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ----------- ------------ Revenues................ $52,977 $105,397 $15,753 $(13,493) $160,634 Cost of sales........... 28,948 58,913 9,002 (8,004) 88,859 Research and development............ 5,829 10,852 1,328 1,788 19,797 Selling, general and administrative......... 14,579 9,905 2,485 (7,291) 19,678 ------- -------- ------- -------- -------- Operating income........ 3,621 25,727 2,938 14 32,300 Other (income) expense.. (117) (2,577) 6 704 (1,984) Interest expense........ 63 1 -- -- 64 ------- -------- ------- -------- -------- Income (loss) before income taxes........... 3,675 28,303 2,932 (690) 34,220 Income tax expense...... 1,779 11,051 10 5 12,845 ------- -------- ------- -------- -------- Net income (loss)..... $ 1,896 $ 17,252 $ 2,922 $ (695) $ 21,375 ======= ======== ======= ======== ========
F-30 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS Year Ended June 28, 1997 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated ------- ------------ ------------ ----------- ------------ Revenues................ $32,917 $67,179 $6,801 $(2,538) $104,359 Cost of sales........... 16,224 36,590 6,196 127 59,137 Research and development............ 4,108 8,196 287 930 13,521 Selling, general and administrative......... 11,166 7,145 1,558 (4,215) 15,654 Write-off of in process research and development............ -- 11,196 -- -- 11,196 ------- ------- ------ ------- -------- Operating income (loss)................. 1,419 4,052 (1,240) 620 4,851 Other (income) expense.. 7,249 (1,148) 37 (154) 5,984 Interest expense........ 61 2 -- -- 63 ------- ------- ------ ------- -------- Income (loss) before income taxes........... (5,891) 5,198 (1,277) 774 (1,196) Income tax expense (benefit).............. 152 6,607 (445) -- 6,314 ------- ------- ------ ------- -------- Income (loss) from continuing operations.. (6,043) (1,409) (832) 774 (7,510) Loss from discontinued operations............. (909) -- -- -- (909) ------- ------- ------ ------- -------- Net income (loss)..... $(6,952) $(1,409) $ (832) $ 774 $ (8,419) ======= ======= ====== ======= ========
F-31 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS July 3, 1999 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated --------- ------------ ------------ ----------- ------------ Net income (loss)....... $ (4,516) $ 18,468 $ 9,312 $ (221) $ 23,043 Depreciation and amortization......... 2,001 2,156 903 (95) 4,965 Other non-cash items.. (13,388) (3,856) -- -- (17,244) Working capital changes.............. (1,081) 18,497 (3,740) 10 13,686 --------- -------- ------- ------- --------- Net cash flows from operating activities... (16,984) 35,265 6,475 (306) 24,450 Capital expenditures.. (912) (6,301) (2,009) 1,528 (7,694) Sales, maturities & purchases of investments.......... -- 16,112 (288) -- 15,824 Other investing activities........... 18,225 484 (4,942) (1,222) 12,545 --------- -------- ------- ------- --------- Net cash flows from investing activities... 17,313 10,295 (7,239) 306 20,675 Proceeds from long- term debt............ 170,000 30 -- -- 170,030 Recapitalization...... (187,782) (59,322) -- -- (247,104) Investments from equity investors..... 30,655 -- -- -- 30,655 Payments of long term debt................. (93) (21) -- -- (114) Purchase of treasury stock................ (3,016) -- -- -- (3,016) Other financing activities........... (11,631) -- -- -- (11,631) --------- -------- ------- ------- --------- Net cash flows from financing activities... (1,867) (59,313) -- -- (61,180) --------- -------- ------- ------- --------- Change in cash.......... (1,538) (13,753) (764) -- (16,055) Beginning balance....... 4,572 16,414 4,354 -- 25,340 --------- -------- ------- ------- --------- Ending balance........ $ 3,034 $ 2,661 $ 3,590 $ -- $ 9,285 ========= ======== ======= ======= =========
F-32 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS June 27, 1998 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------ ----------- ------------ Net income (loss)....... $ 1,221 $ 17,927 $ 2,922 $(695) $ 21,375 Depreciation and amortization......... 2,437 1,762 467 (87) 4,579 Other non-cash items.. (162) 81 -- -- (81) Working capital changes.............. 1,106 (8,347) 3,723 (10) (3,528) -------- -------- ------- ----- -------- Net cash flows from operating activities... 4,602 11,423 7,112 (792) 22,345 Capital expenditures.. (3,945) (2,225) (2,905) 936 (8,139) Sales, maturities & purchases of investments.......... -- (8,072) -- -- (8,072) Other investing activities........... 2,833 29 3 (144) 2,721 -------- -------- ------- ----- -------- Net cash flows from investing activities... (1,112) (10,268) (2,902) 792 (13,490) Payments of long term debt................. (141) (45) -- -- (186) Purchase of treasury stock................ (12,993) -- -- -- (12,993) Exercise of stock options.............. 7,015 -- -- -- 7,015 Other financing activities........... 4,224 -- -- -- 4,224 -------- -------- ------- ----- -------- Net cash flows from financing activities... (1,895) (45) -- -- (1,940) -------- -------- ------- ----- -------- Change in cash.......... 1,595 1,110 4,210 -- 6,915 Beginning balance....... 2,977 15,304 144 -- 18,425 -------- -------- ------- ----- -------- Ending balance.......... $ 4,572 $ 16,414 $ 4,354 $ -- $ 25,340 ======== ======== ======= ===== ========
F-33 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS June 28, 1997 (In thousands)
Non- Parent Guarantor Guarantor Eliminating Company Subsidiaries Subsidiaries Entries Consolidated -------- ------------ ------------ ----------- ------------ Net income (loss)....... $ (6,932) $ (259) $(846) $(382) $ (8,419) Depreciation and amortization......... 2,491 1,172 81 -- 3,744 Other non-cash items.. 9,706 11,300 83 (308) 20,781 Working capital changes.............. 8,339 (14,749) 11 690 (5,709) -------- -------- ----- ----- -------- Net cash flows from operating activities... 13,604 (2,536) (671) -- 10,397 Capital expenditures.. (1,680) (1,261) (417) -- (3,358) Sales, maturities & purchases of investments.......... -- (7,872) -- -- (7,872) Other investing activities........... (8,583) 37 502 -- (8,044) -------- -------- ----- ----- -------- Net cash flows from investing activities... (10,263) (9,096) 85 -- (19,274) Payments of long term debt................. (136) (2) -- -- (138) Purchase of treasury stock................ (10,466) -- -- -- (10,466) Exercise of stock options.............. 10,807 -- -- -- 10,807 Other financing activities........... (277) -- -- -- (277) -------- -------- ----- ----- -------- Net cash flows from financing activities... (72) (2) -- -- (74) -------- -------- ----- ----- -------- Change in cash.......... 3,269 (11,634) (586) -- (8,951) Beginning balance....... (292) 26,938 730 -- 27,376 -------- -------- ----- ----- -------- Ending balance.......... $ 2,977 $ 15,304 $ 144 $ -- $ 18,425 ======== ======== ===== ===== ========
F-34 INTEGRATED CIRCUIT SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (21) Litigation On January 27, 1999, Harbor Finance Partners and John P. McCarthy Money Purchase Plan filed a complaint on behalf of a purported class of our shareholders in the Court of Common Pleas of Montgomery County, Pennsylvania against the Company and Mr. Henry I. Boreen in the capacity as our interim Chief Executive Officer alleging that the consideration to be paid in the merger is inadequate and seeking to enjoin the merger as well as unspecified compensatory damages. In March 1999, the plaintiffs amended their complaint to add Mr. Hock E. Tan as a defendant in his capacity as our Senior Vice President, Chief Financial Officer and Secretary. In September 1999, the plaintiffs dismissed their complaints without requiring any payments or other consideration from the Company or any of the other defendants. On July 31, 1998, Lemelson Medical, Education & Research Foundation, L.P. ("Lemelson") filed a patent infringement action in the U.S. District Court for the District of Arizona against over 20 companies, including the Company. This litigation involves 16 patents, all derived from an original 1954 filing. Lemelson claims that the patents cover a number of aspects of semiconductor chip manufacturing, in particular optical imaging using alignment marks on the semiconductor chips, on assembly of the chips into packages, as well as bar- coding for inventory control. The liability of the Company is alleged under the U.S. Process Patent Act, which makes a seller of goods liable for a process abroad that would infringe a U.S. patent if made here. A few of ICS' foundries are already licensed under the patents, thus reducing the potential liability of the Company. Some of the defendants have settled with Lemelson, and the Company is currently in settlement discussions with Lemelson. On July 2, 1999, Motorola, Inc. filed an action against the Company and four former employees of Motorola in the Superior Court of Arizona, Maricopa County, for unfair competition, breach of contract, misappropriation of trade secrets and intentional interference with contractual relations. The four former employees left Motorola and began employment with the Company in May 1999. Motorola is seeking an injunction to prevent the Company from employing the former Motorola employees for a reasonable period of time and to enjoin the Company from using Motorola's trade secrets. Motorola is also suing to recover its attorneys' fees, unspecified damages and other relief in this matter. In addition to the foregoing, from time to time, various inquiries, potential claims and charges and litigation (collectively "claims") are made, asserted or commenced by or against the Company, principally arising from or related to contractual relations and possible patent infringement. The Company believes that any such claims currently pending, and the other litigation matters discussed above, individually and in the aggregate, have been adequately reserved and will not have any material adverse effect on the Company's consolidated financial position or results of operations, although no assurance can be made in this regard. (22) Major Customers During fiscal year 1999, Maxtek Technology represented 12% of the Company's revenues. During fiscal years 1998 and 1997, no customer represented 10% or more of the Company's revenues. (23) Quarterly Data (Unaudited) The following is a summary of the unaudited quarterly results of operations for the years ended July 3, 1999 and June 27, 1998 (in thousands):
Quarter Ended ------------------------------------------------------------------------------------ September 26 December 26 March 27 July 3 September 27 December 27 March 28 June 27 1998 1998 1999 1999 1997 1997 1998 1998 ------------ ----------- -------- ------- ------------ ----------- -------- ------- Revenue................. $32,200 $35,815 $34,980 $36,068 $38,585 $43,045 $43,545 $35,459 Cost of sales........... 17,259 18,334 14,582 14,321 21,052 23,457 23,977 20,373 Research and development............ 4,760 5,434 6,241 4,881 4,236 5,321 5,540 4,700 Operating income (loss)................. 5,582 6,157 9,493 (2,826) 8,143 9,137 9,070 5,950 Net income (loss)....... $ 4,149 $ 4,512 $16,510 $(2,128) $ 5,042 $ 6,021 $ 6,208 $ 4,104
F-35 INTEGRATED CIRCUIT SYSTEMS, INC.. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (24) Subsequent Event On March 27, 2000, the Company's Board of Directors authorized the filing of a Registration Statement on Form S-1 in connection with a planned initial public offering of the Company's common stock. The Company intends to reclassify all of its classes of common stock into a single class of common stock and effect a stock split in the form of a stock dividend in the amount of 1.6942 shares for every one share outstanding as of the pricing date of the initial public offering. All share and per share information in the accompanying consolidated financial statements have been retroactively adjusted to give effect to the planned modification of the Company's capital structure. F-36 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
April 1, July 3, 2000 1999 ----------- --------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents............................. $ 31,320 $ 9,285 Marketable securities................................. 278 288 Accounts receivable, net.............................. 18,389 18,120 Inventory, net........................................ 8,829 8,736 Deferred income taxes................................. 8,209 8,644 Prepaid assets........................................ 1,645 797 Other current assets.................................. 707 523 Current portion of deposit on purchase contracts...... 10,177 3,973 --------- --------- Total current assets................................ 79,554 50,366 --------- --------- Property and equipment, net............................. 12,335 12,127 Deferred financing costs, net........................... 11,947 12,767 Deposits on purchase contracts.......................... -- 11,348 Other assets............................................ 1,455 1,187 --------- --------- Total assets........................................ $ 105,291 $ 87,795 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term obligations.............. $ 23 $ 1,030 Accounts payable...................................... 11,093 10,258 Income tax payable.................................... 4,834 4,473 Accrued payroll and bonus............................. 1,309 2,056 Accrued interest...................................... 4,556 2,108 Accrued expenses and other current liabilities........ 3,314 3,531 --------- --------- Total current liabilities........................... 25,129 23,456 --------- --------- Long-term debt, less current portion.................... 150,597 169,000 Other liabilities....................................... 1,373 1,462 Deferred income taxes................................... 928 789 --------- --------- Total liabilities................................... 178,027 194,707 ========= ========= Shareholders' deficit: (Note 10) Series A preferred stock, $4.00 par, authorized 3,367; Issued and outstanding 3,367 shares as of April 1, 2000..................... 13,467 -- Class A common stock, $0.01 par, authorized 52,520; Issued and outstanding 28,425 and 26,452 shares as of April 1, 2000 and July 3, 1999, respectively......... 285 264 Class B common stock, $0.01 par, authorized 52,520; Issued and outstanding 9,577 shares as of April 1, 2000 and July 3, 1999, respectively.................. 96 96 Class L common stock, $0.01 par, authorized 6,777; Issued and outstanding 3,998 and 4,003 shares as of April 1, 2000 and July 3, 1999, respectively ............................... 40 40 Additional paid in capital............................ 34,579 34,556 Accumulated deficit................................... (120,923) (141,413) Notes receivable...................................... (280) (455) --------- --------- Total shareholders' deficit......................... (72,736) (106,912) --------- --------- Total liabilities and shareholders' deficit......... $ 105,291 $ 87,795 ========= =========
See accompanying notes to consolidated financial statements. F-37 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except for per share data) (Unaudited)
Three months ended Nine months ended ------------------ ------------------ March April 1, 27, April 1, March 2000 1999 2000 27, 1999 -------- -------- -------- -------- Revenues:............................. $41,613 $ 34,980 $120,511 $102,995 Cost and expenses: Cost of sales....................... 16,068 14,582 48,938 50,175 Research and development expense.... 6,341 6,241 18,062 16,435 Selling, general and administrative expense............................ 5,856 4,538 16,983 14,910 Management fee...................... 250 -- 750 -- Goodwill amortization............... 59 59 176 176 ------- -------- -------- -------- Operating income.................. 13,039 9,560 35,602 21,299 ------- -------- -------- -------- Interest and other (income)........... (423) (498) (792) (1,917) Gain on Sale of Datacom............... -- (10,580) -- (10,580) Interest expense...................... 4,543 13 13,855 78 ------- -------- -------- -------- Income before income taxes........ 8,919 20,625 22,539 33,718 Income taxes.......................... 810 4,115 2,213 8,547 ------- -------- -------- -------- Income before extraordinary items... 8,109 16,510 20,326 25,171 Extraordinary gain on early retirement of bonds, net of taxes............... -- -- 170 -- ------- -------- -------- -------- Net income........................ $ 8,109 $ 16,510 $20,496 $ 25,171 ======= ======== ======== ======== Income per common share: Basic income per common share....... $ 0.19 $ 0.80 $ 0.48 $ 1.22 Diluted income per common share..... $ 0.42 $ 0.77 $ 0.41 $ 1.19 Shares used to compute income per common share Basic............................... 37,748 20,569 36,473 20,701 Diluted............................. 49,836 21,415 43,104 21,111
See accompanying notes to consolidated financial statements. F-38 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended ------------------ March April 1, 27, 2000 1999 -------- -------- Cash flows from operating activities: Net income............................................... $ 20,496 $ 25,171 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation and amortization.......................... 3,371 3,605 Amortization of deferred financing charge.............. 1,215 -- Loss (gain) on sale of fixed assets.................... 60 262 (Gain) loss on sale of building........................ (78) -- (Gain) loss on sale of DataCom......................... -- (10,580) Sale (purchase) of trading securities.................. -- 454 Stock compensation..................................... -- 1,280 Tax benefit from the exercise of stock options......... 219 154 Deferred income taxes.................................. 573 (894) Accounts receivable.................................... (269) (540) Inventory.............................................. (93) 5,843 Other assets, net...................................... (1,289) (930) Accounts payable, accrued expenses and other current liabilities........................................... (127) (2,701) Accrued interest expense............................... 2,448 -- Income taxes........................................... 360 2,869 -------- -------- Net cash provided by operating activities.................. 26,886 23,993 -------- -------- Cash flows from investing activities: Purchase of investments.................................. -- (31,685) Proceeds from sale/maturities of marketable securities... -- 27,246 Capital expenditures..................................... (3,505) (6,618) Change in deposits on purchase contracts................. 5,143 (7,739) Proceeds from sale of fixed assets....................... 93 16,134 -------- -------- Net cash used in investing activities................ 1,731 (2,662) -------- -------- Cash flows from financing activities: Exercise of stock options................................ 60 840 Investment into the Company.............................. 13,467 -- Repayments of long-term debt............................. (19,463) (112) Repurchase of common stock............................... -- (3,016) Deferred financing charges............................... (395) -- Other.................................................... (251) -- -------- -------- Net cash used in financing activities................ (6,582) (2,288) -------- -------- Net increase in cash and cash equivalents.................. 22,035 19,043 Cash and cash equivalents: Beginning of period...................................... 9,285 25,340 -------- -------- End of period............................................ $ 31,320 $ 44,383 ======== ======== Supplemental disclosures of cash flow information: Cash payments during the period for: Interest............................................... $ 9,927 $ 64 ======== ======== Income taxes........................................... $ 1,024 $ 4,743 ======== ======== Non-cash disclosures: Capital lease of equipment............................. $ 53 $ -- ======== ========
See accompanying notes to consolidated financial statements. F-39 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Interim Accounting Policy The accompanying financial statements have not been audited. In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's financial position at April 1, 2000 and results of operations and cash flows for the interim periods presented. Certain items have been reclassified to conform to current period presentation. Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere herein. Results of operations for the three and nine months ended April 1, 2000 are not necessarily indicative of results to be expected for the full year. (2) Consolidation Policy The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries (wholly and majority-owned), after elimination of all significant intercompany accounts and transactions. (3) The Recapitalization In the recapitalization on May 11, 1999, affiliates of Bain Capital, an affiliate of Bear Stearns and Co., Inc. and certain members of management made an aggregate equity investment in the Company of approximately $50 million as part of agreements to redeem and purchase all of our outstanding shares of common stock and vested options for consideration (including fees and expenses) totaling $294.4 million. (4) Inventory Inventory is valued at the lower of market or standard cost, which approximates actual costs using the first-in, first-out (FIFO) method. The components of inventories are as follows (in thousands):
April 1, July 3, 2000 1999 -------- ------- Work-in-process........................................... $ 7,297 $ 8,211 Finished parts............................................ 6,072 5,665 Less: Obsolescence reserve................................ (4,540) (5,140) ------- ------- $ 8,829 $ 8,736 ======= =======
(5) Purchase Commitments In the third quarter of fiscal 2000, Chartered Semiconductor PTE repaid the $4.3 million, extinguishing the balance outstanding under the first deposit. The second deposit commitment period ends December 31, 2000 and accordingly, the remaining balance of $10.2 million is recorded as a current asset. (6) Debt The Company purchased $2.0 million of its 11 1/2% senior subordinated notes below par in September, resulting in a gain of $36,000 net of income taxes, and $5.0 million below par in November, resulting in a gain of $134,000 net of income taxes. In addition, the Company has paid $12.4 million of principal on the term A and term B loans, as well as $9.9 million in interest during the first nine months of fiscal year 2000. F-40 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Certain of the Company's loan agreements require the maintenance of specified financial ratios and impose financial limitations. At April 1, 2000, the Company was in compliance with the senior credit facility covenants. (7) Net Income Per Share The Company had adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires the Company to report both basic net income per share, which is based on the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares that contingently convert into Common Stock upon certain events, and diluted net income per share, which is based on the weighted average number of common shares outstanding and diluted potential common shares outstanding. Class A Stock, Class B Stock and Class L Stock share ratably in the net income (loss) remaining after giving effect to the 9% yield on Class L Stock. Net income for the three and nine months ended April 1, 2000 used in the net income per share calculation represents the income attributable to the weighted average number of shares of Class A Stock, Class B Stock and Common Stock outstanding after giving effect to the 9% yield on Class L Stock. The following tables set forth the computation of net income (numerator) and shares (denominator) for earnings per share:
Three Months Ended Nine Months Ended ------------------ ------------------ April 1, March 27, April 1, March 27, 2000 1999 2000 1999 -------- --------- -------- --------- Numerator (in thousands): Net Income.............................. $ 8,109 $16,510 $ 20,496 $25,171 Less: Income attributable to Class L Stock.................................. 995 -- 2,950 -- ------- ------- -------- ------- 7,114 16,510 17,546 25,171 Denominator (in thousands): Common Stock............................ -- 20,569 -- 20,701 Class A Stock........................... 28,170 -- 26,896 -- Class B Stock........................... 9,577 -- 9,577 -- ------- ------- -------- ------- Weighted average shares outstanding used for basic income per share............. 37,747 20,569 36,473 20,701 Common Stock Options.................... 6,955 846 4,844 410 Series A Preferred Stock................ 5,134 -- 1,787 -- ------- ------- -------- ------- Weighted average shares outstanding used for diluted income per share........... 49,836 21,415 43,104 21,111 ======= ======= ======== =======
(8) Equity During December 1999, the Company received $13.5 million in exchange for 3.4 million shares of $4.00 par value preferred stock from a strategic corporate investor. (9) Business Segment Information The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which became effective for fiscal year 1999. The Company adopted the requirements of this statement in fiscal year 1999. F-41 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has two reportable segments, core products and non-core products. The core segment represents parts that synchronize the timing signals in electronic devices. The non-core products include data communication transceivers and custom components. The Company's reportable segments are strategic product lines that differ in nature and have different end uses. As such these product lines are managed and reported to the chief operating decision-maker separately. Core products are standard application specific products that are sold into a variety of applications. The average selling prices (ASP's) tend to be stable, gross margins are higher than commodity products, and the volumes higher than the non-core segment. The non-core segment is made up of custom parts using varied technologies for different applications such as transceivers. Each component in the custom product line is developed specifically for one customer for their specific application. Revenue and operating profit by business segment were as follows:
Business Segment Net Revenue --------------------------------------- Three months ended Nine months ended ------------------- ------------------- April 1, March 27, April 1, March 27, 2000 1999 2000 1999 -------- --------- -------- --------- Core............................... $36,968 $27,553 $106,801 $ 78,612 Non-core........................... 4,645 7,427 13,710 24,383 ------- ------- -------- -------- Total net revenues............... $41,613 $34,980 $120,511 $102,995 ======= ======= ======== ======== Business Segment Profit (Loss) --------------------------------------- Three months ended Nine months ended ------------------- ------------------- April 1, March 27, April 1, March 27, 2000 1999 2000 1999 -------- --------- -------- --------- Operating Profit: Core............................... $11,224 $ 8,717 $ 31,113 $ 17,721 Non-core........................... 2,065 843 5,239 3,578 Management fee..................... (250) -- (750) -- ------- ------- -------- -------- Total operating profit........... 13,039 9,560 35,602 21,299 Reconciliation to statements of operations: Interest & other income............ 423 11,078 792 12,497 Interest expense................... (4,543) (13) (13,855) (78) ------- ------- -------- -------- Net income (loss) before Income taxes............................. $ 8,919 $20,625 $ 22,539 $ 33,718 ======= ======= ======== ========
The Company does not allocate items below operating income to specific segments. The core and Non-core profit is calculated as revenues less cost of sales, research and development and selling, general and administrative expenses for that segment. (10) Initial Public Offering On March 27, 2000, the Company announced that it had filed with the Securities and Exchange Commission, a registration statement relating to a proposed initial public offering of its common stock. The net cash proceeds of the offering to be received by the Company, will be used to redeem or repurchase outstanding senior subordinated notes, repay in full all outstanding obligations under the Company's senior bank credit facility, pay fees and expenses of the offering, and fund general corporate requirements. The proposed offering will be underwritten by a group led by Credit Suisse First Boston, Inc. There can be no assurance that the Company will complete its initial public offering on the terms proposed or at all. F-42 INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (11) New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities," which defers the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt the requirements of this statement in fiscal year 2001. (12) Legal On July 2, 1999, Motorola, Inc. filed an action against the Company and four former employees of Motorola in the Superior Court of Arizona, Maricopa County, for unfair competition, breach of contract, misappropriation of trade secrets and intentional interference with contractual relations. Motorola is suing to recover its attorneys' fees, unspecified damages and other relief in this matter. Independent of the lawsuit, a restraining order for the Company's Phoenix design center was put in place. A $0.5 million payment was made during the second quarter of fiscal 2000 in conjunction with the placement of the restraining order, allowing the Phoenix design center to move forward with research and development. Both parties entered into a settlement agreement in the third quarter of fiscal 2000, wherein, Motorola received a payment of $2.3 million from the Company and the case has been dismissed. The Company also incurred $1.4 million in legal fees in conjunction with this lawsuit, $0.9 million of which was expensed during the quarter ended April 1, 2000. (13) Subsequent Event All share and per share amounts have been retroactively adjusted to reflect a 1.6942 to 1 stock split which will occur with the Company's initial public offering. F-43 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses to be incurred in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions, to be paid by the Registrant. SEC registration fee................................................ $ 132,000 National Association of Securities Dealers, Inc. filing fee......... 30,500 Nasdaq National Market listing fee.................................. 5,000 Printing and engraving fees......................................... 300,000 Legal fees and expenses............................................. 1,000,000 Accounting fees and expenses........................................ 500,000 Blue Sky fees and expenses.......................................... 5,000 Transfer agent and Registrar fees................................... 3,500 Management and consulting fees...................................... 3,200,000 Miscellaneous....................................................... 1,724,000 ---------- Total............................................................... 6,900,000 ==========
Item 14. Indemnification of Directors and Officers. The Registrant and its subsidiary ICST, Inc. are incorporated under the laws of the Commonwealth of Pennsylvania. Sections 1741 through 1750 of Chapter 17, Subchapter D, of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL") contain provisions for mandatory and discretionary indemnification of a corporation's directors, officers and other personnel, and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors and officers under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with an action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a representative, director or officer of the corporation or serving at the request of the corporation as a representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under Section 1743, indemnification of expenses actually and reasonably incurred is mandatory to the extent that the officer or director has been successful on the merits or otherwise in defense of any action or proceeding. Section 1742 provides for indemnification in derivative actions except in respect of any claim, issue or matter as to which the person has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. Section 1744 provides that, unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that the representative met the applicable standard of conduct, and such determination will be made by the board of directors (i) by a majority vote of a quorum of directors not parties to the action or proceeding; (ii) if a quorum is not obtainable, or if obtainable and a majority vote of a quorum of disinterested directors so directs, by independent legal counsel; or (iii) by the shareholders. II-1 Section 1745 provides that expenses incurred by an officer, director, employee or agent in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Section 1746 provides generally that, except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter 17D of the BCL shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders of disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office. Section 1747 also grants to a corporation the power to purchase and maintain insurance on behalf of any director or officer against any liability incurred by him or her in his or her capacity as officer or director, whether or not the corporation would have the power to indemnify him or her against the liability under Subchapter 17D of the BCL. Section 1748 and 1749 extend the indemnification and advancement of expenses provisions contained in Subchapter 17D of the BCL to successor corporations in fundamental changes and to representatives serving as fiduciaries of employee benefit plans. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and personal representative of such person. For information regarding provisions under which a director or officer of the Registrant may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to Article 23 of the Registrant's Bylaws, which provides in general that the Registrant shall indemnify its officers and directors to the fullest extent permitted by Pennsylvania law. Article 23 further provides that no director of the Registrant shall be personally liable, as such, for monetary damages for any action taken unless the director has breached or failed to perform the duties of his or her office, and the breach or failure to perform constitutes self-dealing, wilful misconduct or recklessness, except with respect to the responsibility or liability of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes. It is the policy of the Registrant that indemnification of, and advancement of expenses to, directors and officers of the Registrant shall be made to the fullest extent permitted by law. The Registrant shall pay expenses incurred by an officer or director, and may pay expenses incurred by any other employee or agent, in defending a proceeding, in advance of the final disposition of such action or proceeding. The Registrant has the authority to create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner, its indemnification obligations, whether arising under the Registrant's Bylaws or otherwise. The Registrant has the authority to enter into a separate indemnification agreement with any officer, director, employee or agent of the Registrant or any subsidiary providing for such indemnification of such person as the Board of Directors shall determine up to the fullest extent permitted by law. The Registrant has the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Registrant, whether or not the Registrant would have the power to indemnify him against such liability under the provisions of the Bylaws or under any provision of the BCL or other applicable law. II-2 The Registrant currently provides insurance coverage to its directors and officers for up to $20 million. In connection with the recapitalization, Bain Capital Fund VI, L.P. and Bear Stearns Merchant Fund Corp., equity investors in the Registrant after the recapitalization, have agreed to severally and not jointly, indemnify and hold harmless Rudolf S. Gassner, John L. Pickitt and Edward M. Esber, Jr., directors of the Registrant who will not continue to be directors after the recapitalization, and their respective heirs, personal representatives and administrators, from and against any and all liabilities that any of them may incur solely to the extent incurred directly as a result of their approval of (i) the Confidential Information Memorandum ("Memorandum") dated February 1999 relating to proposed $145 million credit facilities ("Facilities"), (ii) a letter from the Registrant to Credit Suisse First Boston relating to the Memorandum, a copy of which is included in the Memorandum, (iii) the Rule 144A Offering Circular of the Registrant relating to an offering of $100,000,000 of Senior Subordinated Notes ("Notes"), (iv) the incurrence of any indebtedness under the Facilities or the Notes, and (v) the engagement of Murray, Devine & Co., Inc. to provide a solvency opinion in connection with the recapitalization. For information regarding provisions under which a director or officer of ICST, Inc. may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to Article 23 of ICST's bylaws, which provides in general that ICST shall indemnify its officers and directors to the fullest extent permitted by Pennsylvania law. The Registrant's subsidiaries, ICS Technologies, Inc. and MicroClock, Inc., are incorporated under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware ("Section 145"), inter alia, provides that a Delaware corporation may indemnify any persons who were, are or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses, such as attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he or she reasonably believed to be or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, were or are threatened to be made, party to any threatened, pending or completed action or suit by or in the right of the corporation by reasons of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnify may include expenses, including attorneys' fees, actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests, provided that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director has actually and reasonably incurred. Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him or her in any such capacity, arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify him or her under Section 145. For information regarding provisions under which a director or officer of ICS Technologies, Inc. may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to Article VI of ICS Technologies' bylaws, which provides in general that ICS Technologies shall indemnify its officers and directors to the fullest extent permitted by and under Section 145. II-3 For information regarding provisions under which a director or officer of MicroClock, Inc. may be insured or indemnified in any manner against any liability which he or she may incur in his or her capacity as such, reference is made to Article VII of MicroClock's bylaws, which provides in general that MicroClock shall indemnify its officers and directors and authorized representatives who was or is a party, or is threatened to be made a party to any third party proceeding or any corporate proceeding by reason of the fact that such person is or was an authorized representative of the MicroClock against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of MicroClock. Item 15. Recent Sales of Unregistered Securities. On May 11, 1999, as part of a recapitalization of the Registrant, the Registrant issued Class A common stock, Class B common stock and Class L common stock to affiliates of Bain Capital Inc., an affiliate of The Bear Sterns Companies, Inc. and certain members of management of the Registrant for consideration totaling approximately $50 million pursuant to an exemption from registration provided by Section 4(2) of the Securities Act. On December 23, 1999, the Registrant issued 3,366,670 Series A Cumulative Convertible Preferred Stock to Intel Corporation pursuant to an exemption from registration provided by Section 4(2) of Securities Act. Item 16. Exhibits and Financial Statement Schedules. 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of the Registrant. 3.2 Amended and Restated By-laws of the Registrant. *4.1 Indenture, dated as of May 11, 1999, between the Company and Chase Manhattan Trust Company, National Association, as Trustee with respect to the 11 1/2% Senior Subordinated Notes (including the form of 11 1/2% Senior Subordinated Notes). 4.2 Form of certificate representing shares of common stock. 5.1 Opinion of Pepper Hamilton LLP. *10.1 Purchase Agreement, dated as of May 5, 1999, among the Company, Bear Stearns & Co. Inc. and Credit Suisse First Boston Corporation. *10.2 Registration Rights Agreement, dated as of May 11, 1999, among the Company, each of the three Guarantor Subsidiaries, Bear, Stearns & Co., Inc. and Credit Suisse First Boston Corporation. *10.3 Consulting Agreement, dated as of May 11, 1999, between the Company and Henry I. Boreen. *10.4 Integrated Circuit Systems, Inc. 1999 Stock Option Plan. *10.5 Credit Agreement, dated as of May 11, 1999, among the Company, Credit Suisse First Boston as Administrative Agent, Sole Lead Arranger and Collateral Agent, and the various lending institutions party thereto. *10.6 Lease, dated as of January 29, 1999 between BET Investments IV and the Company. *10.7 Agreement and Plan of Merger as of January 20, 1999, between the Company and ICS Merger Corp. (the "Recapitalization Agreement"). *10.8 Amendment No. 1 to the Recapitalization Agreement, dated as of February 16, 1999.
II-4 *10.9 Executive Stock and Option Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.10 Deferred Compensation Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.11 Stockholders Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II, BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp. and Integrated Circuit Systems Equity Investors, L.L.C. 10.12 Amendment No. 1 to Stockholders Agreement, dated December 23, 1999. 10.13 Amendment No. 2 to Stockholders Agreement, dated , 2000. *10.14 Employee Agreement, dated August 1, 1994, between the Company and Hock E. Tan. *10.15 Consultant Stock Agreement, dated as of May 11, 1999, between the Company and Henry I. Boreen. *10.16 Registration Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Trust Associates II, BCIP Trust Associates II-B, BCIP Associates II, BCIP Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Hock E. Tan, Lewis C. Eggebrecht and Integrated Circuit Systems Equity Investors, L.L.C. 10.17 Amendment No. 1 to Registration Statement, dated December 23, 1999. *10.18 Executive Stock Purchase Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.19 Promissory Note, dated as of May 11, 1999, executed by Hock E. Tan. *10.20 Pledge Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.21 Voting Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II, BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II- C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Henry I. Boreen, Christopher J. Bland and Barry E. Olsen. *10.22 Employment Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.23 Non-Compete Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.24 Advisory Agreement, dated as of May 11, 1999, between the Company and Bain Capital Partners VI, L.P. *10.25 Advisory Agreement, dated as of May 11, 1999, between the Company and ICST Acquisition Corp. 10.26 Lease Agreement, dated June 13, 1988, between VLSI Design Associates and The Sobrato Group (Incorporated by reference to Exhibit 10.27 to the Registrant's registration statement, No. 33-54142, on Form S-4, filed November 3, 1992). 10.27 Lease between Turtle Beach Systems, Inc. and Winship Land Associates III, dated May 28, 1993 (Incorporated by reference to Exhibit 10.27 to the Registrant's 1993 Annual Report on Form 10-K). 10.28 First Amendment to lease, dated as of May 13, 1993, between the registrant and The Sobrato Group (Incorporated by reference to Exhibit 10.28 to the Registrant's 1993 Annual Report on Form 10-K).
II-5 10.29 Wafer purchase contract, dated as of October 12, 1994, between the Company and American Microsystems, Inc. (Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.30 Agreement, dated as of November 21, 1994, between the Company and Edward H. Arnold (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended December 31, 1994). 10.31 Wafer purchase contract, dated as of November 8, 1995, between the Company and Chartered Semiconductor Manufacturing Pte. Ltd. (Incorporated by reference to Exhibits 10(a) and 10(b) to the Registrant's Form 10-Q for the quarter ended December 30, 1995). 10.32 2000 Long Term Equity Incentive Plan 10.33 Series A Cumulative Convertible Preferred Stock Purchase Agreement by the Registrant and Intel Corporation dated December 23, 1999. 10.34 Employee Stock Purchase Plan. *16.1 Letter from KPMG LLP re: Change in Certifying Accountant. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. 23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included in Part II of the Registration Statement). 27.1 Financial Data Schedule.
- --------------------- * Incorporated by reference to the Registrant's Form S-4, as amended, filed October 7, 1999. Item 17. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to provisions described in Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the SEC 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, 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. The undersigned Registrant hereby undertakes that: (1) 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. (2) 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 that time shall be deemed to be the initial bona fide offering thereof. 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. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Pre-effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Norristown, Pennsylvania, on this 19th day of May, 2000. Integrated Circuit Systems, Inc. /s/ Hock E. Tan By: _________________________________ Name:Hock E. Tan Title:President and Chief Executive Officer II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, this Pre-effective Amendment No. 2 to the Registration Statement on Form S-1 and Power of Attorney have been signed by or on behalf of the following persons in the capacity and on the date indicated. Integrated Circuit Systems, Inc.
Signature Title(s) Date --------- -------- ---- /s/ Hock E. Tan President and Chief May 19, 2000 ______________________________________ Executive Officer Hock E. Tan (Principal Executive Officer) and Director /s/ Justine F. Lien Chief Financial Officer May 19, 2000 ______________________________________ (Principal Financial and Justine F. Lien Accounting Officer) * Director May 19, 2000 ______________________________________ Henry I. Boreen * Director May 19, 2000 ______________________________________ David Dominik * Director May 19, 2000 ______________________________________ Michael A. Krupka * Director May 19, 2000 ______________________________________ Prescott Ashe * Director May 19, 2000 ______________________________________ John D. Howard
- --------------------- * By Justine F. Lien, attorney-in-fact. II-8 SCHEDULE II INTEGRATED CIRCUIT SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS Years ended July 3, 1999, June 27, 1998 and June 28, 1997 (in thousands)
Balance at Additions Charged Beginning of to Costs and Balance at Description Period Expenses Deductions End of Period - ------------------------ ------------ ----------------- ---------- ------------- Year ended July 3, 1999: Valuation reserves: Doubtful Accounts..... $ 627 $ 430 $ 116 $ 941 Returns and Allowances........... 1,166 43 -- 1,209 Inventory............. 3,360 2,380 600 5,140 Deferred tax valuation............ 3,145 -- 428 2,717 Year ended June 27, 1998: Valuation reserves: Doubtful Accounts..... $ 212 $ 543 $ 128 $ 627 Returns and Allowances........... 231 935 -- 1,166 Inventory............. 2,373 2,687 1,700(1) 3,360 Deferred tax valuation............ 3,090 55 -- 3,145 Year ended June 28, 1997: Valuation reserves: Doubtful Accounts..... $ 230 $ 172 $ 190 $ 212 Returns and Allowances........... 1,849 -- 1,618(1) 231 Inventory............. 2,001 372 -- 2,373 Deferred tax valuation............ 911 2,179 -- 3,090
- ---------- (1) Reflects the de-consolidation of Turtle Beach. EXHIBIT INDEX
Exhibit No. Description Page ----------- ----------- ---- 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation of the Registrant. 3.2 Amended and Restated By-laws of the Registrant. *4.1 Indenture, dated as of May 11, 1999, between the Company and Chase Manhattan Trust Company, National Association, as Trustee with respect to the 11 1/2% Senior Subordinated Notes (including the form of 11 1/2% Senior Subordinated Notes). 4.2 Form of certificate representing shares of common stock. 5.1 Opinion of Pepper Hamilton LLP. *10.1 Purchase Agreement, dated as of May 5, 1999, among the Company, Bear Stearns & Co. Inc. and Credit Suisse First Boston Corporation. *10.2 Registration Rights Agreement, dated as of May 11, 1999, among the Company, each of the three Guarantor Subsidiaries, Bear, Stearns & Co., Inc. and Credit Suisse First Boston Corporation. *10.3 Consulting Agreement, dated as of May 11, 1999, between the Company and Henry I. Boreen. *10.4 Integrated Circuit Systems, Inc. 1999 Stock Option Plan. *10.5 Credit Agreement, dated as of May 11, 1999, among the Company, Credit Suisse First Boston as Administrative Agent, Sole Lead Arranger and Collateral Agent, and the various lending institutions party thereto. *10.6 Lease, dated as of January 29, 1999 between BET Investments IV and the Company. *10.7 Agreement and Plan of Merger as of January 20, 1999, between the Company and ICS Merger Corp. (the "Recapitalization Agreement"). *10.8 Amendment No. 1 to the Recapitalization Agreement, dated as of February 16, 1999. *10.9 Executive Stock and Option Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.10 Deferred Compensation Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.11 Stockholders Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II, BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp. and Integrated Circuit Systems Equity Investors, L.L.C. 10.12 Amendment No. 1 to Stockholders Agreement, dated December 29, 1999. 10.13 Amendment No. 2 to Stockholders Agreement, dated February, 2000. *10.14 Employee Agreement, dated August 1, 1994, between the Company and Hock E. Tan. *10.15 Consultant Stock Agreement, dated as of May 11, 1999, between the Company and Henry I. Boreen.
Exhibit No. Description Page ----------- ----------- ---- *10.16 Registration Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Trust Associates II, BCIP Trust Associates II-B, BCIP Associates II, BCIP Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Hock E. Tan, Lewis C. Eggebrecht and Integrated Circuit Systems Equity Investors, L.L.C. 10.17 Amendment No. 1 to Registration Statement, dated December 29, 1999. *10.18 Executive Stock Purchase Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.19 Promissory Note, dated as of May 11, 1999, executed by Hock E. Tan. *10.20 Pledge Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.21 Voting Agreement, dated as of May 11, 1999, among the Company, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II, BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Henry I. Boreen, Christopher J. Bland and Barry E. Olsen. *10.22 Employment Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.23 Non-Compete Agreement, dated as of May 11, 1999, between the Company and Hock E. Tan. *10.24 Advisory Agreement, dated as of May 11, 1999, between the Company and Bain Capital Partners VI, L.P. *10.25 Advisory Agreement, dated as of May 11, 1999, between the Company and ICST Acquisition Corp. *10.26 Lease Agreement, dated June 13, 1988, between VLSI Design Associates and The Sobrato Group (Incorporated by reference to Exhibit 10.27 to the Registrant's registration statement, No. 33-54142, on Form S-4, filed November 3, 1992). *10.27 Lease between Turtle Beach Systems, Inc. and Winship Land Associates III, dated May 28, 1993 (Incorporated by reference to Exhibit 10.27 to the Registrant's 1993 Annual Report on Form 10- K). *10.28 First Amendment to lease, dated as of May 13, 1993, between the registrant and The Sobrato Group (Incorporated by reference to Exhibit 10.28 to the Registrant's 1993 Annual Report on Form 10-K). *10.29 Wafer purchase contract, dated as of October 12, 1994, between the Company and American Microsystems, Inc. (Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1994). *10.30 Agreement, dated as of November 21, 1994, between the Company and Edward H. Arnold (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended December 31, 1994). *10.31 Wafer purchase contract, dated as of November 8, 1995, between the Company and Chartered Semiconductor Manufacturing Pte. Ltd. (Incorporated by reference to Exhibits 10(a) and 10(b) to the Registrant's Form 10-Q for the quarter ended December 30, 1995). 10.32 2000 Long Term Equity Incentive Plan. 10.33 Series A Cumulative Convertible Preferred Stock Purchase Agreement by the Registrant and Intel Corporation, dated December 23, 1999.
Exhibit No. Description Page ------- ----------- ---- 10.34 Employee Stock Purchase Plan. *16.1 Letter from KPMG LLP re: Change in Certifying Accountant. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. 23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included in Part II of the Registration Statement). 27.1 Financial Data Schedule.
- --------------------- * Incorporated by reference to the Registrant's Form S-4, as amended, filed October 7, 1999. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 12,500,000 Shares INTEGRATED CIRCUIT SYSTEMS, INC. Common Stock, Par Value $.01 Per Share UNDERWRITING AGREEMENT ---------------------- May , 2000 CREDIT SUISSE FIRST BOSTON CORPORATION FLEETBOSTON ROBERTSON STEPHENS INC. LEHMAN BROTHERS INC. BEAR, STEARNS & CO. INC. and PENNSYLVANIA MERCHANT GROUP As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Integrated Circuit Systems, Inc., a Pennsylvania corporation ("Company"), proposes to issue and sell 12,500,000 shares of its Common Stock, par value $.01 per share ("Securities") (such 12,500,000 shares of Securities being hereinafter referred to as the "Firm Securities") and the stockholders listed in Schedules A-1, A-2, A-3, A-4 and A-5 hereto ("Selling Stockholders") propose severally to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 1,875,000 additional outstanding shares of the Company's Securities, as set forth below (such 1,875,000 additional shares being hereinafter referred to as the "Optional Securities"). The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities". As part of the offering contemplated by this Agreement, Credit Suisse First Boston Corporation ("CSFBC") (the "Designated Underwriter") has agreed to reserve out of the Firm Securities purchased by it under this Agreement, up to 625,000 shares, for sale to the Company's directors, officers, employees and other parties associated with the Company (collectively, "Participants"), as set forth in the Prospectus (as defined herein) under the heading "Underwriting" (the "Directed Share Program"). The Firm Securities to be sold by the Designated Underwriter pursuant to the 1 Directed Share Program (the "Directed Shares") will be sold by the Designated Underwriter pursuant to this Agreement at the public offering price. Any Directed Shares not subscribed for by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus. The Company and the Selling Stockholders hereby agree with the several Underwriters named in Schedule B hereto ("Underwriters") as follows: 2. Representations and Warranties of the Company and the Selling Stockholders. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 333-33318) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("Commission") and either (A) has been declared effective under the Securities Act of 1933, as amended ("Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (A) an additional registration statement (the "additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (B) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement, means (A) if the Company has advised the Representatives that it does not propose to amend such 2 registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (B) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are hereinafter referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the 3 Commission ("Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(c) hereof. (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the Commonwealth of Pennsylvania, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing would not reasonably be expected to 4 individually or in the aggregate (x) result in a material adverse effect on the properties, business, result of operations, condition (financial or other), affairs or prospects of the Company and its subsidiaries taken as a whole, (y) interfere with or adversely affect the issuance or marketability of the Offered Securities or (z) in any manner draw into question the validity of this Agreement (any of the events set forth in clauses (x), (y) or (z), a "Material Adverse Effect"). (iv) Each subsidiary of the Company that (A) generates 5% or more of the revenues, (B) generates 5% or more of the operating income, or (C) holds 5% or more of the assets, in each case, of the Company and its subsidiaries on a consolidated basis as reflected in the financial statements included in the Prospectus under the heading "Unaudited Pro Forma Consolidated Financial Data" (each, a "Significant Subsidiary") of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each Significant Subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified and in good standing could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; all of the issued and outstanding capital stock of the Company and of each Significant Subsidiary has been duly authorized and validly issued and is fully paid and nonassessable; and except for pledges in favor of Credit Suisse First Boston, as collateral agent, under the secured global credit facility consisting of an aggregate of $70 million of term loan facilities and an aggregate $25 million revolving credit facility, the capital stock of each Significant Subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (v) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized by all necessary corporate action and validly issued, fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities. (vi) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. 5 (vii) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act, and to the extent any such rights are applicable in respect of a Registration Statement, such rights have been fully satisfied or waived in accordance with their terms. (viii) The Offered Securities have been approved for listing subject to notice of issuance on The Nasdaq Stock Market's National Market (the "Nasdaq National Market"). (ix) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court or other person is required to be obtained or made by the Company for the execution and delivery of this Agreement and consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities (including the reclassification (the "Reclassification") and stock-split (the "Stock-Split"), as described in the Prospectus under the caption "The Reclassification"), except such as have been obtained and made under the Act and such as may be required under state securities or "Blue Sky" laws. (x) The execution, delivery and performance of this Agreement, and the consummation of the transactions herein contemplated (including the Reclassification and the Stock-Split) will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (A) any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, (B) any agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the properties of the Company or any of its subsidiaries is subject, or (C) or the charter or by-laws of the Company or any of its subsidiaries, except (1) in each case, that any rights to indemnity and contribution may be limited by federal and state securities laws and public policy considerations and (2) in the case of clauses (A) and (B) for such breaches, violations or defaults as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and the 6 Company has full corporate power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement, and the Company has full corporate power and authority to execute, deliver and perform this Agreement. (xi) This Agreement has been duly authorized, executed and delivered by the Company. (xii) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them that are material to the Company and its subsidiaries taken as a whole, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or proposed to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property that is material to the Company and its subsidiaries taken as a whole under valid and enforceable leases with no exceptions that would materially interfere with the use made or proposed to be made thereof by them. (xiii) The Company and its subsidiaries possess all certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (xiv) No labor strike, slowdown, stoppage or dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. None of the Company or any of its subsidiaries has violated (A) any federal, state or local law or foreign law relating to discrimination in hiring, promotion or pay of employees, (B) any applicable wage or hour laws of, or (C) any provision of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder, except those violations that could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (xv) The Company and its subsidiaries own, possess, have the right to use or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property 7 rights") used in the conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. To the knowledge of the Company after due inquiry, the use of the intellectual property rights in connection with the business and operations of the Company or any of its subsidiaries does not infringe on the rights of any person, except such infringements as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. (xvi) Neither the Company nor any of its subsidiaries (A) is in violation of any statute, any rule, regulation, decision or order of any govern mental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), (B) owns or operates any real property contaminated with any substance that is subject to any environmental laws, (C) is liable for any off-site disposal or contamination pursuant to any environmental laws, or (D) is subject to any claim relating to any environmental laws, in each case, which violation, contamination, liability or claim would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (xvii) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are, to the Company's knowledge, threatened or contemplated. (xviii) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown (subject in the case of interim financial statements to the normal year-end adjustments) and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting 8 principles in the United States applied on a consistent basis and the schedules included in each Registration Statement present fairly the information required to be stated therein. The assumptions used in preparing the pro forma financial data included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xix) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been (A) no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, (B) except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock, (C) none of the Company or any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, which are material, individually or in the aggregate, to the Company and its subsidiaries, taken as a whole, nor entered into any transaction not in the ordinary course of business, and (D) none of the Company or any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, that are material, individually or in the aggregate, to the Company and its subsidiaries, taken as a whole, and that are required to be disclosed on a balance sheet or notes thereto in accordance with generally accepted accounting principles and are not disclosed on the latest balance sheet or notes thereto included in the Prospectus. (xx) The Company is not an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940 (the "Investment Company Act"); and the Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act. (xxi) Each of the Company and its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (A) transactions are executed in accordance with management's general or specific authorizations; (B) transactions are recorded as necessary to permit 9 preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect thereto. (xxii) Each of the Company and its subsidiaries maintains insurance covering its properties, operations, personnel and businesses, insuring against such losses and risks as are consistent with industry practice to protect the Company and its subsidiaries and their respective businesses. None of the Company or any of its subsidiaries has received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. (xxiii) The statistical and market-related data included in the Prospectus are based on or derived from sources that the Company believes to be accurate and reliable in all material respects. (xxiv) The Company has not, directly or indirectly, (A) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (B) since the filing of the Registration Statement (1) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Securities by the Selling Stockholders under this Agreement). (xxv) Each certificate signed by any officer of the Company or any of its subsidiaries and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company or such subsidiary to the Underwriters as to the matters covered thereby. (xxvi) The Company represents and warrants to the Underwriters that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that (ii) no authorization, approval, consent, license, order, registration or 10 qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities law and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. (xxvii) The Company has not offered, or caused the Underwriters to offer, any offered Securities to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. (b) Each Selling Stockholder severally represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has and on each Closing Date hereinafter mentioned will have valid and unencumbered title to the Offered Securities to be delivered by such Selling Stockholder on such Closing Date, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind; such Selling Stockholder has full right, power and authority to enter into this Agreement, the Custody Agreement (the "Custody Agreement") and the Irrevocable Power of Attorney (the "Power of Attorney") entered into by such Selling Stockholder in connection with the transactions contemplated hereby and to sell, assign, transfer and deliver the Offered Securities to be delivered by such Selling Stockholder on such Closing Date hereunder; and upon the delivery of and payment for the Offered Securities on each Closing Date hereunder such Selling Stockholder will pass valid and unencumbered title to the Offered Securities to be delivered by such Selling Stockholder to the several Underwriters on such Closing Date. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the 11 Effective Date of the Additional Registration Statement in which the Prospectus is included, and on each Closing Date neither each Registration Statement nor the Prospectus includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement and on each Closing Date, neither the Initial Registration Statement nor the Prospectus will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences apply only to the extent that any statements in or omissions from a Registration Statement or the Prospectus are based on written information furnished to the Company by such Selling Stockholder specifically for use therein. (iii) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between such Selling Stockholder and any third party that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney. (iv) This Agreement, the Custody Agreement and the Power of Attorney have each been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and this Agreement, the Custody Agreement and the Power of Attorney each constitute the legal, valid and binding obligations of such Selling Stockholder enforceable against such Selling Stockholder in accordance with their respective terms (except as rights to indemnification and contribution may be limited by applicable federal or state law). (v) No consent, approval, authorization, order, registration or qualification of, or filing with, any third party (whether acting in an individual, fiduciary or other capacity) or any governmental or regulatory agency or body or court is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws. (vi) The execution, delivery and performance of this Agreement, the Custody Agreement and the Power of Attorney by such Selling Stockholder and the consummation of the transactions herein and therein contemplated 12 (including the Reclassification and the Stock-Split) will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (A) any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over such Selling Stockholder or any of its properties or operations, or any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the properties or operations of such Selling Stockholder is subject, or (B) if applicable, the charter, by-laws or other organizational documents of such Selling Stockholder, except, in the case of clause (A), for such conflicts, breaches, violations or defaults which could not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the consummation of the transactions contemplated by this Agreement (including the Reclassification and the Stock-Split), the Custody Agreement or the Power of Attorney. (vii) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in stabilization or manipulation of the price of the Offered Securities to facilitate the sale or resale of the Offered Securities, and such Selling Stockholder has not distributed and will not distribute any offering material in connection with the offering and sale of the Offered Securities other than any preliminary prospectus filed with the Commission or the Prospectus or other materials, if any, permitted by the Act or the Rules and Regulations. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $[ ] per share, that number of Firm Securities (rounded up or down, as determined by CSFBC in its discretion, in order to avoid fractions) obtained by multiplying the number of Firm Securities by a fraction the numerator of which is the number of Firm Securities set forth opposite the name of such Underwriter in Schedule B hereto and the denominator of which is the total number of Firm Securities. Certificates in negotiable form for the Offered Securities to be sold by the Selling Stockholders hereunder have been placed in custody, for delivery under this Agreement, under Custody Agreements made with [ ] (the "Custodian"). Each Selling Stockholder agrees that the shares represented by the certificates held in custody for the Selling Stockholders under such Custody Agreements are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Stockholders for such custody are to that extent irrevocable, and that the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, whether by the death of any individual Selling Stockholder or 13 the occurrence of any other event, or in the case of a trust, by the death of any trustee or trustees or the termination of such trust. If any individual Selling Stockholder or any such trustee or trustees should die, or if any other such event should occur, or if any of such trusts should terminate, before the delivery of the Offered Securities hereunder, certificates for such Offered Securities shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death or other event or termination had not occurred, regardless of whether or not the Custodian shall have received notice of such death or other event or termination. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of the Company in the case of 12,5000,000 shares of Firm Securities, at the office of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps"), at 9:00 A.M., New York time, on [ ], 2000, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "First Closing Date". The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the office of Skadden Arps at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company and the Selling Stockholders from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Selling Stockholders agree, severally and not jointly, to sell to the Underwriters the respective numbers of Optional Securities obtained by multiplying the number of Optional Securities specified in such notice by a fraction the numerator of which is the number of shares set forth opposite the names of such Selling Stockholders in Schedules A-1, A-2, A-3, A-4 and A-5 hereto under the caption "Number of Optional Securities to be Sold" and the denominator of which is the total number of Optional Securities (subject to adjustment by CSFBC to eliminate fractions). Such Optional Securities shall be purchased from each Selling Stockholder for the account of each Underwriter in the same proportion as the number of Firm Securities set forth opposite such Underwriter's name bears to the total number of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company and the Selling Stockholders. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First 14 Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Custodian will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account or accounts at a bank(s) acceptable to CSFBC drawn to the order of the respective Selling Stockholders in amounts relating to the number of Optional Securities being sold by each such Selling Stockholder as determined pursuant to the preceding paragraph, at the above office of Skadden Arps. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the office of Skadden Arps at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company and the Selling Stockholders. The Company and the several Selling Stockholders, to the extent such covenants relate to their performance, agree with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 A.M., New York time, on the business day following the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation 15 without CSFBC's consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (five of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other such documents shall be so furnished as soon as available. The Company and the Selling Stockholders will pay the expenses of printing and distributing to the Underwriters all such documents. 16 (f) The Company will cooperate with the Underwriters and their counsel in connection with the registration and qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions as CSFBC designates and do all things necessary to continue such qualifications in effect so long as required for the resale of the Offered Securities by the Underwriters, provided that the Company will not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options or the exercise of any other employee stock options outstanding on the date hereof. (i) The Company and each Selling Stockholder agree with the several Underwriters that the Company and such Selling Stockholder will pay all expenses incident to the performance of the obligations of the Company and such Selling Stockholder, as the case may be, under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and the printing of memoranda relating thereto, for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc.("NASD") of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities, for any transfer taxes on the sale by the Selling Stockholders of the Offered Securities to the Underwriters and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. 17 (j) Each Selling Stockholder agrees to deliver to CSFBC, attention: Transactions Advisory Group, on or prior to the first Optional Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (k) Each Selling Stockholder agrees, for a period of 180 days after the date of the initial public offering of the Offered Securities, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of the Securities of the Company or securities convertible into or exchangeable or exercisable for any shares of Securities, 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 the Securities, whether any such aforementioned transaction is to be settled by delivery of the Securities or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of CSFBC. (l) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. The Designated Underwriter will notify the Company as to which Participants will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (m) The Company will pay all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the underwriters in connection with the Directed Share Program. (n) The Company covenants with the Underwriters that the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. (o) The Company agrees that it will use the net proceeds to it from the Offered Securities in the manner described in the Prospectus under the caption "Use of Proceeds". 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the 18 Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of this Agreement, of PricewaterhouseCoopers LLP in agreed form confirming that they are independent public accountants within the meaning of the Act and the published Rules and Regulations and stating to the effect that: (i) in their opinion the financial statements and schedules, for all periods after July 3, 1999, examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements, for all periods after July 3, 1999, and certain specified financial information included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company and of all subsidiaries of the Company for which such interim financial statements are provided, inquiries of officials of the Company and of such subsidiaries who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) with respect to the unaudited financial statements, for all periods after July 3, 1999, included in the Registration Statements, that any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its 19 consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement included in the Prospectus, in consolidated net sales or net operating income or net income; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; (iv) they have performed the procedures specified therein on the pro forma financial statements included in the Prospectus; (v) on the basis of the review referred to in clause (iv) above, nothing came to their attention that caused them to believe that the pro forma financial data included in the Prospectus (not including specified supplemental adjustments thereto) do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (vi) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter; and 20 (vii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of management's discussion and analysis of financial condition and results of operations as described in Statement of Auditing Standards No. 86, Management's Discussion and Analysis, on certain specified portions of the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Registration Statement. For purposes of this subsection (a) and subsection (b) below, (i) if the Effective Time of the Initial Registration Statements is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statements is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration Statement is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. (b) The Representatives shall have received a letter, dated the date of this Agreement, of KPMG LLP in agreed form confirming that they are independent public accountants within the meaning of the Securities Act and the Rules and Regulations and to the effect that: (i) in their opinion the financial statements and schedules, for all periods prior to and including July 3, 1999, examined by them and included in the Registration Statements for comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements, for all periods prior to and including July 3, 1999, and certain specified financial information included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, and of all subsidiaries of the Company for which such interim financial statements are provided, inquiries of officials of the Company and of such subsidiaries 21 who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that with respect to the unaudited financial statements, for all periods prior to and including July 3, 1999, included in the Registration Statement, that any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (iv) they have performed the procedures specified therein on the pro forma financial statements included in the Prospectus; (v) on the basis of the review referred to in clause (iv) above, nothing came to their attention that caused them to believe that the pro forma financial data included in the Prospectus (not including specified supplemental adjustments thereto) do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (vi) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter; and (vii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of management's discussion and analysis of financial condition and results of operations as described in Statement of Auditing Standards No. 86, Management's Discussion and Analysis, on certain specified portions of the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Registration Statement. (c) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 A.M., New York time, on the business day following the date of 22 this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of any Selling Stockholder, the Company or the Representatives, shall be contemplated by the Commission. (d) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries which, in the reasonable judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any suspension or material limitation of trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market, or any establishment of minimum or maximum prices for trading, or any requirement of maximum ranges for prices for securities, on such exchange or the Nasdaq National Market, or by such exchange or other regulatory body or governmental authority having jurisdiction (other than limitations on price fluctuations or minimums or maximums in effect as of the date of this Agreement); (iv) any banking moratorium declared by federal or state authorities, or any moratorium declared in foreign exchange trading by major international banks or persons; or (v) any outbreak or escalation of armed hostilities involving the United States on or after the date hereof, or if there has been a declaration by the United States of a national emergency or war, the effect of which shall be, in the Underwriters' reasonable judgment, to make it inadvisable or impracticable to proceed with the public offering or delivery of the Offered Securities on the terms and in the manner contemplated in the Prospectus. 23 (e) The Underwriters shall have received an opinion, dated the Closing Date, of Kirkland & Ellis, counsel for the Company, that: (i) ICS Technologies, Inc. ("Delaware Sub") (A) is duly incorpo rated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, (B) has all requisite corporate power and authority to carry on its business as it is currently being conducted and as described in the Prospectus and to own, lease and operate its properties, and (C) is duly qualified and in good standing as a foreign corporation, authorized to do business in each jurisdiction set forth beside such entity's name on a schedule to such opinion; (ii) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (ii) To such counsel's knowledge, all of the outstanding shares of capital stock of Delaware Sub have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any adverse claim. The term "adverse claim" as used in such opinion has the meaning given such term in Article 8 of the Uniform Commercial Code and does not include (i) any claim which arises through you or any person claiming through you (such as any security interest you may have granted in the shares) and (ii) any adverse interest which would not be extinguished upon the purchase of the Offered Securities by a person who qualifies as a "bona fide purchase" or "protected purchase" under Section 8-303 of the Uniform Commercial Code. We advise you that we have no actual knowledge of the existence of any interest of the kind specified in clause (ii) of the preceding sentence. (iv) To the knowledge of such counsel, the Company was not required under any New York or federal law to obtain any consent, approval, authorization or order of any governmental agency for the consummation of the transactions contemplated by this Agreement (including the Reclassifica tion and the Stock-Split) in connection with the sale of the Offered Securities, except for any such consent, approval, authorization or order which may be required under the so- called "Blue Sky" or securities laws of any states (as to which such counsel need express no opinion or advice); 24 (v) The execution, delivery and performance of this Agreement and the consummation of the transactions herein (including the Reclassification and the Stock-Split) contemplated will not constitute a violation by the Company of any applicable provision of any New York or federal law, statute or regulation (except that such counsel need express no opinion in this paragraph as to compliance with any disclosure requirement or any prohibition against fraud or misrepresentation or as to whether performance of the indemnification or contribution provisions in this Agreement would be permitted); (vi) The Company's execution and delivery of this Agreement and the performance of its agreements in this Agreement and the consummation of the sale of the Offered Securities to you in accordance with this Agreement do not (i) constitute a violation by the Company or Delaware Sub of any applicable provision of any Delaware, New York or federal law, statute or regulation (except that we express no opinion in this paragraph as to compliance with any disclosure requirement or any prohibition against fraud or misrepresentation or as to whether performance of the indemnification or contribution provisions in this Agreement would be permitted) or (ii) breach, or result in a default under, any existing obligation of the Company or Delaware Sub under any of the agreements listed on a schedule to an officers' certificate relating to such opinion (provided that such counsel need not express any opinion as to compliance with any financial test or cross default provision in any such agreement). (vii) Except as listed on a schedule to an officers' certificate relating to such opinion, to such counsel's knowledge, there is no action, suit, proceeding or investigation before or by any federal or Delaware court or governmental agency or body, domestic or foreign, pending or threatened against, the Company that (i) has caused such counsel to conclude that such action, suit, proceeding or investigation is required by Regulation S-K under the Securities Act to be described in the Registration Statement but is not described in the Prospectus or (ii) would be reasonably likely to adversely affect the consummation of any of the transactions contemplated by this Agreement. (viii) The Company is not an "investment company" within the meaning of the Investment Company Act; (ix) To such counsel's knowledge, there is no stop order preventing the use of the Prospectus or the Registration Statements, or any amendments or supplements thereto; and 25 (x) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus. Such counsel's opinion letter shall also contain the following language: "Based upon our participation in the conferences identified in the preceding paragraph, our understanding of applicable law and the experience we have gained in our practice thereunder and relying as to materiality to a large extent upon the opinions and statements of officers of the Company, we can, however, advise you that nothing has come to our attention that has caused us to conclude that (i) the Registration Statement at its effective date and the Closing Date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (ii) the Prospectus at the date it bears or on the date of this letter contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) as of the effective date either the Registration Statement or the Prospectus appeared on its face not to be responsive in all material respects to the requirements of the Act and the Rules and Regulations; it being understood that we make no such statement in the case of clauses (i)-(iii) with respect to the financial statements and schedules and other financial or related statistical data 26 included in the Registration Statement or the Prospectus or omitted therefrom." (f) The Underwriters shall have received an opinion, dated the Closing Date, of Pepper Hamilton LLP counsel for the Company, that: (i) Each of the Company and ICST, Inc. (A) is duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, (B) has all requisite corporate power and authority to carry on its business as it is currently being conducted and as described in the Prospectus and to own, lease and operate its properties, and (C) is duly qualified and in good standing as a foreign corporation, authorized to do business in each jurisdiction set forth beside such entity's name on a schedule to such opinion; (ii) This Agreement has been duly and validly authorized, executed and delivered by the Company; (ii) The Offered Securities delivered on such Closing Date have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus, and the issuance of the Offered Securities is not subject to preemptive or other similar rights arising under the Pennsylvania Business Corporation Law of 1988; (iv) Neither (A) the execution, delivery or performance by the Company of this Agreement or (B) the issuance and sale of the Offered Securities violates, conflicts with or constitutes a breach of any of the terms or provisions of, or a default under (or an event that with notice or the lapse of time, or both, would constitute a default under), or requires consent under, or results in the imposition of a lien or encumbrance on any properties of the Company or any of the Significant Subsidiaries, or an acceleration of any indebtedness of the Company or any of the Significant Subsidiaries pursuant to, (1) the articles of incorporation or bylaws of the Company, (2) any statute, rule or regulation of the Commonwealth of Pennsylvania applicable to the Company or any of the Significant Subsidiaries or any of their assets or properties or (3) to the best of such counsel's knowledge, any judgment, order or decree known to such counsel of any court or governmental agency or authority of the Commonwealth of Pennsylvania having jurisdiction over the Company or any of the Significant Subsidiaries or any of their assets or properties. Assuming compliance with applicable federal, state and foreign securities and Blue Sky laws, as to which no opinion is rendered hereby, to the best of such counsel's knowledge, no consent, approval, authorization or order of, or filing, registration, qualification, license or permit of or with, (A) any 27 Pennsylvania court or governmental agency, body or administrative agency or (B) any other person is required for (1) the execution, delivery and perfor mance by the Company or any of the Significant Subsidiaries of this Agree ment or (2) the issuance and sale of the Offered Securities, except such as have been obtained and made or have been disclosed in the Prospectus; and Such counsel shall also state that because the primary purpose of such counsel's engagement was not to establish or confirm factual matters or financial or accounting matters and because of the wholly or partially non-legal character of many of the statements contained in the Prospectus, such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Prospectus and such counsel has not independently verified the accuracy or completeness of such statements. Without limiting the foregoing, such counsel assumes no responsibility for and such counsel has not independently verified the accuracy, completeness or fairness of the financial statements and any schedules and other financial data included in the Prospectus and has not examined the accounting or financial records from which such financial statements, schedules (if any) and relevant financial data are derived. However, such counsel participated in conferences with officers and other representatives and legal counsel of the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Prospectus were discussed. Based on such participation and review, and relying as to materiality in part upon the statements of officers and other representatives of the Company, no facts have come to such counsel's attention that have caused such counsel to believe that the Prospectus as of its date and at the Closing Date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that such counsel need not express any comment or belief with respect to the financial statements or schedules, if any, or any other financial information included in the Prospectus. (g) The Representatives shall have received the opinion contemplated in the Power of Attorney executed and delivered by each Selling Stockholder and an opinion, dated such Closing Date, dated the applicable Optional Closing Date, of one or more counsel for the respective Selling Stockholders, to the effect that: (i) To such counsel's knowledge, all of the outstanding shares of capital stock of such Selling Stockholder have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by such Selling Stockholder, directly or indirectly through one or more subsidiaries, free and clear of any adverse claim. The term "adverse claim" as used in such 28 opinion has the meaning given such term in Article 8 of the Uniform Commercial Code and does not include (i) any claim which arises through you or any person claiming through you (such as any security interest you may have granted in the shares) and (ii) any adverse interest which would not be extinguished upon the purchase of the Offered Securities by a person who qualifies as a "bona fide purchase" or "protected purchase" under Section 8-303 of the Uniform Commercial Code. We advise you that we have no actual knowledge of the existence of any interest of the kind specified in clause (ii) of the preceding sentence. (i) This Agreement has been duly authorized, executed and delivered on behalf of such Selling Stockholder; (ii) The Custody Agreement and the Power of Attorney with respect to such Selling Stockholder have been duly authorized (if such selling shareholder is not an individual), executed and delivered by such Selling Stockholder and constitute valid and legally binding obligations of such Selling Stockholder enforceable in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (iii) To the knowledge of such counsel such Selling Stockholder was not required under any New York or federal law to obtain any consent, approval, authorization or order of any governmental agency for the consum mation of the transactions contemplated by this Agreement (including the Reclassification and the Stock-Split) or the Custody Agreement in connection with the sale of the Offered Securities, except for any such consent, approval, authorization or order which may be required under the so-called "Blue Sky" or securities laws of any states (as to which such counsel need express no opinion or advice); (iv) No consent, approval, authorization, order, registration or qualification of, or filing with, any third party (whether acting in an individual, fiduciary or other capacity) or any governmental agency or body or any court is required to be obtained or made by such Selling Stockholder for the consummation of the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws; and (v) The execution, delivery and performance of this Agreement, the Custody Agreement and the Power of Attorney by such Selling Stockholder 29 and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (A) to the knowledge of such counsel, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over such Selling Stockholder or any of its properties or operations, or any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the properties or operations of such Selling Stockholder is subject, or (B) if applicable, the charter, by-laws or other organizational documents of such Selling Stockholder, except, in the case of clause (A), for such conflicts, breaches, violations or defaults which could not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the consummation of the transactions contemplated by this Agreement, the Custody Agreement or the Power of Attorney. (h) The Representatives shall have received from Skadden Arps, counsel for the Underwriters, such opinion or opinions, dated as of the Closing Date, with respect to the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Selling Stockholders and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (i) The Representatives shall have received from each stockholder of the Company listed on Schedule C, in the form attached as Exhibit I hereto, a letter agreement stating that such stockholder agrees, for a period of 180 days after the date of the initial public offering of the Offered Securities, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of the Securities of the Company or securities convertible into or exchangeable or exercisable for any shares of Securities, or publicly disclose the intention to make any such offer, sale, pledge or disposal, without the prior written consent of CSFBC, except as stated in such letter. (j) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the 30 applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (k) The Representatives shall have received a letter, dated the Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three business days prior to the Closing Date for the purposes of this subsection. (l) The Representatives shall have received a letter, dated as of the Closing Date, of KPMG LLP which meets the requirements of subsection (b) of this Section, except that the specified date referred to in such subsection will be a date not more than three business days prior to the Closing Date for the purposes of this subsection. (m) The Securities to be delivered on such Closing Date shall have been approved for listing on the Nasdaq National Market, subject, in the case of the Offered Securities, only to official notice of issuance. (n) On or prior to the First Closing Date, the consummation of the Reclassification and the Stock-Split, on the terms described in the Prospectus under the caption "The Reclassification", shall have occurred. The Selling Stockholders and the Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or 31 arise out of or are based upon the omission or alleged omission to state therein or necessary to make the statements therein not misleading, including any losses, claims, damages or liabilities arising out of or based upon the Company's failure to perform its obligations under Section 5(a) of this Agreement, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that (i) the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below and (ii) that the Company shall not be liable to any such Underwriter with respect to any untrue statement or alleged untrue statement or omission or alleged omission in the preliminary prospectus to the extent that any such loss, liability, claim, damage or expense of such Underwriter results from the fact that such Underwriter sold Offered Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented if the Company had previously furnished copies thereof to such Underwriter and the loss, liability, claim, damage or expense of such Underwriter results from an untrue statement or omission of a material fact contained in the preliminary prospects which was corrected in the Prospectus. The Company agrees to indemnify and hold harmless the Designated Underwriter and each person, if any, who controls the Designated Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (the "Designated Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of the Designated Entities. Insofar as the foregoing indemnity agreement, or the representations and warranties contained in Section 2(a)(ii), may permit indemnification for liabilities 32 under the Act of any person who is an Underwriter or a partner or controlling person of an Underwriter within the meaning of Section 15 of the Act and who, at the date of this Agreement, is a director, officer or controlling person of the Company, the Company has been advised that in the opinion of the Commission such provisions may contravene Federal public policy as expressed in the Act and may therefore be unenforceable. In the event that a claim for indemnification under such agreement or such representations and warranties for any such liabilities (except insofar as such agreement provides for the payment by the Company of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such a person, the Company will submit to a court of appropriate jurisdiction (unless in the opinion of counsel for the Company the matter has already been settled by controlling precedent) the question of whether or not indemnification by it for such liabilities is against public policy as expressed in the Act and therefore unenforceable, and the Company will be governed by the final adjudication of such issue. (b) Each Selling Stockholder will severally and not jointly indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred in each case only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished by such Selling Stockholder specifically for use therein; provided, however, that the Selling Stockholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by an Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below; provided, further, that no Selling Stockholder shall be liable to any such Underwriter with respect to any untrue statement or alleged untrue statement or omission or alleged omission in the preliminary prospectus to the extent that any such loss, liability, claim, damage or expense of such Underwriter results from the 33 fact that such Underwriter sold Offered Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented if the Company had previously furnished copies thereof to such Underwriter and the loss, liability, claim, damage or expense of such Underwriter results from an untrue statement or omission of a material fact contained in the preliminary prospects which was corrected in the Prospectus. Notwithstanding the foregoing, the aggregate liability of any Selling Stockholder pursuant to the provisions of this paragraph shall be limited to an amount equal to the aggregate gross proceeds received by such Selling Stockholder from the sale of such Selling Stockholder's shares hereunder. (c) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the Act, and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and each Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of (i) the following information in the Prospectus furnished on behalf of each Underwriter: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Underwriters, the concession and reallowance figures appearing in the fourth paragraph under the caption "Underwriting" and the over- allotments and stabilizing descriptions appearing in the fourteenth and fifteenth paragraphs under the caption "Underwriting" and (ii) the following information in the Prospectus furnished on behalf of CSFBC, Bear Stearns & Co., Inc. and Pennsylvania Merchant Group: Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc. and ["Bear, Stearns & Co. Inc., one of our underwriters, is an affiliate of our company. The offering, therefore, is being conducted in accordance with the applicable provisions of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720 34 requires that the initial public offering price of the shares of common stock not be higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, FleetBoston Robertson Stephens Inc. is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public offering price of the shares of common stock is no higher than recommended by FleetBoston Robertson Stephens Inc." "Pennsylvania Merchant Group and their respective affiliates have performed and expect to continue to perform financial advisory and investment and commercial banking services for us for which they have received and will receive customary compensation. We intend to use a portion of the net proceeds to repay in full all outstanding obligations under our senior credit facility. Credit Suisse First Boston, an affiliate of Credit Suisse First Boston Corporation, is a lender and the administrative agent under the senior credit facility and will receive some of the proceeds of this offering used to repay our outstanding indebtedness under our senior credit facility. In addition, Credit Suisse First Boston Corporation and Bear, Stearns & Co. Inc. were the initial purchasers in the offering of our senior subordinated notes. An affiliate of Credit Suisse First Boston Corporation and an affiliate of Bear, Stearns & Co. Inc. each own common stock of the company and each is a selling shareholder in the offering. John D. Howard, a director of our company, is a senior managing director of Bear, Stearns & Co. Inc."] (d) Promptly after receipt by an indemnified party under this Section or Section 9 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under subsection (a), (b) or (c) above or Section 9, notify each party against whom indemnification is to be sought in writing of the commencement thereof; but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise than under subsection (a), (b) or (c) above or Section 9. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such 35 counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to take charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying party or parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of counsel shall be borne by the indemnifying parties; provided, however, that the indemnifying party under subsection (a) or (b) above shall only be liable for the legal expenses of one counsel (in addition to any local counsel) for all indemnified parties in each jurisdiction in which any claim or action is brought. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to the last paragraph in Section 7 (a) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for the Designated Underwriter for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control the Designated Underwriter within the meaning of either Section 15 of the Act of Section 20 of the Exchange Act. No indemnifying party shall, without prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and does not include a statement as to and an admission of fault, culpability or failure to act by or on behalf of any indemnified party. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its prior written consent, provided that such consent was not unreasonably withheld, and that if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees it shall be liable for any settlement effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) 36 above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Securities 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 Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault 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 untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribute any amount in excess of the amount by which the aggregate gross proceeds received by such Selling Stockholder from the sale of the Offered Securities hereunder exceeds the amount of any damages or indemnification which such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. The Selling Stockholders' obligations in this subsection (e) to contribute are several and not joint. 37 (f) The obligations of the Company and the Selling Stockholders under this Section or Section 9 shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter or the QIU (as hereinafter defined) within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company and the Selling Stockholders for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC, the Company and the Selling Stockholders for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders, except as provided in Section 10 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Qualified Independent Underwriter. The Company hereby confirms that at its request FleetBoston Robertson Stephens Inc. has without compensation acted as "qualified independent underwriter" (in such capacity, the "QIU") within the meaning of Rule 2710 of the Conduct Rules of the NASD in connection with the offering of the Offered Securities. The Company will indemnify and hold harmless the QIU against any losses, claims, damages or liabilities, joint or several, to which the QIU may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the QIU's acting (or alleged failing to act) as such "qualified independent 38 underwriter" and will reimburse the QIU for any legal or other expenses reasonably incurred by the QIU in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. 10. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Stockholders, of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, any Selling Stockholder, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company and the Selling Stockholders shall remain responsible for the expenses to be paid or reimbursed by them pursuant to Section 5 and the respective obligations of the Company, the Selling Stockholders, and the Underwriters pursuant to Section 7 and the obligations of the Company and the Selling Stockholders pursuant to Section 9 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(d), the Company and the Selling Stockholders will, jointly and severally, reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 11. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department - Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Integrated Circuit Systems, Inc., 2435 Boulevard of the Generals, Valley Forge, PA 19482, Attention: Chief Financial Officer, with a copy to Kirkland & Ellis LLC, Citicorp Center, 153 East 53rd Street, New York, NY 10022-4675, Attention: Lance C. Balk, or, if sent to the Selling Stockholders or any of them, will be mailed, delivered or telegraphed and confirmed to [ ] at [ ]; provided, however, that any notice to an Underwriter pursuant to Section 7 or Section 9 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 39 13. Representation. The Representatives will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. [ ] will act for the Selling Stockholders in connection with such transactions, and any action under or in respect of this Agreement taken by [ ] will be binding upon [all] the Selling Stockholders. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. Delivery by telecopy or facsimile transmission of an executed counterpart of this Agreement shall be considered due and sufficient delivery. 15. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. THE COMPANY AND EACH OF THE SELLING STOCKHOLDER HEREBY SUBMIT TO THE NON- EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE COURTS IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN ANY SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 40 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Stockholders, the Company and the several Underwriters in accordance with its terms. Very truly yours, INTEGRATED CIRCUIT SYSTEMS, INC. _____________________________________ Name: Title: BAIN CAPITAL FUND VI, L.P. BCIP TRUST ASSOCIATES II BCIP TRUST ASSOCIATES II-B BCIP ASSOCIATES II BCIP ASSOCIATES II-B BCIP ASSOCIATES II-C PEP INVESTMENT PTY LTD. By:__________________________________ Name: Title: Under Power of Attorney for Each of the Above Persons ICST ACQUISITION CORP. By:__________________________________ Name: Title: INTEGRATED CIRCUIT SYSTEMS EQUITY INVESTORS, L.L.C. By:__________________________________ Name: Title: 41 RANDOLPH STREET PARTNERS I RANDOLPH STREET PARTNERS II RANDOLPH STREET PARTNERS 1998 DIF, L.L.C. By:__________________________________ Name: Title: Under Power of Attorney for Each of the Above Persons By:__________________________________ Name: Henry I. Boreen The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION, FLEETBOSTON ROBERTSON STEPHENS INC. LEHMAN BROTHERS INC. BEAR, STEARNS & CO. INC. and PENNSYLVANIA MERCHANT GROUP Acting on behalf of themselves and as the Representatives of the several Underwriters. By: CREDIT SUISSE FIRST BOSTON CORPORATION ________________________________________ Name: Title: 42 SCHEDULE A Number of Optional 1) Bain Option Selling Stockholders Securities to be Sold -------------------------------- ---------------------- Bain Capital Fund VI, L.P. [ ] BCIP Trust Associates II [ ] BCIP Trust Associates II-B [ ] BCIP Associates II [ ] BCIP Associates II-B [ ] BCIP Associates II-C [ ] PEP Investment PTY Ltd. [ ] --------- Total..................... 2) Bear Stearns Option Selling Stockholder --------------------------------------- ICST Acquisition Corp. 3) CSFB Option Selling Stockholder ------------------------------- Integrated Circuit Systems Equity Investors, L.L.C. 4) Randolph Street Option Selling Stockholders ------------------------------------------- Randolph Street Partners I [ ] Randolph Street Partners II [ ] --------- Total........................... 5) Henry I. Boreen --------------- TOTAL OPTION SHARES 1,875,000 ========= A-1 SCHEDULE B Number of Firm Securities Underwriter to be Purchased ----------- ---------------- Credit Suisse First Boston Corporation......... FleetBoston Robertson Stephens Inc............. Lehman Brothers Inc............................ Bear, Stearns & Co. Inc........................ Pennsylvania Merchant Group.................... ---------------- Total............................... ================
B-2 SCHEDULE C
Intel Corporation [Asustek] [Gigabite] Alayleh, Majed Fuiks, Kenneth Lucas, John R Urbieta, Alberto R. Alzayat, Nabil Z. Gazda, Jan C. Luong, Don Van Dalsen, Dennis K. Amiri, Farris Geissler, Jonathan W. Lwin, Kyu Lin Venkateswaran, K Asadipour, Pouran Gieng, Menh S. Marten, Lance A. Vi, Luc M. Aycock, Stephen E Glazier, Sherwood D. Martorell, Kimberle M Vongo, Dean T. Bakhshi, Malek M Gopal, Krishan Miller, Rosemary T. Wade, Chandler L. Bal, Jagdeep S Gosse, Thomas J. Morita, Hitoshi Wahli, Barbara M Bartelink, Eric J Green, Carol E. Moyer, Annette Warren, George H Bartolomei, Cecilia A. Hammoud, Hussein Mukaida, Satoshi Warren, William J Bednarz, Anthony B. Hanna, Moheen Y Neely, Eric D. Wauhop, Donna M. Berry Jr., Richard P. Hansen, Peter W. Neiman, Leeann M. Way, Karen A. Bingham, David W. Hingrajia, Rasik Ngo, Dien Dinh Wei, Robin K Bland, Christopher J Hinkley, David E. Ngo, Huy T. Wemhaner, Bradley M. Bliss, Coleen S. Hinkley, Nadine Nguyen, Daniel D. Weng, Siyou Bolger, Steven H. Hoang, Tuan Minh Nguyen, Hai Wheeler, Linda L.K.K. Bredenberg, Robert W Hohmann, Daniel A. Nguyen, Nghe Widman, Carl F. Bui, Dien D. Hon, Pikyue T. Nguyen, Quynh-Chau T Ziegler, Crystal D. Bui, Dinh N. Hostetter, Sara A. Obregon, Carlos D. Jenny Chin Keok Lian, Jenny Bui, Maianh Hsu, John C. Obregon-Jimenez, Rebeca G. Tan Koon Huat Burdett, Stephen Hutnik, Kathleen Oland, Teri Sue Mohd Rashid bin Mohd Noor Buttry, Melissa Iraninejad, Reyhaneh Olsen, Barry E Koh Hui Choon Catagnus, Michael S. Isik, Tacettin O'Maley, Linda Anthony Khoo Chwee Guan Chan, Theodore W. Iyer, Ram H. Palmer, Daniel C. Lim Moi Eng Chang, Steve Jarvis, Bryan J. Pizzola, Andrea Low Min Yee Charbonnier, Michel Y. Jasper, Stephen Pizzolato, William M. Doreen Yan Yin Har Chen, Kristen Q Jerrell, Kelly R. Poitras, Louis Seah Kah Suan Cheung, Derek Jiang, Yun Liang Pollock, Patricia A. Deanna Luu Chevalier, Jeannette A. Jing, Tao Reed, Robert F. Teresa Stahl Cho, Young Shin Jones, Lewis H. Reeves, Scott A. Kevin Tran Christenberry, David Kandler, Bruce A. Robinson, Arthur George Sampson Christiansen, Ed M Kane, Sylvester L. Rodgers, Susan M. Wu, Ted Claudin, Guy Scott Kazak, Bassem Roman, Joseph L Kuo, Ordin Corpron, Janice Klessel, Peter A. Roth, Diane Cheu, Candy Darwish, Samer O. Kulp, Allen Sahu, Alok Lin, Kevin Dematto, Virginia A. Kulp, Danielle Sears, Deborah M. Chan, Jeffrey Despirito, Patricia E. Lance, Lora J. Self, Paul W Hachiro Sumi Disperati, Tara M. Larson, Donald M. Shapiro, Garry R. Hiroake Shimauchi Do, Vinh Trong Lee, Dockjai Silfies, Alan C. Baker, David Doan, Michelle Lee, Joseph M. Singh, Madhulika Domin, Darin S. Lee, Rocky L-K Smith II, Gerald W. Duong, Dien Tam Lee, Simon Chong Smith, Kevin Durham, Carl M. Leung, Eric Squillace, Charlene N. Dvorak, Roxanne K. Lien, Justine F. Stockton, Elyse P. Eggebrecht, Lewis C. Lim, Ming Su, Hanzhong Engel, Ann Limoun, Bassam M Sun, Grace L. Eribes, Ruben Lin, Hao Sweeney, Sally Esgar, Dwight D. Lipcsey, Teresa O. Szucs, Alexander G. Esgar, Shermette L. Lo, Pedro W. Tajnai, Joseph
C-1 Faria, Sandy Lo, Yong-Chou Bruce Tan, Hock E. Fong, Steven Lockwood, Robert J. Taormina, Kristin M. Frederick, Randall R. Look, Kock C. Tat, Vincent T.
C-2 EXHIBIT I May , 2000 Integrated Circuit Systems, Inc. 2435 Boulevard of the Generals Valley Forge, PA 19482 Attention: Justine Lien CREDIT SUISSE FIRST BOSTON CORPORATION FLEETBOSTON ROBERTSON STEPHENS INC. LEHMAN BROTHERS INC. BEAR, STEARNS & CO. INC. and PENNSYLVANIA MERCHANT GROUP As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: As an inducement to the Underwriters to execute the Underwriting Agreement, pursuant to which an offering will be made that is intended to result in the establishment of a public market for the Common Stock, par value $.01 per share (the "Securities") of Integrated Circuit Systems, Inc. (the "Company"), the undersigned hereby agrees that from the date hereof and until 180 days after the public offering date set forth on the final prospectus used to sell the Securities (the "Public Offering Date") pursuant to the Underwriting Agreement, to which you are or expect to become parties, the undersigned will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of Securities or securities convertible into or exchangeable or exercisable for any shares of Securities, 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 the Securities, whether any such aforementioned transaction is to be settled by delivery of the Securities 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 Credit Suisse First Boston Corporation. The undersigned shall not be restricted by the terms of this Agreement from exercising any options granted to the undersigned; provided, however, that any Securities received upon exercise of options granted to the undersigned will be subject to this Agreement. Any Securities acquired by the undersigned in the open market will not be subject to this Agreement. A transfer of Securities to a family member or trust may be made, provided the transferee agrees to be bound in writing by the terms of this Agreement. C-3 In furtherance of the foregoing, the Company and its transfer agent and registrar are hereby authorized to decline to make any transfer of shares of Securities if such transfer would constitute a violation or breach of this Agreement. This Agreement shall be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned. This Agreement shall lapse and become null and void if the Public Offering Date shall not have occurred on or before November 30, 2000. Very truly yours, ------------------------------- [Name of non-selling stockholder] C-4 EX-3.1 3 AMENDED RESTATED ARTICLES OF INCORP. OF THE REGISTRANT Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INTEGRATED CIRCUIT SYSTEMS, INC. ARTICLE ONE The name of the Corporation is Integrated Circuit Systems, Inc. ARTICLE TWO The address of the Corporation's registered office in the State of Pennsylvania is 2435 Boulevard of the Generals, City of Valley Forge, County of Montgomery, State of Pennsylvania. The name of its registered agent at such address is Hock E. Tan. ARTICLE THREE The corporation is incorporated under the Business Corporation Law approved the 5/th/ day of May, 1933, P.L. 364. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law. ARTICLE FOUR At the Effective Time, this Article Four shall amend and restate Article Four of the Original Charter. Until the Effective Time, Article Four of the Original Charter shall continue in full force and effect. A. AUTHORIZED SHARES The total number of shares of capital stock which the Corporation has authority to issue is 305,000,000 shares, consisting of: (1) 5,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"); and (2) 300,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock"). The Preferred Stock and the Common Stock shall have the rights, preferences and limitations set forth below. Capitalized terms used but not otherwise defined in Part A, Part B or Part C of this Article Four are defined in Part D. B. PREFERRED STOCK The Preferred Stock may be issued from time to time and in one or more series. The board of directors of the Corporation is authorized to determine or alter the powers, preferences and rights, and the qualifications, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and within the limitations or restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series of Preferred Stock, to increase or decrease (but not below the number of shares of any such series of Preferred Stock then outstanding) the number of shares of any such series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock. In the event that the number of shares of any series of Preferred Stock shall be so decreased, the shares constituting such decrease shall resume the status which such shares had prior to the adoption of the resolution originally fixing the number of shares of such series of Preferred Stock subject to the requirements of applicable law. C. COMMON STOCK Section 1. Dividends. Except as otherwise provided by the Business Corporation Law or these Amended and Restated Articles of Incorporation (the "Restated Articles"), the holders of Common Stock: (i) subject to the rights of holders of any series of Preferred Stock, shall share ratably in all dividends payable in cash, stock or otherwise and other distributions, whether in respect of liquidation or dissolution (voluntary or involuntary) or otherwise and (ii) are subject to all the powers, rights, privileges, preferences and priorities of any series of Preferred Stock as provided herein or in any resolution or resolutions adopted by the board of directors pursuant to authority expressly vested in it by the provisions of Part B of this Article Four. Section 2. Conversion Rights. The Common Stock shall not be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same class of the Corporation's capital stock. Section 3. Cumulative Voting. The shareholders of the Corporation shall not be entitled to cumulate their votes for the election of directors. Section 4. Voting Rights. Except as otherwise provided by the Business Corporation Law or the Restated Articles and subject to the rights of holders of any series of Preferred Stock, all of the voting power of the shareholders of the Corporation shall be vested in the holders of the Common Stock, and each holder of Common Stock shall have one vote for each share held by such holder on all matters voted upon by the shareholders of the Corporation. Section 5. Registration or Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration 2 of Common Stock. Upon the surrender of any certificate representing shares of any class of Common Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of such class represented by the surrendered certificate, and the Corporation forthwith shall cancel such surrendered certificate. Each such new certificate will be registered in such name and will represent such number of shares of such class as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. The issuance of new certificates shall be made without charge to the holders of the surrendered certificates for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such issuance. Section 6. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder will be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of any class of Common Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement will be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 7. Notices. All notices referred to herein shall be in writing, shall be delivered personally or by first class mail, postage prepaid, and shall be deemed to have been given when so delivered or mailed to the Corporation at its principal executive offices and to any shareholder at such holder's address as it appears in the stock records of the Corporation (unless otherwise specified in a written notice to the Corporation by such holder). Section 8. Fractional Shares. In no event will holders of fractional shares be required to accept any consideration in exchange for such shares other than consideration which all holders of Common Stock are required to accept. Section 9. Reclassification of Existing Common Stock and Forward Stock Split. (i) Reclassification. At the Effective Time, each share of capital stock of the Corporation then outstanding shall, without any action by the holder thereof, convert and be reclassified as follows (the "Reclassification"): (A) first, each outstanding share of Series A Cumulative ----- Convertible Preferred Stock (the "Series A Preferred") shall automatically convert into Class A Common and Class L Common in an amount equal to the quotient obtained by dividing (x) the Stated Value multiplied by the number of Series A Preferred being converted by (y) the Preferred Conversion Price, as last adjusted and then in effect; provided, however, that 90% of the shares of common stock issuable upon such 3 conversion shall be issued as shares of Class A Common and 10% of the shares of common stock issuable upon such conversion shall be issued as shares of Class L Common; (B) then, ---- (1) each outstanding share of Class A Common Stock, par value $0.01 per share (the "Class A Common"), shall be reclassified into one share of Common Stock; (2) each outstanding share of Class B Common Stock, par value $0.01 per share (the "Class B Common"), shall be reclassified into one share of Common Stock; and (3) each outstanding share of Class L Common Stock, par value $0.01 per share (the "Class L Common" and, together with the Class A Common and Class B Common, the "Existing Common Stock"), shall be reclassified into a number of shares of Common Stock equal to the sum of (i) one and (ii) the quotient obtained by dividing (x) the Unreturned Cost plus Unpaid Yield of such share of Class L Common by (y) the price per share of the Common Stock paid by investors in the public offering contemplated by the Registration Statement (in each case before giving effect to the Stock Split). Prior to the effectiveness of the Reclassification, the Series A Preferred and the Existing Common Stock shall continue to have the rights, preferences and limitations set forth in the Original Charter. (ii) Forward Stock Split. Immediately following the Reclassification, each share of Common Stock outstanding at such time (after giving effect to the Reclassification) shall be, without further action by the Corporation or any of the holders thereof, changed and converted into 1.6942 shares of Common Stock (the "Stock Split"). Each certificate then outstanding representing shares of Common Stock (including those certificates that represent shares of Common Stock as a result of the Reclassification) shall automatically represent from and after the Effective Time that number of shares of Common Stock equal to the number of shares shown on the face of the certificate multiplied by 1.6942. (iii) Fractional Shares. Notwithstanding the foregoing, in the event that the Reclassification and Stock Split would result in any holder of shares of Common Stock holding a share of Common Stock that is not an integral multiple of one, the effect of the Reclassification and Stock Split shall be such that the number of such holder's shares of Common Stock issued as a result of the Reclassification and Stock Split with fractions of 0.50 and greater will be rounded up to the next higher integral multiple of one and fractions less than 0.50 being rounded down to the next 4 lower integral multiple of one. No consideration will be paid in lieu of fractions that are rounded down. (iv) As soon as possible after the Reclassification and Stock Split, the Corporation shall deliver to its shareholders a certificate or certificates representing the number of shares of Common Stock issuable by reason of the Reclassification and Stock Split in such name or names and such denomination or denominations as each shareholder has specified. (v) The issuance of certificates for shares of Common Stock after the Reclassification and Stock Split, shall be made without charge to the holders of such Existing Common Stock for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with the Reclassification and Stock Split. Immediately after the Reclassification and Stock Split, the Corporation shall take all such actions as are necessary in order to insure that the Common Stock, issuable with respect to the Reclassification and Stock Split shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. (vi) The Corporation shall not close its books against the transfer of the Existing Common Stock or of Common Stock issued or issuable upon the Reclassification and Stock Split in any manner which interferes with the timely conversion of the Existing Common Stock. The Corporation shall assist and cooperate with any holder of shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (vii) All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). The Corporation shall not take any action which would cause the number of authorized but unissued shares of Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the existing Common Stock. D. DEFINITIONS "Bain Group" means, collectively, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II, L.P., BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-C, PEP Investments PTY Ltd., and Randolph Street Partners II. "Business Corporation Law" means the Business Corporation Law of 1988 of the Commonwealth of Pennsylvania, as amended from time to time. 5 "Effective Time" means the time immediately prior to the effectiveness of the Registration Statement. "Original Charter" means the Amended and Restated Articles of Incorporation of the Corporation in effect immediately prior to the filing of the Restated Articles. "Preferred Conversion Price" has the meaning given such term in the Original Charter. "Registration Statement" means the Corporation's Registration Statement on Form S-1 (Registration No. 333-33318). "Stated Value" has the meaning given such term in the Original Charter. "Unpaid Yield" has the meaning given such term in the Original Charter. "Unreturned Cost" has the meaning given such term in the Original Charter. ARTICLE FIVE The Corporation is to have perpetual existence. ARTICLE SIX In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE SEVEN Meetings of shareholders may be held within or without the State of Pennsylvania, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the Commonwealth of Pennsylvania at such place or places as may be designated from time to time by the board of directors or in the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE EIGHT (a) To the fullest extent permitted by the Business Corporation Law as the same exists or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. (b) The corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or 6 served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. (c) Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Restated Articles inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, proceeding, suit or claim accruing or arising, or that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE NINE The Corporation expressly elects not to be governed by Section 2538 (Adoption of Transactions with Interested Shareholders) and the provisions contained in Subchapters E (Control Transactions), G (Control-Share Acquisitions), H (Disgorgement by Certain Controlling Shareholders for Employees Terminated Following Attempts to Acquire Control), I (Severance Compensation for Employees Terminated Following Certain Control-Share Acquisitions) and J (Business Combination Transactions - Labor Contracts) of Chapter 25 of the Business Corporation Law. ARTICLE TEN The Corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation in the manner now or hereafter prescribed herein and by the laws of the Commonwealth of Pennsylvania, and all rights conferred upon shareholders herein are granted subject to this reservation. ARTICLE ELEVEN At the Effective Time, this Article Eleven shall be inserted as Article Eleven of the Original Charter. Until the Effective Time, the Original Charter shall continue in full force and effect. Section 1. Classification of Directors. At each annual meeting of shareholders, directors of the Corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall be not so held, such election shall take place at shareholders' meeting called and held in accordance with the Business Corporation Law. The directors of the Corporation shall be divided into two classes as nearly equal in size as is practicable, hereby designated Class I and Class II. The term of office of the initial Class I directors shall expire at the next succeeding annual meeting of shareholders, and the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of shareholders. For the purposes hereof, the initial Class I and Class II directors shall be those directors elected by the shareholders of the Corporation in connection with the adoption of this Restated Articles. At each annual meeting after the first annual meeting of shareholders, directors to replace those of a Class whose terms expire at such annual meeting shall be elected to hold office until the second succeeding annual meeting and until their 7 respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as practicable. Section 2. Vacancies. Vacancies occurring on the board of directors for any reason may be filled by vote of a majority of the remaining members of the board of directors, although less than a quorum, at any meeting of the board of directors. A person so elected by the board of directors to fill a vacancy shall hold office until the next succeeding annual meeting of shareholders of the Corporation and until his or her successor shall have been duly elected and qualified. ARTICLE TWELVE At the Effective Time, this Article Twelve shall be inserted as Article Twelve of the Original Charter. Until the Effective Time, the Original Charter shall continue in full force and effect. The shareholders of the Corporation may not take any action by written consent in lieu of a meeting, and must take any actions at a duly called annual or special meeting of shareholders and the power of shareholders to consent in writing without a meeting is specifically denied. Special meetings of shareholders of the Corporation may be called only by either the board of directors pursuant to a resolution adopted by the affirmative vote of the majority of the total number of directors then in office or by the chief executive officer of the Corporation. ARTICLE THIRTEEN At the Effective Time, this Article Thirteen shall be inserted as Article Thirteen of the Original Charter. Until the Effective Time, the Original Charter shall continue in full force and effect. Notwithstanding any other provisions of the Restated Articles or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of the capital stock required by law or the Restated Articles, the affirmative vote of the holders of at least two-thirds (2/3) of the combined voting power of all of the then outstanding shares of the Corporation eligible to be cast in the election of directors shall be required to alter, amend or repeal Articles Eleven or Twelve hereof, or this Article Thirteen, or any provision thereof or hereof, unless such amendment shall be approved by a majority of the directors of the Corporation not affiliated or associated with any person or entity holding (or which has announced an intention to obtain) twenty percent (20%) or more of the voting power of the Corporation's outstanding capital stock (other than the Bain Group). 8 EX-3.2 4 AMENDED AND RESTATED BY-LAWS OF THE REGISTRANT BY-LAWS OF INTEGRATED CIRCUIT SYSTEMS, INC. A Pennsylvania Corporation (Adopted as of May __, 2000) ARTICLE I --------- OFFICES ------- Section 1. Registered Office. The registered office of Integrated Circuit ---------- ----------------- Systems, Inc. (the "Corporation") in the Commonwealth of Pennsylvania shall be ----------- located at 2435 Boulevard of the Generals, City of Valley Forge, County of Montgomery, Commonwealth of Pennsylvania. The name of the Corporation's registered agent at such address shall be Hock E. Tan. The registered office and/or registered agent of the Corporation may be changed from time to time by action of the Board of Directors. Section 2. Other Offices. The Corporation may also have offices at such ---------- ------------- other places, both within and without the Commonwealth of Pennsylvania, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II ---------- MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Annual Meeting. An annual meeting of the stockholders shall ---------- -------------- be held each year within 150 days after the close of the immediately preceding fiscal year of the Corporation or at such other time specified by the Board of Directors for the purpose of electing Directors and conducting such other proper business as may come before the annual meeting. At the annual meeting, stockholders shall elect directors and transact such other business as properly may be brought before the annual meeting pursuant to Section 11 of ARTICLE II ---------- hereof. Section 2. Special Meetings. Special meetings of the stockholders may ---------- ---------------- only be called in the manner provided in the Amended and Restated Articles of Incorporation. Section 3. Place of Meetings. The Board of Directors may designate any ---------- ----------------- place, either within or without the Commonwealth of Pennsylvania, as the place of meeting for any annual meeting or for any special meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal executive office of the Corporation. If for any reason any annual meeting shall not be held during any year, the business thereof may be transacted at any special meeting of the stockholders. Section 4. Notice. Whenever stockholders are required or permitted to ---------- ------ take action at a meeting, written or printed notice stating the place, date, time and, in the case of special meetings, the purpose or purposes, of such meeting, shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. All such notices shall be delivered, either personally or by mail, by or at the direction of the Board of Directors, the chairman of the board, the president or the secretary, and if mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his, her or its address as the same appears on the records of the Corporation. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Section 5. Stockholders List. The officer having charge of the stock ---------- ----------------- ledger of the Corporation shall make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 6. Quorum. The holders of a majority of the outstanding shares of ---------- ------ capital stock entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by the Business Corporation Law of the Commonwealth of Pennsylvania or by the Amended and Restated Articles of Incorporation. If a quorum is not present, the holders of a majority of the shares present in person or represented by proxy at the meeting, and entitled to vote at the meeting, may adjourn the meeting to another time and/or place. When a specified item of business requires a vote by a class or series (if the Corporation shall then have outstanding shares of more than one class or series) voting as a class or series, the holders of a majority of the shares of such class or series shall constitute a quorum (as to such class or series) for the transaction of such item of business. Section 7. Adjourned Meetings. When a meeting is adjourned to another ---------- ------------------ time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, -2- a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. Vote Required. When a quorum is present, the affirmative vote ---------- ------------- of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless (i) by express provisions of an applicable law or of the Amended and Restated Articles of Incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question, or (ii) the subject matter is the election of Directors, in which case Section 2 of ARTICLE III hereof shall govern and control the approval of such ----------- subject matter. Section 9. Voting Rights. Except as otherwise provided by the Business ---------- ------------- Corporation Law of the Commonwealth of Pennsylvania, the Amended and Restated Articles of Incorporation of the Corporation or any amendments thereto or these By-laws, every stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock held by such stockholder. Section 10. Proxies. Each stockholder entitled to vote at a meeting of ----------- ------- stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. Any proxy is suspended when the person executing the proxy is present at a meeting of stockholders and elects to vote, except that when such proxy is coupled with an interest and the fact of the interest appears on the face of the proxy, the agent named in the proxy shall have all voting and other rights referred to in the proxy, notwithstanding the presence of the person executing the proxy. At each meeting of the stockholders, and before any voting commences, all proxies filed at or before the meeting shall be submitted to and examined by the secretary or a person designated by the secretary, and no shares may be represented or voted under a proxy that has been found to be invalid or irregular. Section 11. Business Brought Before an Annual Meeting. At an annual ----------- ----------------------------------------- meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, -------- ------- that in the event that less than 70 days' -3- notice or prior public announcement of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the annual meeting was mailed or such public announcement was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this section. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this section; if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. For purposes of this section,"public announcement" shall mean disclosure in a press release reported ------------------- by Dow Jones News Service, Associated Press or a comparable national news service. Nothing in this section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). ------------ ARTICLE III ----------- Directors --------- Section 1. General Powers. The business and affairs of the Corporation ---------- -------------- shall be managed by or under the direction of the Board of Directors. In addition to such powers as are herein and in the Amended and Restated Articles of Incorporation expressly conferred upon it, the Board of Directors shall have and may exercise all the powers of the Corporation, subject to the provisions of the laws of Pennsylvania, the Amended and Restated Articles of Incorporation and these By-laws. Section 2. Number, Election and Term of Office. Subject to any rights of ---------- ----------------------------------- the holders of any series of Preferred Stock to elect additional Directors under specified circumstances, the number of Directors which shall constitute the Board of Directors shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the total number of Directors then in office. The Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote in the election of Directors; provided that, whenever the holders of any class or series of capital stock of the Corporation are entitled to elect one or more Directors pursuant to the provisions of the Amended and Restated Articles of Incorporation of the Corporation (including, but not limited to, for purposes of these By-laws, pursuant to any duly authorized certificate of designation), such Directors shall be elected by a plurality of the votes of such class or series present in person or represented by proxy at the meeting and entitled to vote in -4- the election of such Directors. The Directors shall be elected and shall hold office only in the manner provided in the Amended and Restated Articles of Incorporation. Section 3. Removal and Resignation. No Director may be removed from ---------- ----------------------- office without cause and without the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of capital stock entitled to vote generally in the election of Directors voting together as a single class; provided, however, that if the holders of any class or series of capital stock are entitled by the provisions of the Amended and Restated Articles of Incorporation (it being understood that any references to the Amended and Restated Articles of Incorporation shall include any duly authorized certificate of designation) to elect one or more Directors, such Director or Directors so elected may be removed without cause only by the vote of the holders of a majority of the outstanding shares of that class or series entitled to vote. Any Director may resign at any time upon written notice to the Corporation. Section 4. Vacancies. Vacancies and newly created directorships resulting ---------- --------- from any increase in the total number of Directors may be filled only in the manner provided in the Amended and Restated Articles of Incorporation. Section 5. Nominations. ---------- ----------- (a) Only persons who are nominated in accordance with the procedures set forth in these By-laws shall be eligible to serve as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-law, who is entitled to vote generally in the election of Directors at the meeting and who shall have complied with the notice procedures set forth below in Section 5(b). (b) In order for a stockholder to nominate a person for election to the Board of Directors of the Corporation at a meeting of stockholders, such stockholder shall have delivered timely notice of such stockholder's intent to make such nomination in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation (i) in the case of an annual meeting, not less than 60 nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event -------- ------- that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the meeting was made, and (ii) in the case of a special meeting at which Directors are to be elected, not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure of the meeting was made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election as a Director at such meeting all information relating to such person that is required to be disclosed in solicitations of proxies for -5- election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder and also which are owned of record by such stockholder; and (iii) as to the beneficial owner, if any, on whose behalf the nomination is made, (A) the name and address of such person and (B) the class and number of shares of the Corporation which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (c) No person shall be eligible to serve as a Director of the Corporation unless nominated in accordance with the procedures set forth in this section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this section, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. A stockholder seeking to nominate a person to serve as a Director must also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this section. Section 6. Annual Meetings. The annual meeting of the Board of Directors ---------- --------------- shall be held without other notice than this By-law immediately after, and at the same place as, the annual meeting of stockholders. Section 7. Other Meetings and Notice. Regular meetings, other than the ---------- ------------------------- annual meeting, of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the Board of Directors. Special meetings of the Board of Directors may be called by the chairman of the board, the president (if the president is a Director) or, upon the written request of at least a majority of the Directors then in office, the secretary of the Corporation on at least 24 hours notice to each Director, either personally, by telephone, by mail or by telecopy. Section 8. Chairman of the Board, Quorum, Required Vote and Adjournment. ---------- ------------------------------------------------------------ The Board of Directors shall elect, by the affirmative vote of a majority of the total number of Directors then in office, a chairman of the board, who shall preside at all meetings of the stockholders and Board of Directors at which he or she is present and shall have such powers and perform such duties as the Board of Directors may from time to time prescribe. If the chairman of the board is not present at a meeting of the stockholders or the Board of Directors, the president (if the president is a Director and is not also the chairman of the board) shall preside at such meeting, and, if the president is not present at such meeting, a majority of the Directors present at such meeting shall elect one of their members to so preside. A majority of the total number of Directors then in office shall constitute a quorum for the transaction of business. Unless by express provision of an applicable law, the -6- Amended and Restated Articles of Incorporation or these By-laws a different vote is required, the vote of a majority of Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Committees. The Board of Directors may, by resolution passed ---------- ---------- by a majority of the total number of Directors then in office, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation, which to the extent provided in such resolution or these By- laws shall have, and may exercise, the powers of the Board of Directors in the management and affairs of the Corporation, except as otherwise limited by law. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors upon request. Section 10. Committee Rules. Each committee of the Board of Directors may ----------- --------------- fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the Board of Directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum. Unless otherwise provided in such a resolution, in the event that a member and that member's alternate, if alternates are designated by the Board of Directors, of such committee is or are absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Section 11. Communications Equipment. Members of the Board of Directors ----------- ------------------------ or any committee thereof may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear and speak with each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting. Section 12. Waiver of Notice and Presumption of Assent. Any member of the ----------- ------------------------------------------ Board of Directors or any committee thereof who is present at a meeting shall be conclusively presumed to have waived notice of such meeting except when such member attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of -7- the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action. Section 13. Action by Written Consent. Unless otherwise restricted by the ----------- ------------------------- Amended and Restated Articles of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of such board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. ARTICLE IV ---------- OFFICERS -------- Section 1. Number. The officers of the Corporation shall be elected by ---------- ------ the Board of Directors and shall consist of a chairman of the board, a chief executive officer, a president, one or more vice-presidents, a secretary, a chief financial officer and such other officers and assistant officers as may be deemed necessary or desirable by the Board of Directors. Any number of offices may be held by the same person, except that neither the chief executive officer nor the president shall also hold the office of secretary. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable, except that the offices of president and secretary shall be filled as expeditiously as possible. Section 2. Election and Term of Office. The officers of the Corporation ---------- --------------------------- shall be elected annually by the Board of Directors at its first meeting held after each annual meeting of stockholders or as soon thereafter as convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided. Section 3. Removal. Any officer or agent elected by the Board of ---------- ------- Directors may be removed by the Board of Directors at its discretion, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. Vacancies. Any vacancy occurring in any office because of ---------- --------- death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors. Section 5. Compensation. Compensation of all executive officers shall be ---------- ------------ approved by the Board of Directors, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a Director of the Corporation; provided however, that compensation of all executive officers may -------- ------- be determined by a committee established for that purpose if so authorized by the unanimous vote of the Board of Directors. -8- Section 6. Chairman of the Board. The chairman of the board shall preside ---------- --------------------- at all meetings of the stockholders and of the Board of Directors and shall have such other powers and perform such other duties as may be prescribed to him or her by the Board of Directors or provided in these By-laws. Section 7. Vice-Chairman of the Board. Whenever the chairman of the board ---------- -------------------------- in unable to serve, by reason of sickness, absence, or otherwise, the vice- chairman shall have the powers and perform the duties of the chairman of the board. The vice-chairman shall have such other powers and perform such other duties as may be prescribed by the chairman of the board, the board of directors or these By-laws. Section 8. Chief Executive Officer. The chief executive officer shall ---------- ----------------------- have the powers and perform the duties incident to that position. Subject to the powers of the Board of Directors and the chairman of the board, the chief executive officer shall be in the general and active charge of the entire business and affairs of the Corporation, and shall be its chief policy making officer. The chief executive officer shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in these By-laws. The chief executive officer is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Whenever the president is unable to serve, by reason of sickness, absence or otherwise, the chief executive officer shall perform all the duties and responsibilities and exercise all the powers of the president. Section 9. The President. The president of the Corporation shall, subject ---------- ------------- to the powers of the Board of Directors, the chairman of the board and the chief executive officer, have general charge of the business, affairs and property of the Corporation, and control over its officers, agents and employees. The president shall see that all orders and resolutions of the Board of Directors are carried into effect. The president is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The president shall have such other powers and perform such other duties as may be prescribed by the chairman of the board, the chief executive officer, the Board of Directors or as may be provided in these By- laws. Section 10. Vice-Presidents. The vice-president, or if there shall be ----------- --------------- more than one, the vice-presidents in the order determined by the Board of Directors or the chairman of the board, shall, in the absence or disability of the president, act with all of the powers and be subject to all the restrictions of the president. The vice-presidents shall also perform such other duties and have such other powers as the Board of Directors, the chairman of the board, the chief executive officer, the president or these By-laws may, from time to time, prescribe. The vice-presidents may also be -9- designated as executive vice-presidents or senior vice-presidents, as the Board of Directors may from time to time prescribe. Section 11. The Secretary and Assistant Secretaries. The secretary shall ----------- --------------------------------------- attend all meetings of the Board of Directors, all meetings of the committees thereof and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose or shall ensure that his or her designee attends each such meeting to act in such capacity. Under the chairman of the board's supervision, the secretary shall give, or cause to be given, all notices required to be given by these By-laws or by law; shall have such powers and perform such duties as the Board of Directors, the chairman of the board, the chief executive officer, the president or these By-laws may, from time to time, prescribe; and shall have custody of the corporate seal of the Corporation. The secretary, or an assistant secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The assistant secretary, or if there be more than one, any of the assistant secretaries, shall in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors, the chairman of the board, the chief executive officer, the president, or secretary may, from time to time, prescribe. Section 12. The Chief Financial Officer. The chief financial officer ----------- --------------------------- shall have the custody of the corporate funds and securities; shall keep full and accurate all books and accounts of the Corporation as shall be necessary or desirable in accordance with applicable law or generally accepted accounting principles; shall deposit all monies and other valuable effects in the name and to the credit of the Corporation as may be ordered by the chairman of the board or the Board of Directors; shall cause the funds of the Corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the Board of Directors, at its regular meeting or when the Board of Directors so requires, an account of the Corporation; shall have such powers and perform such duties as the Board of Directors, the chairman of the board, the chief executive officer, the president or these By-laws may, from time to time, prescribe. If required by the Board of Directors, the chief financial officer shall give the Corporation a bond (which shall be rendered every six years) in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of chief financial officer and for the restoration to the Corporation, in case of death, resignation, retirement or removal from office of all books, papers, vouchers, money and other property of whatever kind in the possession or under the control of the chief financial officer belonging to the Corporation. Section 13. Other Officers, Assistant Officers and Agents. Officers, ----------- --------------------------------------------- assistant officers and agents, if any, other than those whose duties are provided for in these By-laws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the Board of Directors. -10- Section 14. Absence or Disability of Officers. In the case of the absence ----------- --------------------------------- or disability of any officer of the Corporation and of any person hereby authorized to act in such officer's place during such officer's absence or disability, the Board of Directors may by resolution delegate the powers and duties of such officer to any other officer or to any Director, or to any other person selected by it. ARTICLE V --------- CERTIFICATES OF STOCK --------------------- Section 1. Form. Every holder of stock in the Corporation shall be ---------- ---- entitled to have a certificate, signed by, or in the name of the Corporation by the chairman of the board, the chief executive officer or the president and the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. If such a certificate is countersigned (i) by a transfer agent or an assistant transfer agent other than the Corporation or its employee or (ii) by a registrar, other than the Corporation or its employee, the signature of any such chairman of the board, chief executive officer, president, secretary or assistant secretary may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation whether because of death, resignation or otherwise before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may neverthe less be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. All certificates for shares shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the Corporation. Shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holder's attorney duly authorized in writing, upon surrender to the Corporation of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In that event, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates and record the transaction on its books. The Board of Directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the Corporation. Section 2. Lost Certificates. The Board of Directors may direct a new ---------- ----------------- certificate or certificates to be issued in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, -11- or his or her legal representative, to give the Corporation a bond sufficient to indemnify the Corporation against any claim that may be made against the Corporation on account of the loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 3. Fixing a Record Date for Stockholder Meetings. In order that ---------- --------------------------------------------- the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is first given. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Fixing a Record Date for Other Purposes. In order that the ---------- --------------------------------------- Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5. Registered Stockholders. Prior to the surrender to the ---------- ----------------------- Corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the Corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof. Section 6. Subscriptions for Stock. Unless otherwise provided for in the ---------- ----------------------- subscription agreement, subscriptions for shares shall be paid in full at such time, or in such installments and at such times, as shall be determined by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same class or as to all shares of the same series. In case of default in the payment of any installment or call when such payment is due, the Corporation may proceed to collect the amount due in the same manner as any debt due the Corporation. -12- ARTICLE VI ---------- INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS ------------------------------------------------- Section 1. Nature of Indemnity. Each person who was or is made a party or ---------- ------------------- is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer, of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the corporation to the fullest extent which it is empowered to do so unless prohibited from doing so by the Business Corporation Law of the Commonwealth of Pennsylvania, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) against all expense, liability and loss (including attorneys' fees actually and reasonably incurred by such person in connection with such proceeding) and such indemnification shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in Section 2 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. The right to indemnification conferred in this Article VI shall be a contract right and, subject to Sections 2 and 5 hereof, shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition. The corporation may, by action of its board of directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. Section 2. Procedure for Indemnification of Directors and Officers. Any ---------- ------------------------------------------------------- indemnification of a director or officer of the corporation under Section 1 of this Article VI or advance of expenses under Section 5 of this Article VI shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article VI is required, and the corporation fails to respond within sixty (60) days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Business Corporation Law of the Commonwealth of Pennsylvania for the corporation to indemnify the claimant for the amount claimed, but the burden -13- of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel or it stockholders) 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 Business Corporation Law of the Commonwealth of Pennsylvania, nor an actual determination by the corporation (including its board of directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. Article Not Exclusive. The rights to indemnification and the ---------- --------------------- payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The corporation may purchase and maintain insurance ---------- --------- on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the corporation would have the power to indemnify such person against such liability under this Article VI. Section 5. Expenses. Expenses incurred by any person described in Section ---------- -------- 1 of this Article VI in defending a proceeding shall be paid by the corporation in advance of such proceeding's final disposition unless otherwise determined by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 6. Employees and Agents. Persons who are not covered by the ---------- -------------------- foregoing provisions of this Article VI and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors. Section 7. Contract Rights. The provisions of this Article VI shall be ---------- --------------- deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article VI and the relevant provisions of the Business Corporation Law of the Commonwealth of Pennsylvania or other applicable law are in effect, and any repeal or modification of this Article VI or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing. -14- Section 8. Merger or Consolidation. For purposes of this Article VI, ---------- ----------------------- references to "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 this Article VI with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued. ARTICLE VII ----------- GENERAL PROVISIONS ------------------ Section 1. Dividends. Dividends upon the capital stock of the ---------- --------- Corporation, subject to the provisions of the Amended and Restated Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, in accordance with applicable law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Amended and Restated Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contin gencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or any other purpose and the Directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Checks, Drafts or Orders. All checks, drafts or other orders ---------- ------------------------ for the payment of money by or to the Corporation and all notes and 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 by resolution of the Board of Directors or a duly authorized committee thereof. Section 3. Contracts. In addition to the powers otherwise granted to ---------- --------- officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any ---------- officer or officers, or any agent or agents, of the Corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 4. Loans. The Corporation may lend money to, or guarantee any ---------- ----- obligation of, or otherwise assist any officer or other employee of the Corporation or of its subsidiaries, including any officer or employee who is a Director of the Corporation or its subsidiaries, whenever, in the judgment of the Directors, such loan, guaranty or assistance may reasonably be expected to benefit -15- the Corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at common law or under any statute. Section 5. Fiscal Year. The fiscal year of the Corporation shall be fixed ---------- ----------- by resolution of the Board of Directors. Section 6. Corporate Seal. The Board of Directors may provide a corporate ---------- -------------- seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Pennsylvania." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 7. Voting Securities Owned By Corporation. Voting securities in ---------- -------------------------------------- any other Corporation held by the Corporation shall be voted by the chief executive officer, the president or a vice-president, unless the Board of Directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution. Section 8. Inspection of Books and Records. The Board of Directors shall ---------- ------------------------------- have power from time to time to determine to what extent and at what times and places and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by the laws of the Commonwealth of Pennsylvania, unless and until authorized so to do by resolution of the Board of Directors or of the stockholders of the Corporation. Section 9. Section Headings. Section headings in these By-laws are for ---------- ---------------- convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein. Section 10. Inconsistent Provisions. In the event that any provision of ----------- ----------------------- these By-laws is or becomes inconsistent with any provision of the Amended and Restated Articles of Incorporation, the Business Corporation Law of the Commonwealth of Pennsylvania or any other applicable law, the provision of these By-laws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect. -16- ARTICLE VIII ------------ AMENDMENTS ---------- In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, alter, amend, change, add to or repeal these By-laws by the affirmative vote of a majority of the total number of Directors then in office. Any alteration or repeal of these By-laws by the stockholders of the Corporation shall require the affirma tive vote of a majority of the outstanding shares of the Corporation entitled to vote on such alteration or repeal; provided, however, that Section -------- ------- 11 of ARTICLE II and Sections 2, 3, 4 and 5 of ARTICLE III and this ARTICLE VIII ---------- ----------- ------------ of these By-laws shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least two thirds (2/3) of the combined voting power of all of the then outstanding shares of the Corporation entitled to vote on such alteration or repeal unless such amendment shall be approved by a majority of the directors of the Corporation not affiliated or associated with any person or entity holding (or which has announced an intention to obtain) twenty percent (20%) or more of the voting power of the Corporation's outstanding capital stock (other than the Bain Group). EX-4.2 5 CERTIFICATE REPRESENTING SHARES OF COMMON STOCK EXHIBIT 4.2 - ------------ ----------- NUMBER SHARES - ------------ ----------- INCORPORATED UNDER THE LAWS COMMONWEALTH OF PENNSYLVANIA - ------------------------------------------------------------------------------- INTEGRATED CIRCUIT SYSTEMS, INC. - ------------------------------------------------------------------------------- SEE LEGENDS ON REVERSE SIDE This Certifies that _______________ is the owner of full paid and non-assessable Shares of the Class A Common Stock, $.01 par value per share, of Integrated Circuit Systems, Inc., transferable on the books of the Corporation in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and sealed with the Seal of the Corporation, this_____________day of______________A.D._______ _____________________ ___________________________ SECRETARY PRESIDENT NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER For Value Received, _______ hereby sell, assign and transfer unto ___________ _____________________________________________________________________Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated_________________________________ In presence of _______________________________________________________________________ ----------------------------- THIS SPACE IS NOT TO BE COVERED IN ANY WAY ----------------------------- EX-5.1 6 OPINION OF PEPPER HAMILTON LLP Exhibit 5.1 May 19, 2000 Integrated Circuit Systems, Inc. 2435 Boulevard of the Generals Norristown, PA 19403 Re: Registration Statement on Form S-1 (Registration No. 333-33318) ---------------------------------- Ladies and Gentlemen: We have acted as special counsel to Integrated Circuit Systems, Inc., a Pennsylvania corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), of a public offering (the "Offering") of up to 12,500,000 shares (the "Primary Shares") of the Company's Common Stock, par value $.01 per share (the "Common Stock") to be offered by the Company, and up to 1,875,000 shares of Common Stock to be offered by certain selling shareholders pursuant to an over-allotment option (the "Additional Shares" and, together with the Primary Shares, the "Shares"). The opinion is delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. We have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (No. 333-33318) originally filed under the Act with the Securities and Exchange Commission (the "Commission") on March 27, 2000, Amendment No. 1 thereto filed on May 2, 2000 and Amendment No. 2 thereto filed on or about May 19, 2000 (as so amended the "Registration Statement"); (ii) the form of underwriting agreement, filed as Exhibit 1.1 to Amendment No. 2 to the Registration Statement (the Integrated Circuit Systems, Inc. May 19, 2000 Page 2 "Underwriting Agreement"), to be entered into by and among the Company, Credit Suisse First Boston Corporation, Fleet Boston Robertson Stephens, Inc., Lehman Brothers, Inc., Bear Stearns & Co., Inc. and Pennsylvania Merchant Group, as representatives of the several underwriters (the "Representatives"); (iii) the form of the Company's Amended and Restated Articles of Incorporation (the "Restated Articles") and By-Laws (the "Restated By-Laws") filed as exhibits to Amendment No. 2 to the Registration Statement which are to become effective immediately prior to completion of the Offering; (iv) certain resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Shares; (v) the form of resolutions to be adopted by the Board of Directors and shareholders of the Company relating to, among other things, the approval and adoption of the Restated Articles and Restated By-Laws; (vi) a specimen certificate representing the shares of Common Stock; and (vii) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts material to the opinions expressed herein which were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. In addition, we have assumed the conformity of the certificates representing the Shares to the form of the specimen thereof examined by us and the due execution and delivery of such certificates. We have also assumed that the Restated Articles and Restated By-Laws will be duly approved and adopted by the Company's Board of Directors and shareholders and will become effective immediately prior to the completion of the Offering. We express no opinion as to the laws of any other jurisdiction other than the Federal laws of the United States of America and the Business Corporation Law of the Commonwealth of Pennsylvania. Based upon and subject to the foregoing, we are of the opinion that when (i) the Board of Directors of the Company or a duly designated committee thereof authorizes the initial public offering price per Share, (ii) the duly appointed officers of the Company execute and deliver the Underwriting Agreement, (iii) the Primary Shares are issued and delivered against payment therefor in accordance with the terms and conditions of the Underwriting Agreement and (iv) the Additional Shares are delivered against payment therefor in accordance with the terms and conditions of the Underwriting Agreement, the Shares will be duly authorized, validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Opinions" in the prospectus Integrated Circuit Systems, Inc. May 19, 2000 Page 3 filed as part of the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations promulgated thereunder. This opinion is furnished by us, as your special counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person. Very truly yours, PEPPER HAMILTON LLP EX-10.12 7 AMENDMENT NO.#1 TO STOCKHOLDERS AGREEMENT EXHIBIT A AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT This Amendment No. 1 to STOCKHOLDERS Agreement (the "Amendment") is made and entered into as of December 29, 1999, by and among Integrated Circuit Systems, Inc., a Pennsylvania corporation (the "Company"), each of the Persons ------- listed on Schedule I attached hereto (the "Bain Stockholders"), each of the ---------- ----------------- Persons listed on Schedule II attached hereto (the "Bear Stearns Stockholders"), ----------- ------------------------- the Person listed on Schedule III hereto (the "First Boston Stockholder") and ------------ ------------------------ the Person listed on Schedule IV hereto (the "Intel Stockholder"). ----------- ----------------- RECITALS A. The Bain Stockholders, the Bear Stearns Stockholder, the First Boston Stockholder and the Company entered into that certain Stockholders Agreement dated as of May 11, 1999 (the "Original Agreement") for the purposes, among others, of (i) assuring continuity in the management and ownership of the Company and (ii) limiting the manner and terms by which the Stockholders' Common Stock may be transferred. B. Pursuant to a Series A Cumulative Convertible Preferred Stock Purchase Agreement dated December 28, 1999 between the Company and Intel Corporation (the Purchase Agreement"), the Company has agreed to sell to Intel Corporation, and - ------------------ Intel Corporation has agreed to purchase from the Company, certain shares of the Company's Series A Cumulative Convertible Preferred Stock (the "Series A -------- Preferred Stock"). Pursuant to the Purchase Agreement, the Company has agreed - --------------- to provide certain rights to the Intel Stockholder, as more particularly set forth in this Amendment. C. Terms not otherwise defined in this Amendment have the meanings given to them in the Agreement. AGREEMENT The parties hereto, intending to be legally bound, hereby agree as follows: 1. This Amendment constitutes an amendment to the Original Agreement. The Original Agreement, as amended by this Amendment, is herein referred to as the "Agreement." Except as specifically amended pursuant to the terms of this Amendment, all of the terms of the Original Agreement shall continue in full force and effect. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Section 11 of the Agreement. 2. The Intel Stockholder is hereby added as a party to the Agreement, and the definition of "Stockholder" in the first paragraph of the Original Agreement shall be amended to include the Intel Stockholder. 3. Schedule IV shall be added to the Original Agreement, and the reference to "Schedule I, II or III" in Section 1 of the Original Agreement are hereby replaced with "Schedule I, II, III or IV." 4. Section 2(a) of the Original Agreement is hereby amended to add ", the Intel Stockholder" after the words "the Bear Stearns Stockholders," and before the words "or the First Boston Stockholder" in the first sentence thereof, and to replace the words "Public Offering" with the words "Qualified Initial Public Offering" in the first sentence thereof. 5. Section 2(b) of the Original Agreement is hereby amended to add the words "the Intel Stockholder," after the words "the Bear Stearns Stockholders," and before the words "the First Boston Stockholder" in part (iv) thereof. 6. Section 3(a) of the Original Agreement is hereby amended to add the words "(in connection with a Transfer by an Intel Stockholder only), 3(d)," after the word "3(c)" and to add "the Intel Stockholder," after the word "Neither" and before the words " the First Boston Stockholder" in the first sentence thereof. 7. Section 3(b)(i) of the Original Agreement is hereby amended to add ", the Intel Stockholder," after the words "the Bear Stearns Stockholders" and before the words "and the First Boston Stockholder" in the first and last sentences thereof. 8. Section 3 of the Original Agreement is hereby amended by renumbering the existing paragraphs (c) and (d) thereof as paragraph (d) and (e), respectively, and by adding the following subsection as new paragraph (c): "(c) Intel Right of First Offer. Other than -------------------------- pursuant to an Approved Sale or an Approved Bain Sale, the Intel Stockholder may not Transfer any Stockholder Shares, directly or indirectly, in one transaction or a series of related transactions, to a Person engaged in the business of designing, producing and marketing mixed signal integrated circuits (a "Competitor"). Prior to making any Transfer ---------- of Intel Shares pursuant to this Section 3(c), Intel shall deliver a written notice (the "Intel Offer Notice") to the Company. ------------------ The Intel Offer Notice shall disclose in reasonable detail the proposed number of its Stockholder Shares to be transferred (the "Offered Shares") and the proposed sale -------------- price, terms and conditions of the Transfer. The Company may elect to purchase all, but not less than all, of the Offered Shares at the price and on the other terms specified in the Intel Offer Notice by delivering written notice of such election to Intel within 20 days after receipt of the Intel Offer Notice by the Company. If the Company has elected to purchase the Offered Shares from Intel within the aforementioned 20-day period, the Transfer of such shares shall be consummated as soon as practical after the delivery of the election notice to Intel, but in any event within 45 days after receipt of the Intel Offer Notice by the Company (or such longer period of time as may be required pursuant to applicable law). If the Company does not elect -2- within the aforementioned 20-day period to purchase the Offered Shares, Intel may, within 80 days after the Company's receipt of the Intel Offer Notice, transfer such Intel Shares to one or more Persons (other than a Competitor) at a price and on other terms no more favorable to the transferee(s) thereof than offered to the Company in the Intel Offer Notice. Any Intel Shares not transferred within such 45-day period shall be reoffered to the Company in accordance with this Section 3(c) prior to any subsequent Transfer." 9. Section 3(c) of the Original Agreement (renumbered as 3(d) pursuant to Section 8 hereof) is hereby amended to delete the second proviso which begins "and provided further" and replace the second proviso in its ----------------- entirety with the following language: "and provided further that the -------- ------- transferees of such Stockholder Shares shall have agreed in writing to be bound by the provisions of this Agreement and, with respect to all Stockholders other than transferees of the Intel Stockholder, the Voting Agreement, in each case affecting the Stockholder Shares so transferred." 10. Section 4(a) of the Original Agreement is hereby amended to add the words ", subject to paragraph (d) of this Section 4" after the words "by executing definitive agreements with respect to the sale thereof" in the second sentence thereof and to add the words "and paragraph (d) of this Section 4" after the words "immediately preceding proviso" in the last sentence thereof. 11. Section 4 of the Original Agreement is hereby amended by renumbering the existing paragraph (d) as paragraph (e), and by adding the following subsection as new paragraph (d): "(d) Without the prior written consent of the Intel Stockholder, the Company shall not enter into any agreement in connection with an Approved Sale unless (i) with respect to the Intel Stockholder, the liability of the shareholders under the agreement for the Approved Sale is several, and not joint and several, (ii) the liability of the Intel Stockholder under the offer is limited to the Intel Stockholder's pro rata portion of any claim and the liability of the Intel Stockholder will not, in any event, exceed that portion of the purchase price received by the Intel Stockholder in the Approved Sale; and (iii) the Intel Stockholder shall not be restricted from engaging in any line of business or subject to any non- competition, non-solicitation or similar covenants." 12. Section 5(a) of the Original Agreement is hereby amended to add the words ", subject to paragraph (d) of this Section 5" after the words "by executing definitive -3- agreements with respect to the sale thereof" in the second sentence thereof and again at the end of such Section. 13. Section 5 of the Original Agreement is hereby amended by renumbering the existing paragraph (d) as paragraph (e), and by adding the following subsection as new paragraph (d): "(d) out the prior written consent of the Intel Stockholder, the Company shall not enter into any agreement in connection with an Approved Bain Sale unless (i) with respect to the Intel Stockholder, the liability of the shareholders under the agreement for the Approved Bain Sale is several, and not joint and several, (ii) the liability of the Intel Stockholder under the offer is limited to the Intel Stockholder's pro rata portion of any claim and the liability of the Intel Stockholder will not, in any event, exceed that portion of the purchase price received by the Intel Stockholder in the Approved Bain Sale; and (iii) the Intel Stockholder shall not be restricted from engaging in any line of business or subject to any non- competition, non-solicitation or similar covenants." 14. Section 7 of the Original Agreement is hereby deleted and replaced in its entirety with the following section: "7. Initial Public Offering. In the event ----------------------- that the Board approves an initial public offering and sale of Common Stock (a "Public ------ Offering") pursuant to an effective -------- registration statement under the Securities Act of 1933, as amended, the holders of Common Stock shall take all necessary or desirable actions in connection with the consummation of the Public Offering. In the event that such Public Offering is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the Common Stock structure would adversely affect the marketability of the offering, each holder of Common Stock shall consent to and vote for a recapitalization, reorganization and/or exchange of the Common Stock into securities that the managing underwriters and the Board find acceptable and shall take all necessary or desirable actions in connection with the consummation of the recapitalization, reorganization and/or exchange; provided that -------- (a) the resulting securities take into account the rights and preferences set forth in the Company's Amended and Restated Articles of Incorporation as in effect immediately prior to such Public Offering and (b) any securities issued in exchange for the Series A Preferred Stock shall have rights, preferences and -4- privileges substantially similar to and no less favorable than the Series A Preferred Stock. Nothing in this Section 7 shall be deemed to constitute a consent or waiver by the holders of Series A Preferred Stock with respect to any action for which such consent is required under the Company's Amended and Restated Articles of Incorporation." 15. Section 13 of the Original Agreement is hereby deleted and replaced in its entirety with the following section: "13. Amendment and Waiver. Except as -------------------- otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company or the Stockholders unless such modification, amendment or waiver is approved in writing by the Company and the holders of a majority of each class of the Stockholder Shares; provided that in the event that such -------- modification, amendment, action or waiver (or any action with the effect of amending, modifying or waiving) would adversely affect the Intel Stockholder, the Bear Stearns Stockholders or the First Boston Stockholder in a manner different than the Bain Stockholders or otherwise reduce or diminish any rights that are applicable to the Intel Stockholder, the Bear Stearns Stockholders or the First Boston Stockholder unless the same rights applicable to the Bain Stockholders are reduced or diminished in the same manner, then such modification, amendment or waiver will require the consent of the Intel Stockholder, the Bear Stearns Stockholders or the First Boston Stockholder, as applicable. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms." 16. Section 18 of the Original Agreement is hereby deleted and replaced in its entirety with the following section: "18. Remedies. The Company, the Bain -------- Stockholders, the Bear Stearns Stockholders, the Intel Stockholder and the First Boston Stockholder shall be entitled to enforce their rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that the -5- Company, any of the Bain Stockholders, the Bear Stearns Stockholders, the Intel Stockholder or the First Boston Stockholder may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting a bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement." 17. Section 23 of the Oiginal Agreement is hereby amended to add ", the Intel Stockholder" after the words "the Bear Stearns Stockholders" and before the words "and the First Boston Stockholder" in the first sentence thereof. 18. Section 25 of the Original Agreement is hereby deleted and replaced in its entirety with the following section: "25. Rights Granted to the Bain -------------------------- Stockholders, the Bear Stearns Stockholders, ------------------------------------------- the First Boston Stockholder, the Intel -------------------------------------- Stockholder and their Affiliates. Any rights -------------------------------- granted to the Bain Stockholders, the Bear Stearns Stockholders, the First Boston Stockholder, the Intel Stockholder or their Affiliates hereunder may also be exercised (in whole or in part) by its designees (which may be Affiliates)." 19. Miscellaneous. ------------- (a) Severability. Whenever possible, each provision of this ------------ Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Amendment in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Amendment shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. (b) Entire Agreement. Except as otherwise expressly set forth herein, ---------------- this Amendment embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (c) Successors and Assigns. Except as otherwise provided herein, this ---------------------- Amendment shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Stockholders and any -6- subsequent holders of Stockholder Shares and the respective successors and assigns of each of them, so long as they hold Stockholder Shares. (d) Counterparts. This Amendment may be executed in multiple ------------ counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. (e) Governing Law. The corporate law of the Commonwealth of ------------- Pennsylvania shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All other issues and questions concerning the construction, validity, interpretation and enforceability of this Amendment and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflict of law rules or provisions (whether of the Commonwealth of Pennsylvania or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. -7- IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. INTEGRATED CIRCUIT SYSTEMS, INC. By: /s/ Hock E. Tan ---------------------------------------- Name: Hock E. Tan Its: President and Chief Executive Officer INTEL CORPORATION By: /s/ Arvind Sodhni ---------------------------------------- Name: Arvind Sodhni Its: Vice President and Tresurer -8- BAIN STOCKHOLDERS: - ----------------- BAIN CAPITAL FUND VI, L.P. By: Bain Capital Partners VI, L.P. Its: General Partner By: Bain Capital Investors VI, Inc. Its: General Partner By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director BCIP TRUST ASSOCIATES II By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director BCIP TRUST ASSOCIATES II-B By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director BCIP ASSOCIATES II By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director BCIP ASSOCIATES II-B By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director BCIP ASSOCIATES II-C By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director PEP INVESTMENTS PTY LTD. By: /s/ Michael Krupka ------------------------ Name: Michael Krupka Its: Managing Director RANDOLPH STREET PARTNERS II By:_______________________________ Name: Its: RANDOLPH STREET PARTNERS 1998 DIF, L.L.C. By:_______________________________ Name: Its: -9- BEAR STEARNS STOCKHOLDERS: ------------------------- ICST ACQUISITION CORP. By: /s/ Bodil Arlander ---------------------- Name: Bodil Arlander Its: Vice President -10- SCHEDULE IV ----------- Name and Address Number of Stockholder Shares - ---------------- ---------------------------- Intel Corporation 3,366,670 shares of Series A Cumulative Convertible Preferred Stock EX-10.13 8 AMENDMENT #2 TO STOCKHOLDERS AGREEMENT EXHIBIT B AMENDMENT NO. 2 TO STOCKHOLDERS AGREEMENT This Amendment No. 2 to Stockholders Agreement (the "Amendment") is made and entered into as of February __, 2000, by and among Integrated Circuit Systems, Inc., a Pennsylvania corporation (the "Company"), each of the Persons listed on Schedule I attached hereto (the "Bain Stockholders"), each of the ---------- Persons listed on Schedule II attached hereto (the "Bear Stearns Stockholder"), ----------- the Person listed on Schedule III hereto (the "First Boston Stockholder") and ------------ the Person listed on Schedule IV hereto (the "Intel Stockholder"). ----------- RECITALS A. The Company entered into a Confidentiality Agreement with Intel Corporation on December 29, 1999 (the "Confidentiality Agreement") in connection with the Series A Cumulative Convertible Preferred Stock Purchase Agreement dated December 23, 1999 between the Company and Intel Corporation (the "Purchase Agreement"). Under Section 1.6 of the Confidentiality Agreement, the Company is required to use its reasonable best efforts to amend the Stockholders Agreement dated as of May 11, 1999 by and among the Bain Stockholders, the Bear Stearns Stockholders, the First Boston Stockholder, the Intel Stockholder and the Company, as amended by Amendment No. 1 dated December 29, 1999 (as amended, the "Stockholders Agreement"), to include the terms and provisions of the Confidentiality Agreement. B. Terms not otherwise defined in this Amendment have the meanings given to them in the Stockholders Agreement. AGREEMENT The parties hereto, intending to be legally bound, hereby agree as follows: 1. This Amendment constitutes an amendment to the Stockholders Agreement. Except as specifically amended pursuant to the terms of this Amendment, all of the terms of the Stockholders Agreement shall continue in full force and effect. 2. Section 29 is hereby added to the Stockholders Agreement to read in full as follows: The Stockholders hereby agree to comply with the terms and provisions of the Confidentiality Agreement dated December 29, 1999 by and between the Company and Intel Corporation (a copy of which is attached hereto and marked as Exhibit A) that are --------- applicable to the Company to the same extent that the Company is bound thereby. 3. Miscellaneous. (a) Entire Agreement. Except as otherwise expressly set forth herein, ---------------- this Amendment embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. (b) Successors and Assigns. Except as otherwise provided herein, this ---------------------- Amendment shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Stockholders and any subsequent holders of Stockholder Shares and the respective successors and assigns of each of them, so long as they hold Stockholder Shares. (c) Counterparts. This Amendment may be executed in multiple ------------ counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. (d) Governing Law. The corporate law of the Commonwealth of ------------- Pennsylvania shall govern all issues and questions concerning the relative rights of the Company and its stockholders. All other issues and questions concerning the construction, validity, interpretation and enforceability of this Amendment and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflict of law rules or provisions (whether of the Commonwealth of Pennsylvania or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. -2- IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. INTEGRATED CIRCUIT SYSTEMS, INC. By:___________________________________ Name: Hock E. Tan Its: President and Chief Executive Officer -3- BAIN STOCKHOLDERS: - ----------------- BAIN CAPITAL FUND VI, L.P. BCIP ASSOCIATES II-C By: Bain Capital Partners VI, L.P. By: /s/ Michael Krupka Its: General Partner ----------------------- Name: Michael Krupka By: Bain Capital Investors VI, Inc. Its: Managing Director Its: General Partner By: /s/ Michael Krupka ----------------------- Name: Michael Krupka Its: Managing Director PEP INVESTMENTS PTY LTD. BCIP TRUST ASSOCIATES II By: /s/ Michael Krupka ----------------------- Name: Michael Krupka By: /s/ Michael Krupka Its: Managing Director ----------------------- Name: Michael Krupka Its: Managing Director RANDOLPH STREET PARTNERS II BCIP TRUST ASSOCIATES II-B By:_____________________________ Name: Its: By: /s/ Michael Krupka ----------------------- Name: Michael Krupka RANDOLPH STREET PARTNERS 1998 Its: Managing Director DIF, L.L.C. BCIP ASSOCIATES II By:_____________________________ Name: Its: By: Name: Michael Krupka Its: Managing Director BCIP ASSOCIATES II-B By: /s/ Michael Krupka ----------------------- Name: Michael Krupka Its: Managing Director -4- BEAR STEARNS STOCKHOLDER: ------------------------ ICST ACQUISITION CORP. By: /s/ Bodil Arlander ------------------- Name: Bodil Arlander Its: Vice President -5- FIRST BOSTON STOCKHOLDER: ------------------------ INTEGRATED CIRCUIT SYSTEMS EQUITY INVESTORS, L.L.C. By:_________________________________ Name: Its: INTEL STOCKHOLDER: ----------------- INTEL CORPORATION By: /s/ Arvind Sodhni --------------------------------- Name: Arvind Sodhni Its: Vice President and Treasurer SCHEDULE I ---------- Bain Stockholders ----------------- Bain Capital Fund VI, L.P. BCIP Associates II BCIP Trust Associates II BCIP Associates II-B BCIP Trust Associates II-B BCIP Associates II-C PEP Investments PTY Ltd. Randolph Street Partners II Randolph Street Partners 1998 DIF, L.L.C. SCHEDULE II ----------- Bear Stearns Stockholder ------------------------ ICST Acquisition Corp. SCHEDULE III ------------ First Boston Stockholder ------------------------ Integrated Circuit Systems Equity Investors, L.L.C. SCHEDULE IV ----------- Intel Stockholder ----------------- Intel Corporation EXHIBIT A --------- [Confidentiality Agreement entered into with Intel] EX-10.17 9 AMENDMENT #1 TO REGISTRATION AGREEMENT EXHIBIT C AMENDMENT NO. 1 TO REGISTRATION AGREEMENT ----------------------------------------- THIS AMENDMENT NO. 1 TO REGISTRATION AGREEMENT ("Amendment No. 1") is --------------- made and entered into as of December 29, 1999, by and among Integrated Circuit Systems, Inc., a Pennsylvania corporation (the "Company"), each of the Persons ------- listed on Schedule I attached hereto (the "Bain Stockholders"), each of the ----------------- Persons listed on Schedule II attached hereto (the "Bear Stearns Stockholders") ------------------------- and each of the Persons listed on Schedule V attached hereto (the "Intel ----- Stockholders"). - ------------ All of the Stockholders other than the Intel Stockholder are parties to that certain Registration Agreement dated as of May 11, 1999 (the "Original -------- Agreement"). Pursuant to a Series A Cumulative Convertible Preferred Stock - --------- Purchase Agreement dated December 23, 1999 between the Company and Intel Corporation (the Purchase Agreement"), the Company has agreed to sell to Intel ------------------ Corporation, and Intel Corporation has agreed to purchase from the Company, certain shares of the Company's Series A Cumulative Convertible Preferred Stock (the "Preferred Stock"). Pursuant to the Purchase Agreement, the Company has --------------- agreed to provide certain registration rights to the Intel Stockholders, as more particularly set forth in this Amendment. The parties hereto, intending to be legally bound, hereby agree as follows: 1. Amendment to Original Agreement. This Amendment constitutes an ------------------------------- amendment to the Original Agreement. The Original Agreement, as amended by this Amendment, is herein referred to as the "Agreement." Except as specifically amended pursuant to the terms of this Amendment, all of the terms of the Original Agreement shall continue in full force and effect. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in paragraph 9 of the Agreement. 2. Demand Registrations. Paragraphs (a), (b), (c) and (g) of Section -------------------- 1 of the Original Agreement are hereby amended to read in full as follows: 1. Demand Registrations. (a) Requests for Registration. At any time after the date ------------------------- hereof and prior to an IPO, the holders of a majority of the Class A Common (excluding any shares of Class A Common issued upon conversion of Preferred Stock) may request, and at any time after an IPO, subject to the limitations set forth in Section 1(b) and 1(c) hereof, the holders of a majority of the Bain Registrable Securities, the holders of a majority of the Intel Registrable Securities or the holders of a majority of Bear Stearns Registrable Securities may request a registration (a "Demand") ------ under the Securities Act of all or part of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registrations") or, if available, on ----------------------- Form S-2 or S-3 (including pursuant to Rule 415 under the Securities Act) or any similar short-form registration ("Short- ------- Form Registrations"). Each Demand shall specify the approximate ------------------ number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within ten (10) days after receipt of any Demand, the Company will give written notice of such requested registration to all other holders of Registrable Securities and, subject to paragraph 1(d) below, will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within fifteen (15) days after the receipt of the Company's notice. All registrations requested pursuant to this paragraph 1(a) are referred to herein as "Demand Registrations." -------------------- (b) Long-Form Registrations. The holders of a majority of the ----------------------- Bain Registrable Securities will be entitled to request (i) three Long-Form Registrations in which the Company will pay all Registration Expenses and (ii) any other number of Long-Form Registrations in which Registration Expenses will be paid in accordance with Section 5(c) hereof. Each of the following groups ------------ will be entitled to request one Long-Form Registration in which the Company will pay all Registration Expenses: (i) the holders of a majority of the Intel Registrable Securities and (ii) the holders of a majority of the Bear Stearns Registrable Securities. A registration shall not count as one of the permitted Long-Form Registrations until it has become effective and the holders of Registrable Securities initially requesting the Long-Form Registration are able to register and sell at least 95% of the Registrable Securities requested to be included in such registration by such holders; provided that in any event the -------- Company will pay all Registration Expenses in connection with any registration initiated as a Long-Form Registration whether or not it has become effective and whether or not such registration has counted as one of the permitted Long-Form Registrations. Long-Form Registrations may be underwritten or non-underwritten registrations. (c) Short-Form Registrations. In addition to the Long-Form ------------------------ Registrations provided pursuant to Section 1(b): (i) holders of a ------------ majority of Bain Registrable Securities will be entitled to request unlimited Short-Form Registrations in which the Company will pay all Registration Expenses; and (ii) each of the following groups will be entitled to request three Short-Form -2- Registrations (to be filed no more frequently than one in any six- month period) in which the Company will pay all Registration Expenses: (1) the holders of a majority of Intel Registrable Securities and (2) the holders of a majority of the Bear Stearns Registrable Securities. Notwithstanding anything contained herein to the contrary, Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form. After the Company has become subject to the reporting requirements of the Securities Exchange Act, the Company will use its best efforts to make Short-Form Registrations available for the sale of Registrable Securities. (d) Priority on Demand Registrations. The Company will not -------------------------------- include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of a majority of the Bain Registrable Securities or, in the case where the holders of Intel Registrable Securities or Bear Stearns Registrable Securities have made a Demand pursuant to Section 1, the holders of a majority of Intel Registrable Securities or Bear Stearns Registrable Securities, respectively. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing (with a copy to each party hereto requesting registration of Registrable Securities) that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration prior to the inclusion of any securities which are not Registrable Securities: (i) subject to the proviso set forth below, not less than 20% of the securities requested to be registered by the holders requesting such Demand Registration, (ii) the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold without adversely affecting the marketability of the offering, (1) subject to the proviso set forth below, first pro rata among the respective holders requesting such Demand Registration under Section 1(a), and then (2) to the extent that any additional Registrable Securities can still be included, pro rata among the respective holders of the remaining Registrable Securities on the basis of the amount of Registrable Securities owned by each such holder and then (3) to the extent that any securities which are not Registrable Securities can still be -3- included, pro rata among the respective holders thereof on the basis of the amount of such securities owned by each such holder; provided, however, that the priorities set forth in clauses (i) and (ii)(1) set forth above shall not apply if holders of Registrable Securities making the Demand have registered any Registrable Securities in the six months preceding the date of the Demand. Any Persons other than holders of Registrable Securities who participate in Demand Registrations which are not at the Company's expense, if any, must pay their share of the Registration Expenses as provided in Section 5 hereof. --------- * * * * * (g) Selection of Underwriters. The holders of a majority of ------------------------- the Bain Registrable Securities or, in the case where the holders of Intel Registrable Securities have requested the Demand Registration pursuant to Section 1, the holders of a majority of Intel Registrable Securities, or, in the case where the holders of Bear Stearns Registrable Securities have requested the Demand Registration pursuant to Section 1, the holders of a majority of Bear Stearns Registrable Securities, will have the right to select the investment banker(s) and manager(s) to administer the offering." 3. Restrictions on Demand Registrations. Paragraph (e) of Section 1 ------------------------------------ of the Original Agreement is hereby amended by replacing the words "six months" in the second sentence thereof with the words "90 days" and by adding the following to the end of the first sentence thereof: "provided, further that the -------- ------- Company may postpone the filing or effectiveness of a registration statement in accordance with this Section 3 no more than 90 days in any 12-month period." 4. Holdback Agreements. Paragraph (a) of Section 3 of the Original ------------------- Agreement is hereby amended to read in full as follows: "3. Holdback Agreements. (a) Notwithstanding anything else in this Agreement to the contrary (but subject to the proviso in the last sentence of this paragraph 3(a)), to the extent not inconsistent with applicable law, each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities, options or rights convertible into or exchangeable or exercisable for such securities during the period (the "LockUp Period") that ------------- is agreed to with respect to such holder by the -4- underwriter managing the registered public offering and the Company, with the consent of the holders of a majority of the Bain Registrable Securities (in the case of a Piggyback Registration) or the underwriter managing the registered public offering and the holders of a majority of the Bain Registrable Securities included in such registration (in the case of a Demand Registration); provided that the LockUp Period shall not be more restrictive upon the holders of Intel Registrable Securities or Bear Stearns Registrable Securities than upon the holders of Bain Registrable Securities. The LockUp Period may include a period before and a period after the effective date of any (i) underwritten Demand Registration (except as part of such underwritten registration), or (ii) underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations of Form S-4 or Form S-8 or any successor form); provided that the portion of the LockUp Period following the effective date of any registration shall in no event exceed the 180-day period following such effective date; and further provided that with respect to any holders of Intel Registrable Securities or Bear Stearns Registrable Securities, after a Qualified Initial Public Offering has taken place, the holders of Intel Registrable Securities and Bear Stearns Registrable Securities shall be subject to a LockUp Period with respect to such Intel Registrable Securities and Bear Stearns Registrable Securities only if: (x) such holders offer securities in the registration that is the subject of such LockUp Period, (y) officers and directors of the Company enter into holdback agreements providing for restrictions during the LockUp Period that are no less restrictive than those that are applicable to such holders, and (z) the portion of the LockUp Period following the effective date of such registration does not exceed the 90-day period following such effective date." 5. Definitions. Section 9 of the Original Agreement is hereby ----------- amended by amending the defined terms in the Agreement that are set forth below and by adding definitions for the terms "Intel Registrable Securities" and "Qualified Initial Public Offering," as follows: "Group" means each of the Bain Stockholders, the Bear ----- Stearns Stockholders, the Executive Stockholders, the Intel Stockholders and the holders of Other Registrable Securities. "Intel Registrable Securities" means (i) any shares of ---------------------------- Common Stock issuable upon conversion of Preferred Stock; and (ii) any shares of Common Stock issued or -5- issuable directly or indirectly with respect to the securities referred to in clause (i) by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, including a recapitalization or exchange; provided that in the event that -------- pursuant to such recapitalization or exchange, Non-Participating Securities are issued, such Non-Participating Securities will not be Registrable Securities. "IPO" means the initial sale of Common Stock to the public --- pursuant to an underwritten offering registered under the Securities Act. "Qualified Initial Public Offering" shall have the meaning --------------------------------- given in the Stockholders Agreement. "Other Registrable Securities" means any shares of Common ---------------------------- Stock held by Other Stockholders or other Persons that are a party to this Agreement that are of the same class and type as Bain Registrable Securities but that do not constitute Bain Registrable Securities, Bear Stearns Registrable Securities, Intel Registrable Securities or Executive Stockholder Registrable Securities. "Preferred Stock" means any capital stock of the Company --------------- having a preference over the Common Stock as to dividends or assets or both and that is convertible into Common Stock. "Registrable Securities" means collectively the Bain ---------------------- Registrable Securities, Bear Stearns Registrable Securities, Intel Registrable Securities, Executive Stockholder Registrable Securities and Other Registrable Securities. For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and, except as set forth in the definition of "Executive Stockholder Registrable Securities", such Person shall be entitled to exercise the rights of a holder of Registrable Securities hereunder. As to any particular shares constituting Registrable Securities, such shares will cease to be Registrable Securities when they have been (x) effectively registered under the Securities Act and disposed of in -6- accordance with the registration statement covering them, or (y) sold to the public through a broker, dealer or market maker pursuant to Rule 144 (or by similar provision then in force) under the Securities Act. All other defined terms set forth in Section 9 of the Original Agreement that are not amended as set forth in this Section 5 shall remain in full force and effect. 6. Miscellaneous. (a) The provisions of paragraphs (d), (f), (g), (h), (i) and (j) of Section 10 of the Original Agreement are incorporated by reference herein as if set forth in full in this Amendment. (b) Paragraph (e) of Section 10 of the Original Agreement is hereby amended to read in full as follows: "(e) Additional Parties. The Board of Directors of the ------------------ Company shall be entitled, but not obligated, with the consent of Person(s) holding at least a majority of the Bain Registrable Securities, to allow any purchaser of equity securities (or securities or rights convertible or exercisable into equity securities), of the same type and class of the Registrable Securities, to execute a counterpart to this Agreement and become a party hereto (each, an "Additional Party"), in which case the ---------------- equity securities issued or issuable to any such Additional Party shall be deemed a holder of "Executive Stockholder Registrable Securities," "Bain Registrable Securities", "Bear Stearns Registrable Securities," "Intel Registrable Securities" or "Other Registrable Securities," as the case may be, in accordance with the definitions thereof; provided, however, that if -------- ------- allowing such Person to become an Additional Party shall adversely affect any Group in a manner adversely different than any other Group, no such Person shall become an Additional Party without the prior written consent of such Group adversely affected thereby (with it being understood that if the admission of an Additional Party is adversely different to the holders of Bear Stearns Registrable Securities or otherwise reduces or diminishes any rights applicable to the holders of Bear Stearns Registrable Securities without reducing or diminishing the same rights applicable to the holders of Bain Registrable Securities in the same manner, such admission shall require the consent of the holders of a majority of the Bear Stearns Registrable Securities). Except as set forth in this Section 10(e), the Company will not grant to any other Persons any registration rights." -7- (c) The obligations of the parties hereto with respect to Intel Registrable Securities, and any rights of the holders of Intel Registrable Securities set forth herein, shall expire, to the extent not earlier terminated or expired, on the seventh anniversary of the first issuance of a share of Preferred Stock. (d) Paragraph (c) of Section 2 of the Original Agreement is hereby amended by replacing the word "os" in the last sentence thereof with the word "of." -8- IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. INTEGRATED CIRCUIT SYSTEMS, INC. By: /S/ HOCK E. TAN --------------------------------------- Name: Hock E. Tan Its: President and Chief Executive Officer INTEL CORPORATION By: /S/ Arvind Sodhni --------------------------------------- Name: Arvind Sodhni Its: Vice President and Teasurer -9- BAIN STOCKHOLDERS: - -------------------- BAIN CAPITAL FUND VI, L.P. BCIP ASSOCIATES II-B By: Bain Capital Partners VI, L.P. By:/S/ MICHAEL KRUPKA Its: General Partner ---------------------------------- Name: Michael Krupka Its: Managing Director By: Bain Capital Investors VI, Inc. Its: General Partner By: /S/ MICHAEL KRUPKA BCIP ASSOCIATES II-C --------------------------------- Name: Michael Krupka Its: Managing Director By: /S/ MICHAEL KRUPKA ------------------------------- Name: Michael Krupka BCIP TRUST ASSOCIATES II Its: Managing Director By: /S/ MICHAEL KRUPKA PEP INVESTMENTS PTY LTD. --------------------------------- Name: Michael Krupka Its: Managing Director By: /S/ MICHAEL KRUPKA -------------------------------- Name: Michael Krupka BCIP TRUST ASSOCIATES II-B Its: Managing Director By: /S/ MICHAEL KRUPKA RANDOLPH STREET PARTNERS II --------------------------------- Name: Michael Krupka Its: Managing Director By:________________________________ Name: BCIP ASSOCIATES II Its: By: /S/ MICHAEL KRUPKA RANDOLPH STREET PARTNERS 1998 --------------------------------- Name: Michael Krupka DIF, L.L.C. Its: Managing Director By:_______________________________ Name: Its: -10- BEAR STEARNS STOCKHOLDERS: ------------------------- ICST ACQUISITION CORP. By: /S/ Bodil Arlander ------------------------------ Name: Bodil Arlander Its: Vice President -11- Schedule I ---------- Bain Capital Fund VI, L.P. BCIP Trust Associates II BCIP Trust Associates II-B BCIP Associates II BCIP Associates II-B BCIP Associates II-C PEP Investments PTY Ltd. Randolph Street Partners II Randolph Street Partners 1998 DIF, L.L.C. -12- Schedule II ----------- ICST Acquisition Corp. -13- Schedule V ---------- Intel Corporation -14- EX-10.32 10 2000 LONG TERM EQUITY INCENTIVE PROGRAM EXHIBIT D INTEGRATED CIRCUIT SYSTEMS, INC. 2000 LONG-TERM EQUITY INCENTIVE PLAN 1. Purpose. This plan shall be known as the Integrated Circuit Systems, Inc. 2000 Long-Term Equity Incentive Plan (the "Plan"). The purpose of the Plan shall be to promote the long-term growth and profitability of Integrated Circuit Systems, Inc. (the "Company") and its Subsidiaries by (i) providing certain directors, officers and employees of, and certain other individuals who perform services for, or to whom an offer of employment has been extended by, the Company and its Subsidiaries with incentives to maximize shareholder value and otherwise contribute to the success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of responsibility. Grants of incentive or non-qualified stock options, stock appreciation rights ("SARs"), either alone or in tandem with options, restricted stock, performance awards, or any combination of the foregoing may be made under the Plan. 2. Definitions. (a) "Board of Directors" and "Board" mean the board of directors of the Company. (b) "Cause" means the occurrence of one or more of the following events: (i) conviction of a felony or any crime or offense lesser than a felony involving the property of the Company or a Subsidiary; or (ii) conduct that has caused demonstrable and serious injury to the Company or a Subsidiary, monetary or otherwise; or (iii) willful refusal to perform or substantial disregard of duties properly assigned, as determined by the Company; or (iv) breach of duty of loyalty to the Company or a Subsidiary or other act of fraud or dishonesty with respect to the Company or a Subsidiary. (c) "Change in Control" means the occurrence of one of the following events: (i) if any "person" or "group" as those terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successors thereto, other than an Exempt Person, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act or any successor thereto), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new directors whose election by the Board or nomination for election by the Company's shareholders was approved by at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election was previously so approved, cease for any reason to constitute a majority thereof; (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (A) which would result in all or a portion of the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) by which the corporate existence of the Company is not affected and following which the Company's chief executive officer and directors retain their positions with the Company (and constitute at least a majority of the Board); or (iv) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means the Compensation Committee of the Board, which shall consist solely of two or more members of the Board. (f) "Common Stock" means the common stock, par value $0.01 per share, of the Company, and any other shares into which such stock may be changed by reason of a recapitalization, reorganization, merger, consolidation or any other change in the corporate structure or capital stock of the Company. (g) "Competition" is deemed to occur if a person whose employment with the Company or its Subsidiaries has terminated obtains a position as a full-time or part-time employee of, as a member of the board of directors of, or as a consultant or advisor with or to, or acquires an ownership interest in excess of 5% of, a corporation, partnership, firm or other entity that engages in any of the businesses of the Company or any Subsidiary with which the person was involved in a management role at any time during his or her last five years of employment with or other service for the Company or any Subsidiaries. (h) "Disability" means a disability that would entitle an eligible participant to payment of monthly disability payments under any Company disability plan or as otherwise determined by the Committee. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. -2- (j) "Exempt Person" means any employee benefit plan of the Company or a trustee or other administrator or fiduciary holding securities under an employee benefit plan of the Company. (k) "Family Member" has the meaning given to such term in General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, and any successor thereto. (l) "Fair Market Value" of a share of Common Stock of the Company means, as of the date in question, the officially-quoted closing selling price of the stock (or if no selling price is quoted, the bid price) on the principal securities exchange on which the Common Stock is then listed for trading (including for this purpose the Nasdaq National Market) (the "Market") for the applicable trading day or, if the Common Stock is not then listed or quoted in the Market, the Fair Market Value shall be the fair value of the Common Stock determined in good faith by the Board; provided, however, that when shares received upon exercise of an option are immediately sold in the open market, the net sale price received may be used to determine the Fair Market Value of any shares used to pay the exercise price or applicable withholding taxes and to compute the withholding taxes. (m) "Incentive Stock Option" means an option conforming to the requirements of Section 422 of the Code and any successor thereto. (n) "Non-Employee Director" has the meaning given to such term in Rule 16b-3 under the Exchange Act and any successor thereto. (o) "Non-qualified Stock Option" means any stock option other than an Incentive Stock Option. (p) "Other Company Securities" mean securities of the Company other than Common Stock, which may include, without limitation, unbundled stock units or components thereof, debentures, preferred stock, warrants and securities convertible into or exchangeable for Common Stock or other property. (q) "Retirement" means retirement as defined under any Company pension plan or retirement program or termination of one's employment on retirement with the approval of the Committee. (r) "Subsidiary" means a corporation or other entity of which outstanding shares or ownership interests representing 50% or more of the combined voting power of such corporation or other entity entitled to elect the management thereof, or such lesser percentage as may be approved by the Committee, are owned directly or indirectly by the Company. 3. Administration. The Plan shall be administered by the Committee; provided that the Board may, in its discretion, at any time and from time to time, resolve to administer the Plan, in which case the -3- term "Committee" shall be deemed to mean the Board for all purposes herein. Subject to the provisions of the Plan, the Committee shall be authorized to (i) select persons to participate in the Plan, (ii) determine the form and substance of grants made under the Plan to each participant, and the conditions and restrictions, if any, subject to which such grants will be made, (iii) certify that the conditions and restrictions applicable to any grant have been met, (iv) modify the terms of grants made under the Plan, (v) interpret the Plan and grants made thereunder, (vi) make any adjustments necessary or desirable in connection with grants made under the Plan to eligible participants located outside the United States and (vii) adopt, amend, or rescind such rules and regulations, and make such other determinations, for carrying out the Plan as it may deem appropriate. Decisions of the Committee on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with applicable federal and state laws and rules and regulations promulgated pursuant thereto. No member of the Committee and no officer of the Company shall be liable for any action taken or omitted to be taken by such member, by any other member of the Committee or by any officer of the Company in connection with the performance of duties under the Plan, except for such person's own willful misconduct or as expressly provided by statute. The expenses of the Plan shall be borne by the Company. The Plan shall not be required to establish any special or separate fund or make any other segregation of assets to assume the payment of any award under the Plan, and rights to the payment of such awards shall be no greater than the rights of the Company's general creditors. 4. Shares Available for the Plan. Subject to adjustments as provided in Section 15, the number of shares of Common Stock (the "Shares") issuable pursuant to the Plan shall equal the sum of (a) 6,400,000 Shares, plus (b) any Shares returned to the Company's existing stock option plans (the "Existing Plans") as a result of termination of options under the Existing Plans, plus (c) an annual increase to be added on the date of each annual meeting of the shareholders of the Company, beginning with the 2000 annual meeting of the shareholders, equal to one percent (1.0%) of the outstanding Shares on such date or such lesser amount determined by the Board. Such Shares may be in whole or in part authorized and unissued or held by the Company as treasury shares. If any grant under the Plan expires or terminates unexercised, becomes unexercisable or is forfeited as to any Shares, or is tendered or withheld as to any shares in payment of the exercise price of the grant or the taxes payable with respect to the exercise, then such unpurchased, forfeited, tendered or withheld Shares shall thereafter be available for further grants under the Plan unless, in the case of options granted under the Plan, related SARs are exercised. Without limiting the generality of the foregoing provisions of this Section 4 or the generality of the provisions of Sections 3, 6 or 17 or any other section of this Plan, the Committee may, at any time or from time to time, and on such terms and conditions (that are consistent with and not in contravention of the other provisions of this Plan) as the Committee may, in its sole discretion, determine, enter into agreements (or take other actions with respect to the options) for new options containing terms (including exercise prices) more (or less) favorable than the outstanding options. -4- 5. Participation. (a) Participation in the Plan shall be limited to those directors (including Non-Employee Directors), officers (including non-employee officers) and employees of, and other individuals performing services for, or to whom an offer of employment has been extended by, the Company and its Subsidiaries selected by the Committee (including participants located outside the United States). Nothing in the Plan or in any grant thereunder shall confer any right on a participant to continue in the employ as a director or officer of or in the performance of services for the Company or shall interfere in any way with the right of the Company to terminate the employment or performance of services or to reduce the compensation or responsibilities of a participant at any time. By accepting any award under the Plan, each participant and each person claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee. Incentive Stock Options or Non-qualified Stock Options, SARs alone or in tandem with options, restricted stock awards, performance awards, or any combination thereof, may be granted to such persons and for such number of Shares as the Committee shall determine (such individuals to whom grants are made being sometimes herein called "optionees" or "grantees," as the case may be). Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such individuals are similarly situated. A grant of any type made hereunder in any one year to an eligible participant shall neither guarantee nor preclude a further grant of that or any other type to such participant in that year or subsequent years. (b) On the first business day immediately following the date that an individual is first elected or appointed to serve as a Non-Employee Director (other than Non-Employee Directors affiliated with any shareholder of the Company beneficially owning 10% or more of the Company's outstanding common stock), such Non-Employee Director shall be granted an option to purchase 12,000 Shares (the "Initial Options"). Thereafter, each year on the first business day immediately following the date of the Company's annual meeting of shareholders, each individual reelected or continuing as a Non-Employee Director shall automatically receive an option to acquire 8,000 Shares (the "Annual Options"). Except as set forth herein, each Non-Employee Director who receives options under the Plan must continue as a Non-Employee Director for one year from the date of grant of the Initial Options and six months from the date of grant of the Annual Options in order to exercise any options granted hereby. Each Initial Option will vest and be exercisable as to [_____] Shares on the first anniversary of grant and [_____] additional shares beginning on the first day of each three-month period commencing on the date three months after the first anniversary of the date of grant. The right to exercise an Initial Option will expire on the fifth anniversary of the date on which the option was granted. Once an installment of an Initial Option has become exercisable, such installment may be exercised in whole at any time or in part from time to time until the expiration of the option, whether or not any option granted previously remains outstanding at the time of such exercise. Each Annual Option will vest and be exercisable, on a cumulative basis, as to [____] shares beginning six months from the date of grant, [____] additional shares beginning nine months from the date of grant and [____] additional shares beginning on the first anniversary of the date of grant. -5- The right to exercise an Annual Option will expire on the fifth anniversary of the date on which the option was granted. Once an Annual Option has become exercisable, it may be exercised in whole at any time or in part from time to time until the expiration of the option, whether or not any option granted previously to the optionee remains outstanding at the time of such exercise. 6. Incentive and Non-qualified Options and SARs. The Committee may from time to time grant to eligible participants Incentive Stock Options, Non-qualified Stock Options, or any combination thereof; provided that the Committee may grant Incentive Stock Options only to eligible employees of the Company or its subsidiaries (as defined for this purpose in Section 424(f) of the Code or any successor thereto). In any one calendar year, the Committee shall not grant to any one participant options or SARs to purchase a number of shares of Common Stock in excess of __% of the total number of Shares authorized under the Plan pursuant to Section 4. The options granted shall take such form as the Committee shall determine, subject to the following terms and conditions. It is the Company's intent that Non-qualified Stock Options granted under the Plan not be classified as Incentive Stock Options, that Incentive Stock Options be consistent with and contain or be deemed to contain all provisions required under Section 422 of the Code and any successor thereto, and that any ambiguities in construction be interpreted in order to effectuate such intent. If an Incentive Stock Option granted under the Plan does not qualify as such for any reason, then to the extent of such non-qualification, the stock option represented thereby shall be regarded as a Non-qualified Stock Option duly granted under the Plan, provided that such stock option otherwise meets the Plan's requirements for Non-qualified Stock Options. (a) Price. The price per Share deliverable upon the exercise of each option ("exercise price") shall be established by the Committee, except that in the case of the grant of any Option, the exercise price may not be less than 50% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, and in the case of the grant of any Incentive Stock Option to an employee who, at the time of the grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the exercise price may not be less than 110% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, in each case unless otherwise permitted by Section 422 of the Code or any successor thereto. (b) Payment. Options may be exercised, in whole or in part, upon payment of the exercise price of the Shares to be acquired. Unless otherwise determined by the Committee, payment shall be made (i) in cash (including check, bank draft, money order or wire transfer of immediately available funds), (ii) by delivery of outstanding shares of Common Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price payable with respect to the options' exercise, (iii) by simultaneous sale through a broker reasonably acceptable to the Committee of Shares acquired on exercise, as permitted under Regulation T of the Federal Reserve Board, (iv) by authorizing the Company to withhold from issuance a number of Shares issuable upon exercise of the options which, when multiplied by the Fair Market Value of a share of Common Stock on the date of exercise, is equal to the aggregate exercise price payable with respect to the options so -6- exercised or (v) by any combination of the foregoing. Options may also be exercised upon payment of the exercise price of the Shares to be acquired by delivery of the optionee's promissory note, but only to the extent specifically approved by and in accordance with the policies of the Committee. In the event a grantee elects to pay the exercise price payable with respect to an option pursuant to clause (ii) above, (A) only a whole number of share(s) of Common Stock (and not fractional shares of Common Stock) may be tendered in payment, (B) such grantee must present evidence acceptable to the Company that he or she has owned any such shares of Common Stock tendered in payment of the exercise price (and that such tendered shares of Common Stock have not been subject to any substantial risk of forfeiture) for at least six months prior to the date of exercise, and (C) Common Stock must be delivered to the Company. Delivery for this purpose may, at the election of the grantee, be made either by (A) physical delivery of the certificate(s) for all such shares of Common Stock tendered in payment of the price, accompanied by duly executed instruments of transfer in a form acceptable to the Company, or (B) direction to the grantee's broker to transfer, by book entry, of such shares of Common Stock from a brokerage account of the grantee to a brokerage account specified by the Company. When payment of the exercise price is made by delivery of Common Stock, the difference, if any, between the aggregate exercise price payable with respect to the option being exercised and the Fair Market Value of the shares of Common Stock tendered in payment (plus any applicable taxes) shall be paid in cash. No grantee may tender shares of Common Stock having a Fair Market Value exceeding the aggregate exercise price payable with respect to the option being exercised (plus any applicable taxes). In the event a grantee elects to pay the exercise price payable with respect to an option pursuant to clause (iv) above, (A) only a whole number of Share(s) (and not fractional Shares) may be withheld in payment and (B) such grantee must present evidence acceptable to the Company that he or she has owned a number of shares of Common Stock at least equal to the number of Shares to be withheld in payment of the exercise price (and that such owned shares of Common Stock have not been subject to any substantial risk of forfeiture) for at least six months prior to the date of exercise. When payment of the exercise price is made by withholding of Shares, the difference, if any, between the aggregate exercise price payable with respect to the option being exercised and the Fair Market Value of the Shares withheld in payment (plus any applicable taxes) shall be paid in cash. No grantee may authorize the withholding of Shares having a Fair Market Value exceeding the aggregate exercise price payable with respect to the option being exercised (plus any applicable taxes). Any withheld Shares shall no longer be issuable under such option (except pursuant to any Reload Option (as defined below) with respect to any such withheld Shares). (c) Terms of Options. The term during which each option may be exercised shall be determined by the Committee, but if required by the Code and except as otherwise provided herein, no option shall be exercisable in whole or in part more than ten years from the date it is granted, and no Incentive Stock Option granted to an employee who at the time of the grant owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries shall be exercisable more than five years from the date it is granted. All rights to purchase Shares pursuant to an option shall, unless sooner terminated, expire at the date designated by the Committee. The Committee shall determine the date on which each option shall become exercisable and may provide that an option shall become exercisable in installments. The Shares -7- constituting each installment may be purchased in whole or in part at any time after such installment becomes exercisable, subject to such minimum exercise requirements as may be designated by the Committee. Prior to the exercise of an option and delivery of the Shares represented thereby, the optionee shall have no rights as a shareholder with respect to any Shares covered by such outstanding option (including any dividend or voting rights). (d) Limitations on Grants. If required by the Code, the aggregate Fair Market Value (determined as of the grant date) of Shares for which an Incentive Stock Option is exercisable for the first time during any calendar year under all equity incentive plans of the Company and its Subsidiaries (as defined in Section 422 of the Code or any successor thereto) may not exceed $100,000. (e) Termination; Forfeiture. (i) Death or Disability. If a participant ceases to be a director, officer or employee of, or to perform other services for, the Company and any Subsidiary due to death or Disability, all of the participant's options and SARs that were exercisable on the date of Retirement shall remain exercisable for, and shall otherwise terminate at the end of, a period of 180 days from the date of such death or Disability, but in no event after the expiration date of the options or SARs; provided that the participant does not engage in Competition during such 180-day period unless he or she received written consent to do so from the Board or the Committee. Notwithstanding the foregoing, if the Disability giving rise to the termination of employment is not within the meaning of Section 22(e)(3) of the Code or any successor thereto, Incentive Stock Options not exercised by such participant within 90 days after the date of termination of employment will cease to qualify as Incentive Stock Options and will be treated as Non-qualified Stock Options under the Plan if required to be so treated under the Code. (ii) Retirement. If a participant ceases to be a director, officer or employee of, or to perform other services for, the Company and any Subsidiary upon the occurrence of his or her Retirement, (A) all of the participant's options and SARs that were exercisable on the date of Retirement shall remain exercisable for, and shall otherwise terminate at the end of, a period of 90 days after the date of Retirement, but in no event after the expiration date of the options or SARs; provided that the participant does not engage in Competition during such 90-day period unless he or she receives written consent to do so from the Board or the Committee, and (B) all of the participant's options and SARs that were not exercisable on the date of Retirement shall be forfeited immediately upon such Retirement; provided, however, that such options and SARs may become fully vested and exercisable in the discretion of the Committee. (iii) Discharge for Cause. If a participant ceases to be a director, officer or employee of, or to perform other services for, the Company or a Subsidiary due to Cause, or if a participant does not become a director, officer or employee of, or does not begin performing other services for, the Company or a Subsidiary for any reason, all of the participant's options and SARs shall expire and be forfeited immediately upon such cessation or non- commencement, whether or not then exercisable. -8- (iv) Other Termination. Unless otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company or a Subsidiary for any reason other than death, Disability, Retirement or Cause, (A) all of the participant's options and SARs that were exercisable on the date of such cessation shall remain exercisable for, and shall otherwise terminate at the end of, a period of 30 days after the date of such cessation, but in no event after the expiration date of the options or SARs; provided that the participant does not engage in Competition during such 30-day period unless he or she receives written consent to do so from the Board or the Committee, and (B) all of the participant's options and SARs that were not exercisable on the date of such cessation shall be forfeited immediately upon such cessation. (v) Change in Control. If there is a Change in Control of the Company and a participant is terminated as a director, officer or employee of, or from performing other services for, the Company or a subsidiary within one year after such Change in Control, all of the participant's options and SARs shall become fully vested and exercisable upon such termination and shall remain so until the expiration date of the options or SARS. In addition, the Compensation Committee shall have the authority to grant options that become fully vested and exercisable automatically upon a Change in Control, whether or not the grantee is subsequently terminated. (f) Forfeiture. If a participant exercises any of his or her options or SARs and, within one year thereafter, either (i) is terminated from the Company or a Subsidiary for any of the reasons specified in the definition of "Cause" set forth in Section 2(b)(i), (ii) or (iv), or (ii) engages in Competition without having received written consent to do so from the Board or the Committee, then the participant may, in the discretion of the Committee, be required to pay the Company the gain represented by the difference between the aggregate selling price of the Shares acquired upon the options' exercise (or, if the Shares were not then sold, their aggregate Fair Market Value on the date of exercise) and the aggregate exercise price of the options exercised (the "Option Gain"), without regard to any subsequent increase or decrease in the Fair Market Value of the Common Stock. In addition, the Company may, in its discretion, deduct from any payment of any kind (including salary or bonus) otherwise due to any such participant an amount equal to the Option Gain. (g) Grant of Reload Options. The Committee may provide (either at the time of grant or exercise of an option), in its discretion, for the grant to a grantee who exercises all or any portion of an option ("Exercised Options") and who pays all or part of such exercise price with shares of Common Stock, of an additional option (a "Reload Option") for a number of shares of Common Stock equal to the sum (the "Reload Number") of the number of shares of Common Stock tendered or withheld in payment of such exercise price for the Exercised Options plus, if so provided by the Committee, the number of shares of Common Stock, if any, tendered or withheld by the grantee or withheld by the Company in connection with the exercise of the Exercised Options to satisfy any federal, state or local tax withholding requirements. The terms of each Reload Option, including the date of its expiration and the terms and conditions of its exercisability and transferability, shall be the same as the terms of the Exercised Option to which it relates, except that (i) the grant date for each Reload Option shall be the date of exercise of the Exercised Option to -9- which it relates and (ii) the exercise price for each Reload Option shall be the Fair Market Value of the Common Stock on the grant date of the Reload Option. 7. Stock Appreciation Rights. The Committee shall have the authority to grant SARs under this Plan, either alone or to any optionee in tandem with options (either at the time of grant of the related option or thereafter by amendment to an outstanding option). SARs shall be subject to such terms and conditions as the Committee may specify. No SAR may be exercised unless the Fair Market Value of a share of Common Stock of the Company on the date of exercise exceeds the exercise price of the SAR or, in the case of SARs granted in tandem with options, any options to which the SARs correspond. Prior to the exercise of the SAR and delivery of the cash and/or Shares represented thereby, the participant shall have no rights as a shareholder with respect to Shares covered by such outstanding SAR (including any dividend or voting rights). SARs granted in tandem with options shall be exercisable only when, to the extent and on the conditions that any related option is exercisable. The exercise of an option shall result in an immediate forfeiture of any related SAR to the extent the option is exercised, and the exercise of an SAR shall cause an immediate forfeiture of any related option to the extent the SAR is exercised. Upon the exercise of an SAR, the participant shall be entitled to a distribution in an amount equal to the difference between the Fair Market Value of a share of Common Stock on the date of exercise and the exercise price of the SAR or, in the case of SARs granted in tandem with options, any option to which the SAR is related, multiplied by the number of Shares as to which the SAR is exercised. The Committee shall decide whether such distribution shall be in cash, in Shares having a Fair Market Value equal to such amount, in Other Company Securities having a Fair Market Value equal to such amount or in a combination thereof. All SARs will be exercised automatically on the last day prior to the expiration date of the SAR or, in the case of SARs granted in tandem with options, any related option, so long as the Fair Market Value of a share of Common Stock on that date exceeds the exercise price of the SAR or any related option, as applicable. An SAR granted in tandem with options shall expire at the same time as any related option expires and shall be transferable only when, and under the same conditions as, any related option is transferable. 8. Restricted Stock. The Committee may at any time and from time to time grant Shares of restricted stock under the Plan to such participants and in such amounts as it determines. Each grant of restricted stock shall specify the applicable restrictions on such Shares, the duration of such restrictions (which shall be at least six months except as otherwise determined by the Committee or provided in the third -10- paragraph of this Section 8), and the time or times at which such restrictions shall lapse with respect to all or a specified number of Shares that are part of the grant. The participant will be required to pay the Company the aggregate par value of any Shares of restricted stock (or such larger amount as the Board may determine based upon applicable law) within ten days of the date of grant, unless such Shares of restricted stock are treasury shares. Unless otherwise determined by the Committee, certificates representing Shares of restricted stock granted under the Plan will be held in escrow by the Company on the participant's behalf during any period of restriction thereon and will bear an appropriate legend specifying the applicable restrictions thereon, and the participant will be required to execute a blank stock power therefor. Except as otherwise provided by the Committee, during such period of restriction the participant shall have all of the rights of a holder of Common Stock, including but not limited to the rights to receive dividends and to vote, and any stock or other securities received as a distribution with respect to such participant=s restricted stock shall be subject to the same restrictions as then in effect for the restricted stock. Except as otherwise provided by the Committee, no restrictions on Shares shall lapse because of a Change in Control or the death, Disability or Retirement of any participant. At such time as a participant ceases to be, or in the event a participant does not become, a director, officer or employee of, or otherwise performing services for, the Company or its Subsidiaries for any other reason, all Shares of restricted stock granted to such participant on which the restrictions have not lapsed shall be immediately forfeited to the Company. 9. Performance Awards. Performance awards may be granted to participants at any time and from time to time as determined by the Committee. The Committee shall have complete discretion in determining the size and composition of performance awards granted to a participant and the appropriate period over which performance is to be measured (a "performance cycle"). Performance awards may include (i) specific dollar-value target awards (ii) performance units, the value of each such unit being determined by the Committee at the time of issuance, and/or (iii) performance Shares, the value of each such Share being equal to the Fair Market Value of a share of Common Stock. The value of each performance award may be fixed or it may be permitted to fluctuate based on a performance factor (e.g., return on equity) selected by the Committee. The Committee shall establish performance goals and objectives for each performance cycle on the basis of such criteria and objectives as the Committee may select from time to time, including, without limitation, the performance of the participant, the Company, one or more of its Subsidiaries or divisions or any combination of the foregoing. During any performance cycle, the Committee shall have the authority to adjust the performance goals and objectives for such cycle for such reasons as it deems equitable. The Committee shall determine the portion of each performance award that is earned by a participant on the basis of the Company's performance over the performance cycle in relation -11- to the performance goals for such cycle. The earned portion of a performance award may be paid out in Shares, cash, Other Company Securities, or any combination thereof, as the Committee may determine. A participant must be a director, officer or employee of, or otherwise perform services for, the Company or its Subsidiaries at the end of the performance cycle in order to be entitled to payment of a performance award issued in respect of such cycle; provided, however, that except as otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of, or to otherwise perform services for, the Company and its Subsidiaries upon his or her death, Retirement, or Disability prior to the end of the performance cycle, the participant shall earn a proportionate portion of the performance award based upon the elapsed portion of the performance cycle and the Company's performance over that portion of such cycle. In the event of a Change in Control, a participant shall earn no less than the portion of the performance award that the participant would have earned if the applicable performance cycle(s) had terminated as of the date of the Change in Control. 10. Withholding Taxes. (1) Participant Election. Unless otherwise determined by the Committee, a participant may elect to deliver shares of Common Stock (or have the Company withhold shares acquired upon exercise of an option or SAR or deliverable upon grant or vesting of restricted stock, as the case may be) to satisfy, in whole or in part, the amount the Company is required to withhold for taxes in connection with the exercise of an option or SAR or the delivery of restricted stock upon grant or vesting, as the case may be. Such election must be made on or before the date the amount of tax to be withheld is determined. Once made, the election shall be irrevocable. The fair market value of the shares to be withheld or delivered will be the Fair Market Value as of the date the amount of tax to be withheld is determined. In the event a participant elects to deliver or have the Company withhold shares of Common Stock pursuant to this Section 10(a), such delivery or withholding must be made subject to the conditions and pursuant to the procedures set forth in Section 6(b) with respect to the delivery or withholding of Common Stock in payment of the exercise price of options. (2) Company Requirement. The Company may require, as a condition to any grant or exercise under the Plan or to the delivery of certificates for Shares issued hereunder, that the grantee make provision for the payment to the Company, either pursuant to Section 10(a) or this Section 10(b), of federal, state or local taxes of any kind required by law to be withheld with respect to any grant or delivery of Shares. The Company, to the extent permitted or required by law, shall have the right to deduct from any payment of any kind (including salary or bonus) otherwise due to a grantee, an amount equal to any federal, state or local taxes of any kind required by law to be withheld with respect to any grant or delivery of Shares under the Plan. 11. Written Agreement; Vesting. Each employee to whom a grant is made under the Plan shall enter into a written agreement with the Company that shall contain such provisions, including without limitation vesting -12- requirements, consistent with the provisions of the Plan, as may be approved by the Committee. Unless the Committee determines otherwise and except as otherwise provided in Sections 6, 7, 8 and 9 in connection with a Change of Control or certain occurrences of termination, no grant under this Plan may be exercised, and no restrictions relating thereto may lapse, within six months of the date such grant is made. 12. Transferability. Unless the Committee determines otherwise, no option, SAR, performance award or restricted stock granted under the Plan shall be transferable by a participant other than by will or the laws of descent and distribution or to a participant's Family Member by gift or a qualified domestic relations order as defined by the Code. Unless the Committee determines otherwise, an option, SAR or performance award may be exercised only by the optionee or grantee thereof; by his or her Family Member if such person has acquired the option, SAR or performance award by gift or qualified domestic relations order; by his or her executor or administrator or any person to whom the Option is transferred by will or the laws of descent and distribution; or by his or her guardian or legal representative; provided that Incentive Stock Options may be exercised by any Family Member, guardian or legal representative only if permitted by the Code and any regulations thereunder. All provisions of this Plan shall in any event continue to apply to any option, SAR, performance award or restricted stock granted under the Plan and transferred as permitted by this Section 12, and any transferee of any such option, SAR, performance award or restricted stock shall be bound by all provisions of this Plan as and to the same extent as the applicable original grantee. 13. Listing, Registration and Qualification. If the Committee determines that the listing, registration or qualification upon any securities exchange or under any law of Shares subject to any option, SAR, performance award or restricted stock grant is necessary or desirable as a condition of, or in connection with, the granting of same or the issue or purchase of Shares thereunder, no such option or SAR may be exercised in whole or in part, no such performance award may be paid out, and no Shares may be issued, unless such listing, registration or qualification is effected free of any conditions not acceptable to the Committee. 14. Transfer of Employee. The transfer of an employee from the Company to a Subsidiary, from a Subsidiary to the Company, or from one Subsidiary to another shall not be considered a termination of employment; nor shall it be considered a termination of employment if an employee is placed on military or sick leave or such other leave of absence which is considered by the Committee as continuing intact the employment relationship. -13- 15. Adjustments. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of Shares or other property available for issuance under the Plan (including, without limitation, the total number of Shares available for issuance under the Plan pursuant to Section 4), in the number and kind of options, SARs, Shares or other property covered by grants previously made under the Plan, and in the exercise price of outstanding options and SARs. Any such adjustment shall be final, conclusive and binding for all purposes of the Plan. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation or in which a Change in Control is to occur, all of the Company's obligations regarding options, SARs, performance awards, and restricted stock that were granted hereunder and that are outstanding on the date of such event shall, on such terms as may be approved by the Committee prior to such event, be assumed by the surviving or continuing corporation or canceled in exchange for property (including cash). Without limitation of the foregoing, in connection with any transaction of the type specified by clause (iii) of the definition of a Change in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any or all outstanding options under the Plan in consideration for payment to the holders thereof of an amount equal to the portion of the consideration that would have been payable to such holders pursuant to such transaction if their options had been fully exercised immediately prior to such transaction, less the aggregate exercise price that would have been payable therefor, or (ii) if the amount that would have been payable to the option holders pursuant to such transaction if their options had been fully exercised immediately prior thereto would be equal to or less than the aggregate exercise price that would have been payable therefor, cancel any or all such options for no consideration or payment of any kind. Payment of any amount payable pursuant to the preceding sentence may be made in cash or, in the event that the consideration to be received in such transaction includes securities or other property, in cash and/or securities or other property in the Committee's discretion. 16. Amendment and Termination of the Plan. The Board of Directors or the Committee, without approval of the shareholders, may amend or terminate the Plan, except that no amendment shall become effective without prior approval of the shareholders of the Company if shareholder approval would be required by applicable law or regulations, including if required for continued compliance with the performance-based compensation exception of Section 162(m) of the Code or any successor thereto, under the provisions of Section 422 of the Code or any successor thereto, or by any listing requirement of the principal stock exchange on which the Common Stock is then listed. 17. Amendment or Substitution of Awards under the Plan. The terms of any outstanding award under the Plan may be amended from time to time by the Committee in its discretion in any manner that it deems appropriate (including, but not -14- limited to, acceleration of the date of exercise of any award and/or payments thereunder or of the date of lapse of restrictions on Shares); provided that, except as otherwise provided in Section 15, no such amendment shall adversely affect in a material manner any right of a participant under the award without his or her written consent. The Committee may, in its discretion, permit holders of awards under the Plan to surrender outstanding awards in order to exercise or realize rights under other awards, or in exchange for the grant of new awards, or require holders of awards to surrender outstanding awards as a condition precedent to the grant of new awards under the Plan. 18. Commencement Date; Termination Date. The date of commencement of the Plan shall be May __, 2000, subject to approval by the shareholders of the Company. If required by the Code, the Plan will also be subject to reapproval by the shareholders of the Company prior to the fifth anniversary of the date of commencement of this Plan. Unless previously terminated upon the adoption of a resolution of the Board terminating the Plan, the Plan shall terminate at the close of business on the tenth anniversary of the date of commencement of this Plan. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his or her written consent, under any grant of options or other incentives theretofore granted under the Plan. 19. Severability. Whenever possible, each provision of the Plan shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Plan is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of the Plan. 20. Governing Law. The Plan shall be governed by the corporate laws of the State of Pennsylvania, without giving effect to any choice of law provisions that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction. -15- EX-10.33 11 CUMULATIVE CONVERTIBLE PREFERRED STOCK PURCHASE AG EXHIBIT E - -------------------------------------------------------------------------------- SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT BETWEEN INTEL CORPORATION AND INTEGRATED CIRCUIT SYSTEMS, INC. Dated as of December 23, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- SECTION 1 - Authorization and Sale of the Preferred Stock.................. 2 1.1. Sale of the Preferred Stock.............................. 2 SECTION 2 - Closing Date; Delivery....................................... 2 2.1. Closing Date........................................... 2 2.2. Delivery............................................... 2 SECTION 3 - Representations and Warranties of the Company................ 2 3.1. Organization and Qualification; Subsidiaries........... 2 3.2. Capitalization; Subsidiaries........................... 3 3.3. Authority Relative to this Agreement................... 3 3.4. No Violation........................................... 4 3.5. Financial Statements................................... 4 3.6. Compliance with Applicable Laws........................ 5 3.7. Litigation............................................. 5 3.8. Certain Approvals...................................... 5 3.9. Employee Benefit Plans................................. 6 3.10. Taxes.................................................. 7 3.11. Environmental Matters.................................. 8 3.12. Absence of Certain Changes............................. 10 3.13. Brokers................................................ 11 3.14. Material Contracts..................................... 11 3.15. Issuance of Shares..................................... 12 3.16. Intellectual Property.................................. 12 3.17. Related Party Transactions............................. 13 3.18. Labor Relations and Employment......................... 14 3.19. Year 2000.............................................. 15 3.20. Real Estate............................................ 15 (a) Owned Properties................................. 15 (b) Leased Properties................................ 15 (c) Real Property Disclosure......................... 16 (d) No Proceedings................................... 16 (e) Condition and Operation of Improvements.......... 16 (f) Permits.......................................... 16
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Page ---- 3.21. Knowledge Qualification................................ 17 SECTION 4 - Representations and Warranties of Purchaser.................. 17 4.1. Organization........................................... 17 4.2. Authorization.......................................... 17 4.3. Experience............................................. 17 4.4. Investment............................................. 17 4.5. Rule 144............................................... 18 4.6. No Public Market....................................... 18 4.7. Access to Data......................................... 18 4.8. Brokers or Finders..................................... 18 SECTION 5 - Conditions to Closing of Purchaser........................... 18 5.1. Representations and Warranties Correct................. 18 5.2. Covenants.............................................. 19 5.3. Filing of Articles of Incorporation.................... 19 5.4. Ancillary Agreements................................... 19 5.5. Delivery of Preferred Shares........................... 19 5.6. Opinion of Company Counsel............................. 19 5.7. Addendum to Purchase Agreement......................... 19 5.8. Board and Shareholder Approval......................... 19 5.9. Good Standing Certificate.............................. 19 SECTION 6 - Conditions to Closing of Company............................. 20 6.1. Representations and Warranties Correct................. 20 6.2. Filing of Articles of Incorporation.................... 20 6.3. Ancillary Agreements................................... 20 6.4. Delivery of Purchase Price............................. 20 6.5. Addendum to Purchase Agreement......................... 20 6.6. Board and Shareholder Approval......................... 20 SECTION 7 - Affirmative Covenants of the Company......................... 20 7.1. Financial Information.................................. 20 7.2. Shareholder and Commission Reports..................... 21 SECTION 8 - Restrictions on Transferability of Securities; Registration Rights........................... 22
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Page ---- 8.1. Restrictions on Transfer............................... 22 8.2. Restrictive Legend..................................... 22 8.3. Notice of Proposed Transfers........................... 22 8.4. Required Registration and Notice....................... 23 SECTION 9 - Miscellaneous................................................ 23 9.1. Governing Law.......................................... 23 9.2. Counterparts; Telecopied Signatures.................... 23 9.3. Termination............................................ 23 9.4. Survival............................................... 23 9.5. Successors and Assigns................................. 24 9.6. Entire Agreement; Amendment............................ 24 9.7. Notices, etc........................................... 24 9.8. Expenses............................................... 25 9.9. Severability........................................... 25 9.10. Titles and Subtitles................................... 25
EXHIBITS - -------- A. Amended and Restated Articles of Incorporation B. Amendment No. 1 to Registration Agreement C. Amendment No. 1 to Stockholders Agreement D. Confidentiality Agreement E. Opinion of Company Counsel DISCLOSURE SCHEDULE - ------------------- -iii- SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT This Series A Cumulative Convertible Preferred Stock Purchase Agreement ("Agreement") is made this 23rd day of December, 1999, between INTEL CORPORATION, a Delaware corporation (the "Purchaser"), and INTEGRATED CIRCUIT SYSTEMS, INC., a Pennsylvania corporation (the "Company"). WHEREAS, The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933 (the "1933 Act") and Section 4(6) of the 1933 Act; WHEREAS, The Company's Board of Directors has authorized a new series of preferred stock, designated as its Series A Cumulative Convertible Preferred Stock (the "Preferred Stock"), having the rights and preferences set forth in the Amended and Restated Articles of Incorporation of Integrated Circuit Systems, Inc. attached hereto as Exhibit "A" (the "Articles of Incorporation"), and the Board and the Company's shareholders have approved the Articles of Incorporation; WHEREAS, The Preferred Stock is convertible into shares of Class A Common Stock, par value $.01 per share, of the Company and Class L Common Stock, par value $.01 per share, of the Company, upon the terms and subject to the conditions set forth in the Articles of Incorporation (the Common Stock into which the Preferred Stock is convertible being hereinafter referred to as the "Conversion Shares"); WHEREAS, The Purchaser desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, (i) an aggregate of Three Million Four Hundred Sixty Six Thousand Six Hundred Eights (3,366,670) shares of Preferred Stock (the "Preferred Shares"), having a stated value of Four Dollars ($4.00) per share, for an aggregate purchase price of Thirteen Million Four Hundred Sixty Six Thousand Six Hundred Eighty Dollars ($13,466,680) (the "Purchase Price"); WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering (1) Amendment No.1 to the Registration Agreement dated May 11, 1999 among the Company, Investment Stockholders specified therein, Executive Stockholders specified therein and Other Stockholders specified therein, in the form attached hereto as Exhibit "B" (the "Amended Registration Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws; (2) Amendment No.1 to the Stockholders Agreement dated May 11, 1999 among the Bain Stockholders, the Bear Stearns Stockholders and the FirstBoston Stockholder, in the form attached hereto as Exhibit "C" (the "Amended Stockholders Agreement"); and (3) a Confidentiality Agreement, in the form attached hereto as Exhibit "D" (the "Confidentiality Agreement"). NOW, THEREFORE, the parties agree as follows: SECTION 1 Authorization and Sale of the Preferred Stock 1.1 Sale of the Preferred Stock. Subject to the terms and conditions --------------------------- hereof, the Company will issue and sell to the Purchaser and the Purchaser will buy from the Company the Preferred Shares for the Purchase Price, payable via wire transfer of immediately available Federal funds to an account designated in writing by the Company at least one day prior to the Closing Date. SECTION 2 Closing Date; Delivery 2.1 Closing Date. The closing of the purchase and sale of the ------------ Preferred Shares hereunder (the "Closing") shall be held within two business days after the date of this Agreement or on such other date upon which the Company and the Purchaser shall agree (the date of the Closing is hereinafter referred to as the "Closing Date"). 2.2 Delivery. At the Closing, the Company will deliver to the -------- Purchaser duly executed certificates representing the Preferred Shares being purchased by Purchaser hereunder and the Purchaser will pay the Purchase Price in the manner specified in Section 2.1. SECTION 3 Representations and Warranties of the Company The Company hereby represents and warrants to the Purchaser as follows: 3.1 Organization and Qualification; Subsidiaries. The Company and -------------------------------------------- each of its Subsidiaries (as hereinafter defined) is a corporation duly organized, validly existing and in good standing under the laws of its state or jurisdiction of incorporation and has all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on -2- its business as now being conducted and is in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated, or the business conducted, by it require such qualification and where failure to be in good standing or to so qualify would have a Material Adverse Effect on the Company. The term "Material Adverse Effect on the Company," as used in this Agreement, means any effect, event, occurrence, change or state of facts that, individually or aggregated with other effects, events, occurrences, changes or states of facts, is, or is reasonably likely to be, materially adverse to (i) the assets, liabilities, business, property, operations, condition as a whole (financial or otherwise) of the Company and its Subsidiaries taken as a whole, or (ii) the ability of the Company to perform its obligations under this Agreement. The Company has heretofore made available to Purchaser a complete and correct copy of its Articles of Incorporation, as amended, and By-Laws. The following is a list of every corporation, limited liability company, partnership or other business organization or entity of which the Company owns either directly or through its Subsidiaries, (a) more than 50% of (i) the total combined voting power of all classes of voting securities of such entity, (ii) the total combined equity interests therein, or (iii) the capital or profit interests therein, in the case of a partnership; or (b) or otherwise has the power to vote or direct the voting of sufficient securities to elect a majority of the board of directors or similar governing body of such entity (the "Subsidiaries"): ICS Technologies, Inc., ICST, Inc., Integrated Circuit Systems PTE Ltd. and MicroClock, Inc. 3.2 Capitalization; Subsidiaries. Upon filing the Articles of ---------------------------- Incorporation with the Pennsylvania Department of State, the authorized capital stock of the Company will consist of 68,366,670 shares, including 3,366,670 shares of Preferred Stock, 31,000,000 shares of Class A Common Stock, 31,000,000 shares of Class B Common Stock and 4,000,000 shares of Class L Common Stock ("Common Stock"). As of the close of business on November 12, 1999, 15,612,588 shares of Class A Common Stock were issued and outstanding, 5,653,079 shares of Class B Common Stock were issued and outstanding and 2,362,852 shares of Class L Common Stock were issued and outstanding. Prior to the date of this Agreement, the Company had no shares of Preferred Stock authorized or issued and outstanding. Except for (i) 6,868,000 shares of Class A Common Stock and 137,000 shares of Class L Common Stock reserved for issuance pursuant to outstanding Options and rights granted under the Stock Plans, there are no existing options, warrants, calls, subscriptions, or other rights, or other agreements or commitments, obligating the Company to issue, transfer or sell any shares of capital stock of the Company or any of its Subsidiaries, other than in favor of the Company's senior secured lenders. All of the outstanding shares of capital stock of each of the Company's Subsidiaries have been validly issued and are fully paid and non-assessable. 3.3 Authority Relative to this Agreement. ------------------------------------ (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. Upon receipt of the Board of Directors and shareholder approval as contemplated by Section 5.8, -3- the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will have been duly and validly authorized by the Company Board and, to the extent necessary, the shareholders of the Company, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. Upon receipt of the Board of Directors and shareholder approval as contemplated by Section 5.8, this Agreement has been duly and validly executed and delivered by the Company, and, assuming this agreement constitutes a valid and binding obligation of Purchaser, this Agreement will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting the rights of creditors generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (b) Other than in connection with, or in compliance with, the provisions of the Pennsylvania Business Corporation Law of 1988 ("BCL") with respect to the transactions contemplated hereby, and federal and state securities laws, no authorization, consent or approval of, or filing with, any Governmental Entity (as hereinafter defined) is necessary for the consummation by the Company of the transactions contemplated by this Agreement. As used in this Agreement, the term "Governmental Entity" means any government or subdivision thereof, domestic, foreign or supranational or any administrative, governmental or regulatory authority, agency, commission, tribunal or body, domestic, foreign or supranational. 3.4 No Violation. Neither the execution or delivery of this ------------ Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) constitute a breach or violation of any provision of the Articles of Incorporation or By-Laws of the Company, (ii) violate any applicable law or other restriction of any governmental body or (iii) constitute a breach or violation of any obligation, agreement, covenant, consideration or condition contained in any indenture, mortgage, deed of trust, loan agreement, note, lease or other contract to which the Company is a party or by which it or any of its assets is subject. 3.5 Financial Statements. Since January 1, 1995, the Company has -------------------- filed all forms, reports and documents ("SEC Reports") with the SEC required to be filed by it pursuant to the federal securities laws and the SEC rules and regulations thereunder. Copies of all such SEC Reports have been made available to Purchaser by the Company or are publicly available on EDGAR. None of such SEC Reports (as of their respective filing dates) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading except as subsequently disclosed. The audited and unaudited consolidated financial statements of the Company included in the SEC Reports have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as otherwise stated in such financial statements, including the related notes) and -4- fairly present the financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the results of their operations and changes in financial position for the periods then ended, subject, in the case of the unaudited financial statements, to year-end audit adjustments. Except as set forth in the SEC Reports, at the date of the most recent audited financial statements of the Company included in the SEC Reports, neither the Company nor any of its Subsidiaries had, and since such date neither the Company nor any of such Subsidiaries has incurred, any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) which, individually or in the aggregate, would be required to be disclosed in a balance sheet of the Company prepared in accordance with generally accepted accounted principles except liabilities incurred in the ordinary and usual course of business and consistent with past practice, liabilities incurred in connection with the transactions contemplated by this Agreement, and liabilities that would not reasonably be expected to have a Material Adverse Effect on the Company. 3.6 Compliance with Applicable Laws. Except for matters relating to ------------------------------- Environmental Laws (which matters are covered in Section 3.12 hereof) or matters relating to real estate (which matters are covered in Section 3.20 hereof), (i) the Company and its Subsidiaries possess all permits, licenses, certifications and other governmental or regulatory authorizations and approvals necessary to enable the Company and its Subsidiaries to carry on their business as presently conducted except for such failures to have such permits, licenses, certifications or regulatory authorizations or approvals that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, and all such permits are valid, and in full force and effect and there exists no default thereunder and (ii) the operations of the Company and its Subsidiaries have been conducted in compliance with all laws, ordinances, regulations, judgments and decrees of any Governmental Entity applicable to the Company or such Subsidiary or by which it may be bound, except for possible violations which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. 3.7 Litigation. Except as set forth in the SEC Reports filed prior to ---------- the date of this Agreement or on Section 3.7 of the Disclosure Schedule, there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened, at law or in equity, or before any Governmental Entity, against the Company or any of its Subsidiaries, and the matters set forth on Section 3.7 of the Disclosure Schedule, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company or would reasonably be expected to prevent or materially delay the consummation of the transactions contemplated by this Agreement. Except as disclosed in the SEC Reports filed prior to the date of this Agreement or on Section 3.7 of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is subject to any outstanding order, writ, injunction or decree. 3.8 Certain Approvals. The Company Board has taken any and all ----------------- necessary and appropriate action to approve the transactions contemplated by this Agreement. -5- 3.9 Employee Benefit Plans. ---------------------- (a) Section 3.9 of the Disclosure Schedule includes a list of all material employee benefit plans and programs providing benefits to any employee or former employee of the Company and its Subsidiaries sponsored or maintained by the Company or any of its Subsidiaries or to which the Company or any of its Subsidiaries contributes or is obligated to contribute ("Plans"). Without limiting the generality of the foregoing, the term "Plans" includes all employee welfare benefit plans within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder ("ERISA"), and all employee pension benefit plans within the meaning of Section 3(2) of ERISA. (b) With respect to each Plan, the Company has made available to Purchaser a true, correct and complete copy of: (i) all plan documents, benefit schedules, trust agreements, and insurance contracts and other funding vehicles; (ii) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii) the current summary plan description, if any; (iv) the most recent annual financial report, if any; (v) the most recent actuarial report, if any; and (vi) the most recent determination letter from the United States Internal Revenue Service (the "IRS"), if any. (c) The Company and each of its Subsidiaries has complied, and is now in compliance, in all material respects with all provisions of ERISA, the Internal Revenue Code of 1986, as amended, including the Treasury Regulations thereunder (the "Code") and all laws and regulations applicable to the Plans. With respect to each Plan that is intended to be a "qualified plan" within the meaning of Section 401(a) of the Code ("Qualified Plans"),(i) such Plan is a Qualified Plan within the meaning of Section 401(a) of the Code, (ii) such Qualified Plans are within the remedial amendment period and (iii) the Company will submit such Qualified Plans to the IRS for a favorable determination letter within the remedial amendment period. (d) All contributions required to be made to any Plan by applicable law or regulation or by any plan document or other contractual undertaking, and all premiums due or payable with respect to insurance policies funding any Plan, for any period through the date hereof have been timely made or paid in full or, to the extent not required to be made or paid on or before the date hereof, have been fully reflected in the financial statements of the Company included in the SEC Reports to the extent required under generally accepted accounting principles. (e) No Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code. Without limiting the generality of the foregoing, no Plan is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a "Multiemployer Plan") or a plan that has two or more contributing sponsors at least two of whom are not under -6- common control, within the meaning of Section 4063 of ERISA and which is subject to Title IV of ERISA (a "Multiple Employer Plan"). (f) There does not now exist, nor do any circumstances exist that could result in, any material liability under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code, (iv) the continuation coverage requirements of section 601 et seq. of ERISA and Section 4980B of the Code, or (v) corresponding or similar provisions of foreign laws or regulations, other than a liability that arises solely out of, or relates solely to, the Plans, that would be a liability of the Company or any of its Subsidiaries following the Effective Time. Without limiting the generality of the foregoing, none of the Company, its Subsidiaries nor any ERISA Affiliate of the Company or any of its Subsidiaries has engaged in any transaction described in Section 4069 or Section 4204 or 4212 of ERISA. An "ERISA Affiliate" means any entity, trade or business that is a member of a group described in Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that includes the Company or any of its Subsidiaries, or that is a member of the same "controlled group" as the Company or any of its Subsidiaries, pursuant to Section 4001(a)(14) of ERISA. 3.10. Taxes. ----- (a) The Company and each of its Subsidiaries has timely filed all federal, state, local and foreign income Tax Returns (as hereinafter defined) required to be filed by it in all jurisdictions in which it is required to do so, and all other Tax Returns required to be filed by it, and such Tax Returns are true and complete, and the Company and each of its Subsidiaries has paid or caused to be paid all Taxes (as hereinafter defined) shown due on such Tax Returns and has made adequate provision in the Company's financial statements for payment of all Taxes that are not payable as of the date hereof or have not been paid, in respect of all taxable periods or portions thereof ending on or before the date hereof, except where the failure to so file or pay or make adequate provision would not, individually or in the aggregate, have a Material Adverse Effect on the Company. All Tax Returns for the Company in respect of all years not barred by the statute of limitations have heretofore been made available by the Company to Purchaser. There are no outstanding Agreements, waivers or requests for waivers extending the statutory period of limitation applicable to any Tax Return of the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries (i) has been a member of a group filing consolidated returns for federal income tax purposes (except for the group of which the Company is the common parent), (ii) is a party to or has any liability pursuant to a Tax sharing or Tax indemnity agreement or any other agreement of a similar nature that remains in effect or (iii) has any liability for the Taxes of any person (other than any of the Company or its Subsidiaries) under Treas. Reg. (S) 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. No claim has ever been made by a taxing authority in a jurisdiction where the Company or any of its Subsidiaries does not file Tax Returns that such person is or may be subject to taxation by such jurisdiction. None of the Company or its Subsidiaries will be required to include any item of income in, or exclude any -7- item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a taxable period ending on or prior to the Closing Date under Code (S) 481(c) (or any corresponding or similar provision of state, local or foreign income Tax law), (ii) "closing agreement" as described in Code (S) 7121 (or any corresponding or similar provision of state, local or foreign income Tax law) or (iii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Code Section 1502. None of the Company or its Subsidiaries is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payment" within the meaning of Code (S) 280G (or any corresponding provision of state, local or foreign income Tax law). (b) For purposes of this Agreement, the term "Taxes" means all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, property, sales, transfer, license, payroll, withholding, capital stock and franchise taxes, imposed by the United States or any state, local or foreign government or subdivision or agency thereof, including any interest, penalties or additions thereto. For purposes of this Agreement, the term "Tax Return" means any report, return or other information or document required to be supplied to a taxing authority in connection with Taxes. 3.11. Environmental Matters. --------------------- Except for such matters that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Company (other than the representation with respect to the matters described in paragraph (c) below, which is made without any Material Adverse Effect qualification): (a) with respect to the Business, the Company and its Subsidiaries have complied and are in compliance with all Environmental and Safety Requirements; (b) without limiting the generality of the foregoing, the Company and its Subsidiaries have obtained and complied with, and are in compliance with, all permits, licenses and other authorizations that may be required pursuant to Environmental and Safety Requirements for the occupation of their facilities and the operation of the Business and all such permits, licenses and authorizations may be relied upon for the lawful operation of the Business and such facilities on and after the Closing without transfer, reissuance or other governmental action; (c) neither the Company nor any Subsidiary has received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental and Safety Requirements, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial -8- or corrective obligations, relating to the Business or its past or current facilities and arising under Environmental and Safety Requirements; (d) none of the following exists at any property or facility owned or operated by the Company or any Subsidiary in connection with the Business: (i) underground storage tanks; (ii) asbestos-containing material in any form or condition; (iii) materials or equipment containing polychlorinated biphenyls; or (iv) landfills, surface impoundments, or disposal areas; (e) with respect to the Business, neither the Company nor any Subsidiary has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to liabilities, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, or any investigative, corrective or remedial obligations, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA") or the Solid Waste Disposal Act, as amended ("SWDA") or any other Environmental and Safety Requirements; (f) no facts, events or conditions relating to the past or present facilities, properties or operations of the Company, any Subsidiary, or any of their respective affiliates or predecessors the Business will prevent, hinder or limit continued compliance by the Business with Environmental and Safety Requirements, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental and Safety Requirements, or give rise to any other liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental and Safety Requirements, including without limitation any relating to onsite or offsite releases or threatened releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage; (g) neither this Agreement nor the consummation of the transaction that is the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called "transaction- triggered" or "responsible property transfer" Environmental and Safety Requirements; (h) with respect to the Business, neither the Company nor any Subsidiary has, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other person relating to Environmental and Safety Requirements; and -9- (i) for purposes of this Agreement, "Environmental and Safety Requirements" shall mean all federal, state, local and foreign statutes, regulations, ordinances and similar provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, as such of the foregoing are enacted or in effect, prior to, on, or after the Closing Date. 3.12. Absence of Certain Changes. Except as disclosed in the SEC -------------------------- Reports, since July 3, 1999, through the date of this Agreement the Company (a) has conducted its business only in the ordinary course consistent with past practice and (b) has not: (a) incurred any indebtedness for borrowed money, except borrowings from banks (or other financial institutions) necessary to meet ordinary course working capital requirements and to finance ordinary course capital expenditures; (b) mortgaged, pledged or subjected to any Lien, any asset or related group of assets having a net book value in excess of $500,000; (c) sold, leased, assigned or transferred any tangible asset or related group of assets having a net book value in excess of $500,000 except for the sale of inventory and obsolete or used machinery and equipment in the ordinary course of business consistent with past practice; (d) sold, leased, assigned or transferred any interest in real estate having a net book value in excess of $500,000; (e) sold, licensed, assigned or transferred any patents, trademarks, trade names, copyrights, trade secrets or other intangible assets having a fair market value in excess of $500,000 individually or in the aggregate; (f) waived or relinquished any right or claim or related group of rights or claims except any such item which the Company believes has a fair value of less than $500,000 individually or in the aggregate; (g) (x) issued or sold any of its Common Stock or other equity securities or any warrants, options or other rights to acquire its Common Stock or other securities of the Company except for the issuance of Common Stock upon exercise of Options outstanding -10- as of July 3, 1999, or (y) purchased or redeemed or agreed to purchase or redeem any Common Stock or other equity securities; (h) made or entered into binding commitment for any capital expenditures or related group of capital expenditures in excess of $2,500,000; (i) modified or amended in any material manner or terminated any Material Contract (as hereinafter defined) other than the termination of any such contract by its terms; (j) granted any increase in the base compensation of, or made any other material change in the employments terms for, any of its directors, officers, and employees other than normal periodic increases or changes reflecting or based upon changed responsibilities or duties made in the ordinary course of business consistent with past practice or changes made pursuant to any collective bargaining agreements or existing contracts; (k) adopted, modified, or terminated any bonus, profit- sharing, incentive, severance or other plan or contract for the benefit of any of its directors, officers, and employees, other than for changes which do not materially increase the aggregate cost of such plan or contract or which are required by law or a collective bargaining agreement; or (l) declared or paid any dividend or other distribution with respect to the Common Stock. 3.13. Brokers. None of the Company, any of its Subsidiaries, or any ------- of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. 3.14. Material Contracts. Except as set forth on Section 3.14 of the ------------------ Disclosure Schedule or filed as exhibits to the SEC Reports, neither the Company nor any of its Subsidiaries is a party to any: (i) collective bargaining agreement or contract with any labor union; (ii) bonus, pension, profit sharing, retirement or other form of deferred compensation plan; (iii) stock purchase, stock option, stock appreciation or similar plan; (iv) contract for the employment of any officer, individual employee or other person on a full-time or consulting basis involving an annual compensation commitment by the Company or a Subsidiary in excess of $200,000; (v) agreement or indenture relating to the borrowing of money in excess of $1,000,000 or to mortgaging, pledging or otherwise placing a Lien (other than a Permitted Lien (as defined herein)) on any material portion of the Company's assets; (vi) guaranty of any obligation for borrowed money in excess of $1,000,000; (vii) lease or agreement under which it is lessee of, or holds or operates any personal property owned by any other party, for which the annual rental exceeds $250,000, (viii) contract or group of related contracts with the same party for the -11- purchase of inventories, supplies or services, under which the undelivered balance of such inventories, supplies or services has a selling price in excess of $1,000,000; (ix) contract or group of related contracts with the same party for the sale of products or services under which the undelivered balance of such products or services has a sales price in excess of $1,000,000; (x) agreement pertaining to Intellectual Property (as hereinafter defined) including, license agreements or similar arrangements; or (xi) contract which prohibits or limits the Company or a Subsidiary from freely engaging in business in the United States or anywhere else in the world (all such contracts and agreements, "Material Contracts"). The Company has provided or made available to Purchaser (i) true and complete copies of all written Material Contracts, or (ii) with respect to such Material Contracts that have not been reduced to writing, a written description thereof, each of which is listed on Section 3.14 of the Disclosure Schedule. Neither the Company nor any of its Subsidiaries is, or has received any notice or has any knowledge that any other party is, in default in any respect under any such Material Contract, except for those defaults which would not reasonably be likely, either individually or in the aggregate, to have a Material Adverse Effect on the Company; and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a default by the Company or any of its Subsidiaries or, to the knowledge of the Company, by any other party thereto. For purposes of this Agreement, "Permitted Liens" shall mean (i) Liens for Taxes (other than those pursuant to Section 412 of the Code) or governmental assessments, charges or claims, the payment of which is not yet due, or for Taxes, the validity of which are being contested in good faith by appropriate proceedings; (ii) statutory Liens incurred in the ordinary course of business for sums not yet due or being contested in good faith; (iii) Liens relating to deposits made in the ordinary course of business; and (iv) Liens which do not individually or in the aggregate materially interfere with or materially impair the conduct of the Business as it is currently being conducted, or the value, marketability, use or ownership of the asset to which it attaches. 3.15. Issuance of Shares. Upon receipt of the Board of Directors and ------------------ shareholder approval as contemplated by Section 5.8, the Preferred Shares and the Conversion Shares will be duly authorized and, upon issuance in accordance with the terms of this Agreement or upon conversion of the Preferred Shares, as applicable, the Preferred Shares and the Conversion Shares will be validly issued, fully paid and non-assessable, and free from all taxes, liens and charges with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of securityholders of the Company (other than any such rights created by the Purchaser). 3.16. Intellectual Property. --------------------- (a) Section 3.16 of the Disclosure Schedule contains a complete and accurate list of all (i) patented or registered Intellectual Property (as hereinafter defined) owned or filed by the Company or any Subsidiary, (ii) pending patent applications and applications for registration of other Intellectual Property filed by or on behalf of the Company or any Subsidiary, (iii) material unregistered trade names, corporate names, or Internet domain names owned or -12- used by the Company or any Subsidiary, (iv) material unregistered trademarks, service marks, copyrights and mask works owned or used by the Company or any Subsidiary, (v) all computer software owned and/or used by the Company or any of its Subsidiaries (other than mass-marketed software with a license fee of less than $10,000) that is material to the Business, and (vi) all material licenses or similar agreements or arrangements pertaining to Intellectual Property to which the Company or its Subsidiaries is a party, either as licensee or licensor. "Intellectual Property" means (i) all patents, patent applications and patent disclosures; all inventions (whether or not patentable and whether or not reduced to practice); (ii) all trademarks, service marks, trade names, logos, slogans, corporate names and Internet domain names, and all the goodwill associated with each of the foregoing; (iii) all mask works and registrations and applications for registry thereof; (iv) all registered and unregistered statutory and common law copyrights; (v) all registrations, applications and renewals for any of the foregoing; and (vi) all trade secrets, confidential information, ideas, formulae, compositions, know-how, manufacturing and production processes and techniques, research information, drawings, specifications, designs, plans, improvements, proposals, technical and computer data, documentation and software, financial business and marketing plans, customer and supplier lists and related information and marketing materials and all other proprietary rights. (b) Except as set forth on Section 3.16 of the Disclosure Schedule, (i) the Company or one of its Subsidiaries owns all right, title and interest to, or has a valid and enforceable license to use, all Intellectual Property necessary for the operation of the businesses of the Company and its Subsidiaries as presently conducted and free and clear of all Liens or other encumbrances or restrictions; (ii) no claim by any other Person contesting the validity, enforceability, use or ownership of any of the Intellectual Property owned or used by the Company or any of its Subsidiaries (the "Company Intellectual Property") has been made, is currently outstanding or, to the knowledge of the Company, is threatened (including, without limitation, any demand or request that the Company or its Subsidiaries license any rights from a third Person); (iii) neither the Company nor its Subsidiaries have received any notices of, nor are aware of any facts which indicate a likelihood of, any infringement or misappropriation by, or conflict with, any third Person with respect to the Company Intellectual Property; (iv) to the knowledge of the Company, neither the Company nor its Subsidiaries have infringed, misappropriated, or otherwise conflicted with any Intellectual Property or other rights of any third Persons and neither the Company nor its Subsidiaries is aware of any infringement, misappropriation or conflict which will occur as a result of the continued operation of the business of the Company or its Subsidiaries as currently conducted; (v) no loss or expiration of any of the material Company Intellectual Property is threatened, pending or reasonably foreseeable; (vi) the transactions contemplated by this Agreement will have no Material Adverse Effect on the Company on the right, title and interest in and to the Company Intellectual Property; and (vii) the Company and its Subsidiaries have taken all necessary and desirable action to maintain and protect the Company Intellectual Property and will continue to maintain and protect the Company Intellectual Property to ensure that there is no effect on any of the Company Intellectual Property that would have a Material Adverse Effect on the Company. -13- 3.17. Related Party Transactions. Except as set forth in Section 3.17 -------------------------- of the Disclosure Schedule hereto, and excluding intercompany arrangements solely between or among the Company and any of its Subsidiaries (or solely between or among Subsidiaries), no director, officer, partner, "affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act")) of the Company or any of its Subsidiaries (i) has borrowed any monies from or has outstanding any indebtedness or other similar obligations to the Company or any of its Subsidiaries; (ii) owns any direct or indirect interest of any kind in, or is a director, officer, employee, partner, affiliate or associate of, or consultant or lender to, or borrower from, or has the right to participate in the management, operations or profits of, any person or entity which is (1) a competitor, supplier, customer, distributor, lessor, tenant, creditor or debtor of the Company or any of its Subsidiaries, (2) engaged in a business related to the business of the Company or any of its Subsidiaries, (3) participating in any transaction to which the Company or any of its Subsidiaries is a party or (iii) otherwise a party to any contract, arrangement or understanding with the Company or any of its Subsidiaries. 3.18. Labor Relations and Employment. ------------------------------ (a) Except as set forth on Section 3.18(a) of the Disclosure Schedule and except for matters which would not (other than in the case of clauses (i), (ii), (iii),(iv), (vi), (vii) and (ix) of this sentence) be reasonably likely to result in a Material Adverse Effect on the Company, (i) there is no labor strike, dispute, slowdown, stoppage or lockout actually pending, or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, and during the past three years there has not been any such action; (ii) to the knowledge of the Company, no union claims to represent the employees of the Company or any of its Subsidiaries; (iii) neither the Company nor any of its Subsidiaries is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Company or any of its Subsidiaries; (iv) none of the employees of the Company or any of its Subsidiaries is represented by any labor organization and the Company does not have any knowledge of any current union organizing activities among the employees of the Company or any of its Subsidiaries, nor does any question concerning representation exist concerning such employees; (v) the Company and its Subsidiaries are, and have at all times been, in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health, and are not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance or regulation; (vi) there is no unfair labor practice charge or complaint against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before the National Labor Relations Board or any similar state or foreign agency; (vii) there is no grievance arising out of any collective bargaining agreement or other grievance procedure; (viii) no charges with respect to or relating to the Company or any of its Subsidiaries are pending -14- before the Equal Employment Opportunity Commission or any other agency responsible for the prevention of unlawful employment practices; and (ix) neither the Company nor any of its Subsidiaries has received notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation with respect to or relating to the Company or any of its Subsidiaries and no such investigation is in progress. (b) Within the past five years , there has not been (i) a "plant closing" (as defined in the Worker Adjustment and Retraining Notification ("WARN") Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Company or any of its Subsidiaries; or (ii) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or facility of the Company or any of its Subsidiaries; nor has the Company or any of its Subsidiaries been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local law. None of the employees of the Company or any of its Subsidiaries has suffered an "employment loss" (as defined in the WARN Act) since three months prior to the date of this Agreement. 3.19. Year 2000. The Company has conducted an assessment, testing and --------- remediation of Year 2000 compliance issues as described in the SEC Reports. Based on such assessment, testing and remediation, the Company believes that all Information Technology used by the Company and its Subsidiaries are, and the Company has no knowledge, after due inquiry, that the Information Technology used by the Company's and its Subsidiaries' key suppliers, vendors and customers are not, reasonably expected on a timely basis to be Year 2000 Compliant (as defined below), except to the extent that a failure to do so would not reasonably be expected, individually or in the aggregate, to have Material Adverse Effect on the Company. "Year 2000 Compliant" means, with respect to the Company's information technology, the information technology is designed to be used prior to, during, and after the calendar Year 2000 A.D., and the information technology used during each such time period will accurately receive, provide and process date/time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including the years 1999 and 2000, and leap year calculations and will not malfunction, cease to function, or provide invalid or incorrect results as a result of date/time data. "Information Technology" means the Company's internal application systems, infrastructure and procedures, and manufacturing and control processes and other computer applications. 3.20. Real Estate. ----------- (a) Owned Properties. There is no Real Property owned (the ---------------- "Owned Real Property") by the Company used by the Company in the operation of the Company's business. -15- (b) Leased Properties. Section 3.20 of the Disclosure Schedule ----------------- sets forth a list of all of the leases and subleases ("Leases") and each leased and subleased parcel of real property in which the Company has a leasehold and subleasehold interest (the "Leased Real Property"). Each of the Leases are in full force and effect, and the Company holds a valid and existing leasehold or subleasehold interest under each of the Leases described in Schedule 3.20. With respect to each Lease set forth on Section 3.20 of the Disclosure Schedule: (i) the Lease is legal, valid, binding, enforceable and in full force and effect; (ii) the Lease will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing; (iii) neither the Company, nor, to the knowledge of the Company, any other party to the Lease, is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute such a breach or default by the Company or permit termination, modification or acceleration under the Lease by any other party thereto; (iv) the Company has not, and, to the knowledge of the Company, no third party has repudiated any provision of the Lease; (v) there are no disputes, oral agreements, or forbearance programs in effect as to the Lease; (vi) the Lease has not been modified in any respect, except to the extent that such modifications are disclosed by the documents delivered to ICS; (vii) the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease (except for Permitted Liens); and (viii) the Lease is fully assignable to ICS without the necessity of any consent or the Company shall obtain all necessary consents prior to the Closing. (c) Real Property Disclosure. Except as disclosed on Section ------------------------ 3.20 of the Disclosure Schedule, there is no Real Property leased or owned by the Company used in the Company's business. The Owned Real Property and Leased Real Property is referred to collectively herein as the "Real Property." (d) No Proceedings. There are no proceedings in eminent domain -------------- or other similar proceedings pending or, to the knowledge of the Company, threatened, affecting any portion of the Real Property (except for Permitted Liens). There exists no writ, injunction, decree, order or judgment outstanding, nor any litigation, pending or threatened, relating to the ownership, lease, use, occupancy or operation by any person of the Real Property (except for Permitted Liens). (e) Condition and Operation of Improvements. All buildings and --------------------------------------- other improvements included within the Real Property (the "Improvements") are in good condition and repair and adequate to operate such facilities as currently used, and there are no facts or conditions affecting any of the Improvements which would, individually or in the aggregate, interfere with the use, occupancy or operation thereof in a manner that would reasonably be expected to have a Material Adverse Effect on the Company as currently used, occupied or operated or intended to be used, occupied or operated. No Improvement or portion thereof is dependent for its access, operation or utility on any land, building or other improvement not included in the Real Property. -16- (f) Permits. All required or appropriate certificates of ------- occupancy, permits, licenses, franchises, approvals and authorizations (collectively, the "Real Property Permits") of all governmental authorities having jurisdiction over the Real Property, the absence of which could have a Material Adverse Effect on the Company, have been issued to the Company to enable the Real Property to be lawfully occupied and used for all of the purposes for which it is currently occupied and used have been lawfully issued and are, as of the date hereof, in full force and effect. The Company has delivered complete and correct copies of the Real Property Permits to Purchaser. The Company has not received any notice from any governmental authority having jurisdiction over the Real Property threatening a suspension, revocation, modification or cancellation of any Real Property Permit and, to the knowledge of the Company, there is no basis for the issuance of any such notice or the taking of any such action. 3.21. Knowledge Qualification. Whenever a representation or warranty ----------------------- contained herein is based on the knowledge of the Company, such representation and warranty is made based on the actual knowledge of the officers or directors of the Company and on the knowledge that the officers or directors of the Company would have if it had conducted a diligent inquiry into the subject matter of the representation or warranty. SECTION 4 Representations and Warranties of Purchaser Purchaser hereby represents and warrants to the Company as follows: 4.1. Organization. Purchaser is a corporation duly organized, ------------ validly existing and in good standing under the laws of its jurisdiction of organization and has the power and authority to enter into the Transaction Documents and to carry out the transactions contemplated thereby. 4.2. Authorization. It has all necessary corporate power and ------------- authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by its Board and no other corporate proceedings on the part of it are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by Purchaser, and, assuming this agreement constitutes a valid and binding obligation of the Company, this Agreement constitutes a valid and binding agreement of Purchaser, enforceable against it in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws affecting -17- the rights of creditors generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 4.3 Experience. It has experience in evaluating and investing in ---------- private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. 4.4 Investment. It is acquiring the Preferred Stock for investment ---------- for its own account, not as nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. It understands that the Preferred Stock has not been registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser's representations as expressed herein. 4.5 Rule 144. It acknowledges that the Preferred Stock must be held -------- indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. It is aware of the provisions of Rule 144 promulgated under the Securities Act which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including (except as otherwise provided for in Rule 144(k)), among other things, the existence of a public market for the securities, the availability of certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" or in transactions directly with a "market maker" and the amount of securities being sold during any three-month period not exceeding specified limitations. 4.6 No Public Market. It understands that no public market now ---------------- exists for any of the securities issued by the Company and that it is uncertain whether a public market will ever exist. 4.7 Access to Data. It has had an opportunity to discuss the -------------- Company's business, management and financial affairs with the Company's management and has had the opportunity to inspect the Company's facilities. It understands that such discussions, as well as any written information issued by the Company, were intended to describe the aspects of the Company's business and prospects which it believes to be material but were not necessarily a thorough or exhaustive description. Nothing contained in this Section 4.7 shall be construed as a limitation of any of the representations and warranties contained in Section 3. 4.8 Brokers or Finders. The Purchaser has not incurred, and will not ------------------ incur, directly or indirectly, as a result of any action taken by the Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Transaction Documents. -18- SECTION 5 Conditions to Closing of Purchaser The obligation of the Purchaser at the Closing to purchase the Preferred Stock is, at the option of the Purchaser, subject to the fulfillment of the following conditions: 5.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Company in Section 3 hereof shall be true and correct when made, and shall be true and correct as of the Closing Date. The Purchaser shall have received a certificate signed on behalf of the Company, by an authorized officer of the Company, to the effect set forth in this paragraph. 5.2 Covenants. All covenants, agreements and conditions contained in --------- the Transaction Documents to be performed or complied with by the Company on or prior to the Closing Date shall have been performed or complied with. The Purchaser shall have received a certificate signed on behalf of the Company, by an authorized officer of the Company, to the effect set forth in this paragraph. 5.3 Filing of Articles of Incorporation. The Articles of ----------------------------------- Incorporation shall have been filed with the Secretary of the Commonwealth of Pennsylvania. 5.4 Ancillary Agreements. The Company and the required number of -------------------- signatories to the Registration Agreement shall have executed and delivered to the Purchaser the Amended Registration Agreement. The Company and the required number of signatories to the Stockholders Agreement shall have executed and delivered to the Purchaser the Amended Stockholders Agreement. The Company shall have executed and delivered to the Purchaser the Confidentiality Agreement. 5.5 Delivery of Preferred Shares. The Company shall have delivered ---------------------------- to the Purchaser duly executed certificates representing such number of Preferred Shares as being purchased by Purchaser hereunder. 5.6 Opinion of Company Counsel. The Company shall have delivered to -------------------------- the Purchaser an opinion of its counsel containing the opinions set forth in Exhibit E attached hereto, and otherwise in a form reasonably acceptable to the - --------- Purchaser. 5.7 Addendum to Purchase Agreement. That certain Addendum "I" ------------------------------ Supplemental Provisions to Purchase Agreement - Goods (the "Purchase Addendum") between the Company and the Purchaser shall have been executed and delivered by the Company to the -19- Purchaser. 5.8 Board and Shareholder Approval. This Agreement, the Articles of ------------------------------ Incorporation, the Amended Registration Agreement, the Amended Shareholders Agreement and the Purchase Addendum shall have been approved by the Company's Board of Directors and the Articles of Amendment shall have been approved by the Company's shareholders, in each case in accordance with applicable provisions of the BCL, the Articles of Incorporation, the Company's By-laws and applicable agreements. 5.9 Good Standing Certificate. The Purchaser shall have received a ------------------------- good standing certificate with respect to the Company from the Secretary of the Commonwealth of Pennsylvania. SECTION 6 Conditions to Closing of Company The Company's obligation to sell and issue the Preferred Stock at the Closing Date is, at the option of the Company, subject to the fulfillment as of the Closing Date of the following conditions: 6.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Purchaser in Section 4 hereof shall be true and correct when made, and shall be true and correct as of the Closing Date. 6.2 Filing of Articles of Incorporation. The Articles of ----------------------------------- Incorporation shall have been filed with the Pennsylvania Department of State. 6.3 Ancillary Agreements. The Purchaser shall have executed and -------------------- delivered to the Company the Amended Stockholders Agreement, the Amended Registration Agreement and the Confidentiality Agreement. 6.4 Delivery of Purchase Price. The Purchaser shall have delivered to -------------------------- the Company funds in the total amount of Thirteen Million Four Hundred Sixty Six Thousand Six Hundred Eighty Dollars ($13,466,680), in payment of the Purchase Price, which may be evidenced by a check in such amount payable to the Company or by wire transfer of such amount to the Company's bank account. 6.5 Addendum to Purchase Agreement. That Purchase Addendum shall ------------------------------ have been executed and delivered by the Purchaser to the Company. -20- 6.6 Board and Shareholder Approval. This Agreement, the Articles of ------------------------------ Incorporation, the Amended Registration Agreement, the Amended Shareholders Agreement and the Purchase Addendum shall have been approved by the Company's Board of Directors and the Articles of Amendment shall have been approved by the Company's shareholders, in each case in accordance with applicable provisions of the BCL, the Articles of Incorporation, the Company's By-laws and applicable agreements. SECTION 7 Affirmative Covenants of the Company The Company hereby covenants and agrees as follows: 7.1 Financial Information. At any time that the Company is not --------------------- subject to the periodic reporting requirements of Section 13(a) or 15(d) of the Exchange Act, as long as Purchaser retains at least 25% of the Preferred Stock purchased hereunder (or a corresponding amount of Conversion Shares), the Company will mail to the Purchaser: (a) Within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of changes in financial position of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, consistently applied, in reasonable detail and audited by independent public accountants selected by the Company. (b) Within 45 days after the end of each fiscal quarter, an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such fiscal quarter, and unaudited consolidated statements of income and consolidated statements of changes in financial position of the Company and its subsidiaries, if any, for such quarter, prepared in accordance with generally accepted accounting principles, consistently applied (not including any accompanying notes), subject to changes resulting from year-end audit adjustments. (c) Within 30 days after the end of each month, an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such month, and unaudited consolidated statements of operations of the Company and consolidated statements of changes in financial position, for such month, prepared in accordance with generally accepted accounting principles, consistently applied (not including any accompanying notes), subject to changes resulting from year-end audit adjustments. (d) Within 30 days after the end of each fiscal year, an annual budget -21- for the ensuing fiscal year. 7.2 Shareholder and Commission Reports. At any time that the Company ---------------------------------- is subject to the periodic reporting requirements of Section 13(a) or 15(d) of the Exchange Act, as long as Purchaser retains at least 25% of the Preferred Stock purchased hereunder (or a corresponding amount of Conversion Shares), the Company will deliver to the Purchaser copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with or supplied to any securities exchange or pursuant to the requirements of such exchange or, as the case may be, the SEC pursuant to the 1933 Act or the Exchange Act. SECTION 8 Restrictions on Transferability of Securities; Registration Rights 8.1 Restrictions on Transfer. The Preferred Stock and the Conversion ------------------------ Shares will be subject to the restrictions on transfers set forth in Section 8 hereof. The Purchaser will cause any proposed transferee of the securities held by the Purchaser to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 8. 8.2 Restrictive Legend. The Preferred Stock shall be (unless ------------------ otherwise permitted by the provisions of Section 8.3 below) stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THIS PREFERRED STOCK AND THE SHARES INTO WHICH IT MAY BE CONVERTED HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. COPIES OF THE PURCHASE AGREEMENT DATED DECEMBER 23, 1999, COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL OFFICE OF THE CORPORATION. 8.3 Notice of Proposed Transfers. The Purchaser by its acceptance of ---------------------------- the Preferred Stock agrees to comply in all respects with the provisions of this Section 8.3. Prior to -22- any proposed transfer of the Preferred Stock or Conversion Shares, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Purchaser shall give written notice to the Company of its intention to effect such transfer. Such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail to evidence compliance with securities laws, and shall be accompanied (except in transactions in compliance with Rule 144) by either (i) a written opinion of the in-house counsel of the Purchaser or other legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Preferred Stock or the Conversion Shares may be effected without registration under the Securities Act, or (ii) a "no action" letter from the SEC to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto, whereupon the Purchaser shall be entitled to transfer such Preferred Stock or the Conversion Shares in accordance with the terms of the notice delivered by the Purchaser to the Company. The certificate evidencing the Preferred Stock or the Conversion Shares, as applicable, transferred as above provided shall bear the appropriate restrictive legend set forth in Section 8.2 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for the Company such legend is not required in order to establish compliance with any provisions of the Securities Act. 8.4 Required Registration and Notice. The holder of the Preferred -------------------------------- Stock and the Conversion Shares (the Preferred Stock and the Conversion Shares being collectively referred to as the "Registrable Shares") will be entitled to the registration rights set forth in the Amended Registration Agreement. SECTION 9 Miscellaneous 9.1 Governing Law. This Agreement shall be governed in all respects ------------- by the internal laws of the State of Pennsylvania. 9.2 Counterparts; Telecopied Signatures. This Agreement and any of ----------------------------------- the Transaction Documents may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. The execution signatures of any party pursuant to this Agreement and any of the Transaction Documents may be delivered by telecopy, and any execution signature so delivered shall have the same legal force and effect as the delivery of an ink execution signature. At the request of any other party, each party delivering execution signatures via telecopier will promptly provide original ink execution signatures following the date hereof. 9.3 Termination. This Agreement may be terminated and the ----------- transactions -23- contemplated hereby may be abandoned by either party upon written notice to the other party if approval of this Agreement and the transactions contemplated thereby by the Board of Directors or shareholders of the Company is not obtained by January 31, 1999. In the event of the termination of this Agreement pursuant to this Section 9.3, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders, other than the provisions of Section 9.8 hereof, which shall survive any such termination. Nothing contained in this Section 9.3 shall relieve any party from liability for any breach of any covenant of this Agreement or any breach of warranty or any misrepresentation. 9.4 Survival. The representations, warranties, covenants and -------- agreements made herein shall survive any investigation made by the Purchaser and the Closing for a period of one year following the Closing Date, except for Article VII hereof, which shall survive the Closing and shall expire only in accordance with its terms. 9.5 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto, provided, however, that the rights of the Purchaser to purchase the Preferred Stock shall not be assignable without the consent of the Company, which consent shall not be unreasonably withheld; and provided further that the Company may not assign its rights hereunder. 9.6 Entire Agreement; Amendment. This Agreement and the other --------------------------- documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement and the other documents delivered pursuant hereto at the Closing, nor any term hereof or thereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 9.7 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be delivered personally, by overnight courier, or by messenger, addressed to the other party at the address set forth below, or at such other address as such party shall furnish to the other in writing in accordance with this Section. -24- If to Company: Integrated Circuit Systems, Inc. 23435 Boulevard of the Generals P.O. Box 968 Valley Forge, PA 19482 Attention: Hock E. Tan Telecopier: 610-630-3385 with a copy to: Pepper Hamilton LLP 3000 Two Logan Square 18/th/ and Arch Streets Philadelphia, PA 19103-2799 Attention: Robert Friedel, Esq. Telecopier: (215) 981-4750 If to Purchaser: Intel Corporation 2200 Mission College Blvd. Santa, Clara, CA 95052 Attention: Jose Blanc Telecopier: (408) 765-6038 with a copy to: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 Attention: Brette S. Simon, Esq. Telecopier: (213) 229-7520 Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given upon actual receipt of delivery or refusal of delivery by the intended recipient. 9.8 Expenses. The Company and the Purchaser shall each bear its own -------- expenses incurred on its behalf with respect to this Agreement and the transactions contemplated hereby; except that the Company will reimburse the Purchaser all out-of-pocket fees and expenses, including attorneys' and accountants' fees, whether incurred prior to, on or after the date hereof, in connection with the consummation of all transactions contemplated by this Agreement, up to a maximum of all such fees and expenses of $20,000. 9.9 Severability. In the event that any provision of this Agreement ------------ becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. -25- 9.10 Titles and Subtitles. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement under seal as of the day and year first above mentioned. INTEGRATED CIRCUIT SYSTEMS, INC. BY: /S/ HOCK E. TAN ------------------------------------ Title: President and cheif executive officer INTEL CORPORATION BY: /S/ Arvind Sodhni ------------------------------------- Title: Vice President and Treasurer -26- EX-10.34 12 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT F INCINTEGRATED CIRCUIT SYSTEMS, INC.. 2000 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 2000 Employee Stock Purchase Plan of Integrated Circuit Systems, Inc. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" means the Company's common stock, par value $0.01 per share. (d) "COMPANY" means Integrated Circuit Systems, Inc., a Pennsylvania corporation. (e) "COMPENSATION" means all regular straight time gross earnings, and shall not include commissions, payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (g) "CONTRIBUTIONS" means all amounts credited to the account of a participant pursuant to the Plan. (h) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided however that the Board shall only have the discretion to designate Subsidiaries if the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "EMPLOYEE" means any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "OFFERING DATE" means the first business day of each Offering Period of the Plan. (m) "OFFERING PERIOD" means a period of twenty-four (24) months commencing on April 1, July 1, October 1 and January 1 of each year, except for the first Offering Period as set forth in Section 4(a). (n) "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. (o) "PLAN" means this Employee Stock Purchase Plan. (p) "PURCHASE DATE" means the last day of each Purchase Period of the Plan. (q) "PURCHASE PERIOD" means a period of three (3) months within an Offering Period, except for the first Purchase Period as set forth in Section 4(b). (r) "PURCHASE PRICE" means with respect to a Purchase Period an amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) of any increase in the number of Shares available for issuance under the Plan as a result of a stockholder- approved amendment to the Plan, and (ii) all or a portion of such additional Shares are to be issued with respect to one or more Offering Periods that are underway at the time of such increase ("Additional Shares"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase (the "Approval Date Fair Market Value") is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to Additional Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. 2 (s) "SHARE" means a share of Common Stock, as adjusted in accordance with Section 19 of the Plan. (t) "SUBSIDIARY" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. ELIGIBILITY. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code; provided however that eligible Employees may not participate in more than one Offering Period at a time. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS AND PURCHASE PERIODS. (a) OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods of twenty-four (24) months duration, with new Offering Periods commencing on or about April 1, July 1, October 1 and January 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on the beginning of the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common Stock (the "IPO Date") and continue until June 30, 2002. The Plan shall continue until terminated in accordance with Section 20 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (b) PURCHASE PERIODS. Each Offering Period shall consist of eight (8) consecutive Purchase Periods of three (3) months' duration. The last day of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period commencing on April 1 shall end on the next June 30. A Purchase Period commencing on 3 July 1 shall end on the next September 30. A Purchase Period commencing on October 1 shall end on the next December 31. A Purchase Period commencing on January 1 shall end on the next March 31. The first Purchase Period shall commence on the IPO Date and shall end on June 30, 2000. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Purchase Period to be affected. 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. The subscription agreement shall set forth the percentage of the participant's Compensation (subject to Section 6(a) below) to be paid as Contributions pursuant to the Plan. The eligible Employee may choose one of the following methods of payment for the Shares to be acquired on his or her behalf during the Purchase Period: (i) periodic payroll deduction; or (ii) lump sum cash payment; provided, however, that the Board may, for any Purchase Period, prohibit lump sum cash payments. (b) If periodic payroll deductions are selected, payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the last Purchase Period of the Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. (c) If the lump sum cash payment alternative is selected, the lump sum payment must be paid by the participant within the first fifteen (15) days of the final month of the Purchase Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) A participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than fifteen percent (15%) (or such greater percentage as the Board may establish from time to time before an Offering Date) of such participant's Compensation on each payday during the Offering Period; provided, however, that, in the event the participant chooses the lump sum payment alternative, such payment may not exceed 15% of the Compensation paid to such participant. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. 4 (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during a Purchase Period may increase and on one occasion only during a Purchase Period may decrease the rate of his or her Contributions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in the payroll deduction rate or lump sum payment, as applicable. The change shall be effective as of the beginning of the next payroll period following the date of filing of the new subscription agreement, if the agreement is filed at least ten (10) business days prior to such date and, if not, as of the beginning of the next succeeding payroll period. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions or lump sum payment, as applicable, may be decreased by the Company to 0% at any time during a Purchase Period. Payroll deductions or lump sum payments shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. In addition, a participant's payroll deductions or lump sum payment, as applicable, may be decreased by the Company to 0% at any time during a Purchase Period in order to avoid unnecessary payroll contributions as a result of application of the maximum share limit set forth in Section 7(a), in which case payroll deductions or lump sum payments shall re- commence at the rate provided in such participant's subscription agreement at the beginning of the next Purchase Period, unless terminated by the participant as provided in Section 10. 7. GRANT OF OPTION. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price; provided however that the maximum number of Shares an Employee may purchase during any Purchase Period shall be [400] Shares (subject to any adjustment pursuant to Section 19 below), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13. (b) The fair market value of the Company's Common Stock on a given date (the "Fair Market Value") shall be determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the 5 immediately preceding trading date), as reported in The Wall Street Journal. For purposes of the Offering Date under the first Offering Period under the Plan, the Fair Market Value of a share of the Common Stock of the Company shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. No fractional Shares shall be issued. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after each Purchase Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, the Shares purchased upon exercise of his or her option. No fractional Shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full Share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 below. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. 10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the 6 employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on any Purchase Date of an Offering Period is less than the Fair Market Value of the Shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period, and (ii) be enrolled in the Offering Period commencing on the first business day subsequent to such Purchase Period. 12. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment as provided in Section 19, the maximum number of Shares which shall be made available for sale under the Plan shall be [500,000] Shares or such lesser number of Shares as is determined by the Board. If the Board determines that, on a given Purchase Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the Company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue all Offering Periods then in effect, or (y) that the Company shall make a pro rata allocation of the shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 below. The Company may make pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. 7 (b) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 14. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 15. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any Shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of a Purchase Period but prior to delivery to him or her of such Shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Purchase Date of an Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant (and his or her spouse, if any) at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TRANSFERABILITY. Neither Contributions credited to a participant's account nor any rights with regard to the exercise of an option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 15) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 8 17. USE OF FUNDS. All Contributions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 18. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the maximum number of shares of Common Stock which may be purchased by a participant in a Purchase Period, the number of shares of Common Stock set forth in Section 13(a) above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) CORPORATE TRANSACTIONS. In the event of a dissolution or liquidation of the Company, any Purchase Period and Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for outstanding options, each Purchase Period and Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Purchase Period and Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of 9 consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 19, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided for in this Section 19); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. 20. AMENDMENT OR TERMINATION. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19, no such termination of the Plan may affect options previously granted, provided that the Plan or an Offering Period may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering Period and Purchase Period then in progress if the Board determines that termination of the Plan and/or the Offering Period is in the best interests of the Company and the stockholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan. Except as provided in Section 19 and in this Section 20, no amendment to the Plan shall make any change in any option previously granted which adversely affects the rights of any participant. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as so required. 10 (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. NOTICES. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such Shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the IPO Date. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20. 24. ADDITIONAL RESTRICTIONS OF RULE 16b-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable 11 provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 12 INTEGRATED CIRCUIT SYSTEMS, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN FORM OF SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Integrated Circuit Circuit Systems, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 15% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I elect to have these Contributions made through (choose one): ____ Payroll Deduction or ____ Lump Sum Payment 4. In the event the payroll deduction option was selected, I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. 5. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 6. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can increase or decrease the rate of my Contributions on one occasion only with respect to any increase and one occasion only with respect to any decrease during any Purchase Period by completing and filing a new Subscription Agreement with such increase or decrease taking effect as of the beginning of the calendar month following the date of filing of the new Subscription Agreement, if filed at least ten (10) business days prior to the beginning of such month. Further, I may change the rate of my Contributions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period. 7. I have received a copy of the complete "Integrated Circuit Systems, Inc. 2000 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 8. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): 9. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) -------------------------------------------------------------------------- (First) (Middle) (Last) _______________________________________________________________________________ (Relationship) (Address) AND NAME: (Please print) -------------------------------------------------------------------------- (First) (Middle) (Last) _______________________________________________________________________________ (Relationship) (Address) 10. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price which I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition, and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 11. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) 15% of the fair market value of the shares on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to change. I further understand that I should consult a tax advisor concerning the tax implications of the purchase and sale of stock under the Plan. 12. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE:________________________________________________________________ SOCIAL SECURITY #:________________________________________________________ DATE:_____________________________________________________________________ SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse):______________ ________________________ (Signature) ________________________ (Print name) INTEGRATED CIRCUIT SYSTEMS, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the Integrated Circuit Systems, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for the Offering Period that began on _________ ___, _____. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement. Dated:________________ ________________________________________ Signature of Employee ________________________________________ Social Security Number EX-23.1 13 CONSENT OF KMPG LLP Exhibit 23.1 Consent of Independent Auditors The Board of Directors Integrated Circuit Systems, Inc. The audits referred to in our report dated August 4, 1999, included the related financial statement schedule as of July 3, 1999, and for each of the years in the three-year period ended July 3, 1999, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the references to our firm under the headings "Experts" and "Selected Historical Consolidated Financial Data" in the prospectus. /s/ KPMG LLP Philadelphia, Pennsylvania May 19, 2000 EX-27 14 FINANCIAL DATA SCHEDULE
5 1000 9-MOS 12-MOS JUL-01-2000 JUL-03-1999 JUL-04-1999 JUN-28-1998 APR-01-2000 JUL-03-1999 31,320 9,285 278 288 20,506 20,270 2,117 2,150 8,829 8,736 79,554 49,406 26,077 23,148 13,742 11,021 105,291 87,290 25,129 23,457 93,000 169,000 0 0 13,467 0 248 45,066 (86,451) 152,483 105,291 87,290 120,511 139,063 120,511 139,063 44,558 64,496 48,938 82,792 35,971 41,110 0 2,955 13,855 31,106 22,539 24,826 2,213 0 20,326 0 0 0 170 24,826 0 0 20,496 0 0 0 0 0
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