-----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, BegUpO6UpcY5oWKWs+mNogt7JwudFKbXZZbfv3KjFr5NUK7V0S2CoMfr3lj5I340 OgTQUDMO0SeNNDykJInq7A== /in/edgar/work/20000609/0000893838-00-000167/0000893838-00-000167.txt : 20000919 0000893838-00-000167.hdr.sgml : 20000919 ACCESSION NUMBER: 0000893838-00-000167 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONEXANT SYSTEMS INC CENTRAL INDEX KEY: 0001069353 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 251799439 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-38890 FILM NUMBER: 651761 BUSINESS ADDRESS: STREET 1: 4311 JAMBOREE RD CITY: NEWPORT BEACH STATE: CA ZIP: 92660-3095 BUSINESS PHONE: 9492214600 MAIL ADDRESS: STREET 1: 4311 JAMBOREE RD CITY: NEWPORT BEACH STATE: CA ZIP: 92660-3095 FORMER COMPANY: FORMER CONFORMED NAME: ROCKWELL SEMICONDUCTOR SYSTEMS INC DATE OF NAME CHANGE: 19980929 S-3 1 0001.txt Registration Statement No. 333- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------------------------------------------------- Conexant Systems, Inc. (Exact name of registrant as specified in its charter) - ------------------------------------------------------------------------------- 4311 Jamboree Road Newport Beach, California 92660-3095 Delaware (949) 483-4600 25-1799439 (State or other (Address, including zip code, (I.R.S. Employer jurisdiction of number, including area code, Identification No.) incorporation or of registrant's principal organization) executive offices) - ------------------------------------------------------------------------------- DENNIS E. O'REILLY, ESQ. Senior Vice President, General Counsel and Secretary Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 (949) 483-4600 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: PETER R. KOLYER, ESQ. Chadbourne & Parke LLP 30 Rockefeller Plaza New York, New York 10112 (212) 408-5100 - ------------------------------------------------------------------------------- Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. |_| 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, as amended (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. |X| 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. |_| ------------------------------------------------------------------------- Calculation of Registration Fee
========================================== ==================== ======================= ==================== ==================== Proposed Proposed maximum maximum Title of each class of securities to be Amount to be offering price aggregate offering Amount of registered registered(1) per unit (2) price (2) registration fee ------------------------------------------ -------------------- ----------------------- -------------------- ------------------- Common Stock, par value $1 per share (including the associated Preferred Share Purchase Rights).............. 2,593,938 $40.875 $106,027,216 $27,992 - ------------------------------------------- -------------------- ----------------------- -------------------- -------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) The shares of common stock set forth in the Calculation of Registration Fee table, and which may be offered pursuant to this registration statement, include, pursuant to Rule 416 under the Securities Act, such additional number of shares of the registrant's common stock as may become issuable as a result of any stock splits, stock dividends or similar events. (2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act based on the average of the high and low prices of the common stock as reported on June 1, 2000 on The Nasdaq Stock Market, Inc. National Market System. --------------- 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 of 1933 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. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED JUNE 8, 2000 PROSPECTUS - ---------- Conexant Systems, Inc. Common Stock (including the associated preferred share purchase rights) --------------- This prospectus relates to 2,593,938 shares of our common stock that we may issue from time to time in exchange for exchangeable shares issued by our Canadian subsidiary, Philsar Semiconductor Inc., and upon the exercise of warrants and options (other than employee stock options) to purchase shares of our common stock that previously were warrants and options to purchase Philsar common shares. The previous share capital of Philsar was reorganized and the exchangeable shares were issued by Philsar in connection with our acquisition of Philsar in May 2000. If you are a holder of exchangeable shares, you may exchange your exchangeable shares for shares of our common stock at any time. Upon an exchange of exchangeable shares, you will receive one share of our common stock for each exchangeable share. You also will receive a cash amount equal to any declared and unpaid dividend on the exchangeable shares if the record date for the dividend is prior to the date of exchange. On May 30, 2005 Philsar will redeem, or we will acquire, all outstanding exchangeable shares by delivering, for each outstanding exchangeable share, one share of our common stock plus a cash amount equal to any declared and unpaid dividends. Philsar also may elect to redeem, or we may acquire, all outstanding exchangeable shares before May 30, 2005 if Philsar determines that there are fewer than 150,000 exchangeable shares then outstanding that are not owned by us or our subsidiaries. In connection with the acquisition of Philsar, outstanding warrants to purchase in the aggregate 1,218,400 common shares of Philsar and outstanding options to purchase in the aggregate 49,614 common shares of Philsar were amended to become warrants and options to purchase our common stock, on the basis that the holders would receive on exercise of the amended warrant or option approximately 0.094 of a share of our common stock for each common share of Philsar originally subject to the warrant or option. This is the same exchange ratio applicable to the May 2000 reorganization of the outstanding share capital of Philsar. Outstanding employee stock options to purchase in the aggregate 4,327,610 common shares of Philsar were similarly amended, but the shares of our common stock issuable on exercise of these options are being registered on a separate registration statement and are not included in this prospectus. Our common stock is quoted on the Nasdaq National Market under the symbol "CNXT". On June 7, 2000, the last reported sale price for our common stock on the Nasdaq National Stock Market was $47 per share. --------------- The securities we may offer involve a high degree of risk. Please see the "Risk Factors" beginning on page 5 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. --------------- The date of this prospectus is , 2000
Table of Contents Page SUMMARY............................................................................................................3 RISK FACTORS.......................................................................................................5 USE OF PROCEEDS...................................................................................................23 PRICE RANGE OF COMMON STOCK.......................................................................................23 DIVIDEND POLICY...................................................................................................24 DESCRIPTION OF CAPITAL STOCK......................................................................................24 INCOME TAX CONSIDERATIONS REGARDING OUR COMMON STOCK AND THE EXCHANGE OF EXCHANGEABLE SHARES......................32 PLAN OF DISTRIBUTION..............................................................................................45 LEGAL MATTERS.....................................................................................................52 EXPERTS...........................................................................................................53 HOW TO OBTAIN MORE INFORMATION....................................................................................53 FORWARD-LOOKING STATEMENTS........................................................................................54
SUMMARY Conexant Systems, Inc. Conexant Systems, Inc. (which may be referred to as Conexant, we, us or our) is the world's largest independent company focused exclusively on providing semiconductor products for communications electronics. With more than 30 years of experience in developing communications products, we draw upon our expertise in mixed-signal processing to deliver integrated systems and semiconductor products for a broad range of communications applications. These products facilitate communications worldwide through wireline voice and data communications networks, cordless and cellular wireless telephony systems, personal imaging devices and equipment, and emerging cable and wireless broadband communications networks. We align our business into five product platforms: - - Network Access - - Wireless Communications - - Digital Infotainment - - Personal Imaging - - Personal Computing Before December 31, 1998, we were a wholly-owned subsidiary of Rockwell International Corporation and, together with certain other subsidiaries and divisions of Rockwell, operated Rockwell's semiconductor systems business ("Semiconductor Systems"). On December 31, 1998, we became an independent, public company by means of a tax-free spin-off from Rockwell. Our principal offices are located at 4311 Jamboree Road, Newport Beach, California 92660-3095. Unless the context otherwise indicates, as used in this prospectus, all references to Conexant, we, us and our are to Semiconductor Systems for periods prior to our spin-off from Rockwell and to Conexant Systems, Inc. and its subsidiaries for periods following the spin-off. Acquisition of Philsar Semiconductor Inc. On May 30, 2000, we completed the acquisition of Philsar Semiconductor Inc., a Canadian corporation dedicated to the development of semiconductor solutions for personal wireless connectivity using radio technology. Pursuant to the Reorganization Agreement dated as of April 11, 2000 (the "Reorganization Agreement") between Conexant, Philsar and certain shareholders of Philsar, the transaction involved the following steps: - - A new class of non-voting preferred shares of Philsar was created and 100 shares were issued to Conexant in exchange for ten shares of Conexant common stock. 3 - - All of the other outstanding shares of Philsar (common shares, Class A Preferred Shares and Class B Preferred Shares) were changed into exchangeable shares of Philsar. - - The Philsar employee stock option plans were amended to provide that all outstanding options to acquire Philsar common shares under such plans were converted into options to acquire shares of Conexant common stock on the basis of approximately 0.094 of a share of our common stock for each common share of Philsar originally subject to such options. - - All outstanding warrants and other options (other than employee stock options) to purchase Philsar common shares were amended to become warrants and options to acquire shares of Conexant common stock on the basis of approximately 0.094 of a share of our common stock for each common share of Philsar originally subject to such warrants or options. - - A new class of special voting shares of Philsar that carry in the aggregate 60 million votes (equal to approximately 95 percent of the combined voting power of all of Philsar's outstanding securities) was created and all 60,000 of such special voting shares were issued to us in exchange for the 100 non-voting preferred shares of Philsar acquired by us in the first step referred to above. - - We issued to a voting trust, established for the benefit of holders of Philsar exchangeable shares, one share of Conexant Series B voting preferred stock that entitles the trustee of that voting trust (on behalf of each holder of exchangeable shares) to cast one vote at meetings of holders of our common stock for each exchangeable share not owned by us or one of our subsidiaries. As a result of this series of transactions: - - Philsar has become a majority-owned subsidiary of Conexant. - - We have the right to cast approximately 95 percent of all votes which may be cast by all holders of Philsar securities and, therefore, control Philsar. - - The previous holders of Philsar common shares, Series A Preferred Shares and Series B Preferred Shares hold 90 percent of the exchangeable shares. The other exchangeable shares (representing 10 percent of the total exchangeable shares) are held in escrow as security for indemnity claims that may be made by us under the Reorganization Agreement. These escrowed exchangeable shares will be released twelve months after the closing date except to the extent that there are unresolved indemnity claims pending at that time. 4 - - All outstanding options and warrants to purchase Philsar common shares (including employee stock options) are now options and warrants to purchase shares of Conexant common stock. RISK FACTORS You should carefully consider and evaluate all of the information in this prospectus, including the risk factors listed below. Any of these risks could materially and adversely affect our business, financial condition and results of operations, which in turn could materially and adversely affect the price of our common stock or other securities. The exchange of your exchangeable shares is generally a taxable event and your tax consequences will vary depending on a number of factors. The exchange of Philsar exchangeable shares for shares of Conexant common stock is generally a taxable event in Canada and the United States. A summary of the material Canadian and United States federal income tax considerations generally applicable under the Income Tax Act (Canada) or the Internal Revenue Code of 1986, as amended, if you exchange your exchangeable shares for our common stock is included later in this prospectus under the section entitled "Income Tax Considerations Regarding Our Common Stock and the Exchange of Exchangeable Shares". Your tax consequences can vary depending on a number of factors, including: - - your residency; - - the method of exchange; and - - the length of time that the exchangeable shares were held prior to exchange. Canadian and United States federal income tax considerations will vary according to your particular circumstances. You should consult with your own tax advisor as to the tax consequences of exchanging your exchangeable shares for shares of our common stock. Our common stock will be foreign property in Canada and may subject some trusts holding our common stock to tax. Our common stock will be foreign property in Canada for trusts governed by registered pension plans, registered retirement savings plans, registered retirement income funds and deferred profit sharing plans and for some other tax-exempt persons. Under the Income Tax Act (Canada), Part XI tax is generally imposed on these trusts where the cost amount of foreign property held by the trust or tax-exempt person exceeds the permissible foreign property limit. Part XI tax is imposed at the rate of one percent per month on the cost amount of any excess foreign property. 5 Our common stock is not listed on a stock exchange in Canada and will not initially be freely tradable in Canada. Shares of our common stock issued in exchange for exchangeable shares or upon the exercise of amended warrants and options may not be traded to residents of Canada or by shareholders who are residents of Canada until exempting orders are obtained from Canadian securities regulators. We have made application for such exempting orders. We do not intend to list our common stock on any stock exchange in Canada. Our future success depends largely on the continued growth of our expansion platforms. Our recent revenue growth is principally a result of our plan, begun in 1995, to diversify our business and expand into the following selected related product platforms: - - Network Access; - - Wireless Communications; - - Digital Infotainment; and - - Personal Imaging. These product platforms represented 64 percent of our total revenues for the first six months of fiscal 2000, compared to 51 percent for the first six months of fiscal 1999. We believe that these platforms continue to offer higher growth prospects than our dial-up PC modem business. Our future financial performance and overall success, particularly in the long term, will depend largely on the rate of sales growth and margin contribution of our expansion platforms and whether these platforms will continue to increase their relative contribution to our financial performance. There are numerous risks inherent in our diversification and expansion strategy, many of which are beyond our control. In certain product lines within these expansion platforms, we currently have minimal market presence relative to other more established competitors. Moreover, continued growth of these expansion platforms depends, in part, on the ability of our customers to develop new and enhanced products and to successfully introduce and market those products to end users. We cannot assure you that we will be able to sustain the recent growth of our expansion platforms or that our diversification and expansion program will be successful. A failure of this program would have a material adverse effect on our business, financial condition and results of operations. We must incur substantial research and development expenses. The semiconductor industry requires substantial investment in research and development. In order to remain competitive, we must continue to make substantial investments in research and development to develop new and enhanced products. We cannot assure you that we will have sufficient resources to develop new and enhanced technologies and competitive products. 6 Our failure to continue to make sufficient investments in research and development programs could have a material adverse effect on our business, financial condition and results of operations. Our success is dependent upon our ability to timely develop new products and reduce costs. Our operating results will depend largely on our ability to continue to introduce new and enhanced semiconductor products on a timely basis. Successful product development and introduction depends on numerous factors, including, among others: - - our ability to anticipate customer and market requirements and changes in technology and industry standards; - - our ability to accurately define new products; - - our ability to timely complete new products and introduce our products to the market; - - our ability to differentiate our products from offerings of our competitors; and - - market acceptance of our products. Furthermore, we are required to continually evaluate expenditures for planned product development and to choose among alternative technologies based upon our expectations of future market growth. We cannot assure you that we will be able to develop and introduce new or enhanced products in a timely and cost-effective manner, that our products will satisfy customer requirements or achieve market acceptance, or that we will be able to anticipate new industry standards and technological changes. We also cannot assure you that we will be able to respond successfully to new product announcements and introductions by competitors. In addition, prices of established products may decline, sometimes significantly, over time. We believe that in order to remain competitive we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be able to continue to reduce the cost of our products to remain competitive. We must incur significant capital expenditures for manufacturing technology and equipment to remain competitive. The semiconductor industry is highly capital intensive. Semiconductor manufacturing requires a constant upgrading of process technology to remain competitive, as new and enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful semiconductor devices. We maintain our own manufacturing, assembly and test facilities which have required and will continue to require significant investments in manufacturing technology and equipment. 7 We expect fiscal 2000 capital expenditures to be in excess of $300 million, compared to $214 million spent on capital expenditures during fiscal 1999. There can be no assurance that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment. We face a risk that capital needed for our business will not be available when we need it. We believe that cash flows from operations, existing cash reserves, and available borrowings under our three-year $350 million secured revolving credit facility will be sufficient to satisfy our future research and development, capital expenditure, working capital and other financing requirements. However, we cannot assure you that this will be the case or that we will have access to alternative sources of capital on favorable terms or at all. In addition, we have and will continue to review on an ongoing basis strategic investments and acquisitions which will help us grow our business. These investments and acquisitions may require additional capital resources. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future. Our operating results may be impacted by substantial quarterly and annual fluctuations and market downturns. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others: - - the effects of competitive pricing pressures; - - decreases in average selling prices of our products; - - production capacity levels and fluctuations in manufacturing yields; - - availability and cost of products from our suppliers; - - the gain or loss of significant customers; - - our ability to develop, introduce and market new products and technologies on a timely basis; - - new product and technology introductions by competitors; - - changes in the mix of products produced and sold; - - market acceptance of our products and our customers' products; - - intellectual property disputes; - - seasonal customer demand; 8 - - the timing of significant orders; and - - the timing and extent of product development costs. General economic or other conditions causing a downturn in the market for semiconductor products, affecting the timing of customer orders or causing order cancellations or rescheduling of orders, could also adversely affect our operating results. Moreover, our customers may change delivery schedules or cancel or reduce orders without significant penalty and generally are not subject to minimum purchase requirements. The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly or annual operating results. If our operating results fail to meet the expectations of analysts or investors, it could materially and adversely affect the price of our common stock. We face a risk that we will be unable to integrate companies we acquire. In addition to the acquisition of Philsar, we have recently completed several acquisitions, including the acquisitions of Maker Communications, Inc., Microcosm Communications Limited, Applied Telecom, Inc., the wireless broadband business of Oak Technology, Inc. and Istari Design, Inc. In May 2000, we announced an agreement to acquire Sierra Imaging, Inc., a leading supplier of digital camera image-processing solutions. On an ongoing basis, we evaluate acquisitions and may make additional acquisitions in the future. Integrating acquired organizations and their products and services may be expensive, time-consuming and a strain on our resources. Risks we could face with respect to acquisitions include: - - the difficulty of integrating acquired technology into our product offerings; - - the failure successfully to integrate acquired technology, resulting in the impairment of amounts currently capitalized as intangible assets; - - the impairment of relationships with employees and customers; - - the difficulty of coordinating and integrating geographically-dispersed operations; - - the difficulty of coordinating and integrating overall business strategies and sales and marketing and research and development efforts; - - the potential disruption of our ongoing business and distraction of management; - - the maintenance of brand recognition of acquired businesses; - - the maintenance of corporate cultures, controls, procedures and policies; and - - the potential unknown liabilities associated with acquired businesses. 9 Our inability to address any of these risks successfully could harm our business. We may have difficulty in integrating any future acquisitions with our current organization, technology and product and services offerings, and any acquired features, functions, products or services may not achieve market acceptance. We may not be able to sustain our operating profitability and may incur further losses as a result of acquisition-related amortization and in-process research and development expenses. In September 1998, we announced a comprehensive plan to restructure our business to position us for future profitability. This plan resulted in fourth quarter fiscal 1998 special charges of approximately $147 million and included workforce reductions, facility closures and other actions. Our fiscal 1998 full-year net loss was approximately $262 million, including inventory write-offs of approximately $66 million, a charge for intellectual property matters of approximately $43 million and the fourth quarter special charges. Although we returned to profitability in fiscal 1999, for the first six months of fiscal 2000 we incurred a net loss of $132 million, due primarily to $145.9 million of in-process research and development expense arising out of our recent acquisitions. Also as a result of our recent acquisitions, we expect to record amortization expenses related to goodwill and intangible assets of approximately $200 million annually for five years. There can be no assurance that we will not incur further losses as a result of these types of write-offs, which are not uncommon in acquisitions of technology companies, as we make additional acquisitions or that we will be able to return to profitability in the near future. Our credit facility may restrict our operating and financial flexibility. We entered into a three-year $350 million secured revolving credit facility in December 1998. This credit facility is guaranteed by each of our domestic subsidiaries and includes covenants that may restrict our operating and financial flexibility in the future. Substantially all of our assets and the assets of our domestic subsidiaries and the stock of our subsidiaries, subject to certain exceptions, have been pledged as collateral to secure repayment of this credit facility. The credit facility includes restrictions on capital expenditures, indebtedness, acquisitions, mergers, asset sales and liens on assets that apply to us and our subsidiaries. We also must meet certain financial tests and maintain certain financial ratios. Although we believe that we will be able to comply with these requirements, compliance with these requirements may restrict our operating and financial flexibility. We cannot assure you that we will in fact be able to satisfy all of the requirements in the credit facility. If we do not satisfy the financial ratios or comply with the other covenants included in the credit facility, the lenders under the credit facility could declare all amounts owed to them due and payable and proceed against their collateral. Such a foreclosure on the collateral would have a material adverse effect on our business, financial condition and results of operations. We engage in litigation to protect our intellectual property rights and to defend ourselves against claims of infringement by others. Our business faces risks of intellectual property infringement and litigation. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual 10 property rights. In the past, we have found it necessary to engage in litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. We expect future litigation on similar grounds. We have received, and may continue to receive in the future, claims of infringement of intellectual property rights of others. We are a party to certain pending proceedings involving such claims. We cannot assure you that: - - we will prevail in pending actions; - - other actions alleging infringement by us of third-party patents or invalidity of our patents will not be asserted or prosecuted against us; or - - any assertions of infringement or actions seeking to establish the invalidity of our patents will not materially and adversely affect our business, financial condition and results of operations. Even if we are successful in such matters, the attempted enforcement of intellectual property rights by or against us could result in significant costs and diversion of our resources. It could also have a material adverse effect on our business, financial condition and results of operations. If claims or actions are asserted or commenced against us, in certain situations we may seek to obtain licenses under a third party's intellectual property rights to avert or resolve a controversy. We cannot assure you that under such circumstances a license would be available on commercially reasonable terms, if at all. We may not be successful in protecting our intellectual property rights. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies and processes. In addition, we often incorporate the intellectual property of our customers into our designs, and have certain obligations with respect to the non-use and non-disclosure of their intellectual property. We cannot assure you that: - - the steps we take to prevent misappropriation or infringement of our intellectual property or the intellectual property of our customers will be successful; - - any existing or future patents will not be challenged, invalidated or circumvented; or - - any of the measures described above would provide meaningful protection. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. If any of our patents fails to protect our technology it would make it easier for our competitors to offer similar products. In addition, effective copyright, trademark and trade secret protection may be unavailable or limited in certain countries. 11 Our intellectual property indemnification practice may adversely impact our business. We have historically indemnified our customers for certain costs and damages of patent infringement in circumstances where our product is the factor creating the customer's infringement exposure. This practice generally excludes coverage in circumstances where infringement arises out of the combination of our products with products of others. This indemnification practice could have a material adverse effect on our business, financial condition and results of operations, particularly in situations where our products are designed for use in devices manufactured by our customers that comply with international standards. These international standards are often covered by patent rights held by our competitors or our customers. The combined costs of obtaining licenses from all holders of patent rights essential to such standards could be high and could have a material adverse effect on our business, financial condition and results of operations. We operate in the highly cyclical semiconductor industry. The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles (of both semiconductor companies' and their customers' products) and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. We have, in the recent past, experienced these conditions in our dial-up PC modem chipset business and may experience such downturns in this and other product platforms in the future. For example, in fiscal 1998, average selling prices for our Personal Computing products fell by approximately 50 percent, the annual growth rate for such products fell to approximately 20 percent and in the fourth quarter, we made a provision for excess and obsolete inventories of approximately $66 million due to lower than anticipated demand, price declines and obsolescence of certain products. Any future downturns of this nature could have a material adverse effect on our business, financial condition and results of operations. From time to time the semiconductor industry also has experienced periods of increased demand and production capacity constraints. We may experience substantial changes in future operating results due to general semiconductor industry conditions, general economic conditions and other factors. We are subject to intense competition and could lose business to our competitors. The semiconductor industry in general and the markets in which we compete in particular are intensely competitive. We compete worldwide with a number of United States and international semiconductor manufacturers that are both larger and smaller than us in terms of resources and market share. We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted and is expected to continue to result in declining average selling prices for our products. We also anticipate that additional competitors will enter our markets as a result of growth opportunities in communications 12 electronics, the trend toward global expansion by foreign and domestic competitors, technological and public policy changes and relatively low barriers to entry in certain markets of the industry. We currently enjoy substantial market share in our V.90 and facsimile modem chipset product lines. However, as we continue our diversification strategy and develop our expansion platforms, we are and will be competing in certain new markets in which we have lesser market shares and existing competitors have dominant market positions. Moreover, as with many companies in the semiconductor industry, customers for certain of our products offer other products that compete with similar products offered by us. We believe that the principal competitive factors for integrated circuit ("IC") providers to our addressed markets are: - - product performance; - - level of integration; - - quality; - - compliance with industry standards; - - price; - - time-to-market; - - system cost; - - design and engineering capabilities; - - new product innovation; and - - customer support. The specific bases on which we compete vary by product platform. Many of our current and potential competitors have certain advantages, including: - - longer operating histories and presence in key markets; - - greater name recognition; - - access to larger customer bases; and - - significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we have. 13 As a result, such competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than Conexant. Current and potential competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect customers' purchasing decisions. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current and potential competitors. We also cannot assure you that competition will not have a material adverse effect on our business, financial condition and results of operations. Many of our competitors have combined with each other and consolidated their businesses, including the consolidation of competitors with our customers. This is attributable to a number of factors, including the high-growth nature of the communications electronic industry and the time-to-market pressures on suppliers to decrease the time required for product conception, research and development, sampling and production launch before a product reaches the market. This consolidation trend is expected to continue, since investments, alliances and acquisitions may enable semiconductor suppliers, including Conexant and our competitors, to augment technical capabilities or to achieve faster time-to-market for their products than would be possible solely through internal development. Consolidations by industry participants, including in some cases, acquisitions of certain of our customers by our competitors, are creating entities with increased market share, customer base, technology and marketing expertise in markets in which we compete. These developments may significantly and adversely affect our current markets, the markets we are seeking to serve and our ability to compete successfully in those markets. We may not be able to keep abreast of the rapid technological changes in our markets. The demand for our products can change quickly and in ways we may not anticipate because our markets generally exhibit the following characteristics: - - rapid technological developments; - - evolving industry standards; - - changes in customer requirements; - - frequent new product introductions and enhancements; and - - short product life cycles with declining prices over the life cycle of the product. Our products could become obsolete sooner than anticipated because of a faster than anticipated change in one or more of the technologies related to our products or in market demand for products based on a particular technology, particularly due to the introduction of new technology 14 that represents a substantial advance over current technology. Such an event could have a material adverse effect on our business, financial condition and results of operations. For example, increased market demand for sub-$1,000 PCs is causing PC OEMs to require less expensive modem devices, such as software modems, which require fewer semiconductor components than our traditional modem chipsets. As a result, these devices may render obsolete the traditional hardware upgrade path for our modem products. Currently accepted industry standards are also subject to change, which may contribute to the obsolescence of our products. Our manufacturing process is extremely complex and specialized. Our manufacturing operations are complex and subject to disruption due to causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of hundreds of separate steps. It requires production in a highly controlled, clean environment. Minute impurities, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer or a number of other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer not to function. Our operating results are highly dependent upon our ability to produce large volumes of integrated circuits at acceptable manufacturing yields. Our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities or those of our subcontractors. These disruptions may include labor strikes, work stoppages, fire, earthquake, flooding or other natural disasters. These disruptions could cause significant delays in shipments until we could shift the products from an affected facility or subcontractor to another facility or subcontractor. In the event of these types of delays, we cannot assure you that the required alternate capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternate wafer production capacity is available, we may not be able to obtain it on favorable terms, which would result in a loss of customers. Any inability to obtain sufficient manufacturing capacities to meet demand, either at our own facilities or through foundry or similar arrangements with others, could have a material adverse effect on our business, financial condition and results of operations. Certain of our manufacturing facilities are located near major earthquake fault lines, including our California and Mexico facilities. We maintain only minimal earthquake insurance coverage on these facilities. Due to the highly specialized nature of the gallium arsenide semiconductor manufacturing process, in the event of a disruption at our Newbury Park, California wafer fabrication facility, alternate gallium arsenide production capacity would not be readily available from third party sources. Although we recently entered into a multi-year agreement with a foundry that guarantees us access to additional gallium arsenide wafer production capacity beginning in the fourth quarter of calendar year 2000, a disruption of operations at our Newbury Park wafer fabrication facility or the interruption in the supply of epitaxial wafers used in our gallium arsenide process could have a material adverse effect on our business, financial condition and results of operations, particularly with respect to our Wireless Communications products. Our ability to sustain our revenue growth is also dependent on our ability to secure adequate additional manufacturing capacity, including wafer production capacity. We have recently entered 15 into agreements with outside foundries to secure additional wafer manufacturing capacity, including additional gallium arsenide wafer production capacity. In addition, we continue to explore wafer manufacturing alternatives, which may include increased use of outside foundries, entering into new or expanded business relationships with respect to wafer manufacturing or other actions related to our wafer manufacturing facilities. We cannot assure you that we will be successful in securing adequate additional manufacturing capacity, and our inability to do so could result in delays in customer shipments. We may not be able to achieve manufacturing yields to maintain our profitability. Minor deviations in the manufacturing process can cause substantial manufacturing yield loss, and in some cases, cause production to be suspended. Manufacturing yields for new products initially tend to be lower as we complete product development and commence volume manufacturing, and will typically increase as we ramp to full production. Our forward product pricing includes this assumption of improving manufacturing yields and, as a result, material variances between projected and actual manufacturing yields have a direct effect on our gross margin and profitability. The difficulty of forecasting manufacturing yields accurately and maintaining cost competitiveness through improving manufacturing yields will continue to be magnified by the ever increasing process complexity of manufacturing integrated circuit products. Our manufacturing operations also face pressures arising from the compression of product life cycles which requires us to bring new products on line faster and for shorter periods while maintaining acceptable manufacturing yields and quality without, in many cases, reaching the longer-term, high volume manufacturing conducive to higher manufacturing yields and declining costs. We are dependent upon third parties for the supply of raw materials and components. We believe we have adequate sources for the supply of raw materials and components for our manufacturing needs with suppliers located around the world. Although we currently purchase wafers used in the production of our CMOS products from one major supplier, such wafers are available from several other suppliers. We are currently dependent on two suppliers for epitaxial wafers used in the gallium arsenide semiconductor manufacturing processes at our Newbury Park, California facility and we are in the process of arranging another supplier for epitaxial wafers. The number of qualified alternative suppliers for wafers is limited and the process of qualifying a new wafer supplier could require a substantial leadtime. Although we historically have not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for our manufacturing operations, the loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have a material adverse effect on our business, financial condition and results of operations. Uncertainties involving the ordering and shipment of our products could adversely affect our business. Our sales are typically made pursuant to individual purchase orders and we generally do not have long-term supply arrangements with our customers. Our customers may cancel orders until 30 days prior to the shipping date. In addition, we sell a portion of our products through distributors 16 who have certain rights to return unsold products to us. Moreover, semiconductor companies, including Conexant, routinely manufacture or purchase inventory based on estimates of customer demand for their products, which is difficult to predict. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize could result in our holding excess or obsolete inventory which could have a material adverse effect on our business, financial condition and results of operations. We are subject to the risks of doing business internationally. For the six months ended March 31, 2000, approximately 69 percent of our total sales were to customers located outside the United States, primarily in the Asia-Pacific and European countries. In addition, we have facilities and suppliers located outside the United States, including our assembly and test facility in Mexicali, Mexico and third-party foundries located in the Asia-Pacific region. Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include, but are not limited to, risks regarding: - - currency exchange rate fluctuations; - - local economic and political conditions; - - disruptions of capital and trading markets; - - restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs); - - changes in legal or regulatory requirements; - - import or export licensing requirements; - - limitations on the repatriation of funds; - - difficulty in obtaining distribution and support; - - nationalization; - - the laws and policies of the United States affecting trade, foreign investment and loans; - - tax laws; and - - limitations on our ability under local laws to protect our intellectual property. Because most of our international sales, other than sales to Japan (which are denominated principally in Japanese yen), are currently denominated in U.S. dollars, our products could become 17 less competitive in international markets if the value of the U.S. dollar increases relative to foreign currencies. Moreover, we may be competitively disadvantaged relative to our competitors located outside the United States who may benefit from a devaluation of their local currency. We cannot assure you that the factors described above will not have a material adverse effect on our ability to increase or maintain our foreign sales or on our business, financial condition and results of operations. Our past operating performance has been impacted by adverse economic conditions in the Asia-Pacific region, which have increased the uncertainty with respect to the long-term viability of certain of our customers and suppliers in the region. Sales to customers in Japan and other countries in the Asia-Pacific region, principally Taiwan, South Korea and Hong Kong, represented approximately 58 percent of total revenues in the first six months of fiscal 2000. We enter into foreign currency forward exchange contracts, principally for the Japanese yen, to minimize risk of loss from currency exchange rate fluctuations for foreign currency commitments entered into in the ordinary course of business. We have not experienced nor do we anticipate any material adverse effect on our results of operations or financial condition related to these foreign currency forward exchange contracts. We have not entered into foreign currency forward exchange contracts for other purposes and our financial condition and results of operations could be affected (negatively or positively) by currency fluctuations. Our success depends on our ability to effect suitable investments, alliances or acquisitions. Although we invest significant resources in research and development activities, the complexity and rapidity of technological changes make it impractical for us to pursue development of all technological solutions on our own. As part of our goal to provide advanced semiconductor product systems, we have and will continue to review on an ongoing basis investment, alliance and acquisition prospects that would complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future. Moreover, if we consummate such transactions, they could result in: - - the diversion of management resources; - - dilutive issuances of equity securities; - - large one-time write-offs; - - the incurrence of debt and contingent liabilities; - - amortization expenses related to goodwill and other intangible assets; and 18 - - other acquisition related costs. Any of these events could materially adversely affect our business, financial condition and results of operations and the price of our common stock. For example, as a result of our acquisitions in early fiscal 2000, we recorded a charge of $145.9 million for purchased in-process research and development and we expect to record amortization expense related to goodwill and intangible assets of approximately $200 million annually for five years. The ultimate success of any such investments, alliances or acquisitions in achieving the purposes for which they are undertaken will depend on our ability to integrate successfully any acquired business and to retain key personnel, as well as a variety of other factors. Our success could be negatively affected if key personnel leave. Our future success depends largely upon the continued service of our executive officers and other key management and technical personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified personnel. We are dependent on key technical personnel. They represent a significant asset, as the source of our technological and product innovations. The competition for such personnel is intense in the semiconductor industry. We cannot assure you that we will be able to continue to attract and retain qualified management and other personnel necessary for the design, development, manufacture and sale of our products. We may have difficulty attracting and retaining key personnel during periods of poor operating performance. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations. In particular, the loss of the services of Dwight W. Decker, our Chairman and Chief Executive Officer, or certain key design and technical personnel could materially and adversely affect us. Our management team may be subject to a variety of demands for its attention. Our management currently faces a variety of challenges. These include implementing our ongoing diversification and expansion strategy and continuing to expand the infrastructure and systems necessary for us to operate as an independent public company and to integrate our recent acquisitions. While we believe that we have sufficient management resources to execute each of these initiatives, we cannot assure you that we will have these resources or that our initiatives will be successfully implemented. Failure to implement these initiatives successfully could have a material adverse effect on our business, financial condition and results of operations. We may be liable for penalties under environmental laws, rules and regulations, which could negatively affect our success. We use a variety of chemicals in our manufacturing operations and are subject to a wide range of environmental protection regulations in the United States, Mexico and Canada. While we have not experienced any material adverse effect on our operations as a result of such regulations, 19 we cannot assure you that current or future regulations would not have a material adverse effect on our business, financial condition and results of operations. In the United States, environmental regulations often require parties to fund remedial action regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including potential liabilities. We cannot assure you that the amount of expense and capital expenditures that might be required to complete remedial actions and to continue to comply with applicable environmental laws will not have a material adverse effect on our business, financial condition and results of operations. We have been designated as a potentially responsible party at one Superfund site located at a former silicon wafer manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania formerly occupied by Semiconductor Systems. The site was also formerly occupied by Recticon Corporation and Allied Steel Products Corporation, each of whom has been named as a potentially responsible party and each of whom is insolvent. We have accrued approximately $4 million at March 31, 2000 for the cost of groundwater remediation, including installation of a public water supply line and groundwater pump and treatment system, as well as routine groundwater sampling. In addition, we are engaged in two other remediations of groundwater contamination at our Newport Beach and Newbury Park, California facilities for which we have accrued approximately $3 million for the costs of remediation at March 31, 2000. Pursuant to our agreement with Rockwell, we have assumed liabilities in respect of environmental matters related to current and former operations of Conexant. We have a limited history as an independent company. We have a limited operating history as an independent company. Accordingly, the financial information incorporated into this prospectus for periods prior to January 1, 1999 may not necessarily reflect the results of the operations, financial position and cash flows we would have achieved if we had operated independently during the periods presented. We cannot assure you that we will be profitable on an ongoing basis as a stand-alone company. Prior to the spin-off, we relied on Rockwell for cash investments and various financial and administrative services. The value of our common stock may be adversely affected by market volatility. The trading price of our common stock fluctuates significantly. Since our common stock began trading publicly, the reported sale price of our common stock on the Nasdaq National Market has been as high as $132-1/2 and as low as $6-27/32 per share. This price may be influenced by many factors, including: - - our performance and prospects; - - the depth and liquidity of the market for our common stock; - - investor perception of Conexant and the industry in which it operates; - - changes in earnings estimates or buy/sell recommendations by analysts; 20 - - general financial and other market conditions; and - - domestic and international economic conditions. In addition, public stock markets have experienced, and are currently experiencing, extreme price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. Certain provisions in our organizational documents and rights agreement and Delaware law may make it difficult for someone to acquire control of Conexant. We have established certain anti-takeover measures that may affect our common stock and convertible notes. Our restated certificate of incorporation, our by-laws, our rights agreement with ChaseMellon Shareholder Services, L.L.C., as rights agent, dated as of November 30, 1998, as amended, and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of Conexant in a transaction not approved by our board of directors. Our restated certificate of incorporation and by-laws include provisions such as: - - the ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our shareowners; - - a fair price provision, as described under "Description of Capital Stock -- Certain Provisions of Our Restated Certificate of Incorporation and By-Laws"; - - a prohibition on shareowner action by written consent, as described under "Description of Capital Stock -- Certain Provisions of Our Restated Certificate of Incorporation and By-Laws"; - - a requirement that shareowners provide advance notice of any shareowner nominations of directors or any proposal of new business to be considered at any meeting of shareowners; - - a requirement that a supermajority vote be obtained to remove a director for cause or to amend or repeal certain provisions of our restated certificate of incorporation or by-laws; - - elimination of the right of shareowners to call a special meeting of shareowners; and - - the division of our board of directors into three classes to be elected on a staggered basis, one class each year. 21 We also have a rights agreement which gives our shareowners certain rights that would substantially increase the cost of acquiring us in a transaction not approved by our board of directors. In addition to the rights agreement and the provisions in our restated certificate of incorporation and by-laws, Section 203 of the Delaware General Corporation Law provides that, subject to certain exceptions, a corporation shall not engage in any business combination with any interested shareowner during the three-year period following the time that such shareowner becomes an interested shareowner. The restrictions of Section 203 of the Delaware General Corporation Law, in certain circumstances, make it more difficult for a person who would be an interested shareowner to effect various business combinations with a corporation during this three-year period. The provisions of Section 203 of the Delaware General Corporation Law provide that the shareowner approval requirement may be avoided if a majority of the directors then in office approved either the business combination or the transaction that resulted in the shareowner becoming an interested shareowner. We may be responsible for certain federal income tax liabilities that relate to our spin-off from Rockwell. In connection with our spin-off from Rockwell, the Internal Revenue Service issued a tax ruling to Rockwell stating that the spin-off would qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended. While the tax ruling generally is binding on the Internal Revenue Service, the continuing validity of the tax ruling is subject to certain factual representations and assumptions. We are not aware of any facts or circumstances that would cause such representations and assumptions to be untrue. The Tax Allocation Agreement dated as of December 31, 1998 between Conexant and Rockwell provides that we will be responsible for any taxes imposed on Rockwell, Conexant or Rockwell shareowners as a result of either: - - the failure of the spin-off from Rockwell to qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(D) of the Internal Revenue Code or - - the subsequent disqualification of the spin-off from Rockwell as a tax-free transaction to Rockwell under Section 361(c)(2) of the Internal Revenue Code, if the failure or disqualification is attributable to certain post-spin-off actions by or in respect of Conexant (including our subsidiaries) or our shareowners, such as our acquisition by a third party at a time and in a manner that would cause such failure or disqualification. The Tax Allocation Agreement also provides, among other things, that neither Rockwell nor Conexant is to take any action inconsistent with, nor fail to take any action required by, the request for the tax ruling or the tax ruling unless: - - required to do so by law; - - the other party has given its prior written consent; or 22 - - in certain circumstances, a supplemental ruling permitting such action is obtained. Rockwell and Conexant have indemnified each other for any tax liability resulting from each entity's failure to comply with these provisions. In addition, we effected certain tax-free intragroup spin-offs as a result of Rockwell's spin-off of Meritor Automotive, Inc. on September 30, 1997. The Tax Allocation Agreement provides that we will be responsible for any taxes imposed on Rockwell, Conexant or Rockwell shareowners in respect of those intragroup spin-offs if such taxes are attributable to certain actions taken after the spin-off from Rockwell by or in respect of Conexant (including our subsidiaries) or our shareowners, such as our acquisition by a third party at a time and in a manner that would cause the taxes to be incurred. If we were required to pay any of the taxes described above, such payment would have a material adverse effect on our financial position, results of operations and cash flow. USE OF PROCEEDS We will receive no cash proceeds from holders of exchangeable shares for the issuance of shares of our common stock. We will receive nominal cash amounts equal to the exercise price payable on exercise of the warrants or options for our common stock which we will use for general corporate purposes. PRICE RANGE OF COMMON STOCK Our common stock began trading on the Nasdaq National Market under the symbol "CNXT" on January 4, 1999. The following table lists the high and low per share sale prices for our common stock as reported by the Nasdaq National Market for the periods indicated. These per share sale prices reflect the 2-for-1 stock split effected in the form of a stock dividend on October 29, 1999.
High Low ---- --- Fiscal year ending September 30, 1999: Second quarter............................................. $ 13 27/32 $ 6 27/32 Third quarter.............................................. $ 31 15/16 $ 13 3/16 Fourth quarter............................................. $ 41 17/32 $ 27 5/8 Fiscal year ending September 30, 2000: First quarter.............................................. $ 76 3/16 $ 30 7/8 Second quarter............................................. $ 132 1/2 $ 53 Third quarter (through June 7, 2000)....................... $ 79 $ 31 1/4
23 On June 7, 2000 the last sale price of our common stock as reported on the Nasdaq National Market was $47 per share. As of May 26, 2000 there were approximately 51,000 holders of record of our common stock. DIVIDEND POLICY We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. In addition, our existing bank credit facility limits our ability to declare and pay dividends. DESCRIPTION OF CAPITAL STOCK The following description of our capital stock includes a summary of certain provisions of our restated certificate of incorporation and our by-laws. This description is subject to the detailed provisions of, and is qualified by reference to, our restated certificate of incorporation, as amended, and our by-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. We are authorized to issue (1) 1,000,000,000 shares of common stock, of which approximately 217,500,000 shares of common stock were outstanding as of May 26, 2000, and (2) 25,000,000 shares of preferred stock, without par value, of which our board of directors has designated (a) 1,500,000 shares as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of our preferred share purchase rights and (2) one share as Series B Voting Preferred Stock issued in connection with the Philsar acquisition. For a more detailed discussion of our preferred share purchase rights and how they relate to our common stock, see "Conexant Rights Plan". The authorized shares of common stock and preferred stock will be available for issuance without further action by our shareowners, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. If the approval of our shareowners is not so required, our board of directors may determine not to seek shareowner approval. Certain of the provisions described under this section entitled "Description of Capital Stock" could have the effect of discouraging transactions that might lead to a change of control of Conexant. Our restated certificate of incorporation and by-laws: - - establish a classified board of directors, whereby our directors are elected for staggered terms in office so that only one-third of our directors stand for election in any one year; - - require shareowners to provide advance notice of any shareowner nominations of directors or any proposal of new business to be considered at any meeting of shareowners; 24 - - require a supermajority vote to remove a director or to amend or repeal certain provisions of our restated certificate of incorporation or by-laws; and - - preclude shareowners from calling a special meeting of shareowners. Common Stock Holders of common stock are entitled to such dividends as may be declared by our board of directors out of funds legally available therefor. Dividends may not be paid on common stock unless all accrued dividends on preferred stock, if any, have been paid or set aside. In addition, pursuant to the Support Agreement dated as of May 30, 2000 between Conexant and Philsar, dividends may not be declared and paid on the common stock unless Philsar has, or is provided with, funds to pay a like dividend on the exchangeable shares. In the event of our liquidation, dissolution or winding up, the holders of common stock will be entitled to share pro rata in the assets remaining after payment to creditors and after payment of the liquidation preference plus any unpaid dividends to holders of any outstanding preferred stock. See "Dividend Policy". Each holder of common stock will be entitled to one vote for each such share outstanding in such holder's name. No holder of common stock will be entitled to cumulate votes in voting for directors. Our certificate provides that, unless otherwise determined by our board of directors, no holder of common stock will have any right to purchase or subscribe for any stock of any class which we may issue or sell. ChaseMellon Shareholder Services, L.L.C. is the transfer agent and registrar for our common stock. Preferred Stock Our restated certificate of incorporation permits us to issue up to 25,000,000 shares of our preferred stock in one or more series and with rights and preferences that may be fixed or designated by our board of directors without any further action by our shareowners. Our board of directors has designated (1) 1,500,000 shares of our preferred stock as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of our preferred share purchase rights and (2) one share of our preferred stock as Series B Voting Preferred Stock issued in connection with the Philsar acquisition. The powers, preferences, rights and qualifications, limitations and restrictions of the preferred stock of any other series will be fixed by the certificate of designation relating to such series, which will specify the terms of the preferred stock, including: - - the maximum number of shares in the series and the distinctive designation; - - the terms on which dividends, if any, will be paid; - - the terms on which the shares may be redeemed, if at all; - - the terms of any retirement or sinking fund for the purchase or redemption of the shares of the series; 25 - - the liquidation preference, if any; - - the terms and conditions, if any, on which the shares of the series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock; - - the restrictions on the issuance of shares of the same series or any other class or series; and - - the voting rights, if any, on the shares of the series. Although our board of directors has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. Series A Junior Participating Preferred Stock For a description of the Series A Junior Participating Preferred Stock, see "-- Conexant Rights Plan". Series B Voting Preferred Stock Under the Voting and Exchange Trust Agreement entered into in connection with the Philsar acquisition, Conexant issued one share of Series B Voting Preferred Stock to CIBC Mellon Trust Company, as trustee of the voting trust established thereunder, which is holding the share in trust for the benefit of the holders of the exchangeable shares. The Series B preferred stock entitles the trustee to vote at meetings of the holders of our common stock. For each exchangeable share that is not held by us or one of our subsidiaries on the record date for any meeting of holders of our common stock, the trustee will have one vote for each such exchangeable share at such meeting, which will be exercised only to the extent that the trustee receives voting instructions from the registered holders of exchangeable shares. The trustee is entitled to notice of any stockholder's meeting in accordance with our by-laws. The trustee, as the holder of the Series B preferred stock, is entitled to receive such dividends and distributions in equal amounts per exchangeable share, payable in cash or otherwise, as may be declared per share of Conexant's common stock by Conexant's board of directors from time to time out of assets or funds of Conexant legally available therefor to the holder of record as it appears on the stock books on such record dates as are fixed by the board of directors out of funds at the time legally available for the payment of dividends. Such dividends will not be cumulative. In the event of a liquidation, dissolution or winding up of Conexant, whether voluntary or involuntary, the holder of Series B preferred stock is entitled to receive out of the assets of Conexant, whether such assets are capital or surplus of any nature, an amount equal to the sum of (1) the dividends declared but not paid thereon to the date of the final distribution to such holder, and (2) $100 per share, and no more, before any payment shall be made or any assets distributed to the holders of shares of our common stock or any other class or series of Conexant's capital stock ranking junior as to liquidation rights to the Series B preferred stock. 26 The Series B preferred stock is not convertible into or exchangeable for any other class or series of capital stock, or any other securities, of Conexant or any other corporation. The Series B preferred stock is not subject to redemption by Conexant until such time as there are no exchangeable shares outstanding which are not owned by Conexant or any of its direct or indirect subsidiaries. Thereafter, the share of Series B preferred stock may be redeemed at any time by Conexant, out of funds legally available for a stock redemption, for cash, at a price equal to the sum of $1.00 plus any declared and unpaid dividends, upon giving 30 days' written notice to the holder of record of the Series B preferred stock at the address of such holder set forth in the stock books of Conexant. No sinking fund has been provided for the purchase or redemption of Series B preferred stock. At such time as (1) the Series B preferred stock is no longer entitled to vote at a meeting of holders of our common stock because there are no exchangeable shares outstanding which are not owned by Conexant or any of its direct or indirect subsidiaries, and (2) there is no share of stock, warrant, option or other agreement, obligation or commitment of Philsar which by its terms could require Philsar to issue any exchangeable shares to any person other than Conexant or any of its direct or indirect subsidiaries, then the share of Series B preferred stock will be retired and canceled promptly thereafter. Such share will upon its cancellation, and upon the taking of any action required by applicable law, become an authorized but unissued preferred share and may be reissued as part of a new series of preferred shares to be created by resolution or resolutions of our board of directors, subject to the conditions and restrictions on issuance set forth in our certificate of incorporation. The Series B preferred stock ranks pari passu with our common stock as to payment of dividends and prior to our common stock and our Series A junior preferred stock as to distribution of assets upon liquidation to the extent provided above. Certain Provisions in Our Restated Certificate of Incorporation and By-Laws Our certificate and by-laws contain various provisions intended to (1) promote the stability of our shareowner base and (2) render more difficult certain unsolicited or hostile attempts to take us over which could disrupt us, divert the attention of our directors, officers and employees and adversely affect the independence and integrity of our business. Pursuant to our certificate, the number of directors is fixed by our board of directors. Other than directors elected by the holders of any series of preferred stock or any other series or class of stock except common stock, our directors are divided into three classes, each class to consist as nearly as possible of one-third of the directors. Directors elected by shareowners at an annual meeting of shareowners will be elected by a plurality of all votes cast. Currently, the terms of office of the three classes of directors expire, respectively, at our annual meetings in 2001, 2002 and 2003. The term of the successors of each such class of directors expires three years from the year of election. Our restated certificate of incorporation contains a fair price provision pursuant to which a Business Combination (as defined in our restated certificate of incorporation) between us or one of 27 our subsidiaries and an Interested Shareowner (as defined in our restated certificate of incorporation) requires approval by the affirmative vote of the holders of not less than 80 percent of the voting power of all of our outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class, unless the Business Combination is approved by at least two-thirds of the Continuing Directors (as defined in our restated certificate of incorporation) or certain fair price criteria and procedural requirements specified in the fair price provision are met. If either the requisite approval of our board of directors or the fair price criteria and procedural requirements were met, the Business Combination would be subject to the voting requirements otherwise applicable under the Delaware General Corporation Law, which for most types of Business Combinations currently would be the affirmative vote of the holders of a majority of all of our outstanding shares of stock entitled to vote thereon. Any amendment or repeal of the fair price provision, or the adoption of provisions inconsistent therewith, must be approved by the affirmative vote of the holders of not less than 80 percent of the voting power of all of our outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class, unless such amendment, repeal or adoption were approved by at least two-thirds of the Continuing Directors, in which case the provisions of the Delaware General Corporation Law would require the affirmative vote of the holders of a majority of the outstanding shares of our capital stock entitled to vote thereon. Our restated certificate of incorporation and by-laws provide that a special meeting of shareowners may be called only by a resolution adopted by a majority of the entire board of directors. Shareowners are not permitted to call, or to require that the board of directors call, a special meeting of shareowners. Moreover, the business permitted to be conducted at any special meeting of shareowners is limited to the business brought before the meeting pursuant to the notice of the meeting given by us. In addition, our certificate provides that any action taken by our shareowners must be effected at an annual or special meeting of shareowners and may not be taken by written consent in lieu of a meeting. Our by-laws establish an advance notice procedure for shareowners to nominate candidates for election as directors or to bring other business before meetings of our shareowners. Our restated certificate of incorporation provides that the affirmative vote of at least 80 percent of the voting power of all of our outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class, would be required to: - - amend or repeal the provisions of our certificate with respect to (a) the election of directors, (b) the right to call a special shareowners' meeting or (c) the right to act by written consent; - - adopt any provision inconsistent with such provisions; or - - amend or repeal the provisions of our restated certificate of incorporation with respect to amendments to our restated certificate of incorporation or by-laws. In addition, our restated certificate of incorporation provides that our board of directors may make, alter, amend and repeal our by-laws and that the amendment or repeal by shareowners of 28 any of our by-laws would require the affirmative vote of at least 80 percent of the voting power described above, voting together as a single class. Conexant Rights Plan Each outstanding share of common stock also evidences one preferred share purchase right. Each preferred share purchase right entitles the registered holder to purchase from us one two-hundredth of a share of Series A Junior Participating Preferred Stock, at $300, subject to adjustment. The description and terms of the preferred share purchase rights are set forth in the rights agreement dated as of November 30, 1998, as amended as of December 9, 1999. Until the earlier to occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 20 percent or more of the outstanding common stock or (2) 10 business days, or such later date as may be determined by our board of directors prior to such time as any person or group becomes an Acquiring Person, following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20 percent or more of the outstanding common stock, preferred share purchase rights will be attached to common stock and will be owned by the registered owners of common stock. The rights agreement provides that, until the preferred share purchase rights are no longer attached to the common stock, or until the earlier redemption or expiration of the preferred share purchase rights: - - the preferred share purchase rights will be transferred with and only with common stock; - - certificates representing common stock and statements in respect of shares of common stock registered in book-entry or uncertificated form will contain a notation incorporating the terms of the preferred share purchase rights by reference; and - - the transfer of any shares of common stock will also constitute the transfer of the associated preferred share purchase rights. As soon as practicable following the date the preferred share purchase rights are no longer attached to the common stock (the "Distribution Date"), separate certificates evidencing preferred share purchase rights will be mailed to holders of record of common stock as of the close of business on the date the preferred share purchase rights are no longer attached to the common stock and the separate certificates alone will evidence preferred share purchase rights. In addition, the rights agreement provides that in connection with the issuance or sale of our common stock following the Distribution Date and prior to the earlier of (1) the date the preferred share purchase rights are redeemed and (2) the date the preferred share purchase rights expire, (a) we will, with respect to common stock issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement in existence prior to the Distribution Date, or upon the exercise, 29 conversion or exchange of securities, notes or debentures (pursuant to the terms thereof) issued by us and in existence prior to the Distribution Date, and (b) we may, in any other case, if deemed necessary or appropriate by the board of directors, issue certificates representing the appropriate number of preferred share purchase rights in connection with such issuance or sale. We will not be obligated to issue any of these certificates if, and to the extent that, we are advised by counsel that the issuance of those certificates would create a significant risk of material adverse tax consequences to us or the person to whom such certificate would be issued or would create a significant risk that the stock options or employee plans or arrangements would fail to qualify for otherwise available special tax treatment. In addition, no certificate will be issued if, and to the extent that, appropriate adjustments otherwise have been made in lieu of the issuance thereof. Preferred share purchase rights will not be exercisable until the Distribution Date. Preferred share purchase rights will expire on December 31, 2008, unless this expiration date is extended or unless preferred share purchase rights are earlier redeemed by us, in each case, as described below. The purchase price payable, and the number of shares of Series A junior preferred stock or other securities or property issuable, upon exercise of the preferred share purchase rights will be subject to adjustment from time to time to prevent dilution upon the occurrence of the following events: - - in the event of a stock dividend on, or a subdivision, combination or reclassification of, Series A junior preferred stock; - - upon the grant to holders of shares of Series A junior preferred stock of certain rights or warrants to subscribe for or purchase shares of Series A junior preferred stock at a price, or securities convertible into shares of Series A junior preferred stock with a conversion price, less than the then current market price of the shares of Series A junior preferred stock; or - - upon the distribution to holders of shares of Series A junior preferred stock of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in shares of Series A junior preferred stock) or of subscription rights or warrants (other than those referred to above). The number of outstanding preferred share purchase rights and the number of one two-hundredths of a share of Series A junior preferred stock issuable upon exercise of each preferred share purchase right will also be subject to adjustment in the event of a stock split of common stock or a stock dividend on common stock payable in common stock or subdivisions, consolidations or combinations of common stock occurring, in any such case, prior to the date the preferred share purchase rights are no longer attached to the common stock. We cannot redeem shares of Series A junior preferred stock purchasable upon exercise of preferred share purchase rights. Each share of Series A junior preferred stock will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock whenever such dividend is 30 declared. In the event of liquidation, the holders of Series A junior preferred stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per share of common stock. Each share of Series A junior preferred stock will have 100 votes, voting together with common stock. In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each share of Series A junior preferred stock will be entitled to receive 100 times the amount received per share of common stock. These rights will be protected by customary antidilution provisions. Because of the nature of the Series A junior preferred stock's dividend, liquidation and voting rights, the value of each one-hundredth interest in a share of Series A junior preferred stock purchasable upon exercise of each preferred share purchase right should approximate the value of one share of common stock. In the event that, at any time after a person has become an Acquiring Person, we are acquired in a merger or other business combination transaction or 50 percent or more of our consolidated assets or earning power is sold, proper provision will be made so that each holder of a preferred share purchase right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of a preferred share purchase right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of a preferred share purchase right. In the event that any person becomes an Acquiring Person, proper provision shall be made so that each holder of a preferred share purchase right, other than preferred share purchase rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise, in lieu of shares of Series A junior preferred stock, that number of shares of common stock having a market value of two times the exercise price of a preferred share purchase right. At any time after any person or group of affiliated or associated persons becomes an Acquiring Person, and prior to the acquisition by such person or group of 50 percent or more of the outstanding shares of common stock, our board of directors may exchange preferred share purchase rights (other than preferred share purchase rights owned by such person or group, which will have become void after such person became an Acquiring Person) for common stock or Series A junior preferred stock, in whole or in part, at an exchange ratio of one share of common stock, or two hundredths of a share of Series A junior preferred stock (or of a share of another series of preferred stock having equivalent rights, preferences and privileges), per preferred share purchase right (subject to adjustment). With certain exceptions, no adjustment in the purchase price will be required until cumulative adjustments require an adjustment of at least one percent. No fractional shares of Series A junior preferred stock will be issued, other than fractions which are integral multiples of one two-hundredth of a share of Series A junior preferred stock, which may, at our election, be evidenced by depository receipts. Instead, an adjustment in cash will be made based on the market price of Series A junior preferred stock on the last trading day prior to the date of exercise. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20 percent or more of the outstanding shares of common stock, our board of 31 directors may redeem preferred share purchase rights in whole, but not in part, at a price of $.01 per preferred share purchase right. The redemption of preferred share purchase rights may be made effective at such time, on such basis and with such conditions as our board of directors may determine, in its sole discretion. Immediately upon any redemption of preferred share purchase rights, the right to exercise preferred share purchase rights will terminate and the only right of the holders of preferred share purchase rights will be to receive the redemption price. The terms of preferred share purchase rights may be amended by our board of directors without the consent of the holders of preferred share purchase rights, including an amendment to decrease the threshold at which a person becomes an Acquiring Person from 20 percent to not less than 10 percent, except that from and after such time as any person becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of preferred share purchase rights. Until a preferred share purchase right is exercised, the holder thereof, as such, will have no rights as a shareowner of Conexant, including, without limitation, the right to vote or to receive dividends. The foregoing summary of the material terms of preferred share purchase rights is qualified by reference to the rights agreement, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part. INCOME TAX CONSIDERATIONS REGARDING OUR COMMON STOCK AND THE EXCHANGE OF EXCHANGEABLE SHARES Canadian Federal Income Tax Considerations We have been advised by McCarthy Tetrault, counsel for Conexant, that summarized below are the principal consequences under the Income Tax Act (Canada) (the "Canadian Tax Act") generally applicable to (i) certain holders of exchangeable shares of Philsar in respect of the exchange of exchangeable shares for our common stock, (ii) certain holders of warrants or options to purchase shares of our common stock (other than Philsar options acquired by employees by virtue of their employment) which were amended in connection with our acquisition of Philsar in respect of the exercise of such warrants to purchase our common stock ("amended warrants") and options to purchase our common stock ("amended options") and (iii) such holders of exchangeable shares, amended warrants or amended options in respect of the acquisition, holding and disposition of our common stock. The summary does not discuss the income tax consequences in respect of the acquisition or holding of exchangeable shares, amended warrants or amended options. This summary also does not consider the income tax consequences that could arise by virtue of the special rules contained in the Canadian Tax Act applicable to employees who acquire shares of, or options for, the capital stock of their employer by virtue of their employment. Further, the summary does not apply to certain "financial institutions" that are subject to the "mark-to-market" rules contained in the Canadian Tax Act (as those terms are defined in the Canadian Tax Act). 32 This summary is based on the current provisions of the Canadian Tax Act and the regulations thereunder (the "Canadian Tax Regulations") in force as of the date hereof, the current published administrative policies of the Canada Customs and Revenue Agency (the "Revenue Agency") and all specific proposals (the "Tax Proposals") to amend the Canadian Tax Act and the Canadian Tax Regulations publicly announced by the Minister of Finance of Canada prior to the date hereof. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, and does not take into account provincial, territorial or foreign tax considerations which may differ significantly from those discussed herein. With respect to the Tax Proposals, no assurance can be given that the Tax Proposals will be enacted in the form proposed or at all. This summary is of general nature only and not intended to be, nor should it be construed to be, legal or tax advice to any particular holder of exchangeable shares, amended warrants or amended options. Accordingly, such holders, and particularly those to whom this summary is not applicable, should consult with their own tax advisors for advice with respect to the tax consequences to them having regard to their own particular circumstances. Holders Resident in Canada For purposes of this summary, Canadian Holders are holders of exchangeable shares, amended warrants or amended options who, for purposes of the Canadian Tax Act and at all relevant times, are resident or deemed to be resident in Canada, hold their exchangeable shares, amended warrants or amended options, and will hold any of our common stock, as capital property and deal at arm's length with Philsar and Conexant. This part of the summary is applicable only to Canadian Holders. Canadian Holders should consult with their own tax advisors as to whether they will hold their exchangeable shares, amended warrants or amended options and Conexant common stock as capital property for purposes of the Canadian Tax Act. Securities will generally be considered to be capital property to a Canadian Holder unless the Canadian Holder holds the securities in the course of carrying on a business of trading or dealing in securities or otherwise as part of a business of buying and selling securities or the Canadian Holder acquired the securities in a venture in the nature of trade. Certain Canadian Holders whose shares might not otherwise be considered to be capital property may be entitled to have their shares deemed to be capital property by making the irrevocable election permitted by subsection 39(4) of the Canadian Tax Act. The Canadian federal income tax consequences to a Canadian Holder who disposes of exchangeable shares are quite different depending on whether the event giving rise to the disposition is (i) a redemption by Philsar of exchangeable shares (including pursuant to an exchangeable shareholders' retraction right) or (ii) an acquisition by us (or a Canadian subsidiary of ours through which exchanges may be effected ("Conexant Sub")) of exchangeable shares, although in each such case the disposition is a taxable transaction for the Canadian Holder. A Canadian Holder who exercises the right to require redemption of an exchangeable share cannot control whether the exchangeable share will be acquired by us or Conexant Sub under the overriding call rights or 33 redeemed by Philsar; however, the Canadian Holder will be notified if the overriding call rights will not be exercised in which case the Canadian Holder may cancel the exercise of the retraction right and retain the exchangeable share. Acquisition by Conexant or Conexant Sub of Exchangeable Shares Where an exchangeable share of a Canadian Holder is acquired by us or Conexant Sub for a share of our common stock, in general the Canadian Holder will realize a capital gain (or a capital loss) equal to the amount by which the Canadian Holder's proceeds of disposition in respect of the disposition of the exchangeable share exceed (or are exceeded by) the total of (i) the adjusted cost base of the exchangeable share to the Canadian Holder, and (ii) any reasonable costs of disposition. The proceeds of disposition in respect of the disposition of the exchangeable share will be equal to the fair market value of the share of our common stock at the time of the exchange plus the amount of all declared but unpaid dividends, if any, on the exchangeable share. The acquisition of an exchangeable share of a Canadian Holder by us or Conexant Sub should not result in a deemed dividend to the Canadian Holder. A Canadian Holder must include in income two-thirds of the amount of any capital gain as a "taxable capital gain" for the taxation year in which a disposition of exchangeable shares occurs and generally will be entitled to deduct two-thirds of any capital loss as an "allowable capital loss" against taxable capital gains realized in such taxation year or in any of the three preceding taxation years or in any subsequent taxation year to the extent and under the circumstances described in the Canadian Tax Act. The Tax Proposals contain transitional rules which may increase the proportion of a capital loss that will be recognized as an allowable capital loss to be applied against taxable capital gains in taxation years that include February 27, 2000 or end before such date. A Canadian Holder that is throughout the relevant taxation year a "Canadian-controlled private corporation" may be liable to pay, in addition to the tax otherwise payable under the Canadian Tax Act, a refundable tax of 6-2/3% determined by reference to its aggregate investment income for the year, which is defined to include an amount in respect of taxable capital gains. Capital gains realized by individuals and trusts, other than certain specified trusts, may be subject to alternative minimum tax. The Canadian Tax Act provides that the tax payable by individuals and such trusts is the greater of the tax otherwise determined and an alternative minimum tax. For purposes of computing the alternative minimum tax, a portion of all capital gains is added back to the individual's or the trust's income as otherwise determined. In the case of a Canadian Holder that is a corporation, partnership or trust, the amount of any capital loss otherwise determined may be reduced by the amount of dividends previously received to the extent and under the circumstances described in the Canadian Tax Act. Redemption by Philsar of Exchangeable Shares Where an exchangeable share of a Canadian Holder is redeemed by Philsar for a share of our common stock, in general the Canadian Holder may be deemed to receive a dividend as well as realize a capital gain (or a capital loss). The deemed dividend is equal to the amount, if any, by 34 which the redemption proceeds exceed the paid-up capital (for purposes of the Canadian Tax Act) at the time of the redemption of the exchangeable share. For this purpose, the redemption proceeds of an exchangeable share will be equal to the fair market value of a share of our common stock at the time of the redemption plus the amount of all declared but unpaid dividends, if any, on the exchangeable share. In the case of a Canadian Holder that is a corporation, in some circumstances the amount of such deemed dividend may be treated as proceeds of disposition and not as a dividend. The capital loss (or a capital gain) is generally equal to the amount by which the total of (i) the adjusted cost base to the Canadian Holder of the exchangeable share; and (ii) any reasonable costs of disposition exceeds (or is exceeded by) the redemption proceeds less the amount of the deemed dividend described above. The deemed dividend is subject to different tax rules depending on whether the Canadian Holder is an individual or a corporation. A Canadian Holder who is an individual will be required to include a dividend deemed to be received on a redemption of exchangeable shares in computing the Canadian Holder's income, subject to the gross-up and dividend tax credit rules normally applicable to taxable dividends received from taxable Canadian corporations. A Canadian Holder that is a corporation will be required to include a dividend deemed to be received on a redemption of exchangeable shares in computing the corporation's income and, such dividend will normally be deductible in computing the corporation's taxable income, subject to the following special rules and limitations: - - A "specified financial institution" (as defined in the Canadian Tax Act) will generally be able to deduct such dividend only to the extent that the Canadian Holder did not acquire the exchangeable shares in the ordinary course of its business; - - No such deduction is permitted if Conexant or any person with whom Conexant does not deal at arm's length is a specified financial institution when such dividend is deemed to be paid; - - A corporate Canadian Holder that is a "private corporation" (as defined in the Canadian Tax Act) or resident in Canada and controlled or deemed to be controlled by or for the benefit of an individual or a related group of individuals may be liable under Part IV of the Canadian Tax Act to pay a refundable tax of 33-1/3% on such deemed dividends to the extent that such dividends are deductible in computing the Canadian Holder's taxable income; - - A corporate Canadian Holder that is throughout the relevant year a "Canadian-controlled private corporation" may be liable to pay, in addition to the tax otherwise payable under the Canadian Tax Act, a refundable tax of 6-2/3% determined by reference to its aggregate investment income for the year, which is defined to include any non-deductible dividends; and 35 - - Such dividends may be subject to the 10% tax under Part IV.1 of the Canadian Tax Act applicable to certain corporations that receive dividends on certain "taxable preferred shares" (as defined in the Canadian Tax Act). The Canadian federal income tax treatment of capital gains or losses realized on a redemption by Philsar of an exchangeable share is the same as described above under "Acquisition by Conexant or Conexant Sub of Exchangeable Shares". Exercise of Warrants or Options A Canadian Holder will not realize a gain or loss upon the exercise of an amended warrant or an amended option. The cost of the shares of our common stock acquired upon the exercise will equal the adjusted cost base of such amended warrant or amended option plus the exercise price for the amended warrant or amended option. Acquisition, Holding and Disposition of Conexant Common Stock The cost of a share of our common stock to a Canadian Holder received on the redemption or acquisition of an exchangeable share will be equal to the fair market value of the share of our common stock at the time of such redemption or acquisition. Dividends on our common stock received by a Canadian Holder will be required to be included in computing a Canadian Holder's income for the purposes of the Canadian Tax Act. Such dividends received by a Canadian Holder who is an individual will not be subject to the gross-up and dividend tax credit rules in the Canadian Tax Act. A Canadian Holder that is a corporation will generally not be entitled to deduct the amount of such dividends in computing its taxable income. A Canadian Holder that is a Canadian-controlled private corporation may be liable to pay an additional refundable tax of 6-2/3% of such dividends. United States non-resident withholding tax on such dividends will be eligible for foreign tax credit or deduction treatment where applicable under the Canadian Tax Act. A disposition or deemed disposition of shares of our common stock by a Canadian Holder will generally result in a capital gain (or a capital loss) equal to the amount by which the Canadian Holder's proceeds of disposition in respect of the disposition of the shares exceed (or are exceeded by) the total of (i) the adjusted cost base of the shares to such Canadian Holder, and (ii) any reasonable costs of disposition. See the description of the Canadian federal income tax treatment of capital gains and losses under "Acquisition by Conexant or Conexant Sub of Exchangeable Shares" above. Foreign Property Information Reporting A Canadian Holder of our common stock who is a "specified Canadian entity" (as defined in the Canadian Tax Act) and whose aggregate cost amount at any time in a year or fiscal period of all of the Canadian Holder's "specified foreign property" (which includes our common stock) exceeds Canadian $100,000 will be required to file an information return in respect of such shares disclosing 36 the Canadian Holder's cost amount, any dividends received in the year and any gains or losses realized in the year in respect of such shares. Foreign Property Held by Deferred Income Plans Shares of our common stock will be foreign property under the Canadian Tax Act and, therefore, should not be held by trusts governed by registered pension plans, registered retirement savings plans, registered income funds, deferred profit sharing plans and certain other tax-exempt persons if it would cause such entities to exceed the permissible foreign property limit. Exceeding the foreign property limit set out in the Canadian Tax Act will cause such trusts and other tax-exempt persons to be liable for tax under Part XI of the Canadian Tax Act. Part XI tax is imposed at the rate of 1% per month of the cost amount of any excess foreign property. Holders Not Resident in Canada For purposes of this summary, Non-Resident Holders are holders of exchangeable shares, amended warrants or amended options who, for purposes of the Canadian Tax Act and at all relevant times, are not resident or deemed to be resident in Canada, deal at arm's length with Philsar and Conexant, hold their exchangeable shares, amended warrants or amended options and will hold any of our common stock as capital property, will not use or hold (and will not be deemed to use or hold) such securities in carrying on a business in Canada and to whom such securities are not "taxable Canadian property". This part of the summary is applicable only to Non-Resident Holders. Generally, shares of our common stock, amended warrants and amended options will not constitute taxable Canadian property to a holder at the time of disposition or exercise if: - - the shares of our common stock are listed on a prescribed stock exchange (which currently includes the Nasdaq National Market), - - the holder does not use or hold, and is not deemed to use or hold, the securities in connection with carrying on a business in Canada and - - none of the holder, persons with whom the holder does not deal at arm's length or the holder and such persons together has owned (or had under option), at any time during the immediately preceding five year period, 25% or more of the issued shares of any class or series of the capital stock of Conexant. Shares of our common stock, amended warrants and amended options can be deemed to be "taxable Canadian property" in certain circumstances set out in the Canadian Tax Act. Redemption or Acquisition of Exchangeable Shares In general, on a redemption or acquisition of exchangeable shares for our common stock, a Non-Resident Holder will be subject to the same deemed dividend and capital gains (or capital loss) consequences described under "Holders Resident in Canada" above. 37 Subject to the provisions of an applicable income tax treaty that may exempt the Non-Resident Holder from Canadian federal income tax on certain capital gains, a Non-Resident Holder must include in income for purposes of the Canadian Tax Act two-thirds of capital gains realized on a redemption or acquisition of exchangeable shares. Under the Canada-United States Income Tax Convention, any capital gain realized on a disposition of an exchangeable share will generally be exempt from Canadian federal income tax to a Non-Resident Holder who is resident in the United States for purposes of the treaty provided that, at the time of the disposition, the value of the exchangeable share is not derived principally from real property situated in Canada. If the exchangeable shares are "treaty-protected property" as defined in the Canadian Tax Act, a taxable capital gain or allowable capital loss resulting from a disposition of such shares will not be included or deducted in computing the Non-Resident Holder's income for purposes of the Canadian Tax Act. Shares owned by a Non-Resident Holder generally will be treaty-protected property if the gain from a disposition of such property would, because of an applicable income tax treaty, be exempt from tax under the Canadian Tax Act. The amount of a dividend deemed to be received by a Non-Resident Holder on a redemption by Philsar of exchangeable shares will be subject to non-resident withholding tax under the Canadian Tax Act at the rate of 25%, although such rate may be reduced under the provisions of an applicable income tax treaty. Under the Canada-United States Income Tax Convention, the rate is generally reduced to 15% in respect of dividends paid to a person who is the beneficial owner of the dividends and who is resident in the United States for purposes of the treaty. No dividend will be deemed to be received if the disposition takes the form of the acquisition by Conexant or Conexant Sub of the exchangeable shares. Regardless of whether the exchangeable shares are "treaty-protected property", the notification and withholding provisions of section 116 of the Canadian Tax Act will apply on a redemption or acquisition of exchangeable shares owned by a holder that is not resident in Canada for purposes of the Canadian Tax Act. Conexant or Philsar will withhold the taxes required to be withheld by them. Generally, the tax required to be withheld is 33-1/3% of the proceeds of disposition in respect of the exchangeable shares, although the withholding requirement may be reduced or eliminated by providing to Conexant or Philsar prior to the disposition a certificate from the Revenue Agency pursuant to section 116. Unless the amount of tax required to be withheld has been delivered by the holder to Conexant or Philsar, as the case may be, prior to the redemption or acquisition of exchangeable shares, such tax will be withheld with respect to any holder with a non-resident address by arranging for the sale of shares of our common stock on behalf of the holder as soon as practicable after the disposition of the exchangeable shares. Conexant or Philsar will remit the proceeds of such sale to the Revenue Agency to the extent of the withholding taxes payable and the balance, if any, will be paid to the holder. Exercise of Warrants or Options A Non-Resident Holder will not realize a capital gain or loss upon the exercise of an amended warrant or an amended option. 38 Disposition of Conexant Common Stock A Non-Resident Holder will generally not be subject to tax under the Canadian Tax Act on any capital gain realized on the disposition by the Non-Resident Holder of our common stock. United States Federal Tax Considerations We have been advised by Chadbourne & Parke LLP, counsel to Conexant, that the following discussion sets forth the material U.S. federal income tax considerations applicable to United States Holders (as defined below) arising from the exchange of exchangeable shares for our common stock and the exercise of the outstanding amended warrants and amended options and the material U.S. federal income, estate and withholding tax considerations applicable to non-United States Holders (as defined below) arising from the exchange of exchangeable shares for our common stock, the exercise of the outstanding amended warrants and amended options and the ownership and disposition of our common stock, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. For purposes of this summary, a United States Holder is a beneficial owner of exchangeable shares, the amended warrants or amended options or our common stock who is (a) a citizen or resident of the United States, (b) a corporation created or organized in or under the laws of the United States, or of any political subdivision thereof, or (c) an estate or trust the income of which is subject to U.S. federal income tax regardless of its source. A non-United States Holder is generally a beneficial owner of exchangeable shares, the amended warrants or amended options or our common stock who is an individual, corporation, estate or trust and who is not a United States Holder. This summary is for general information and applies only to United States Holders and non-United States Holders that hold exchangeable shares, the amended warrants or amended options or our common stock as capital assets. It does not address all aspects of U.S. federal taxation that may be applicable to a particular holder in light of such holder's particular circumstances. In addition, this discussion does not address the U.S. federal tax consequences to holders subject to special provisions of U.S. federal tax law, such as holders who acquired their exchangeable shares or our common stock through the exercise of employee stock options or otherwise as compensation for services, tax-exempt organizations, financial institutions, insurance companies, broker-dealers, persons holding exchangeable shares or our common stock through a partnership or other entity that is treated as a "pass-through entity" for U.S. federal income tax purposes, persons having a "functional currency" other than the United States dollar, persons holding exchangeable shares, the amended warrants or amended options or our common stock as part of a straddle, wash sale, hedging or conversion transaction and holders of exchangeable shares or our common stock that own (directly, indirectly or by attribution) 10% or more of the outstanding exchangeable shares or our common stock, as applicable. This summary is based on current provisions of the United States Internal Revenue Code of 1986, as amended (the "Code"), the current and proposed Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof as of the date hereof, all of which are subject to change, possibly on a retroactive basis. No statutory, judicial or administrative 39 authority exists that directly addresses certain of the U.S. federal tax consequences of the ownership of instruments comparable to the exchangeable shares. Consequently, some aspects of the U.S. federal tax treatment of the exchange of exchangeable shares for shares of our common stock are not certain. No advance ruling has been or will be sought or obtained from the United States Internal Revenue Service (the "IRS") regarding the tax consequences of the transactions described herein. Holders are urged to consult their tax advisors with respect to the United States federal, state and local and foreign income and estate tax consequences of the ownership of the exchangeable shares, the ownership of the amended warrants or amended options and the receipt and ownership of our common stock. United States Holders Exchange of Exchangeable Shares A United States Holder that exercises such holder's right to exchange its exchangeable shares for shares of our common stock generally, subject to the discussion below, should recognize taxable gain or loss on such exchange, assuming such exchange does not constitute a tax-free reorganization. Such taxable gain or loss should be equal to the difference between (i) the fair market value of the shares of our common stock exchanged for exchangeable shares at the time of the exchange and (ii) the United States Holder's adjusted tax basis in the exchangeable shares surrendered. The taxable gain or loss generally will be capital gain or loss, except that, with respect to any declared but unpaid dividends on the exchangeable shares, ordinary income may be recognized The taxable gain or loss should be treated as long-term capital gain or loss if the exchangeable shares were held for more than one year, and should be treated as short-term capital gain or loss in all other cases Although the matter is not free from doubt, the holding period of the exchangeable shares should include the holding period of the Philsar shares exchanged therefor, but it is possible that the IRS could take a contrary position which, if contested, might be sustained in court. Taxable gain or loss will be determined separately for each block of exchangeable shares exchanged by a United States Holder. Under the present provisions of the Code, long-term capital gains of individuals are generally taxable at a maximum rate of 20% and short-term capital gains of individuals are generally taxable at the graduated rates applicable to ordinary income. There are limitations on the deductibility of capital losses. The receipt of cash in lieu of any fractional shares of our common stock will generate taxable gain or loss for U.S. federal income tax purposes equal to the difference between the amount of cash so received and the United States Holder's adjusted tax basis in the exchangeable shares exchanged therefor. Such taxable gain or loss will be treated as long-term capital gain or loss if the United States Holder held the exchangeable shares for more than one year as of the date of disposition, and will be treated as short-term capital gain or loss in all other cases. 40 A United States Holder generally, subject to the discussion below, will have a tax basis in the shares of our common stock received equal to the fair market value of such shares at the time of the exchange. The holding period for such shares of common stock generally, subject to the discussion below, will begin on the day after the exchange. It is also possible that the exchange of exchangeable shares for shares of our common stock could be treated as a tax-free exchange if the exchangeable shares were treated as shares of our common stock for U.S. federal income tax purposes. Given the lack of authority on the treatment of shares having features and attendant rights similar to the exchangeable shares, it is uncertain whether the exchangeable shares will be treated as shares of our common stock for this purpose. Even if the exchangeable shares are not treated as shares of our common stock, an exchange of exchangeable shares for our common stock that otherwise would be taxable may be characterized as a tax-free exchange depending upon facts and circumstances existing at the time of the exchange, which cannot be accurately predicted as of the date hereof. If the exchange of exchangeable shares for our common stock properly qualifies as a tax-free exchange, a United States Holder would not recognize taxable gain or loss at the time of the exchange. The United States Holder's tax basis in the shares of our common stock received would be equal to such holder's tax basis in the exchangeable shares exchanged therefor. The holding period of the shares of our common stock received by such United States Holder would include the holding period of the exchangeable shares exchanged therefor. For U.S. federal income tax purposes, taxable gain realized on the exchange of exchangeable shares for shares of our common stock generally will be treated as United States source gain. Any Canadian tax imposed on the exchange may be available as a credit against U.S. federal income taxes, subject to applicable limitations. A United States Holder that is ineligible for a foreign tax credit with respect to any Canadian tax paid may be entitled to a deduction therefor in computing United States taxable income. Exercise of Warrants or Options A United States Holder that exercises amended warrants or amended options to purchase shares of our common stock will generally not be taxable on such exercise. Such United States Holder's tax basis in the shares of our common stock should be equal to such United States Holder's tax basis in the amended warrants or amended options (which should be equal to the fair market value of the amended warrants or amended options on the date the warrants or options to purchase Philsar common shares become warrants or options to purchase our common shares or, if acquired by the United States Holder subsequent to such date, the cost to the United States Holder of the amended warrants or amended options) plus the exercise price for the amended warrants or amended options. The holding period for such shares of our common stock will begin on the day after the amended warrants or amended options are exercised. 41 Passive Foreign Investment Company Considerations U.S. persons owning shares of a "passive foreign investment company" ("PFIC") are subject to a special United States federal income tax regime with respect to certain distributions received from a PFIC and with respect to gain on the sale or other disposition of the shares of a PFIC. Philsar may be classified as a PFIC if, with respect to a taxable year (1) at least 75% of its gross income is passive income or (2) at least 50% of the average value (or, at the election of Philsar, the adjusted tax basis) of its assets produce passive income or are held for the production of passive income. For purposes of applying the foregoing tests, if Philsar owns (directly or indirectly) at least 25% (by value) of the stock of another corporation, Philsar is treated as if it had directly received its proportionate share of the gross income of the other corporation and as if it directly owned its proportionate share of the assets of such other corporation. Passive income generally includes dividends, interest, certain rents, certain royalties, annuities, net gains from the sale or exchange of property that produces any of the foregoing types of income (including, but not limited to, shares of a corporation and partnership interests) or that produce no income, net gains from certain commodity transactions and net gains from certain foreign currency transactions. The IRS takes the position that cash and cash equivalents, including the working capital of an operating business, are passive assets. There can be no assurance with respect to the classification of Philsar as a PFIC. Currently, we and Philsar intend to endeavor to cause Philsar to avoid PFIC status in the future, although there can be no assurance that we will be able to do so or that our intent will not change. For each year, either we or Philsar will endeavor to notify United States Holders of exchangeable shares if we believe that Philsar was a PFIC for that taxable year. If Philsar were to be classified as a PFIC, the consequences to a United States Holder will depend in part on whether the United States Holder has made a "mark-to-market election" or a "QEF election" with respect to Philsar. If Philsar is a PFIC during a United States Holder's holding period and the United States Holder does not make a mark-to market election or a QEF election, then the United States Holder generally will be required to pay a special U.S. tax, in lieu of the U.S. tax that would otherwise apply, if such United States Holder (1) realizes a gain upon the sale or exchange of exchangeable shares or (2) receives an "excess distribution" from Philsar on the exchangeable shares. If a United States Holder makes a mark-to-market election or a QEF election, such holder generally will be required to include amounts in income, based upon Philsar's income or the value of the exchangeable shares, even if Philsar does not make actual distributions to holders of exchangeable shares. The foregoing summary of the possible application of the PFIC rules to Philsar and the United States Holders of exchangeable shares is only a summary of certain material aspects of those rules. Because the U.S. federal income tax consequences to United States Holders under the PFIC provisions are significant and complex, United States Holders are urged to discuss those consequences with their tax advisors. 42 Non-United States Holders Exchange of Exchangeable Shares or Disposition of Conexant Stock Subject to the discussion below, a non-United States Holder generally will not be subject to U.S. federal income tax on gain (if any) recognized on the exchange of the exchangeable shares for our common stock or on the sale or exchange of shares of our common stock, unless (a) such gain is effectively connected with a trade or business of the non-United States Holder in the United States, and where a tax treaty applies, is attributable to a permanent establishment maintained by the non-United States Holder in the United States, (b) in the case of a non-United States Holder who is an individual and who holds the exchangeable shares or our common stock, as the case may be, as a capital asset, such holder is present in the United States for 183 days or more in the taxable year of disposition, and certain other conditions are satisfied, or (c) the non-United States Holder is subject to tax pursuant to the provisions of the Code applicable to certain United States expatriates. An individual non-United States Holder who falls under clause (a) or (c) above will, unless an applicable treaty provides otherwise, be taxed on his or her net gain derived from the sale under regular graduated U.S. federal income tax rates. An individual non-United States Holder who falls under clause (b) above will be subject to a flat 30% tax on the gain derived from the exchange or sale, which may be offset by certain United States source capital losses (notwithstanding the fact that he or she is not considered a resident of the United States). A non-United States Holder that is a foreign corporation falling under clause (a) above will be taxed on its gain under regular graduated U.S. federal income tax rates and may be subject to an additional branch profits tax equal to 30% of its effectively connected earnings and profits within the meaning of the Code for the taxable year, as adjusted for certain items, unless it qualifies for a lower rate under an applicable income tax treaty. Exercise of Warrants or Options A non-United States Holder that exercises amended warrants or amended options to purchase shares of our common stock will not be taxable on such exercise. Such non-United States Holder's tax basis and holding period for U.S. federal income tax purposes will be determined in the same manner as discussed above for United States Holders. Dividends In the event that dividends are paid on shares of our common stock, dividends paid to a non-United States Holder of our common stock will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, if (i) dividends are effectively connected with the conduct of a trade or business by the non-United States Holder within the United States and, where a tax treaty applies, are attributable to a U.S. permanent establishment of the non-United States Holder and (ii) an IRS Form 4224, W-8ECI or successor form is filed with the payer, the dividends are not subject to withholding tax, but instead are subject to U.S. federal income tax on a net basis at applicable graduated individual or corporate rates. Any such effectively connected dividends received by a foreign corporation may, under 43 certain circumstances, be subject to an additional branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Dividends paid to an address outside the United States are presumed to be paid to a resident of such country (unless the payer has knowledge to the contrary) for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. However, Treasury Regulations that are generally effective for payments made after December 31, 2000 (the "Final Withholding Tax Regulations"), provide that a non-United States Holder must comply with certification procedures (or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures), directly or through an intermediary to obtain the benefits of a reduced rate under an income tax treaty. In addition, the Final Withholding Tax Regulations will require a non-United States Holder who provides an IRS Form 4224, W-8ECI or successor form also to provide its U.S. taxpayer identification number. A non-United States Holder of our common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. Information Reporting and Backup Withholding Under Treasury regulations, we must report annually to the IRS and to each non-United States Holder the amounts of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to tax authorities in the country where the non-United States Holder resides under the provisions of an applicable income tax treaty. A backup withholding tax is imposed at the rate of 31% on certain payments to persons that fail to furnish certain identifying information to the payer. Backup withholding generally will not apply to dividends paid to a non-United States Holder at an address outside the United States (unless the payer has knowledge that the payee is a U.S. person). However, in the case of dividends paid after December 31, 2000, the Final Withholding Tax Regulations provide that a non-United States Holder generally will be subject to withholding tax at a 31% rate unless certain certification procedures (or in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures) are complied with, directly or through an intermediary. Backup withholding and information reporting generally will also apply to dividends paid on our common stock at addresses inside the United States to non-United States Holders that fail to provide certain identifying information in the manner required. The Final Withholding Tax Regulations provide certain presumptions unless we receive certification from the holder of the non-United States Holder's non-U.S. status. Payment of the proceeds of the sale or other disposition of the exchangeable shares or our common stock by or through a U.S. office of a broker is subject to both backup withholding and information reporting unless the beneficial owner provides the payer with its name and address and certifies under penalties of perjury that it is a non-United States Holder, or otherwise establishes an exemption. In general, backup withholding and information reporting will not apply to a payment of 44 the proceeds of a sale or other disposition of exchangeable shares or our common stock by or through a foreign office of a broker. If, however, such broker is, for U.S. federal income tax purposes, a U.S. person, a controlled foreign corporation or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States (or, in addition, for periods after December 31, 2000, a foreign partnership in certain circumstances), such payments will be subject to information reporting but not backup withholding, unless (i) such broker has documentary evidence in its records that the beneficial owner is a non-United States Holder and certain other conditions are met or (ii) the beneficial owner otherwise establishes an exemption. Any amount withheld under the backup withholding rules generally will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished in a timely manner to the IRS. Federal Estate Tax Our common stock (or a previously triggered obligation of Conexant or any of its subsidiaries to deliver shares of our common stock along with unpaid dividends) held by an individual non-United States Holder at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes regardless of such holder's residence, unless an applicable estate tax treaty provides otherwise. PLAN OF DISTRIBUTION General If you hold exchangeable shares, you may receive shares of our common stock in exchange for your exchangeable shares as follows: - - you may elect to exchange your exchangeable shares for shares of our common stock at any time, by requesting that Philsar "retract" (or redeem) your exchangeable shares; - - you may elect, at any time, to require Conexant to purchase all or part of your exchangeable shares - - Philsar will automatically redeem all exchangeable shares that are outstanding on May 30, 2005, and may elect to redeem the exchangeable shares at an earlier date if it determines that there are less than 150,000 exchangeable shares outstanding that are not owned by us or our subsidiaries, by delivering shares of our common stock to you; or - - upon a liquidation, dissolution or winding up of Philsar or Conexant, your exchangeable shares will be exchanged for shares of our common stock. 45 Upon exchange of your exchangeable shares, you will receive, for each exchangeable share you hold, one share of our common stock and a cash amount equal to any declared and unpaid dividends on the exchangeable share. If you hold amended warrants or amended options that have become exercisable for our common stock, you may receive on any exercise of those warrants or options (and payment of the applicable exercise price) shares of our common stock, rather than exchangeable shares or common shares of Philsar. We have not engaged any broker, dealer or underwriter in connection with this offering of our common stock. Exchangeable Shares The following is a summary of the material rights, privileges, restrictions and conditions relating to the issuance of our common stock in exchange for your exchangeable shares. The specific provisions governing the exchangeable shares are set forth in the provisions attaching to the exchangeable shares contained in Philsar's articles of incorporation, as amended, the Support Agreement and the Voting and Exchange Trust Agreement, which are included as exhibits to the registration statement of which this prospectus is a part. You should read the provisions attaching to the exchangeable shares contained in Philsar's articles of incorporation, as amended, the Support Agreement and the Voting and Exchange Trust Agreement for a more complete understanding of the exchangeable shares. Election by Holders of Exchangeable Shares to Exchange Their Shares As a holder of exchangeable shares, you have the right at any time to require Philsar to "retract" (or redeem) any or all of the exchangeable shares you hold. In order to effect such redemption, you must present and surrender the following: - - a certificate or certificates representing the number of exchangeable shares to be redeemed; - - such documents and instruments as may be required from time to time to effect a transfer of exchangeable shares under the Canada Business Corporations Act and the by-laws of Philsar; - - a duly authorized statement: (1) specifying that you desire to have all or any number of your exchangeable shares represented by such certificate or certificates redeemed by Philsar; (2) stating the business day on which you desire to have Philsar redeem your shares, (3) acknowledging the overriding right of Conexant to purchase directly from you all of the exchangeable shares that you wish to redeem; and - - such additional documents and instruments as Philsar may reasonably require. 46 Philsar must promptly notify us upon receipt of a redemption request. We have an overriding call right to purchase directly from you the exchangeable shares specified in the redemption request. If we elect to exercise this right, then Philsar will not redeem your exchangeable shares, but, instead, we will purchase your exchangeable shares. In that event, we will deliver to you one share of our common stock for each exchangeable share purchased, plus a cash amount equal to any declared and unpaid dividends on each exchangeable share provided that the record date of the dividend is prior to the date of purchase. The redemption date shall be deemed to be the tenth business day after the date on which the redemption request is received by Philsar, unless another date, not to exceed fifteen business days after the date on which the redemption request is received by Philsar, is requested. We will notify Philsar no later than five business days after Philsar's receipt of your redemption request if we elect to exercise our call right. Philsar will notify you if we have decided not to exercise this right. If we do not elect to exercise our call right, then Philsar will redeem your exchangeable shares on the redemption date. In that event, Philsar will deliver to you one share of our common stock for each exchangeable share redeemed, plus a cash amount equal to any declared and unpaid dividends on each exchangeable share provided that the record date of the dividend is prior to the date of exchange. If, as a result of solvency requirements or applicable law, Philsar is not permitted to redeem all of the exchangeable shares you requested, then Philsar will redeem only those exchangeable shares (rounded down to a whole number of shares) as would not violate applicable law. You will be deemed to have requested us to purchase the remaining exchangeable shares not redeemed by Philsar. In that event, you will receive one share of our common stock for each share purchased by us, plus a cash amount equal to any declared and unpaid dividends on each exchangeable share provided that the record date of the dividend is prior to the date of our purchase. You may revoke your redemption request at any time prior to the close of business on the business day immediately preceding the purchase or redemption date. If you revoke your redemption request, your exchangeable shares will not be purchased by us or redeemed by Philsar. Exchange Put Right by Holders of Exchangeable Shares As a holder of exchangeable shares, you have the irrevocable right at any time to require us to purchase all or any part of your shares. In order to exercise this right, you must provide notice in writing to Philsar and deliver the following: - - a certificate or certificates representing the number of exchangeable shares to be purchased; - - such documents and instruments as may be required from time to effect a transfer of exchangeable shares under the Canada Business Corporations Act and the by-laws of Philsar; and - - such additional documents and instruments as Philsar may reasonably require. 47 Upon receipt of this documentation (and appropriate certificates or other assurances in respect of the payment of any applicable taxes), we will deliver to you one share of our common stock for each exchangeable share you ask us to purchase, plus a cash amount for any dividends that have been declared but not paid prior to this acquisition. If only a part of your exchangeable shares are sold pursuant to this put right, a new certificate for the balance of your exchangeable shares will be issued to you at the expense of Philsar within ten business days. Redemption of Exchangeable Shares by Philsar The automatic redemption date for the exchangeable shares is the earlier of: - - May 30, 2005; and - - the date which is 150 days after a determination by Philsar that there are fewer than 150,000 exchangeable shares outstanding which are not held by Conexant or its subsidiaries. On that date, Philsar will redeem all of the then outstanding exchangeable shares by delivering to you, in accordance with the procedures described below, one share of our common stock for each exchangeable share you hold, plus a cash amount equal to any declared but unpaid dividends on each exchangeable share up to the redemption date. Philsar will, at least 120 days prior to a redemption date, provide all holders of exchangeable shares with written notice of the proposed redemption of the exchangeable shares. The redemption of the exchangeable shares by Philsar is subject to applicable law and to our call right described below. Philsar will deliver to you the exchangeable share consideration representing the redemption price for each such exchangeable share upon presentation and surrender of the following: - - a certificate or certificates representing the number of exchangeable shares to be redeemed; - - such documents and instruments as may be required from time to effect a transfer of exchangeable shares under the Canada Business Corporations Act and the by-laws of Philsar; and - - such additional documents and instruments as Philsar may reasonably require. We have a call right to purchase all but not less than all of the outstanding exchangeable shares on the proposed redemption date. If we elect to exercise this right, we must notify Philsar of our intention to exercise this right at least 60 days prior to the proposed redemption date. Philsar will notify you if we have decided to exercise our call right. If we do exercise this right, we will deliver to you on the redemption date, in accordance with the procedures described above, one share of our common stock for each exchangeable share you hold, plus a cash amount equal to all declared but unpaid dividends on each exchangeable share up to the redemption date. 48 Rights on the Liquidation or Insolvency of Philsar If Philsar liquidates, dissolves, or winds up its affairs or otherwise distributes its assets among its shareholders for the purposes of winding up its affairs, you will receive from Philsar a liquidation payment equal to one share of our common stock for each exchangeable share you hold, plus a cash amount equal to all declared but unpaid dividends on each exchangeable share up to the effective date of the liquidation. Philsar will make this liquidation payment to you, as a holder of exchangeable shares, before it makes any payments to any holder of a class of stock ranking junior to the exchangeable shares. The payment of this liquidation payment to you is subject to applicable law and the overriding liquidation call right of Conexant described below. In the event of a liquidation, dissolution or winding up of Philsar, we will have the overriding call right to purchase all but not less than all of the outstanding exchangeable shares. If we elect to exercise this right, we must notify Philsar of our intention to exercise the right at least 60 days prior to the proposed liquidation date in the case of a voluntary liquidation, dissolution or winding up of Philsar. In the case of an involuntary liquidation, dissolution or winding up of Philsar, we must notify Philsar of our intention to exercise this right at least five business days prior to the proposed liquidation date. Philsar will notify you whether or not we have decided to exercise our liquidation call right. If we exercise this right, we will deliver to you one share of our common stock for each exchangeable share you hold, plus a cash amount equal to all declared but unpaid dividends on each exchangeable share up to the effective date of the liquidation. If a Philsar insolvency event occurs, as a holder of exchangeable shares, you may instruct CIBC Mellon Trust Company, as trustee under the Voting and Exchange Trust Agreement, to exercise its optional exchange right on your behalf. This optional exchange right enables the trustee, on your behalf, to require us to purchase any or all of your exchangeable shares. To cause the trustee to exercise the exchange right, you must present to Philsar the following documents: - - a certificate or certificates, duly endorsed in blank, representing the number of exchangeable shares to be purchased; - - a duly completed form of notice of exercise of the exchange right contained on the reverse of or attached to the certificates, stating: (1) that you instruct the trustee to exercise the exchange right so as to require us to purchase from you the number of exchangeable shares specified therein; (2) that you have good title to and own all such exchangeable shares to be acquired by us free and clear of all liens, claims, encumbrances, security interests and adverse claims or interest; (3) the name in which the certificates representing our common stock issuable in connection with the exercise of the exchange right are to be issued; and (4) the names and addresses of the persons to whom the exchangeable share consideration should be delivered; - - payment (or evidence of payment satisfactory to the trustee, Philsar, and Conexant) of the taxes (if any) payable as contemplated by the Voting and Exchange Trust Agreement. 49 The purchase price we will pay to you upon exercise of the trustee's optional exchange right is one share of our common stock for each exchangeable share purchased, plus a cash amount equal to all declared but unpaid dividends on each exchangeable share. The occurrence of any of the following will constitute a Philsar insolvency event: - - the institution by Philsar of any proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or wound up, or the consent of Philsar to the institution of bankruptcy, insolvency, dissolution or winding up proceedings against it; - - the filing of a petition, answer or consent seeking the dissolution or winding up under any bankruptcy, insolvency or analogous laws, including, without limitation, the Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada) and the failure by Philsar to contest in good faith the commencement of any of these proceedings within 15 days of becoming aware of it; - - Philsar's consent to the filing of any petition referenced above or to the appointment of a receiver; - - the making by Philsar of a general assignment for the benefit of creditors; - - the admission in writing by Philsar of its inability to pay its debts generally as they become due; or - - Philsar's not being permitted, pursuant to solvency requirements of applicable law, to redeem any exchangeable shares presented for redemption by a holder of exchangeable shares. Liquidation of Conexant If a Conexant liquidation event (as described below) occurs, Conexant will automatically purchase all of your outstanding exchangeable shares immediately prior to the effective time of the Conexant liquidation event. The purchase price that we will pay for your exchangeable shares will be one share of our common stock for each exchangeable share you hold, plus a cash amount equal to all declared but unpaid dividends on each exchangeable share up to the effective date of the liquidation. This purchase of your exchangeable shares by us will enable you to participate on an equal basis with the holders of our common stock if a Conexant liquidation event occurs. As a holder of exchangeable shares, you will be notified by the trustee of a Conexant liquidation event within sixty days of a voluntary liquidation and, in the case of an involuntary liquidation, as soon as we become aware of an occurrence which constitutes a Conexant liquidation event. At your request, and upon the surrender of duly endorsed exchangeable share certificates, accompanied by such instruments of transfer as we may reasonably require, we will deliver to you the purchase price for the exchangeable shares you hold. The occurrence of any of the following will constitute a Conexant liquidation event: 50 - - a determination by our board of directors to institute voluntary liquidation, dissolution or winding up proceedings or to effect any other distribution of our assets among our shareowners for the purpose of winding up our affairs; or - - any threatened or instituted claim, suit, petition or other proceedings with respect to our involuntary liquidation, dissolution or winding up or to effect any other distribution of our assets among our shareowners for the purpose of winding up our affairs. Adjustments in the Number of Shares of Our Common Stock You Will Receive in Exchange For Your Exchangeable Shares The number of shares of our common stock into which each of your exchangeable shares is exchangeable will be adjusted to reflect any: - - stock split of our common stock; - - reverse stock split of our common stock; - - stock dividend on our common stock (including any dividend or distribution of securities convertible into our common stock); - - consolidation, merger, arrangement or amalgamation of Conexant with or into another entity; - - reorganization of Conexant; - - recapitalization or reclassification of our outstanding common stock; or - - other similar change regarding our common stock. Fractional Shares No fractional shares of our common stock will be issued upon exchange of exchangeable shares. Instead, you will be paid cash for any fractional portion of a share that you are entitled to, based on the then current market price of our common stock. Withholding Taxes Your entitlement to receive common stock and a cash amount equal to any declared and unpaid dividends upon exchange for your exchangeable shares will be reduced to the extent necessary for Philsar or Conexant to pay applicable withholding taxes and other statutory obligations. 51 Warrants In connection with the acquisition of Philsar, warrants to purchase in the aggregate 1,218,400 common shares of Philsar were amended to become warrants to purchase in the aggregate 114,345 shares of our common stock. The amended warrants remain subject to the terms of the original issuance except that (1) each amended warrant is now exercisable for approximately 0.094 shares of our common stock for each Philsar common share originally subject to such warrant; and (2) the exercise price of the warrants has been adjusted in a manner which does not require the warrant holders to pay any additional aggregate exercise price. If you hold one of these amended warrants, you are entitled to purchase from us approximately 0.094 shares of our common stock for each Philsar common share originally subject to such warrant, at a pre-determined purchase price. Warrants may be exercised at any time or from time to time prior to 5:00 p.m. Ottawa, Ontario time on October 15, 2002, by presenting them to us, along with executed subscription documents and payment of the exercise price. No fractional shares of our common stock will be issued upon the exercise of warrants. Instead, you will be paid cash for any fractional portion of a share that you are entitled to, based on the then current market price of our common stock. Convertible Debenture Options In connection with the acquisition of Philsar, options to purchase in the aggregate 49,614 common shares of Philsar issued in connection with the redemption of Philsar's $618,094 principal amount of convertible debentures due July 8, 2003, were amended to become options to purchase in the aggregate 4,656 shares of our common stock. The amended options remain subject to the terms of the original issuance except that (1) each amended option is now exercisable for approximately 0.094 shares of our common stock for each Philsar common share originally subject to such option; and (2) the exercise price of the options has been adjusted in a manner which does not require the option holders to pay any additional aggregate exercise price. If you hold one of these amended options, you will be entitled on the exercise of the amended option (and payment of the applicable exercise price per share) to purchase from us approximately 0.094 shares of our common stock for each Philsar common share originally subject to the option. No fractional shares of our common stock will be issued upon the exercise of options. Instead, you will be paid cash for any fractional portion of a share that you are entitled to, based on the then current market price of our common stock. LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dennis E. O'Reilly, Senior Vice President, General Counsel and Secretary of Conexant. 52 EXPERTS The consolidated financial statements and the related financial statement schedule incorporated in this prospectus by reference from the Conexant Systems, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 1999 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of Maker Communications, Inc. incorporated by reference in this prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated herein in reliance upon the authority of said firm as experts in giving said reports. HOW TO OBTAIN MORE INFORMATION In accordance with the Exchange Act, we file reports, proxy and information statements and other information with the Securities and Exchange Commission. You may read and copy these reports, proxy and information statements and other information that we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding registrants (including Conexant) that file electronically with the SEC (http://www.sec.gov). Our internet site is http://www.conexant.com. You also may inspect reports, proxy statements and other information about Conexant at the offices of The Nasdaq Stock Market, Inc. National Market System, 1735 K Street, N.W., Washington, D.C. 20006-1500. We have filed with the SEC a registration statement on Form S-3 under the Securities Act. This prospectus does not contain all of the information in the registration statement. We have omitted certain parts of the registration statement, as permitted by the rules and regulations of the SEC. You may inspect and copy the registration statement, including exhibits, at the SEC's public reference room or internet site. Our statements in this prospectus about the contents of any contract or other document are not necessarily complete. You should refer to the copy of each contract or other document we have filed as an exhibit to the registration statement for complete information. The SEC's rules allow us to "incorporate by reference" into this prospectus the information we file with the SEC. This means that we can disclose important information to you by referring you to those filings. This information we incorporate by reference is considered a part of this prospectus, and subsequent information that we file with the SEC will automatically update and supersede this information. Any such information so modified or superseded will not constitute a part of this prospectus, except as so modified or superseded. We incorporate by reference the following documents and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until the offering of securities by this prospectus is completed: 53 - - Our Annual Report on Form 10-K for the fiscal year ended September 30, 1999 (including the portions of our Proxy Statement for our 2000 Annual Meeting of Shareowners that are incorporated therein by reference); - - Our Quarterly Report on Form 10-Q for the quarter ended December 31, 1999; - - Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000; - - Our Current Report on Form 8-K dated January 4, 2000, as amended by our Current Report on Form 8-K/A dated January 11, 2000; - - Our Current Report on Form 8-K dated February 16, 2000; - - Our Current Report on Form 8-K dated March 10, 2000; - - Our Current Report on Form 8-K dated April 3, 2000; - - Our Current Report on Form 8-K dated April 12, 2000; - - Our Current Report on Form 8-K dated May 17, 2000; - - Our Current Report on Form 8-K dated May 23, 2000; and - - The descriptions of our common stock and the preferred share purchase rights contained on pages 78 and 85-87 in our Registration Statement on Form 10, as amended (File Number 000-24923), dated December 1, 1998, as amended by Part II, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 1999. Upon written or oral request, we will provide you with a copy of any of the incorporated documents without charge (not including exhibits to the documents unless the exhibits are specifically incorporated by reference into the documents). You may submit such a request for this material to Office of the Secretary, Conexant Systems, Inc., 4311 Jamboree Road, Newport Beach, California 92660-3095 (telephone number (949) 483-4600). FORWARD-LOOKING STATEMENTS In addition to historical information, this prospectus contains statements relating to our future results. These statements include certain projections and business trends which are "forward looking" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made only as of the date of this prospectus. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. 54 Our actual results may differ materially from projected results as a result of certain risks and uncertainties. These risks and uncertainties include, without limitation, those described under "Risk Factors" as well as those set forth below and those detailed from time to time in our filings with the SEC: - - global and market conditions, including, without limitation, the cyclical nature of the semiconductor industry and the markets related to our products and those of our customers; - - demand for and market acceptance of new and existing products; - - successful development of new products; - - timing of new product introductions; - - successful integration of Maker Communications, Inc., as well as the successful integration of our other recent acquisitions, including Philsar; - - availability and extent of use of manufacturing capacity; - - pricing pressures and other competitive factors; - - changes in product mix; - - fluctuations in manufacturing yields; - - product obsolescence; - - our ability to develop and implement new technologies and to obtain protection of the related intellectual property; - - the successful implementation of our diversification strategy; - - our labor relations and those of our customers and suppliers; - - uncertainties of litigation; and - - other risks and uncertainties. --------------- The Conexant logo is a trademark of Conexant Systems, Inc. Other brands, names and trademarks contained in this prospectus are the property of their respective owners. 55 =============================================================================== Conexant Systems, Inc. Common Stock (including the associated preferred share purchase rights) --------------- Prospectus --------------- You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information contained or incorporated by reference in this prospectus is accurate as of any date other than the date of this prospectus. We are not making an offer of these securities in any state where the offer is not permitted. =============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ------------------------------------- Item 14. Other Expenses of Issuance and Distribution. The following table sets forth the estimated costs and expenses, payable by the registrant in connection with the offering of the securities being registered.
Amount Commission registration fee........................................... $ 27,992 *Printing ............................................................ $ 5,000 *Accounting fees and expenses......................................... $ 10,000 *Legal fees and expenses.............................................. $ 50,000 *Miscellaneous expenses............................................... $ 7,008 ------- *Total............................ $100,000 - ----------- * Estimated
Item 15. Liability and Indemnification of Directors and Officers. The Delaware General Corporation Law permits Delaware corporations to eliminate or limit the monetary liability of directors for breach of their fiduciary duty of care, subject to certain limitations. Our restated certificate of incorporation provides that our directors are not liable to Conexant or its shareowners for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to Conexant or its shareowners, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) for willful or negligent violation of the laws governing the payment of dividends or the purchase or redemption of stock or (4) for any transaction from which a director derived an improper personal benefit. The Delaware General Corporation Law provides for indemnification of directors, officers, employees and agents subject to certain limitations. Our by-laws and the appendix thereto provide for the indemnification of our directors, officers, employees and agents to the extent permitted by Delaware law. Our directors and officers are insured against certain liabilities for actions taken in such capacities, including liabilities under the Securities Act. II-1 Item 16. Index to Exhibits. 4.a.1 Restated Certificate of Incorporation of Conexant, filed as Exhibit 4.1 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755) is incorporated herein by reference. 4.a.2 Amendment to Restated Certificate of Incorporation of Conexant, filed as Exhibit 4.a.2 to Conexant's Registration Statement on Form S-3 (Registration No. 333-30596). 4.b Amended By-Laws of Conexant, filed as Exhibit 4.2 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755), are incorporated herein by reference. 4.c Specimen certificate for Common Stock, par value $1 per share, filed as Exhibit 4.3 to Conexant's Registration Statement on Form 10 (File No. 000-24923), is incorporated herein by reference. 4.d.1 Rights Agreement, dated as of November 30, 1998, by and between Conexant and ChaseMellon Shareholder Services, L.L.C. as rights agent, filed as Exhibit 4.4 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755), is incorporated herein by reference. 4.d.2 First Amendment to Rights Agreement, dated as of December 9, 1999, filed as Exhibit 4.1 to Conexant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, is incorporated herein by reference. 4.e Reorganization Agreement, dated as of April 11, 2000, by and between Conexant, Philsar Semiconductor Inc., and the Shareholders named in Schedule A thereto. 5 Opinion of Dennis E. O'Reilly, Esq., Senior Vice President, General Counsel and Secretary of Conexant. 23.a Consent of Deloitte & Touche LLP, independent auditors. 23.b Consent of Arthur Andersen LLP, independent public accountants. 23.c Consent of Dennis E. O'Reilly, Esq., contained in his opinion filed as Exhibit 5 to this Registration Statement. 23.d Consent of Chadbourne & Parke LLP. 23.e Consent of McCarthy Tetrault. II-2 24 Power of Attorney authorizing certain persons to sign this Registration Statement on behalf of certain directors and officers of Conexant. 99.a Provisions Attaching to Exchangeable Shares contained in the articles of incorporation of Philsar Semiconductor Inc. 99.b Support Agreement dated as of May 30, 2000 between Conexant and Philsar Semiconductor Inc. 99.c Voting and Exchange Trust Agreement dated as of May 30, 2000 by and between Conexant, Philsar Semiconductor Inc. and CIBC Mellon Trust Company, a Canadian trust company. Item 17. Undertakings. A. The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that clauses (i) and (ii) do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by the Company pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment 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. II-3 (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act, each filing of the Company's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in the Registration Statement 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. B. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described above, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company 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 Company 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. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, State of California, on the 8th day of June, 2000. CONEXANT SYSTEMS, INC. By /s/ Dwight W. Decker --------------------------------------- (Dwight W. Decker, Chairman and Chief Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed on the 8th day of June, 2000 by the following persons in the capacities indicated:
Signature Title DWIGHT W. DECKER* Chairman of the Board and Chief Executive Officer (principal executive officer) and Director DONALD R. BEALL* Director F. CRAIG FARRILL* Director JERRE L. STEAD* Director BALAKRISHNAN S. IYER* Senior Vice President and Chief Financial Officer (principal financial officer) STEVEN M. THOMSON* Vice President and Controller (principal accounting officer) *By /s/ Dennis E. O'Reilly ----------------------------------------------- (Dennis E. O'Reilly, Attorney-in-fact)**
** By authority of the power of attorney filed as Exhibit 24 to this Registration Statement. II-5
EXHIBIT INDEX ------------ Page Number ------ 4.a.1 Restated Certificate of Incorporation of Conexant, filed as Exhibit 4.1 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755) is incorporated herein by reference. 4.a.2 Amendment to Restated Certificate of Incorporation of Conexant, filed as Exhibit 4.a.2 to Conexant's Registration Statement on Form S-3 (Registration No. 333-30596), is incorporated herein by reference. 4.b Amended By-Laws of Conexant, filed as Exhibit 4.2 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755), is incorporated herein by reference. 4.c Specimen certificate for Common Stock, par value $1 per share, filed as Exhibit 4.3 to Conexant's Registration Statement on Form 10 (File No. 000-24923), is incorporated herein by reference. 4.d.1 Rights Agreement, dated as of November 30, 1998, by and between Conexant and ChaseMellon Shareholder Services, L.L.C. as rights agent, filed as Exhibit 4.4 to Conexant's Registration Statement on Form S-8 (Registration No. 333-68755), is incorporated herein by reference. 4.d.2 First Amendment to Rights Agreement, dated as of December 9, 1999, filed as Exhibit 4.1 to Conexant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999, is incorporated herein by reference. 4.e Reorganization Agreement, dated as of April 11, 2000, by and between Conexant, Philsar Semiconductor Inc., and the Shareholders named in Schedule A thereto. 5 Opinion of Dennis E. O'Reilly, Esq., Senior Vice President, General Counsel and Secretary of Conexant. 23.a Consent of Deloitte & Touche LLP, independent auditors. 23.b Consent of Arthur Andersen LLP, independent public accountants. 23.c Consent of Dennis E. O'Reilly, Esq., contained in his opinion filed as Exhibit 5 to this Registration Statement. 23.d Consent of Chadbourne & Parke LLP. 23.e Consent of McCarthy Tetrault. 24 Power of Attorney authorizing certain persons to sign this Registration Statement on behalf of certain directors and officers of Conexant. 99.a Provisions Attaching to Exchangeable Shares contained in the articles of incorporation of Philsar Semiconductor Inc. 99.b Support Agreement dated as of May 30, 2000 between Conexant and Philsar Semiconductor Inc. 99.c Voting and Exchange Trust Agreement dated as of May 30, 2000 by and between Conexant, Philsar Semiconductor Inc. and CIBC Mellon Trust Company, a Canadian trust company.
EX-4.E 2 0002.txt REORGANIZATION AGREEMENT EXHIBIT 4.e REORGANIZATION AGREEMENT BETWEEN CONEXANT SYSTEMS, INC. AND PHILSAR SEMICONDUCTOR INC. AND THE SHAREHOLDERS NAMED IN SCHEDULE A HERETO MADE AS OF April 11, 2000
TABLE OF CONTENTS ARTICLE I INTERPRETATION Section 1.1 Definitions.................................................................................3 Section 1.2 Headings...................................................................................12 Section 1.3 Extended Meanings..........................................................................12 Section 1.4 Currency...................................................................................13 Section 1.5 Schedules and Exhibits.....................................................................13 ARTICLE II REORGANIZATION Section 2.1 Reorganization.............................................................................13 Section 2.2 Approval of the Reorganization.............................................................15 Section 2.3 Closing....................................................................................16 Section 2.4 Termination of Agreement...................................................................16 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE CORPORATION Section 3.1 Organization and Good Standing.............................................................17 Section 3.2 Capitalization; Title to Shares and Structure..............................................18 Section 3.3 No Subsidiaries............................................................................20 Section 3.4 Due Authorization; Enforceability..........................................................20 Section 3.5 No Violation...............................................................................20 Section 3.6 Financial Statements.......................................................................21 Section 3.7 Absence of Certain Changes.................................................................21 Section 3.8 Litigation.................................................................................23 Section 3.9 Compliance with Laws.......................................................................23 Section 3.10 Environmental Matters......................................................................23 Section 3.11 Taxes......................................................................................24 Section 3.12 Property...................................................................................25 Section 3.13 Intellectual Property Matters..............................................................26 Section 3.14 Employee Benefit and Labour Matters........................................................29 Section 3.15 Other Compensation Arrangements............................................................32 Section 3.16 Transactions With Affiliates...............................................................32 Section 3.17 Customers and Suppliers....................................................................32 Section 3.18 Material Contracts.........................................................................33 Section 3.19 Insurance..................................................................................35 Section 3.20 Disclosure.................................................................................36 Section 3.21 Brokers or Finders.........................................................................36 ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF CONEXANT Section 4.1 Organization, Standing and Power...........................................................37 Section 4.2 Due Authorization; Enforceability..........................................................37 Section 4.3 No Violation...............................................................................37 Section 4.4 Financial Statements and SEC Documents.....................................................38 Section 4.5 Litigation and Other Proceedings...........................................................38 Section 4.6 Disclosure.................................................................................38 Section 4.7 Brokers and Finders........................................................................39 ARTICLE V COVENANTS Section 5.1 Taxes Not Assumed by Conexant..............................................................39 Section 5.2 Covenants of the Shareholders and the Corporation..........................................39 Section 5.3 Covenants of Conexant......................................................................42 ARTICLE VI CONDITIONS -II- Section 6.1 Conditions for the Benefit of Conexant.....................................................45 Section 6.2 Conditions for the Benefit of the Shareholders.............................................48 ARTICLE VII INDEMNIFICATION AND ESCROW Section 7.1 Survival of Representations and Warranties.................................................49 Section 7.2 Indemnities................................................................................50 Section 7.3 Escrow Fund and Procedure..................................................................51 Section 7.4 No Third Party Beneficiaries...............................................................53 Section 7.5 Exclusive Remedy...........................................................................53 ARTICLE VIII GENERAL Section 8.1 Further Assurances.........................................................................54 Section 8.2 Time of the Essence........................................................................54 Section 8.3 Commissions................................................................................54 Section 8.4 Fees.......................................................................................54 Section 8.5 Public Announcements.......................................................................55 Section 8.6 Benefit of the Agreement...................................................................55 Section 8.7 Entire Agreement...........................................................................55 Section 8.8 Amendments and Waiver......................................................................55 Section 8.9 Assignment.................................................................................55 Section 8.10 Notices....................................................................................55 Section 8.11 Governing Law..............................................................................57 Section 8.12 Tax Effect of Transaction..................................................................57 Section 8.13 Severability...............................................................................57 Section 8.16 Facsimile Signatures.......................................................................58
REORGANIZATION AGREEMENT THIS AGREEMENT is made as of April 11, 2000, between CONEXANT SYSTEMS, INC., a corporation incorporated under the laws of Delaware ("Conexant"), PHILSAR SEMICONDUCTOR INC., a corporation incorporated under the laws of Canada (the "Corporation"), and the shareholders of the Corporation referred to in Schedule A hereto (each a "Shareholder" and, collectively, the "Shareholders"). WHEREAS the Shareholders are the beneficial and registered owners of not less than two-thirds of each class of the issued and outstanding shares of the Corporation; AND WHEREAS upon the terms and subject to the conditions of this Agreement, Conexant, the Corporation and the Shareholders have agreed to effect the following reorganization (the "Reorganization"): (a) the amendment of the share capital of the Corporation by Articles of Amendment in the form annexed hereto as Exhibit I in respect of the creation of 100 Class C Non-Voting Preferred Shares having the respective rights, privileges, restrictions and conditions set forth in Exhibit I hereto; (b) the issue by the Corporation of 100 Class C Non-Voting Preferred Shares to Conexant in consideration for the issue to the Corporation of 10 Conexant Shares; (c) the amendment of the share capital of the Corporation by articles of amendment in the form annexed hereto as Part A of Exhibit II, in respect of the following: (i) the creation of an unlimited number of Exchangeable Shares having the respective rights, privileges, restrictions and conditions set forth in the articles of amendment of the Corporation annexed hereto as Part A of Exhibit II; (ii) the creation of an unlimited number of Class A Common Shares (the "Special Shares") having the rights, privileges, restrictions and conditions set out in the articles of amendment of the Corporation annexed hereto as Part A of Exhibit II; and (iii) the changing of each issued and outstanding Common Share into that number of Exchangeable Shares equal to the Exchange Ratio; (d) the amendment of the share capital of the Corporation by articles of amendment in the form annexed hereto as Part B of Exhibit II, in respect of the following: (i) the changing of each issued and outstanding Class A Preferred Share into that number of Exchangeable Shares equal to the Exchange Ratio; and (ii) the changing of each issued and outstanding Class B Preferred Share into that number of Exchangeable Shares equal to the Exchange Ratio; (e) the amendment of all outstanding Warrants, such that the holders of such Warrants shall be entitled to receive upon due exercise of such Warrants, in the aggregate, that number of Conexant Shares equal to the product obtained by multiplying (i) the number of Common Shares issuable, with or without the passage of time or satisfaction of other conditions, upon the exercise of such Warrants, by (ii) the Exchange Ratio; (f) the amendment of all of the outstanding Employee Stock Options, such that the holders of such Employee Stock Options shall be entitled to receive upon due exercise of such Employee Stock Options, in the aggregate, that number of Conexant Shares equal to the product obtained by multiplying (i) the number of Common Shares issuable, with or without the passage of time or satisfaction of other conditions, upon the exercise of Employee Stock Options by (ii) the Exchange Ratio; (g) the amendment of all of the outstanding Convertible Debenture Options, such that the holders of such Convertible Debenture Options shall be entitled to receive upon due exercise of such Convertible Debenture Options in the aggregate, that number of Conexant Shares equal to the product obtained by multiplying (i) the number of Common Shares issuable, with or without the passage of time or satisfaction of other conditions, upon the exercise of Convertible Debenture Options by (ii) the Exchange Ratio; (h) immediately after step (d) above, the issue to Conexant by the Corporation of 60,000 Special Shares of the Corporation in consideration for the transfer by Conexant to the Corporation of the 100 Class C Non-Voting Preferred Shares of the capital stock of the Corporation acquired by Conexant in step (b) above; 3 (i) the cancellation by the Corporation of the 100 Class C Non-Voting Preferred Shares purchased from Conexant; and (j) the issuance to the Trustee, on behalf of the holders of the Exchangeable Shares, of the Conexant Preferred Share having the right to cast that number of votes at meetings of holders of Conexant Shares equal to the number of Exchangeable Shares outstanding from time to time (excluding any Exchangeable Shares held by Conexant or any direct or indirect subsidiary of Conexant). AND WHEREAS the Exchangeable Shares may be exchanged by the holders for Conexant Shares (as defined below) on a one-for-one basis, subject to the provisions of the Exchangeable Shares, the Exchange Trust Agreement and the Support Agreement. NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the premises and the covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I INTERPRETATION Section 1.1 Definitions. In this Agreement, unless something in the subject matter or context is inconsistent therewith: "Action" means any action, suit, proceeding, appeal, claim, arbitration, mediation, alternative dispute resolution procedure, inquiry or investigation by or before any arbitrator, mediator, court or other Governmental Authority. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For purposes of the immediately preceding sentence, the term "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities or partnership interests, by contract or otherwise. "Agreement" means this agreement (including the Schedules and Exhibits hereto) and all amendments made hereto by written agreement between Conexant, the Corporation and the Shareholders; 4 "Amended and Restated Registration Rights Agreement" means the amended and restated registration rights agreement dated as of March 9, 2000 and made between the Corporation and the investors named in Exhibit 1 thereto; "Amended and Restated Unanimous Shareholders Agreement" means the amended and restated unanimous shareholders agreement dated as of March 9, 2000 made between the Corporation and the shareholders of the Corporation; "Balance Sheet" means the balance sheet of the Corporation as at the Balance Sheet Date; "Balance Sheet Date" means July 31, 1999; "Business Day" means a day other than a Saturday, Sunday or statutory holiday in the Province of Ontario or in the State of California; "Business Intellectual Property" means the Product Intellectual Property and the Own Use Intellectual Property, individually and collectively; "Canadian Dollar Equivalent" means in respect of any amount expressed in a foreign currency (the "Foreign Currency Amount") at any date, the product obtained by multiplying the Foreign Currency Amount by the official noon spot rate of exchange on such date for such foreign currency, as reported by the Bank of Canada; "CBCA" means the Canada Business Corporations Act R.S.C. 1995, c. C-44, as amended to the date of this Agreement; "Class A Preferred Shares" means the Class A Preferred Shares in the capital of the Corporation; "Class B Preferred Shares" means the Class B Preferred Shares in the capital of the Corporation; "Closing" has the meaning ascribed thereto in Section 2.3; "Closing Date" means the earliest of: (a) if the Corporation obtains the shareholder approval required to effect the Reorganization pursuant to a signed resolution and all other conditions to Closing are satisfied by April 27, 2000, May 1, 2000; (b) if the Corporation obtains the shareholder approval required to effect the Reorganization pursuant to a special meeting of shareholders, and all other conditions at Closing are satisfied by May 28, 2000, May 30, 2000; and (c) the third Business Day after the last of the conditions to Closing is satisfied, or such later date as may be agreed to in writing by 5 Conexant, the Corporation and the Shareholders, but in any event not later than the End Date; "Closing Price" means at any date, the amount expressed in US$, equal to the simple average of the closing price of the Conexant Shares on the Nasdaq National Market System for each of the Business Days on which there was a closing price falling not more than 10 Business Days before that date; "Common Shares" means the common shares in the capital of the Corporation; "Conexant Preferred Share" means the share of Series B Voting Preferred Stock of Conexant, having the rights, privileges, conditions and limitations as set out in Exhibit VII; "Conexant Registration Rights Agreement" means the registration rights agreement dated May 12, 1999 by and among Conexant, as issuer, and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation and Lehman Brothers, Inc., as initial purchasers and identified as Exhibit 4.2 to the Registration Statement No. 333-82399 as filed by Conexant with the SEC on July 7, 1999; "Conexant Shares" means the shares of Common Stock, par value US$1.00 per share, of Conexant, including such shares as are issuable in exchange for the Exchangeable Shares pursuant to the terms of the Exchangeable Shares, the Exchange Trust Agreement and the Support Agreement; "Confidentiality Agreement" means the amended and restated standard non-disclosure agreement dated as of January 14, 2000 and made between the Corporation and Conexant; "Consents" means consents, approvals, requirements, exemptions, orders, waivers, allowances, novations, authorizations, declarations, filings, registrations and notifications; "Contracts" means, with respect to any Person, all agreements, undertakings, contracts, obligations, understandings and commitments (whether written or oral) (i) to which such Person is a party, (ii) under which such Person has any rights, (iii) under which such Person has any Liability or (iv) by which such Person, or any of the assets or properties owned or used by such Person, is bound, including all license agreements, manufacturing agreements, supply agreements, purchase orders, sales orders, distributor agreements, sales representation agreements, warranty agreements, indemnity agreements, service agreements, employment and consulting agreements, guarantees, credit agreements, notes, mortgages, security agreements, financing leases, leases, 6 comfort letters, derivative agreements, confidentiality agreements, joint venture agreements, partnership agreements, open bids, powers of attorney, memoranda of understanding and letters of intent, including, in each case, all amendments, modifications and supplements thereto and waivers and consents thereunder; "Convertible Debentures" means the U.S. $618,094 aggregate principal amount of Royal Bank Prime Rate convertible, secured debentures of the Corporation due July 8, 2003; "Convertible Debenture Options" means the options issued on conversion of the Convertible Debentures, of which there remain outstanding Convertible Debenture Options entitling the holders thereof as disclosed in Exhibit VI to acquire an aggregate of 166,193 Common Shares; "Corporation" means Philsar Semiconductor Inc., a corporation incorporated under the CBCA; "Disclosure Schedule" means the schedule attached hereto as Schedule B; "Employee Stock Options" means options issued pursuant to the Share Option Plan entitling the holders thereof to purchase an aggregate of 4,327,610 Common Shares and in favour of the individuals disclosed in Exhibit V; "End Date" means June 15, 2000. "Environmental Laws" means any and all applicable Laws and Permits issued, promulgated or entered into by any Governmental Authority relating to the environment, the protection or preservation of the health or safety of humans, plants or animals, including the health and safety of employees, or the generation, treatment, use, discharge, storage, or disposal of any material, chemical or substance that, whether because of its nature, form, condition or quality, is regulated under applicable Laws; "Equity Security" means, with respect to any Person, any stock, bond, note, debenture, warrant, right, option, share, phantom stock, stock appreciation right, subscription right, profit participation right, partnership interest, or other security (however denominated) issued or granted by such Person that entitles the holder or owner thereof, directly or indirectly (including through exercise, exchange or conversion for another security), to share in the capital, earnings or profits of such Person or to vote for the election of directors, partners or other persons responsible for the management of such Person; 7 "ERISA" means the United States Employee Retirement Income Security Act of 1974, as amended; "Escrow Period" has the meaning ascribed thereto in Section 7.1; "Escrowed Shares" has the meaning ascribed thereto in Section 7.3(a); "Exchange Act" means the United States Securities Exchange Act of 1934, as amended; "Exchange Ratio" means the quotient obtained by dividing (x) the Exchangeable Share Number by (y) the Philsar Share Number; "Exchange Trust Agreement" means the Voting and Exchange Trust Agreement between Conexant, the Corporation and the Trustee, substantially in the form attached as Exhibit III hereto; "Exchangeable Shares" means the Exchangeable Shares of the Corporation having the rights, preferences and limitations set forth in the Corporation's articles of amendment in the form attached hereto as Exhibit II; "Exchangeable Share Number" means 2,685,000, unless the product obtained by multiplying 2,685,000 by the Closing Price is less than US$225,000,000, in which case the Exchangeable Share Number will be that number of Exchangeable Shares (up to but not exceeding 3,000,000) that when multiplied by the Closing Price equals US$225,000,000; "Financial Statements" means the Balance Sheet, together with the statements of income, changes in shareholders equity and changes in financial position, including in each case the notes thereto and the report of Deloitte & Touche LLP, chartered accountants, thereon; "GAAP" means United States generally accepted accounting principles; "Governmental Authority" means, in any jurisdiction, any (i) supranational, national, federal, state, provincial, local, municipal, foreign or international government, (ii) court, arbitral or other tribunal, (iii) governmental or quasi-governmental authority of any nature (including any political subdivision, instrumentality, branch, department, official or entity) or (iv) agency, commission, authority or body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature; "Hazardous Materials" means any waste, pollutant, contaminant, material or substance which is or may be dangerous, hazardous, toxic, explosive, corrosive, 8 flammable, infectious, radioactive, carcinogenic or mutagenic or which could otherwise pose a risk to health, safety or the environment or the value of the material assets of the Corporation or which is the subject of any applicable Laws governing its release, use, storage or identification, including without limitation, any substance which contains polychlorinated biphenyls (PCBs), asbestos, lead, urea formaldehyde or radon gas; "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents (including utility and design patents, industrial designs and utility models), patent applications and patent and invention disclosures, and all other rights of inventorship, together with all reissuances, continuations, continuations-in-part, divisions, revisions, supplementary protection certificates, extensions and re-examinations thereof; (b) all registered and unregistered trademarks, service marks, trade names, trade dress, logos, business, corporate and product names and slogans and registrations and applications for registration thereof; (c) all copyrights in copyrightable works, and all other rights of authorship, worldwide, and all applications, registrations and renewals in connection therewith; (d) all mask works and semiconductor chip rights and all applications, registrations and renewals in connection therewith; (e) all trade secrets and confidential business and technical information (including ideas, research and development, know-how, formulas, technology, compositions, manufacturing and production processes and techniques, technical data, engineering, production and other designs, plans, drawings, engineering notebooks, industrial models, software, specifications, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information); (f) all computer and electronic data, data processing programs, documentation and software, both source code and object code (including flow charts, diagrams, descriptive texts and programs, computer print-outs, underlying tapes, computer databases and similar items), computer applications and operating programs; (g) all rights to sue for and remedies against past, present and future infringements of any or all of the foregoing and rights of priority and protection of interests therein under the Laws of any jurisdiction; (h) all copies and tangible embodiments of any or all of the foregoing (in whatever form or medium, including electronic media); and (i) all other proprietary, intellectual property and other rights relating to any or all of the foregoing, including, in each case, any such rights related to any such items in any and all jurisdictions, worldwide; "Internal Revenue Code" means the United States Internal Revenue Code of 1986, as amended; "Investment" of a Person means (i) any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade and loans to employees in the ordinary 9 course of business) or contribution of capital by such Person; (ii) Equity Securities owned by such Person; (iii) any deposit accounts and certificates of deposit owned by such Person; and (iv) structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person; "Knowledge" means, (i) with respect to the Corporation, the actual knowledge, or the knowledge of a reasonable person in a like position, of those officers, directors and employees of the Corporation who are directly involved in the Transactions and (ii) with respect to Conexant, the actual knowledge, or the knowledge of a reasonable person in the like position, as those officers, directors and employees of Conexant who are directly involved in the Transactions; "Laws" means all laws, statutes, constitutions, treaties, rules, regulations, directives, ordinances, codes, judgments, rulings, orders, writs, decrees, stipulations, injunctions and determinations of all Governmental Authorities; "Liability" means any and all claims, debts, liabilities, obligations and commitments of whatever nature, whether known or unknown, asserted or unasserted, fixed, absolute or contingent, matured or unmatured, accrued or unaccrued, liquidated or unliquidated or due or to become due, and whenever or however arising (including those arising out of any Contract or tort, whether based on negligence, strict liability or otherwise) and whether or not the same would be required by GAAP to be reflected as a liability in financial statements or disclosed in the notes thereto; "Lien" means any charge, claim, adverse claim, community property interest, condition, equitable interest, easement, encumbrance, option, lien, pledge, hypothecation, assignment, deposit arrangement, security interest (preference, priority or other security agreement or preferential arrangement of any kind), mortgage, deed of trust, retention of title agreement, right of first refusal, right of first offer, preemptive right, or other restriction or granting or any rights of any kind (including any restriction on, or right granted with respect to, the use, voting, transfer, receipt of income or exercise of any other attribute of ownership); "Material Adverse Effect" means, with respect to any Person (including the Corporation and Conexant), a material adverse effect on the business, operations, assets or condition (financial or otherwise) of such Person, taken as a whole, or on the ability of such Person and its Subsidiaries to perform that Person's obligations under this Agreement or to consummate the Transactions, provided however, that a Material Adverse Effect shall not include (a) with respect to any Person (including the Corporation and Conexant), any adverse effect following the date of this Agreement on the business, assets, financial condition or results of operations of that Person resulting from the announcement or pendency of the Reorganization or from any general downturn to the market conditions of the business in which that Person operates and (b) with respect to 10 Conexant, any decrease in the trading price of the Conexant Shares attributable primarily to fluctuations in stock prices or to a downturn in the state of North American financial markets, either generally or specifically with respect to publicly-traded technology companies. "Material Contracts" has the meaning set forth in Section 3.18(a); "Order" means any award, decision, stipulation, injunction, judgment, order, ruling, subpoena, writ, decree or verdict entered, issued, made, or rendered by any Governmental Authority; "Own Use Intellectual Property" means all Intellectual Property which the Corporation owns, uses or has the right to use in the conduct of its businesses, other than the Product Intellectual Property; "Permit" means all licenses, permits, certificates, Consents, or other authorizations, issued, granted, given or otherwise made available by or under the authority of any Governmental Authority or pursuant to any Law; "Permitted Liens" means Liens for (i) Taxes, assessments and other governmental charges not yet due and payable or, if due, not delinquent or being diligently contested in good faith through appropriate proceedings; (ii) inchoate workmen's, repairmen's or other similar Liens or retentions of title in respect of raw materials and supplies not yet paid for, in each case arising or incurred in the ordinary course of business consistent with past practices in respect of obligations which are not overdue, minor title defects and recorded easements, which workmen's, repairmen's or other similar Liens, retentions of title, minor title defects and recorded easements do not, individually or in the aggregate, impair the continued use, occupancy, value or marketability of title of the property to which they relate or the Corporation's business, assuming that the property is used on substantially the same basis as such property is currently being used by the Corporation; and (iii) Liens referred to in the Financial Statements or in Part 3.12 of the Disclosure Schedule; "Person" means any individual, firm, partnership, joint venture, trust, corporation, limited liability entity, unincorporated organization, estate or other entity (including a Governmental Authority); "Philsar Share Number" means the sum of: (i) the number of Class A Preferred Shares issued and outstanding on the Closing Date; (ii) the number of Class B Preferred Shares issued and outstanding on the Closing Date; (iii) the number of Common Shares issued and outstanding on the Closing Date; and (iv) the number of Common Shares issuable, with or without the passage of time or satisfaction of other conditions, upon the 11 exercise of all Employee Stock Options, Convertible Debenture Options and Warrants outstanding on the Closing Date; "Plans" has the meaning ascribed thereto in Section 3.14(b); "Product Intellectual Property" means all Intellectual Property which the Corporation owns, uses or has the right to use, and which is comprised in the Corporation's products; "Registration Statement" has the meaning ascribed thereto in Section 5.3(d); "Reorganization" has the meaning set out in the Recitals to this Agreement; "Representatives" means each representative of the Shareholders appointed from time to time in accordance with Section 7.3(g); "SEC" means the United States Securities and Exchange Commission; "Securities Act" means the United States Securities Act of 1933, as amended; "Share Option Plan" means the Corporation's Stock Option Plan dated December 18, 1997, as amended January 5, 1998, August 13, 1998, November 9, 1998, October 21, 1999 and March 9, 2000, collectively; "Special Shares" has the meaning ascribed thereto in the recitals to this Agreement; "Subsidiary" means any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of the Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association, or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing member or general partner of such limited liability company, partnership, association or other business entity; 12 "Support Agreement" means the Support Agreement between Conexant and the Corporation substantially in the form attached as Exhibit IV hereto; "Tax" means any tax, charge, duty, fee, levy or other assessment, including income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, branch profits, environmental, customs duties, capital, franchise, profits, withholding, social security (or similar), unemployment, disability, property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, imposed by any Governmental Authority, and including any interest, penalty, or addition thereto, whether disputed or not; "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof, required to be filed with any Governmental Authority; "Time of Closing" means 3:00 p.m. (Ottawa time) on the Closing Date; "Transaction Documents" means this Agreement, the Support Agreement, the Exchange Trust Agreement, the Articles of Amendment in the forms attached hereto as Exhibits I and II and all other instruments, certificates and documents delivered or required to be delivered by the Corporation, the Shareholders, Conexant or any of their representatives pursuant to this Agreement, individually and collectively; "Transactions" means the transactions contemplated by the Transaction Documents, individually and collectively; "Trustee" means CIBC Mellon Trust Company (or such other Canadian trust company as may be selected by the Corporation and approved by Conexant prior to the Closing Time), in its capacity as Trustee under the Exchange Trust Agreement; and "Warrants" means warrants to purchase in the aggregate 1,218,400 Common Shares, having the terms described in Part 3.2(a) of the Disclosure Schedule and held by the warrantholders disclosed in Exhibit VI. Section 1.2 Headings. The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article, Section or other portion hereof and include any agreement supplemental hereto. Unless 13 something in the subject matter or context is inconsistent therewith, references herein to Articles and Sections are to Articles and Sections of this Agreement. Section 1.3 Extended Meanings. In this Agreement words importing the singular number only shall include the plural and vice versa, words importing the masculine gender shall include the feminine and neuter genders and vice versa and words importing persons shall include individuals, partnerships, associations, trusts, unincorporated organizations and corporations. Section 1.4 Currency. All references to currency herein are to lawful money of Canada, unless otherwise specified. Section 1.5 Schedules and Exhibits. The following are the Schedules and Exhibits annexed hereto and incorporated by reference and deemed to be part hereof: Schedules - --------- Schedule A - Shareholders who are parties to this Agreement and their respective Shareholdings Schedule B - Disclosure Schedule Exhibits - -------- Exhibit I - Articles of Amendment Exhibit II - Articles of Amendment Exhibit III - Form of Exchange Trust Agreement Exhibit IV - Form of Support Agreement Exhibit V - Employee Stock Options Exhibit VI - Convertible Debenture Options and Warrants Exhibit VII - Rights of the Conexant Preferred Share Exhibit VIII - Employees to execute Employment Contracts Exhibit IX - Form of Employment Contract Exhibit X - Non-Competition Agreement Exhibit XI - Opinion of Counsel to the Corporation and the Shareholders Exhibit XII - Share Transmittal Materials Exhibit XIII - Opinion of Conexant's Canadian Counsel 14 ARTICLE II REORGANIZATION Section 2.1 Reorganization. (1) Upon and subject to the terms and conditions of Closing contained herein, on the Closing Date, the Reorganization shall be completed in the manner set forth below: (a) On the second Business Day preceding the Closing Date, the Corporation shall file articles of amendment in the form of Exhibit I to create 100 Class C Non-Voting Preferred Shares. (b) Immediately after the Corporation obtains a certificate of amendment under the CBCA for the articles of amendment referred to in Section 2.1(1)(a), the Corporation shall issue to Conexant 100 Class C Non-Voting Shares in consideration for the issue by Conexant to the Corporation of 10 Conexant Shares. (c) On the Business Day preceding the Closing Date, the Corporation shall file articles of amendment in the form of Part A of Exhibit II to create the Special Shares and the Exchangeable Shares and to change the issued and outstanding Common Shares into Exchangeable Shares, on the basis set out in the recitals hereto. (d) On the Closing Date, the Corporation shall file articles of amendment in the form of Part B of Exhibit II to change the issued and outstanding Class A Preferred Shares and Class B Preferred Shares into Exchangeable Shares, on the basis set out in the recitals hereto. (e) Immediately after the Corporation obtains a certificate of amendment under the CBCA for the articles of amendment referred to in Section 2.1(1)(d), the Corporation shall issue 60,000 Special Shares to Conexant against receipt from Conexant of a share certificate representing the 100 Class C Non-voting Preferred Shares issued previously to Conexant. (f) Subject to (k), below, at Closing, the Corporation shall deliver to each of the shareholders of the Corporation, certificates for the Exchangeable Shares issuable to such shareholder against delivery of certificates for all of the Common Shares, Class A Preferred Shares and Class B Preferred Shares held by such shareholder, accompanied by a letter of transmittal signed by such shareholder in the form attached hereto as Exhibit XII. (g) On the Closing Date, each Employee Stock Option shall continue to have, and be subject to, the same terms and conditions set forth in the Share Option Plan except that: (i) each Employee Stock Option will be exercisable for that whole number of Conexant Shares equal to the product obtained by multiplying the number of Common Shares issuable upon exercise of 15 such Employee Stock Option immediately prior to the Closing Date by the Exchange Ratio, rounded down to the nearest whole number of Conexant Shares; and (ii) the per share exercise price for the Conexant Shares issuable upon exercise of each Employee Stock Option will be equal to the quotient obtained by dividing the exercise price per Common Share for such Employee Stock Option immediately prior to the Closing Date by the Exchange Ratio, rounded up to the nearest whole cent (provided that, in no event, shall such quotient be an amount less than the Canadian Dollar Equivalent of U.S. $1.00) and Conexant will agree in the Support Agreement to make available to the Corporation Conexant Shares for delivery upon exercise of Employee Stock Options. (h) At the Time of Closing, each of the outstanding Warrants shall continue to have, and be subject to, the same terms and conditions set forth therein except that: (i) the Warrant will be exercisable for that number of whole Conexant Shares equal to the product obtained by multiplying the number of the Common Shares that were issuable upon exercise of such Warrant immediately prior to the Time of Closing by the Exchange Ratio, rounded down to the nearest whole number of Conexant Shares; and (ii) the per share exercise price will be equal to the quotient obtained by dividing the exercise price per Common Share at which such Warrant was exercisable immediately prior to the Time of Closing by the Exchange Ratio, rounded up to the nearest whole cent (provided that, in no event, shall such quotient be an amount less than the Canadian Dollar Equivalent of U.S. $1.00) and Conexant will agree in the Support Agreement to make available to the Corporation Conexant Shares for delivery upon exercise of the Warrants. (i) At the Time of Closing, each outstanding Convertible Debenture Option shall continue to have, and be subject to, the same terms and conditions set forth in the terms of the Convertible Debenture Options and/or as provided in the respective option agreements immediately prior to the Time of Closing, except that: (i) each Option will be exercisable for that number of whole Conexant Shares equal to the product obtained by multiplying the number of Common Shares that were issuable upon exercise of such Convertible Debenture Option immediately prior to the Time of Closing multiplied by the Exchange Ratio, rounded down to the nearest whole number of Conexant Shares; and (ii) the per share exercise price for the Conexant Shares issuable upon exercise of the Convertible Debenture Option will be equal to the quotient determined by dividing the exercise price per Common Share at which such Convertible Debenture Option was exercisable immediately prior to the Time of Closing by the Exchange Ratio, rounded up to the nearest whole cent (provided that, in no event, shall such quotient be an amount less than the Canadian Dollar Equivalent of U.S. $1.00) and Conexant will agree in the Support Agreement to make available to the Corporation Conexant Shares for delivery upon exercise of the Convertible Debenture Options. (j) On the Closing Date, the Corporation shall cancel the 100 Class C Non-Voting Preferred Shares purchased from Conexant pursuant to Section 2.1(1)(e). 16 (k) On the Closing Date, the Shareholders shall cause to be deposited into escrow under the Exchange Trust Agreement 10% of the Exchangeable Shares issued pursuant to the Reorganization and such Exchangeable Shares will be held by the Trustee pursuant to the Exchange Trust Agreement. (l) On the Closing Date: (a) Conexant, the Corporation and the Trustee shall enter into the Exchange Trust Agreement; and (b) Conexant and the Corporation shall enter into the Support Agreement. (2) The Reorganization is intended to be a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. Section 2.2 Approval of the Reorganization. Each of the Shareholders agrees to vote at meetings of the holders of each class of shares of the Corporation all shares of the Corporation owned by such Shareholder (or to execute a written resolution in lieu thereof) in favour of the approval of the Reorganization and the filing of the articles of amendment in furtherance of the completion of the Reorganization. Section 2.3 Closing. Subject to the rights of the Shareholders, the Corporation and Conexant to terminate this Agreement pursuant to Section 2.4 hereof, the closing for the consummation of the Reorganization contemplated by this Agreement (the "Closing") shall, unless another date or place is agreed to in writing by the parties, take place at the offices of McCarthy Tetrault, located at The Chambers, Suite 1400, 40 Elgin St., Ottawa, Ontario, at 3:00 p.m., Ottawa time, on or before the Closing Date. Section 2.4 Termination of Agreement. (a) This Agreement may, by written notice given at or prior to the Closing in the manner hereinafter provided, be terminated or abandoned: (i) In the event that the Closing shall not have occurred on or before the End Date, unless the parties hereto shall otherwise agree in writing; (ii) By Conexant, if a default of a material covenant or breach of a material representation shall be made by the Corporation or the Shareholders with respect to the due and timely performance of any of their covenants and agreements contained herein, or with respect to the correctness of or due compliance with any of the Corporation's representations and warranties contained in Article 3 hereof, and such default has not been cured or waived. However, if such default or breach is curable by the Corporation through the exercise of its commercially reasonable efforts, then Conexant may not terminate this Agreement under this Section 2.4(a)(ii) prior to the 17 End Date, provided the Corporation exercises commercially reasonable efforts to cure such breach, the cost of curing such breach is either approved by Conexant in writing or borne entirely by the Corporation (provided that the cost of such cure, together with the Corporation's aggregate fees, expenses and costs in connection with the Transactions, shall not exceed the maximum amount permitted under Section 8.4) or the Shareholders and the breach is cured to the reasonable satisfaction of Conexant before the End Date. It is understood that Conexant may not terminate this Agreement pursuant to this Section 2.4(a)(ii) if Conexant shall itself have materially breached this Agreement; (iii) By the Shareholders, if a default or breach shall be made by Conexant with respect to the due and timely performance of any of its covenants and agreements contained herein, or with respect to the correctness of or due compliance with any of its representations and warranties contained in Article IV hereof, and such default has not been cured or waived. However, if such default or breach is curable by Conexant through the exercise of its commercially reasonable efforts, then the Shareholders may not terminate this Agreement under this Section 2.4(a)(iii) prior to the End Date, provided Conexant exercises commercially reasonable efforts to cure such breach and the breach is cured before the End Date to the reasonable satisfaction of the Shareholders holding a majority of the number of the aggregate number of Common Shares, Class A Preferred Shares and Class B Preferred Shares outstanding on the Closing Date. It is understood that the Shareholders may not terminate this Agreement pursuant to this Section 2.4(a)(iii) if the Corporation or any of the Shareholders shall have materially breached this Agreement; or (iv) By mutual consent of the Corporation and Conexant. (b) No termination of this Agreement, whether pursuant to this Section 2.4 or otherwise, shall terminate or impair any claim by any party against the other based upon any breach hereof, nor shall it terminate any obligations of any party to the other with respect to confidentiality of information provided to such party by the other party pursuant to the terms of the Confidentiality Agreement. 18 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE CORPORATION The Corporation hereby represents and warrants to Conexant as follows: Section 3.1 Organization and Good Standing. (a) The Corporation is a corporation duly incorporated, organized and subsisting under the laws of Canada with the corporate power to own, lease or operate all properties and assets now owned, leased or operated by it and to carry on its business as now conducted and has made all necessary filings under all applicable corporate, securities and taxation laws or any other laws to which the Corporation is subject. (b) The Corporation is duly qualified or licensed to do business and in good standing as a foreign corporation in the State of California which is the only jurisdiction other than the Province of Ontario Canada in which the property owned, leased or operated by the Corporation or the nature of the business conducted by the Corporation makes such qualification or licensing necessary. (c) True and complete copies of the articles of incorporation, as amended, bylaws, minute books, shareholders' register and stock transfer register of the Corporation have previously been made available to Conexant or its counsel. The minute books of the Corporation are complete and accurately reflect all director and shareholder actions taken in respect of the Corporation, and all actions reflected therein have been conducted or taken in compliance with all applicable Laws and with the articles of incorporation, as amended, and bylaws of the Corporation. The share certificate books, register of shareholders and register of transfers of the Corporation are complete and accurately reflect the record ownership of all capital stock of the Corporation and all transfers thereof, and all transfers reflected therein have been duly completed and approved. Section 3.2 Capitalization; Title to Shares and Structure. (a) Part 3.2(a) of the Disclosure Schedule sets forth, prior to giving effect to the Reorganization: (i) the authorized capital stock of the Corporation; (ii) the number of shares of each class or series of shares of the Corporation issued and outstanding; 19 (iii) for each class or series of shares of the Corporation, the name and number of shares owned by each Person that is the record owner of such shares; (iv) each Equity Security of the Corporation (other than capital stock referred to in clauses (i) through (iii) hereof) authorized; (v) each Equity Security of the Corporation (other than capital stock referred to in clauses (i) through (iii) hereof) issued and outstanding; (vi) for each Equity Security of the Corporation issued and outstanding, other than Capital stock referred to in clauses (i) through (iii) hereof: (1) the type and number of securities into which or for which each such Equity Security may be converted, exchanged, or exercised; (2) the exercise, conversion, exchange or strike price or other consideration payable by any holder of such Equity Security on conversion, exchange or exercise thereof; (3) the dates or times any such Equity Security (1) was issued or granted, (2) may be converted, exchanged or exercised, (3) expires, terminates or matures and (4) vests or becomes transferable; and (4) the name of and number of units owned by each Person that is the record owner of each such Equity Security. (b) No shares of capital stock or Equity Securities are held by the Corporation in treasury. (c) All of the outstanding shares of capital stock and all of outstanding Equity Securities are duly authorized, validly issued, fully paid (other than as set forth in Part 3.2(c) of the Disclosure Schedule for Equity Securities) and non-assessable, and were not issued in violation of, and are not subject to, any preemptive rights which have not been complied with or waived. (d) Except as set forth in Part 3.2(d) of the Disclosure Schedule, or as provided in this Agreement or the other Transaction Documents, the capital stock and Equity Securities are not subject to: (i) any Lien; 20 (ii) any restriction on transfer (other than any arising under applicable securities laws); or (iii) any Contract of any kind with any Person other than the Corporation, including any shareholder, voting trust, hypothecation, loan, acquisition or transfer agreement and any stock swap, hedge, collar, cap, loan or other derivative contract. (e) There are no bonds, debentures, notes or other indebtedness of the Corporation having the right to vote (or convertible into, or exchangeable or exercisable for, securities having the right to vote) on any matters on which any Shareholders may vote. (f) Except as set forth in Part 3.2(f) of the Disclosure Schedule, or as contemplated by this Agreement or the other Transaction Documents, there are no Contracts of the Corporation to repurchase, redeem or otherwise acquire any capital stock or Equity Securities of the Corporation. (g) Each Shareholder is, and at the Time of Closing will be, the registered owner of the respective number of Class A Preferred Shares, Class B Preferred Shares, Common Shares, Employee Stock Options, Convertible Debenture Options and Warrants set out, respectively, adjacent to such Shareholder's name in Schedule A hereto (adjusted to reflect any exercises by a Shareholder between the date hereof and the Time of Closing of any Employee Stock Options, Convertible Debenture Options or Warrants), free and clear of any Lien (other than the restrictions set forth in this Agreement and the other Transaction Documents). (h) Except as referred to in Part 3.2(a) of the Disclosure Schedule, there are no securities, options, warrants, calls, rights or other Contracts, including, without limitation, stock appreciation rights, "phantom" stock or similar plans or rights, obligating the Corporation to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other securities or assets of the Corporation or obligating the Corporation to issue, grant, extend or enter into any such security, option, warrant, call, right or Contract, including any securities pursuant to which rights to acquire capital stock become exercisable only after a change of control of the Corporation or upon the acquisition of a specified amount of the Common Stock or voting power of the Corporation. Section 3.3 No Subsidiaries. The Corporation does not have any Subsidiaries. The Corporation does not have any Investments in other Persons except for cash and cash equivalents of the type reflected in the Financial Statements. Except as disclosed pursuant to Section 3.18, the Corporation is not a participant in any joint venture, partnership or similar arrangement. 21 Section 3.4 Due Authorization; Enforceability. The Corporation has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the other Transaction Documents and to consummate the Transactions. Each Shareholder has the legal capacity and full power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a party and to consummate the Transactions. Subject only to obtaining approvals at a meeting from the holders of at least two-thirds of each class of the Corporation's Shares or by a resolution signed by all such holders with respect to the filing of the articles of amendment in Exhibit I and II hereto, the execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the Transactions by the Shareholders and the Corporation have been duly authorized by all necessary or appropriate corporate or other action and no other corporate or other proceedings are necessary to authorize this Agreement or the other Transaction Documents or to consummate the Transactions. This Agreement and those Transaction Documents executed or delivered on or prior to the date of this Agreement constitute, and prior to the Time of Closing the remaining Transaction Documents required to be executed after the date of this Agreement will constitute when executed, the valid and legally binding obligations of the Shareholders and the Corporation, as the case may be (assuming that this Agreement and the Transaction Documents constitute the valid and binding obligations of Conexant), enforceable against the Shareholders and the Corporation, as the case may be, in accordance with their terms except as enforceability may be limited by applicable (i) bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and (ii) Laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Section 3.5 No Violation. Except for filings and Consents set forth in Part 3.5 of the Disclosure Schedule, neither the execution, delivery or performance of this Agreement by the Shareholders or the Corporation, nor the consummation by the Shareholders or the Corporation of the Transactions, will, with or without the giving of notice or lapse of time or both: (i) violate, conflict with or result in any breach of any provision of the articles of incorporation, as amended or by-laws of the Corporation; (ii) require any Permit of any Governmental Authority or violate, conflict with or constitute a default under any of the terms or requirements of any Permit that is held by the Corporation; or (iii) result in a material violation or breach of, or constitute a material default (or give rise to any rights of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which the Corporation is a party or by which any of its assets or properties is bound which would have a Material Adverse Effect; or (iv) violate or result in any breach of any Law applicable to the Corporation. Section 3.6 Financial Statements. (a) The Corporation has delivered to Conexant true and correct copies of the Financial Statements. 22 (b) The Financial Statements were prepared from and in accordance with the books and records of the Corporation in accordance with GAAP consistently applied, are true and correct and fairly present the financial condition, results of operations, changes in shareholder's equity and cash flow of the Corporation as of and for the periods indicated or as of the respective dates set forth therein. (c) As of the date hereof, the Corporation did not have any Liabilities that were not adequately reflected or reserved for in the Balance Sheet, except (i) as set forth in Part 3.6(c) of the Disclosure Schedule (none of which would have a Material Adverse Effect) or (ii) for current liabilities incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date. The Corporation has no Liabilities which are unrelated to the business of the Corporation as currently conducted by it and no Liabilities which are related in any way to any circumstance, event, transaction or occurrence, or any Contract entered into or Permit obtained, prior to June 30, 1997. Section 3.7 Absence of Certain Changes. Since the date of the Financial Statements, the Corporation has been operated only in the ordinary course of business and has not suffered any Material Adverse Effect, and no condition or event, change or development has occurred which, individually or in the aggregate, may result in such a Material Adverse Effect. Except as set forth in Part 3.7 of the Disclosure Schedule or as expressly permitted by this Agreement or the Transaction Documents, since the date of the Financial Statements the Corporation has not: (a) except as set forth in Part 3.2(a) of the Disclosure Schedule, (1) declared, set aside or paid any dividend or made any other actual, constructive or deemed distribution with respect to any of its shares of capital stock, or otherwise made any payments to its stockholders in their capacity as such; (2) redeemed, purchased or otherwise acquired any of its shares of capital stock or any other securities or any rights, warrants or option to acquire any such shares or other securities; (3) split, combined or reclassified any of its shares of capital stock; or (4) issued or authorized the issuance of, or granted any registration rights with respect to, any shares of its capital stock or any other securities in respect of, in lieu of or in substitution for any of its shares of capital stock or (5) issued or authorized the issuance of any Equity Securities; (b) amended its articles of incorporation or bylaws; (c) (1) granted to any officer or director any increase in compensation, severance or termination pay or voluntarily accelerated the vesting thereof, (2) entered into, terminated or modified any employment, severance, termination or consulting agreement with any employee, officer, director or consultant, (3) increased or established any bonus, insurance, deferred compensation, pension, retirement, 23 savings, profit-sharing, stock option (including the granting of stock options, stock appreciation rights, performance awards or restricted stock awards or the amendment of any existing stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan or agreement or arrangement, (4) suffered or received threats of any labour strike, dispute, slowdown or work stoppage; (d) suffered any damage, destruction or other loss, whether or not covered by insurance in excess of $25,000; (e) made any payment to any Shareholder or any Affiliate of a Shareholder exceeding $25,000 in the aggregate; (f) revalued any of its assets; (g) licensed, sold, transferred, pledged, modified, disclosed, disposed of or permitted to lapse any Intellectual Property rights, except in the ordinary course of business consistent with past practice; (h) incurred, assumed, created or guaranteed, directly or indirectly, any Liability exceeding $25,000 in the aggregate, except for trade or business obligations in the ordinary course of business consistent with past practice; (i) sold, transferred or leased any material assets, except for the sale of inventory in the ordinary course of business consistent with past practice; (j) made any change in accounting methods, policies, practices or principles; (k) amended, renegotiated or terminated (other than by completion thereof) any Contract except in the ordinary course of business consistent with past practice; (l) made any capital expenditure or series of capital expenditures in excess of $25,000 in the aggregate; (m) entered into any (A) purchase Contracts in excess of its normal operating inventories or at prices above customary prices or (B) sales Contracts in excess of $25,000 or at prices below customary prices; or (n) agreed, whether in writing or otherwise, to take any action of a type described in this Section 3.7. 24 Section 3.8 Litigation. Except as set forth in Part 3.8 of the Disclosure Schedule, (i) there is no Order in effect to which any Shareholder, the Corporation or any Affiliate thereof is a party and which relates to or affects the Corporation, the business of the Corporation or the Transactions and (ii) neither the Corporation, the Shareholders nor any Affiliate thereof is a party to, or engaged in, or to the Knowledge of the Corporation, threatened, with any Action which relates to or affects the Corporation, the business of the Corporation or the Transactions, and, to the Knowledge of the Corporation, no event has occurred or condition exists which would form the basis of an Action described in this Section 3.8. None of the Actions disclosed or required to be disclosed in Part 3.8 of the Disclosure Schedule, if adversely determined will have a Material Adverse Effect on the Corporation. Section 3.9 Compliance with Laws. The Corporation is, and has been, in compliance with all Laws and Orders applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets, except for such non-compliance as would not have a Material Adverse Effect on the Corporation. No investigation or review by any Governmental Authority with respect to the Corporation is pending or, to the Knowledge of the Corporation, threatened, nor has any Governmental Authority indicated an intention to conduct any such investigation or review. Part 3.9 of the Disclosure Schedule contains a complete and accurate list of all Permits that are held by the Corporation or that otherwise relate to its business or to any of the assets owned or used by the Corporation. The Permits listed in Part 3.9 of the Disclosure Schedule constitute all of the Permits necessary to permit the Corporation lawfully to conduct and operate its business in the manner in which it currently conducts and operates its business and to permit the Corporation to own and use its assets in the manner in which it currently owns and uses such assets. The Corporation is in full compliance with all of the terms and requirements of each Permit identified or required to be identified in Part 3.9 of the Disclosure Schedule. Section 3.10 Environmental Matters. None of the real property now or previously owned or leased by the Corporation or any predecessor thereof has been used at any time: (i) as a site for the storage or disposal of any Hazardous Material or (ii) so as to cause a violation of or to give rise to a removal, restoration or reimbursement Liability under any Environmental Law. The Corporation has no Liability under any applicable Environmental Law or under any Contract related to or affecting its business with respect to or as a result of (A) the storage, handling or removal by or at the request of the Corporation or any predecessor of the Corporation of any Hazardous Material at or from such property, (B) the disposition of such removed Hazardous Materials at any other locations, (C) the Release or presence of Hazardous Materials at any location or (D) the discontinuance, sale or transfer of operations of any business conducted at such properties. Section 3.11 Taxes. 25 (a) All material Tax Returns required to be filed by or on behalf of the Corporation have been timely filed or requests for extensions have been timely filed and any such extensions have been granted and have not expired. Each such Tax Return was true, complete and correct in all material respects. All Taxes with respect to taxable periods covered by such Tax Returns and all other material Taxes for which the Corporation is otherwise liable that are due have been paid in full and to the extent the Liabilities for such Taxes are not due, adequate reserves have been established, in accordance with GAAP consistently applied. (b) All Taxes due, assessed or re-assessed against the Corporation, or as shown on such Tax Returns, or with respect to any completed and settled audit, examination or deficiency litigation with any taxing authority for which the Corporation is or might otherwise be liable, have been paid in full. The Corporation has never been delinquent in the payment of any Tax. Except as set forth in Part 3.11 of the Disclosure Schedule, there is no audit, examination, assessment, deficiency or refund Action pending with respect to any Taxes and no taxing authority has given written notice of the commencement of any audit, examination, assessment or deficiency litigation with respect to any Taxes. No issue has arisen in any examination of the Corporation by any taxing authority that, if raised with respect to the same or substantially similar facts arising in any other Tax period not so examined, would result in a deficiency for such other period, if upheld. (c) No Liens for Taxes exist with respect to any of the assets of the Corporation, except for Taxes not yet due and payable. (d) There is no tax sharing, indemnification or allocation agreement or similar arrangement that will require any payment by the Corporation after the date of this Agreement. (e) Canada is the only jurisdiction in which the Corporation regularly conducts trade or business whose tax authorities seek to charge Tax on the worldwide profits or gains of the Corporation. (f) The Corporation has timely withheld proper and accurate amounts from its employees, customers, independent contractors, shareholders and others from whom it is or was required to withhold Taxes in compliance with all applicable laws and has timely paid all such withheld amounts to the appropriate taxing authorities. (g) There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any claim for, or the period for the collection or assessment of, Taxes of the Corporation due for any taxable period under the Income Tax Act (Canada), the regulations made thereunder or any other legislation or regulations imposing Tax on the Corporation. (h) The Corporation has not made any payment to or provided any benefit for any officer or employee or ex-officer or ex-employee of the Corporation which is not allowable as a deduction in calculating the profits of the Corporation for taxation purposes. 26 (i) The Corporation is not a partner or a member of any partnership or joint venture, or any other entity classified as a partnership or other pass-through entity for taxation purposes. (j) No claim has been made by any taxing authority in a jurisdiction where the Corporation does not file Tax Returns that the Corporation is or may be subject to Tax in that jurisdiction. (k) The paid-up capital for purposes of the Income Tax Act (Canada) in respect of each class of shares of the Corporation is not less than the stated capital in respect of such class. Section III.12 Property. (a) The Corporation has good and marketable title to all property, equipment and other assets owned by it (whether personal, mixed, tangible or intangible), free and clear of any Lien, except for Permitted Liens and such Liens that would not, individually or in the aggregate, have a Material Adverse Effect. The Corporation does not own any real property. The Corporation has valid and enforceable leases for the premises and the equipment, furniture and fixtures purported to be leased by it, free and clear of any Lien, except for Permitted Liens, and such Liens that would not, individually or in the aggregate, have a Material Adverse Effect. (b) The Corporation enjoys peaceful and undisturbed possession of all property leased, subleased or occupied by the Corporation pursuant to a lease. There are no restrictions imposed by any lease or other Contract or by Law which preclude or restrict the ability to use the property leased, subleased or occupied by the Corporation pursuant to a lease for the purposes for which they are currently being used. The Corporation is not in material default, and no notice of alleged default has been received by the Corporation, under any such lease or Contract and no lessor is in default or alleged to be in default thereunder. (c) The properties, assets and rights owned or leased by the Corporation constitute all properties (whether real or personal or tangible or intangible), assets and rights necessary for the Corporation to conduct its business after the Time of Closing as it is presently conducted by the Corporation and as it will be conducted on the Closing Date, no Shareholder or to the Knowledge of the Corporation, any Affiliate of any Shareholder owns or leases to the Corporation any of such properties, assets or rights. (d) The facilities and equipment owned or leased by the Corporation are in good operating condition and repair and free from any defects, reasonable wear and tear excepted, and are suitable for the uses for which they are being used and are performing the functions for which they were intended. Section 3.13 Intellectual Property Matters. 27 (a) Part 3.13(a) of the Disclosure Schedule describes all domestic and foreign (i) issued patents, pending patent applications, approved patents and invention disclosures awaiting filing, (ii) registered trademarks and service marks, pending trademark and service mark applications and unregistered trademarks and service marks, (iii) registered copyrights, pending copyright applications and unregistered copyrights that constitute Business Intellectual Property, together with the name of the owner of each thereof, the country and the serial number, if applicable. (b) Part 3.13(b) of the Disclosure Schedule lists all Contracts of the Corporation or any of its Subsidiaries relating to the Business Intellectual Property, including the distribution or license of Business Intellectual Property (whether as licensor or licensee). Also included are Contracts of the Corporation or any of its Subsidiaries with current or former employees, consultants or contractors, regarding the assignment, appropriation or nondisclosure of any Intellectual Property. (c) Except for those items identified in Part 3.13(c) of the Disclosure Schedule: (i) other than the Business Intellectual Property owned by a Person other than the Corporation that is subject to a license agreement in favour of the Corporation or any of its Subsidiaries set forth on Part 3.13(b) of the Disclosure Schedule, the Corporation owns all right, title and interest in and to the Business Intellectual Property listed in Part 3.13(a) of the Disclosure Schedule, and has an absolute right to use all of the Business Intellectual Property, free and clear of any Liens and free from any requirement of any past, present or future payments (other than maintenance and similar payments), charges or fees or conditions, rights or restrictions; (ii) all license agreements listed in Part 3.13(b) of the Disclosure Schedule were entered into by authorized representatives of the Corporation or any of its Subsidiaries; (iii) no service rendered by the Corporation, or any product, process or material developed, manufactured, produced or used by the Corporation, infringes upon, or, to the Knowledge of the Corporation, is alleged to infringe upon, any Intellectual Property or other rights owned or held by any other Person; (iv) no Business Intellectual Property (to the Knowledge of the Corporation with respect to Business Intellectual Property owned by a Person other than the Corporation that is subject to a license agreement in favour of the 28 Corporation or any of its Subsidiaries set forth on Part 3.13(b) of the Disclosure Schedule) infringes upon, or, to the Knowledge of the Corporation, is alleged to infringe upon, any Intellectual Property or other rights owned or held by any other Person; (v) the rights of the Corporation in and to all Business Intellectual Property are valid and enforceable and no Business Intellectual Property (to the Knowledge of the Corporation with respect to Business Intellectual Property owned by a Person other than the Corporation that is subject to a license agreement in favour of the Corporation or any of its Subsidiaries set forth on Part 3.13(b) of the Disclosure Schedule) is subject to any outstanding Lien, judgment, ruling, order, writ, decree, stipulation, injunction or determination by or with any Governmental Authority, nor is there (or has there been) any pending or, to the Knowledge of the Corporation threatened, any Action relating to any Business Intellectual Property (including any interference, reissue, reexamination or opposition proceeding or proceeding contesting the rights of the Corporation to any Business Intellectual Property or the ownership, use, enforceability or validity of any Business Intellectual Property); (vi) to the Knowledge of the Corporation, there is no infringement or misappropriation of any Business Intellectual Property by any party or Person; (vii) there are no Contracts between the Corporation, and any other party or Person, that may have been terminated or expired prior to the date of this Agreement and under which the Corporation has granted rights or licenses in any Business Intellectual Property or granted an option to acquire any rights or licenses in any Business Intellectual Property, which rights or licenses or option to acquire survived such termination or expiration; (viii) the Corporation has not covenanted or agreed with any Person not to sue or otherwise enforce any legal rights with respect to any Business Intellectual Property; (ix) all Business Intellectual Property (other than Business Intellectual Property owned by a Person other than the Corporation that is subject to a license agreement in favor of the Corporation or any of its Subsidiaries set forth on Part 3.13(b) of the Disclosure Schedule), was developed entirely by employees of the Corporation or any of its Subsidiaries during the time they were employees of the Corporation or any of its Subsidiaries; 29 (x) all of the Business Intellectual Property (to the Knowledge of the Corporation with respect to Business Intellectual Property owned by a Person other than the Corporation that is subject to a licence agreement in favour of the Corporation or any of its Subsidiaries set forth on Part 3.13(b) of the Disclosure Schedule) is in compliance in all material respects with all applicable Laws (including payment of filing, examination, and maintenance fees and proofs of working or use); (xi) all agreements between the Corporation and any third party or Person relating to the Business Intellectual Property are on a non-exclusive basis and no such agreements are subject to clauses that materially change the terms of such agreements as a result of the Transactions; (xii) the Corporation has not sold, assigned, licensed or otherwise transferred any Business Intellectual Property developed or acquired by the Corporation, except pursuant to non-exclusive licenses that may be terminated by the Corporation on not more than 30 days notice and without payment by the Corporation of any monetary amount; (xiii) no Business Intellectual Property (to the Knowledge of the Corporation with respect to Business Intellectual Property that is owned by a Person other than the Corporation that is subject to a licence agreement in favour of the Corporation or any of its Subsidiary set forth on Part 3.13(b) of the Disclosure Schedule) has been abandoned or has expired for non-payment of maintenance fees or failure to respond to administrative deadlines; (xiv) the Corporation has taken all reasonable steps (including measures to protect secrecy and confidentiality) to protect the Corporation's right, title and interest in and to all Business Intellectual Property. All employees, agents, consultants and other representatives of the Corporation who have access to confidential or proprietary information of the Corporation have a legal obligation of confidentiality to the Corporation with respect to such information; (xv) all employees of the Corporation have duly executed and delivered agreements with the Corporation pertaining to the assignment, without additional consideration, to the Corporation of all inventions, discoveries and ideas, whether or not patented or patentable, conceived or reduced to practice during the course of their employment or engagement by the Corporation; 30 (xvi) the documentation that the Corporation possesses relating to trade secrets and confidential business and technical information included in the Business Intellectual Property is current, accurate, and sufficient in detail and content to identify and explain such trade secrets and confidential business and technical information and to allow its full and proper use without reliance on the knowledge or memory of any Person; (xvii) the Business Intellectual Property constitutes all Intellectual Property rights necessary to conduct fully the Business as currently conducted and as it will be conducted through the Closing Date; and (xviii) no Business Intellectual Property or any service rendered by the Corporation or any product, process or material developed, manufactured, produced or used by the Corporation infringes upon, contributorily infringes upon, or induces infringement of, any Intellectual Property or other rights owned or held by Nortel Inc. or any Affiliate of Nortel Inc. Section 3.14 Employee Benefit and Labour Matters. (a) The Corporation is not a party to any Contract regarding collective bargaining or other Contract with any labour union or association representing any employee employed by the Corporation or otherwise engaged in the business of the Corporation. No trade union, council of trade unions, employee bargaining agency or affiliated bargaining agent (i) holds bargaining rights with respect to any of the Corporation's employees by way of certification, interim certification, voluntary recognition, designation or successor rights, (ii) has applied to be certified as the bargaining agent of any of the Corporation's employees, or (iii) has applied to have the Corporation declared a related employer pursuant to Section 1(4) of the Labour Relations Act (Ontario). No Contract regarding collective bargaining has been requested by, or is under discussion between management of the Corporation (or any management group or association of which the Corporation is a member or otherwise a participant) and any group of employees employed by the Corporation or otherwise engaged in the business of the Corporation. There are no representation proceedings or petitions seeking a representation proceeding presently pending against the Corporation with any labour relations tribunal. There are no other current activities known to the Corporation to organize any employees of the Corporation into a collective bargaining unit. There is no unfair labour practice charge or complaint pending or, to the Knowledge of the Corporation, threatened. During the past three years, there has been no labour strike, slow-down, work stoppage, arbitration, grievances or other work-related dispute involving the Corporation or otherwise related to the business of the Corporation, and no such dispute is now pending or threatened against the Corporation. 31 (b) Part 3.14(b) of the Disclosure Schedule sets forth a true, accurate and complete list of each pension, retirement, savings, cash balance, profit sharing, deferred compensation, medical, vision, dental and other health plan, cafeteria, short- and long-term disability, accident and life insurance plan, bonus, stock option, stock purchase, incentive, severance and special compensation and other plan and each other employee benefit plan, program and Contract which is related to the Business and to which the Corporation contributes or is required to contribute, or which the Corporation sponsors, maintains or administers or which is otherwise applicable to employees or categories of employees of the Corporation (hereinafter referred to collectively as the "Plans"). True, accurate and complete copies of all documents relating to such Plans have previously been made available to Conexant. (c) All Plans have been duly registered where required by, and are in good standing under, all applicable legislation, including the Income Tax Act (Canada) and the Pension Benefits Act (Ontario). All required employer contributions under any such Plans, the Income Tax Act (Canada) and the Pension Benefits Act (Ontario) have been timely made and no past service funding liabilities exist thereunder. (d) None of the Plans is subject to ERISA or the Internal Revenue Code. The Corporation has not maintained, contributed to, participated in or incurred any liability to or under (i) any plan subject to ERISA or the Internal Revenue Code or (ii) any "multiemployer plan" (as defined under ERISA). (e) The Corporation has no obligation to provide post-retirement welfare benefits to employees of the Corporation. (f) The Corporation has previously made available to Conexant an accurate and complete list as of the date set forth therein of each employment, consulting, termination, confidentiality, non-competition, retention, severance or other Contract with employees or independent contractors or leased or interim employees of the Corporation. All such Contracts are valid and enforceable, and neither the Corporation nor, to the Knowledge of the Corporation, any employee, independent contractor or leased or interim employee is in default in any material respect under any thereof. Neither the execution, delivery or performance of this Agreement or the other Transaction Documents nor the consummation of the Transactions will result in any obligation to pay any employees, independent contractors or leased or interim employees of the Corporation severance pay, or termination, retention or other benefits. (g) The Corporation has previously made available to Conexant an accurate and complete list as of the date set forth therein of each employee, independent contractor or leased employee of the Corporation (including those who are actually employed or on layoff, leave, or short-term disability or other permitted absence from employment, but excluding those who are on long-term disability), together with each such individual's (i) starting date of work, (ii) present hourly or, if salaried, annual compensation rate, (iii) job title; (iv) vacation accrued; and (v) service credited for purposes of vesting and eligibility to participate under any Plans. None of 32 such persons has notified the Corporation, and the Corporation has no reason to believe, that any of such persons intends to terminate employment or any other relationship with the Corporation following the consummation of the Transactions. (h) No charge against the Corporation or any of its employees is pending before any Governmental Authority responsible for the prevention of unlawful employment. No claims relating to employment or loss of employment from the Corporation are pending in any Governmental Authority and, to the Knowledge of the Corporation, no such claims are threatened. No notice of intent of any Governmental Authority responsible for the enforcement of labour or employment regulations to conduct an investigation has been received, and no such investigation is in progress. (i) There are two employees of the Corporation who reside or work in the United States. All employees presently employed by the Corporation in the United States are authorized for employment by the Corporation in accordance with the Immigration and Naturalization Act. (j) No notice has been received by the Corporation of any complaint (which has not been resolved) filed by any of its employees claiming that the Corporation has violated the Employment Standards Act (Ontario) or the Human Rights Code (Ontario) (or any applicable employee or human rights or similar legislation in the other jurisdictions in which the Corporation operates), or of any complaints or proceedings which have not been resolved of any kind involving the Corporation or, to the Corporation's knowledge, after due inquiry, any of the employees of the Corporation before any labour relations board. There are no outstanding orders or charges against the Corporation under the Occupational Health and Safety Act (Ontario) (or any applicable health and safety legislation in the other jurisdictions in which the Corporation carries on business). All levies, assessments and penalties made against the Corporation pursuant to the Workers' Compensation Act (Ontario) (and any applicable workers' compensation legislation in the other jurisdictions in which the Corporation carries on business) have been paid by the Corporation and the Corporation has not been reassessed under any such legislation except such as have been resolved. (k) All vacation pay (including all banked vacation pay), bonuses, commissions and other employee benefit payments are reflected and have been accrued in the Books and Records of the Corporation. (l) No payments have been made or authorized since the date of the Financial Statements by the Corporation to its officers, directors, former directors, shareholders or employees or to any Person not dealing at arm's length (as such term is defined in the Income Tax Act (Canada)) with any of the foregoing, except in the ordinary course of the Business and at the regular rates payable to them of salary, pension, bonuses, rents or other remuneration of any nature. 33 Section 3.15 Other Compensation Arrangements. Except as set forth on Part 3.15 of the Disclosure Schedule, the Corporation is not a party to any (i) consulting Contract (as recipient of services) (x) terminable on more than 30 calendar days notice or (y) involving the payment of more than $25,000 per annum, (ii) Contract with any employee of the Corporation (x) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Corporation of the nature contemplated by this Agreement and the Transaction Documents or (y) providing any term of employment or compensation guarantee or (iii) Contract or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of the Transactions or the value of any of the benefits of which will be calculated on the basis of the Transactions. Section 3.16 Transactions With Affiliates. (a) Except as set forth on Part 3.16(a) of the Disclosure Schedule or as set forth in the notes to the Financial Statements, during the past three years, no Shareholder and no Affiliate of any Shareholder (other than the Corporation) (x) has had any interest in any property (whether real, personal, or mixed, and whether tangible or intangible), used in or pertaining to the business of the Corporation or (y) to the Knowledge of the Corporation has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in a Person that has (i) had business dealings or a material financial interest in any transaction with the Corporation (other than business dealings or transactions conducted in the ordinary course of business at substantially prevailing market prices and on substantially prevailing market terms), or (ii) engaged in competition with the Corporation with respect to any line of the products or services of the Corporation in any market presently served by the Corporation (except for ownership of less than five percent of the outstanding capital stock of any corporation that is publicly traded on any recognized exchange or in the over-the-counter market). (b) Except for those Shareholders that are employees of the Corporation and except as disclosed in Part 3.16(b) of the Disclosure Schedule, no Shareholder and to the Knowledge of the Corporation no Affiliate of any Shareholder provides any services to the Corporation. 34 Section 3.17 Customers and Suppliers. (a) Part 3.17(a) of the Disclosure Schedule sets forth a list of the 10 most significant customers of the Corporation in terms of revenues to the Corporation during the twelve-month period ended December 31, 1999, showing the approximate total revenues of the Corporation from each customer during the period then ended. Except to the extent set forth in Part 3.17(a) of the Disclosure Schedule, the Corporation has not received any notice or has any reason to believe that any customer of the Corporation has ceased, or will cease, to use the products, equipment, goods or services of the Corporation, or has reduced or will reduce, the use of such products, equipment, goods or services at any time after the Closing, as a result of the Transactions or otherwise. (b) Part 3.17(b) of the Disclosure Schedule sets forth a list of the 10 most significant suppliers of services (including, without limitation, subcontractors), raw materials, supplies, merchandise or other goods for the Corporation in terms of purchases for the twelve-month period ended December 31, 1999 by the Corporation, showing the amount which the Corporation paid to each such significant supplier during such period. Except as disclosed in Part 3.17(b) of the Disclosure Schedule, the Corporation has no reason to believe that any such supplier will not sell raw materials, supplies, merchandise and other goods to the Corporation on the same terms and conditions to those used in its current sales to the Corporation, subject only to general and customary price increases, as a result of the Transaction or otherwise. Section 3.18 Material Contracts. (a) Part 3.18(a) of the Disclosure Schedule identifies all of the following types of agreements, understandings, Contracts, obligations or promises, (whether written or oral and whether express or implied) to which the Corporation is a party or by which any of its properties or assets is bound or affected: (i) pursuant to which the Corporation is the lessee of, or holds or uses, or is the lessor of, or makes available for use, (A) any real property or (B) any machinery, equipment or other tangible personal property, which has an aggregate annual future liability or receivable, as the case may be, in excess of $25,000; (ii) all contracts with customers and suppliers referred to in Section 3.17; (iii) relating to indebtedness of the Corporation, including any note, bond, debenture, instrument or other evidence of indebtedness under which the Corporation has borrowed any money from, or loaned any money to, any Person; 35 (iv) providing for or containing any mortgage, pledge, security agreement, deed of trust, financing lease or similar instrument granting any Lien on any property owned or used by the Corporation; (v) under which (A) any Person has directly or indirectly guaranteed indebtedness or other Liabilities of the Corporation, (B) the Corporation has directly or indirectly guaranteed indebtedness or other Liabilities of any Person or (C) the Corporation has any obligations relating to the financial condition of any other Person (including so-called "keepwell" agreements), in each case, other than endorsements for the purpose of collection in the ordinary course of business; (vi) (A) for the management, operation or control by or of any Person (or any division, material assets, operating unit or product line thereof), (B) under which the Corporation has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any Person or (C) which involves a sharing of profits, losses, costs or Liabilities by the Corporation with any other Person, including, stockholder, joint venture, strategic alliance, joint marketing, research and development, and any other similar Contracts; (vii) providing for indemnification to or from any Person with respect to Liabilities relating to any current or former business of the Corporation or any predecessor Person; (viii) between or among any Shareholder, the Corporation and any of their respective Affiliates; (ix) which limits or purports to limit the ability of the Corporation to compete in any line of business or with any Person or in any geographic area; (x) containing confidentiality or non-disclosure obligations to or from the Corporation; (xi) for the purchase or sale (through the acquisition of shares, assets or by merger, reorganization, or otherwise) of any business, corporation, partnership, joint venture, association or other business organization or any division, material assets, operating unit or product line thereof; (xii) with any Governmental Authority; (xiii) containing any restrictions with respect to payment of dividends or any other distributions in respect of the capital stock of the Corporation; and 36 (xiv) which is otherwise material to the business of the Corporation and is not described in any of the categories specified in this Section. Each item set forth or required to be set forth on Part 3.18 (a) of the Disclosure Schedule is referred to herein as a "Material Contract." (b) Each Material Contract was entered into in the ordinary course of business, is in full force and effect and is a legal, valid and binding obligation to the Corporation (and to the Knowledge of the Corporation, each other party or parties thereto), enforceable in accordance with its terms except as enforceability may be limited by applicable (i) bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and (ii) Laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The Corporation has performed the obligations required to be performed by it to date and, except as disclosed in Part 3.18(b) of the Disclosure Schedules, is not (with or without the lapse of time or the giving of notice, or both) in material breach or default or alleged to be in breach or default under any Material Contract and, to the Knowledge of the Corporation, the other parties thereto have complied in all material respects thereunder. To the Knowledge of the Corporation, no event has occurred or circumstance exists that (with or without lapse of time or the giving of notice) may contravene, conflict with or result in a violation or material breach of or give the Corporation or other Person the right to declare a default or exercise any remedy under or to accelerate the maturity of or to cancel, terminate or modify, any Material Contract. There are no re-negotiations of, attempts or requests to re-negotiate or outstanding rights to re-negotiate any Material Contract with any Person. The Corporation has previously delivered to Conexant, true and complete copies of all Material Contracts. (c) Except as set forth on Part 3.18(c) of the Disclosure Schedule, (A) there are no change of control or similar provisions or any obligations arising under any Material Contract which are created, accelerated or triggered by the execution, delivery or performance of this Agreement or the other Transaction Documents or the consummation of the Transactions and (B) the Transactions will not (x) constitute a "change of control" under, require the Consent from or the giving of notice to any Person, permit any Person to terminate or accelerate vesting, grant any repayment or repurchase rights to any Person, or create any other detriment under the terms, conditions or provisions of any Material Contract. Section 3.19 Insurance. Each of the Insurance policies and surety bonds which the Corporation maintains with respect to the Corporation or its assets, Liabilities, employees, officers, directors or representatives (the "Insurance Policies"): (i) will not lapse or be subject to suspension, modification, revocation, cancellation, termination or nonrenewal by reason of the execution, delivery or performance of any Transaction Document or consummation of the Transactions; (ii) insure the Corporation in reasonably sufficient amounts against all risks usually insured against by Persons operating similar businesses or properties in 37 the localities where such businesses or properties are located and (iii) are sufficient for compliance with all material requirements of Law. The Corporation is current in all premiums or other payments due under each Insurance Policy and, to the Knowledge of the Corporation has otherwise performed in all material respects all of its respective obligations thereunder. The Corporation has not received any notice that any Insurance Policy is not in full force and effect, and the Corporation has no knowledge of any event, circumstance or condition that would cause (or would be reasonably likely to cause) any Insurance Policy not to be in full force and effect. The Corporation has given timely notice to the insurer under each Insurance Policy of all claims that may be insured thereby. Section 3.20 Disclosure. (a) No representation or warranty of the Corporation in this Agreement and no statement contained in any Transaction Document contains any untrue statement or omits to state a material fact necessary to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. All financial projections provided to Conexant concerning the Corporation or its business have been reasonably prepared on bases reflecting the best currently available estimates and judgment of the Corporation's management as to the future operating and financial performances of the Corporation. (b) None of the information supplied or to be supplied by the Corporation for inclusion or incorporation by reference in the Registration Statement will, at the time any amendment or supplement to the Registration Statement is filed with the SEC, or at the time it becomes effective under the Securities Act, contain 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. Notwithstanding the foregoing provisions of this Section, no representation or warranty is made by the Corporation with respect to statements made or incorporated by reference in the Registration Statement based on information supplied by Conexant for inclusion or incorporation by reference therein. (c) Each Shareholder acknowledges that it has received and had an opportunity to review and evaluate the Confidential Information Memorandum of Conexant dated April 11, 2000 relating to the Transactions. Section 3.21 Brokers or Finders. Except for Credit Suisse First Boston, neither the Corporation nor any Shareholder, nor any of their respective representatives has incurred any Liability on the part of the Corporation for brokerage or finders' fees or agents' commissions or other similar payment in connection with the negotiation, preparation, delivery or execution of this Agreement or the consummation of the Transactions, nor is there any basis, to the Knowledge of the Corporation or any of the Shareholders, for any such fee, commission or similar payment to be claimed by any Person against the Corporation. 38 Section 3.22 Representations Complete. The representations and warranties made by the Corporation in this Article III and in any certificate furnished by the Corporation or any of its subsidiaries pursuant to this Agreement, when all such documents are read together in their entirety, do not and will not at the Closing Time contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF CONEXANT Conexant represents and warrants to the Shareholders as follows: Section 4.1 Organization, Standing and Power. Conexant is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, has all requisite power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which a failure to so qualify would have a Material Adverse Effect on Conexant. Section 4.2 Due Authorization; Enforceability. Conexant has all requisite corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents and to consummate the Transactions. The execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the Transactions by Conexant have been duly authorized by all necessary or appropriate corporate or other action and no other corporate or other proceedings are necessary to authorize this Agreement or the other Transaction Documents or to consummate the Transactions. This Agreement and those Transaction Documents executed or delivered on or prior to the date of this Agreement constitute, and prior to the Time of Closing the remaining Transaction Documents required to be executed after the date of this Agreement will constitute when executed, the valid and legally binding obligations of Conexant (assuming that this Agreement and the Transaction Documents constitute the valid and binding obligations of the Shareholders and the Corporation), enforceable against Conexant in accordance with their terms except as enforceability may be limited by applicable (i) bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and (ii) Laws relating to the availability of specific performance, injunctive relief or other equitable remedies. Section 4.3 No Violation. Except for filings and Consents set forth in Part 4.3 of the Disclosure Schedule, neither the execution, delivery or performance of this Agreement by Conexant, nor the consummation by Conexant of the Transactions, will, with 39 or without the giving of notice or lapse of time or both: (i) violate, conflict with or result in any breach of any provision of the articles of association or by-laws of Conexant; (ii) require any Permit of any Governmental Authority or violate, conflict with or constitute a default under any of the terms or requirements of any Permit that is held by Conexant; or (iii) result in a violation or breach of, or constitute a default (or give rise to any rights of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any Contract to which Conexant is a party or by which any of its assets or properties is bound; or (iv) violate, conflict with or result in any breach of any Law applicable to Conexant. Section 4.4 Financial Statements and SEC Documents. Since January 1, 1999, Conexant has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (all of the foregoing and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, with amendments read together with underlying documents, are referred to herein as the "SEC Documents"). As of the date of this Agreement, no event has occurred with respect to Conexant that would require Conexant to have filed any other report or make any other disclosure pursuant to the Exchange Act. As of the Closing Date, no event shall have occurred with respect to Conexant that will require Conexant to file any other report or make any other disclosure pursuant to the Exchange Act except for such other reports or disclosures as do not and will not disclose an adverse material change to the business operations, assets or condition (financial or otherwise) of Conexant and its Subsidiaries, on a consolidated basis. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, 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. As of their respective dates, the financial statements of Conexant included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with GAAP, consistently applied, during the periods involved and fairly present in all material respects the consolidated financial position of Conexant and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Section 4.5 Litigation and Other Proceedings. Except as disclosed in the SEC Documents, there is no action, suit, claim, investigation or proceeding (or any basis therefor known to Conexant) pending against or, to the knowledge of Conexant, threatened against Conexant or its properties and assets before any court or arbitrator or any Governmental Entity that could reasonably be expected to have a material 40 adverse effect on Conexant's Business Condition. Conexant is not subject to any order, writ, judgment, decree, or injunction that has a Material Adverse Effect. Section 4.6 Disclosure. Conexant covenants that none of the information supplied or to be supplied by Conexant for inclusion or incorporation by reference in the Registration Statement will, at the time any amendment or supplement to the Registration Statement is filed with the SEC, or at the time it becomes effective under the Securities Act, contain 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 . Notwithstanding the foregoing provisions of this Section, no representation or warranty is made by Conexant with respect to statements made or incorporated by reference in the Registration Statement based on information supplied by the Corporation for inclusion or incorporation by reference therein. Section 4.7 Brokers and Finders. Conexant has not retained any broker, finder or investment banker in connection with this Agreement or any of the transactions contemplated by this Agreement, nor does or will Conexant owe any fee or other amount to any broker, finder or investment banker in connection with this Agreement or the transactions contemplated by this Agreement. Section 4.8 Special Shares. Conexant confirms that it has no current intention to dispose of the Special Shares acquired pursuant to the Reorganization. Section 4.9 Representations Complete. The representations or warranties made by Conexant in this Article IV and in any certificate furnished by Conexant or any of its Subsidiaries pursuant to the this Agreement, when all such documents are read together in its entirety, do not contain and will not at the Time of Closing contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. 42 ARTICLE V COVENANTS Section 5.1 Taxes Not Assumed by Conexant. Conexant does not assume and shall not be liable for any taxes under the Income Tax Act (Canada) or any other Taxes whatsoever which may be or become payable by the Shareholders including, without limiting the generality of the foregoing, any Taxes which may be or become payable by the Shareholders resulting from or arising as a consequence of the transactions herein contemplated, including the Reorganization and the exchange of Exchangeable Share for Conexant Shares. Section 5.2 Covenants of the Shareholders and the Corporation. (a) The Corporation shall ensure that the representations and warranties of the Corporation set out in Article III over which the Corporation has reasonable control are true and correct at the Time of Closing. (b) The Corporation shall ensure that the conditions of closing for the benefit of Conexant set out in Section 6.1(1) over which the Corporation has reasonable control have been performed or complied with at the Time of Closing. For greater certainty, the Corporation shall not be liable to Conexant for any failure to obtain the approval of the shareholders of the Corporation for the Transactions, either at a special meeting or by a signed resolution, described in Section 5.2(f). (c) Each Shareholder shall ensure that the conditions of closing for the benefit of Conexant set out in Section 6.1(1) over which such Shareholder has reasonable control have been performed or complied with by the Time of Closing. (d) The Corporation shall permit Conexant, through its agents and representatives, to make such reasonable investigation prior to the Time of Closing of the assets of the Corporation and of its financial and legal condition as Conexant consider necessary or advisable to familiarize themselves with such assets and other matters and the Corporation shall supply any and all documents and records of the Corporation to Conexant and its agents and representatives as they may reasonably require. The Corporation shall also permit the inspection of the assets of the Corporation prior to the Time of Closing by such federal, provincial or municipal authorities as Conexant may require. Such investigations and inspections shall not, however, affect or mitigate the Shareholders' or the Corporation's covenants, representations and warranties hereunder, which shall continue in full force and effect. 43 (e) The Corporation shall use its reasonable best efforts to cause all the employees of the Corporation set out to Exhibit VIII to enter into employment agreements substantially in the form of Exhibit IX and non-competition agreements substantially in the form of Exhibit X prior to the Time of Closing. (f) The Corporation shall, as soon as practicable following the date of this Agreement, duly call, give notice of, convene and hold a special meeting of its shareholders for the purpose of obtaining the required vote of its shareholders and the Corporation shall, through its Board of Directors, unanimously recommend to its shareholders that they approve the Transactions. The Corporation shall use its commercially reasonable efforts to hold the Corporation's special shareholders' meeting on or before May 26, 2000. Alternatively, the Corporation may obtain the required approvals from its shareholders to effect the Transactions pursuant to resolutions in writing in accordance with Section 142 of the CBCA on or before April 30, 2000. The Corporation shall provide to Conexant draft copies of all materials to be provided by the Corporation to its shareholders in seeking the consent of the shareholders to the Transactions and Conexant and its counsel shall have a reasonable opportunity to provide comments on such materials prior to their mailing to the Corporation's shareholders. Such materials shall include the Confidential Offering Memorandum dated April 11, 2000, as well as Conexant's Form 10-K for its fiscal year ended September 30, 1999, Conexant's proxy statement dated January 3, 2000 and Conexant's Form 10-Q for its fiscal quarter ended December 31, 1999. (g) The Corporation shall use reasonable efforts to cause to be delivered to Conexant a letter of Deloitte & Touche LLP, the Corporation's chartered accountants, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to Conexant, in form and substance reasonably satisfactory to Conexant and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. (h) The Corporation shall not issue any shares, convertible securities, exchangeable securities, stock options or stock appreciation rights prior to the Closing Date without the prior written approval of Conexant. (i) From the date hereof until termination of this Agreement in accordance with Section 2.4, each of the Shareholders covenants and agrees that: (i) such Shareholder will not directly or indirectly sell or offer for sale, or solicit, initiate, assist, facilitate, promote or encourage any proposal or offer from, or entertain or enter into discussions or negotiations with, any other party related to the Common Shares, Class A Preferred Shares or Class B Preferred Shares; (ii) such Shareholder will, to the extent permitted by relevant law, use such Shareholder's best efforts to prevent, and to vote all of the shares of the 43 Corporation owned by such Shareholder against, the occurrence of any of the following events: (A) any change in the articles or by-laws of the Corporation except as required to facilitate the Reorganization; (B) the granting of any options, warrants or securities convertible into shares of the Corporation; (C) the distribution, sale, transfer or pledge of a substantial part (being in excess of 10%) of the business or property of the Corporation; (D) the merger, consolidation, amalgamation, arrangement or reorganization of the Corporation or any other material change in the corporate structure of the Corporation, other than the Reorganization; (E) the declaration of any dividend by the Corporation, or the making of any other payment by the Corporation to its shareholders; or (F) any other material change in the business of the Corporation; (iii) such Shareholder will not directly or indirectly provide any information concerning the Corporation to any entity in furtherance of any of the transactions described in clauses (i)(i) or (ii) above; (j) The Corporation covenants and agrees that it will not enter into, and will not propose to its shareholders, any transaction described in clause (i)(ii) above, and will not directly or indirectly provide any information concerning the Corporation to any entity in furtherance of any of the transactions described in clauses (i)(i) or (ii) above; (k) The Corporation will promptly advise Conexant in writing: (i) of any event to occur after the date of this Agreement that would render any representation or warranty of the Corporation contained in this Agreement, if made on or as of the date of such event to be untrue or inaccurate in any material respect; (ii) of any event to occur after the date of this Agreement and prior to the Closing Time that would have a Material Adverse Effect on the Corporation; and (iii) of any breach by the Corporation, or, to the Knowledge of the Corporation, by any Shareholder, of any covenant or agreement contained in this Agreement; and (l) The covenants of the Corporation and the Shareholders set forth in this Agreement shall survive the completion of the Transactions and, notwithstanding such completion, shall continue in full force and effect for the benefit of Conexant in accordance with the terms thereof. Section V.3 Covenants of Conexant. (a) Conexant shall ensure that the representations and warranties of Conexant set out in Article IV over which Conexant has reasonable control are true and correct at the Time of Closing and that the conditions of closing for the benefit of the Shareholders set out in Section 6.2(1) over which Conexant has reasonable control have been performed or complied with by the Time of Closing. 44 (b) So long as any Exchangeable Shares are outstanding, Conexant shall provide to the registered holders thereof the same information and at the same times that Conexant provides from time to time to the holders of Conexant Shares. (c) Conexant shall file a notification for listing of the Conexant Shares on the NASDAQ National Market System and shall cause such filing to be accepted prior to any exchange of Exchangeable Shares for Conexant Shares. (d) On or before the date that is the later of 30 days after the date of this Agreement and 10 days after the Closing Date, Conexant shall prepare and file or cause to be prepared and filed with the SEC, as soon as practicable, but in any event within 10 days after the Closing Date, a registration statement (the "Registration Statement") for an offering to be made on a delayed or continuous basis pursuant to Rule 415 of the Securities Act registering (A) all of the Conexant Shares issued or issuable in connection with the redemption by the Corporation, retraction by a shareholder, upon liquidation, dissolution or winding up of the Corporation or the acquisition by Conexant (or any Subsidiary of Conexant) of the Exchangeable Shares and (B) the issuance by Conexant of Conexant Shares upon exercise of all Warrants, Employee Stock Options and Convertible Debenture Options outstanding at the Closing Time, in each case to the extent such securities are capable of being registered at such time under Rule 415 of the Securities Act (the "Registrable Shares"). The Registration Statement shall be on Form S-3 or another appropriate form permitting registration of such Registrable Shares. Conexant shall use its commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as is practicable after the filing thereof with the SEC and to keep such Registration Statement effective until the date that is the earlier of five years and six months after the date hereof and the date upon which all Registrable Shares shall have ceased to be Registrable Shares, subject to the same exceptions and limitations as are set forth in Sections 3(c), (d), (e) and (i) of the Conexant Registration Rights Agreement; provided, that Conexant shall have notified a holder of Exchangeable Shares promptly, and in no event later than five Business Days, after such Exchangeable Shares have been tendered for retraction, redemption or purchase by the Corporation or Conexant (or any Subsidiary of Conexant), as the case may be, if such Registration Statement is not effective at the time of such retraction, redemption or purchase as a result of any such exceptions and limitations set forth in the Conexant Registration Rights Agreement. (e) Conexant shall use reasonable efforts to cause to be delivered to the Corporation a letter of Deloitte & Touche LLP, Conexant's independent public accountants, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to the Corporation, in form and substance reasonably satisfactory to the Corporation and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. 45 (f) At the request of any shareholder (a "Section 85 Shareholder") of the Corporation, Conexant shall cause the Corporation to execute jointly with such shareholder a T-2057 election pursuant to section 85 of the Income Tax Act (Canada), electing therein that the shares of the Corporation exchanged by such shareholder for Exchangeable Shares in the course of the Reorganization shall be deemed to have been disposed of by the Section 85 Shareholder at an amount to be determined by such shareholder, in his discretion, at no less than the cost amount to such shareholder of such shares and not greater than the fair market value of such shares as at the time of the Reorganization. Conexant agrees to cause the Corporation to execute and deliver the election form to the Section 85 Shareholder at the Time of Closing if duly prepared for filing, signed by the Section 85 Shareholder and provided to the Corporation prior to Closing and otherwise will execute and deliver such election form to the Representatives at the address set forth in Section 8.10 within 30 days of delivery to the Corporation of the election form duly prepared for filing and signed by the Section 85 Shareholder. The term "cost amount" as used in this paragraph shall have the meaning ascribed to it in the Income Tax Act (Canada). Compliance with the requirements to ensure the validity of a tax election will be the sole responsibility of the Section 85 Shareholder making the election, and such Section 85 Shareholder will be solely responsible for the filing of any election forms and the payment of any late filing penalties. Neither Conexant nor the Corporation will file any elections on behalf of Section 85 Shareholders. The Corporation will not execute election forms received more than five months after the Closing Date. (g) Conexant shall, within 7 days of the Closing Date, cause its Canadian counsel to apply to the Ontario Securities Commission for a ruling pursuant to subsection 74(1) of the Securities Act (Ontario) to permit the distribution of the Conexant Shares to holders of the Exchangeable Shares without a prospectus and to permit the resale of such Conexant Shares outside Ontario through the facilities of the Nasdaq National Market without a prospectus being filed under the Securities Act (Ontario), and Conexant shall use its commercially reasonable best efforts to obtain such a ruling within 90 days of the Closing Date. (h) Conexant shall cause the Corporation to maintain its existing directors' and officers' insurance policy in force for a period of at least two years following the Closing Date, provided such insurance policy continues to remain available on terms and conditions commercially reasonable to the Corporation. (i) Conexant shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Conexant Shares for delivery upon the exercise of each Employee Share Option referred to in Section 2.1 hereof. As soon as practicable after the Closing Time, and not more than ten Business Days thereafter, Conexant shall file a registration statement on Form S-8 (or any successor or other appropriate form), with respect to the shares of Conexant Shares subject to such options and shall use commercially reasonable efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain 46 outstanding, subject to the same exceptions and limitations as are set forth in Sections 3(c), (d), (e) and (i) of the Conexant Registration Rights Agreement; provided that Conexant shall have notified the holder of such Employee Share Option promptly, and in no event later than five Business Days, after such holder shall have given notice of exercise of Employee Share Options, if such Registration Statement is not effective at the time of exercise of such Employee Share Option because of exceptions or limitations set forth in the Conexant Registration Rights Agreement. (j) Conexant shall use reasonable efforts to attempt to ensure that as soon as practicable after the Closing Time, Conexant's benefit plans and benefit arrangements will provide benefits to the Continuing Employees that are substantially comparable to the non-discretionary, non-cash benefits provided to similarly situated employees of Conexant. Nothing in this clause (j) is intended or shall be construed as requiring Conexant to provide any particular employee benefit to any specific employee of the Corporation or to continue any specific benefit previously provided to any Continuing Employee. For purposes of this Section, "Continuing Employee" shall mean any employee of the Corporation who continues as an employee of the Corporation or Conexant after the Closing Time. (k) Conexant will promptly advise the Corporation in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of Conexant contained in this Agreement, if made on or as of the date of such event, to be untrue or inaccurate in any material respect, (b) of any Material Adverse Effect in Conexant; and (c) of any breach by Conexant of any covenant or agreement contained in the Agreement. (l) The covenants of Conexant set forth in this Agreement shall survive the completion of the transactions herein provided for and, notwithstanding such completion, shall continue in full force and effect for the benefit of the Shareholders in accordance with the terms thereof. ARTICLE VI CONDITIONS Section 6.1 Conditions for the Benefit of Conexant. (1) Closing shall be subject to the following conditions which are for the exclusive benefit of Conexant to be performed or complied with at or prior to the Time of Closing: (a) the representations and warranties of the Corporation set forth in Article III shall be true and correct at the Time of Closing with the same force and effect as if made at and as of such time; 47 (b) the Corporation and each of the Shareholders shall have performed or complied with all of the terms, covenants and conditions of this Agreement to be performed or complied with by the Corporation and the Shareholders, as the case may be, at or prior to the Time of Closing; (c) Conexant shall be furnished with such certificates, affidavits or statutory declarations of the Corporation and of the Shareholders or of officers of the Corporation and of the Shareholders as Conexant and its counsel may reasonably think necessary in order to establish that the terms, covenants and conditions contained in this Agreement to have been performed or complied with by the Shareholders or by the Corporation, as the case may be, at or prior to the Time of Closing have been performed and complied with and that the representations and warranties of the Corporation herein given are true and correct at the Time of Closing; (d) the Corporation shall have amended the terms of the Employee Stock Options, the Convertible Debenture Options and the Warrants so that they shall become exercisable for Conexant Shares in the manner provided in Section 2.1; (e) all directors of the Corporation shall resign; (f) the Shareholders and all directors of the Corporation shall release the Corporation from any and all possible claims against the Corporation arising from any act, matter or thing arising at or prior to the Time of Closing except for obligations of the Corporation pursuant to the Transaction Documents and except for, in the case of directors, claims for contribution and indemnity against the Corporation as provided in the by-laws of the Corporation. (g) all necessary steps and proceedings shall have been taken to permit the Shares purchased by Conexant to be duly and regularly transferred to and registered in the name of Conexant; (h) employment agreements with all of the employees set out in Exhibit VIII, substantially in the form attached hereto as Exhibit IX, shall have been entered into, in full substitution for any existing employment agreements with such individuals; (i) non-competition agreements, substantially in the form attached hereto as Exhibit X, shall have been entered into with each of the employees of the Corporation set out in Exhibit VIII; (j) the Corporation shall have delivered to Conexant favorable opinions of counsel to the Corporation, substantially in the form attached hereto as Exhibit XI; (k) no material change shall have occurred between the execution of this Agreement and the Closing which would have a Material Adverse Effect on the Corporation; 48 (l) the form and legality of all matters incidental to the completion of the Transactions shall be subject to the approval of Conexant's counsel acting reasonably; (m) the Corporation shall have provided documentation satisfactory to Conexant and its counsel, both acting reasonably, as to the due authorization, issue and conversion of the Convertible Debentures, the due authorization and issue of the Convertible Debenture Options and the due authorization and issue of the Common Shares issued upon conversion of such Convertible Debentures; (n) the Reorganization shall have been completed and the only issued and outstanding shares of the Corporation shall be the Special Shares owned by Conexant and the Exchangeable Shares owned by the shareholders of the Corporation; (o) the holders of not more than two percent of the shares of any class of the Corporation shall have exercised dissent and appraisal rights under the CBCA in respect of the changing of the rights of the holders of such class of shares; (p) the Amended and Restated Unanimous Shareholders' Agreement and the Amended and Restated Registration Rights Agreement shall have been terminated in accordance with their respective terms and without triggering any requirement to pay any penalty; (q) the Corporation shall obtain all third party consents set forth in Exhibit XIII to complete the Reorganization and Transactions without triggering any requirement to pay any penalty or imposing any other condition unacceptable to Conexant; (r) the Corporation shall deliver a certificate dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Corporation confirming that the Corporation has satisfied all conditions of closing set forth in this Section 6.1, and has fulfilled all covenants required to be fulfilled by the Corporation prior to the Closing Date and confirming the accuracy of the Corporation's representations and warranties contained in Article III of this Agreement as of the Time of Closing; and (s) each Shareholder shall have tendered to the Corporation all of such Shareholder's certificates representing Class A Preferred Shares, Class B Preferred Shares and Common Shares for exchange into Exchangeable Shares and shall have delivered therewith the share transmittal materials in the form annexed hereto as Exhibit XII ; (t) the Employee Stock Options held by Messrs. Michael O'Neill, Yoram Lapid, Neil Birkett and Luke Smith vesting in 2004 shall be amended such that 50% of such Employee Stock Options shall vest on the same date in 2002 and the remainder of the Employee Stock Options shall vest on the same date in 2003; 49 (u) the Corporation's aggregate fees, expenses and disbursements in connection with the Transactions (including the fees and disbursements of Credit Suisse First Boston and of the Corporation's legal counsel and auditors), when added with any amount expended by the Corporation pursuant to Section 2.4(a)(ii), shall not exceed the lesser of US $6 million and the amount of cash on hand at the Corporation at the Time of Closing, which fees, expenses and disbursements shall be paid in full at the Time of Closing; (v) Conexant shall be furnished with such certificates, affidavits or statutory declarations of each shareholder of the Corporation as Conexant and its counsel may reasonable think necessary in order to establish whether such shareholder is a non-resident of Canada for purposes of section 116 of the Income Tax Act (Canada); and (w) Each shareholder that is a non-resident of Canada for purposes of section 116 of the Income Tax Act (Canada) will have delivered to Conexant on or before Closing a certificate issued by the Minister of National Revenue pursuant to subsection 116(2) of the Income Tax Act (Canada) having a `certificate limit' (as defined therein) of not less than the maximum amount in respect of which Philsar would have any withholding obligation or be subject to any penalty related to entitlement of shareholders who are non-resident of Canada to receive Exchangeable Shares. (2) In case any term or covenant of the Corporation or the Shareholders or condition to be performed or complied with for the benefit of Conexant at or prior to the Time of Closing shall not have been performed or complied with at or prior to the Time of Closing, Conexant may, without limiting any other right that it may have (including Conexant's right to commence an action seeking injunctive relief, including specific performance, or damages), at its sole option, either: (a) rescind this Agreement by notice to the Shareholders, and in such event Conexant shall be released from all obligations hereunder; or (b) waive compliance with any such term, covenant or condition in whole or in part on such terms as may be agreed upon without prejudice to any of its rights of rescission in the event of non-performance of any other term, covenant or condition in whole or in part. VI.2 Conditions for the Benefit of the Shareholders (1) Closing shall be subject to the following conditions which are for the exclusive benefit of the Shareholders to be performed or complied with at or prior to the Time of Closing: 50 (a) the representations and warranties of Conexant set forth in Article IV shall be true and correct at the Time of Closing with the same force and effect as if made at and as of such time; (b) Conexant shall have performed or complied with all of the terms, covenants and conditions of this Agreement to be performed or complied with by Conexant at or prior to the Time of Closing; (c) the Shareholders shall be furnished with such certificates, affidavits or statutory declarations of Conexant or of officers of Conexant as the Shareholders or the Shareholders' counsel may reasonably think necessary in order to establish that the terms, covenants and conditions contained in this Agreement have been performed or complied with by Conexant at or prior to the Time of Closing and that the representations and warranties of Conexant herein given are true and correct at the Time of Closing; (d) Conexant shall have entered into the Exchange Trust Agreement and the Support Agreement in the forms of Exhibit III and IV hereto, respectively; (e) the Conexant Preferred Shares shall have been issued and deposited with the trustee pursuant to the Exchange Trust Agreement; (f) Conexant shall have delivered to the Corporation a favourable opinion of Canadian counsel to Conexant as to the enforceability against Conexant of the Transaction Documents to which Conexant is a party and a favourable opinion of United States counsel to Conexant as to the due incorporation and existence of Conexant, the due authorization, execution and delivery by Conexant of the Transaction Documents to which Conexant is a party, compliance with laws, as to the valid issuance of the Conexant Preferred Share, and as to the validity and registration of the Conexant Shares issuable upon exercise of the Exchangeable Shares, the Warrants, the Employee Stock Options and the Convertible Debenture Options; (g) the form and legality of all matters incidental to the Transactions shall be subject to the approval of the Corporation's counsel, acting reasonably; (h) no event shall have occurred after the date of this Agreement and prior to the Closing Time which would have a Material Adverse Effect on Conexant; (i) the Reorganization shall have been completed and the only issued and outstanding shares of the Corporation shall be the Special Shares owned by Conexant and the Exchangeable Shares owned by the shareholders of the Corporation; and (j) Conexant shall deliver a certificate dated the Closing Date and signed by two officers of Conexant confirming that Conexant has satisfied all conditions of closing set forth in 51 this Section 6.2, and has fulfilled all covenants required to be fulfilled by Conexant prior to the Closing Date and confirming the accuracy of Conexant's representations and warranties contained in Article IV of this Agreement as of the Time of Closing. (2) In case any term or covenant of Conexant or condition to be performed or complied with for the benefit of the Shareholders at or prior to the Time of Closing shall not have been performed or complied with at or prior to the Time of Closing, the Shareholders may, without limiting any other right that the Shareholders may have (including the Shareholders' right to commence an action seeking injunctive relief, including specific performance, or damages), at their sole option, either: (a) rescind this Agreement by notice to Conexant, and in such event the Shareholders shall be released from all obligations hereunder; or (b) waive compliance with any such term, covenant or condition in whole or in part on such terms as may be agreed upon without prejudice to any of their rights of rescission in the event of non-performance of any other term, covenant or condition in whole or in part. ARTICLE VII INDEMNIFICATION AND ESCROW Section 7.1 Survival of Representations and Warranties. All representations and warranties of the Corporation or any authorized representative thereof contained in this Agreement, or in any certificate, document or other instrument delivered in connection herewith or pursuant to any of the Transaction Documents, shall terminate and cease to be of further force and effect as of the first anniversary of the Closing Date (the "Escrow Period"). Those covenants that expressly contemplate or involve actions to be taken or obligations in effect after the Closing shall survive in accordance with their terms. Section 7.2 Indemnities. (a) Each of the Shareholders shall jointly and severally indemnify and save harmless Conexant and Conexant's officers, directors, shareholders, affiliates, employees, financial advisors and legal counsel (for whom it is expressly agreed that Conexant is holding the benefit of this indemnity and rights of enforcement thereof in trust), the Corporation and each of the officers, directors, shareholders, affiliates, employees and agents of the Corporation (for whom it is expressly agreed that the Corporation is holding the benefit of this indemnity and the rights of enforcement thereof in trust) (each such Person an "Indemnitee" and all such Persons, collectively, the "Indemnitees") from and against any and all damages, losses, liabilities, payments, obligations, penalties, claims, litigation, demands, judgments, suits, proceedings, costs, Taxes, disbursements or expenses (including without limitation, reasonable fees, 52 disbursements and expenses of attorneys) of any kind or nature whatsoever (collectively, the "Damages"), directly or indirectly resulting from, relating to or arising out of any breach of or inaccuracy in any representation or warranty of the Corporation contained in Article III or in any Transaction Document, provided that no claim for Damages (each, a "Claim") may be initiated by any Person against any Shareholder (excluding any Claim to enforce the Shareholders' covenant of indemnity provided pursuant to this Article VII) under this Section 7.2(a) at any time after the date that is 365 days after the Closing Date. (b) Each of the Shareholders shall severally indemnify and save harmless Conexant and Conexant's officers, directors, shareholders, affiliates, employees, financial advisors and legal counsel (for whom it is expressly agreed that Conexant is holding the benefit of this indemnity and rights of enforcement thereof in trust), the Corporation and each of the officers, directors, shareholders, affiliates, employees and agents of the Corporation (for whom it is expressly agreed that the Corporation is holding the benefit of this indemnity and the rights of enforcement thereof in trust) from and against any and all Damages directly or indirectly resulting from, relating to or arising out of: (i) any breach of or inaccuracy in any representation or warranty of the Shareholder contained in any Transaction Document; and (ii) any breach or non-performance by the Shareholder of any covenant or agreement of such Shareholder contained in this Agreement or in any Transaction Document; provided that no Claim may be initiated by any Person against any Shareholder (excluding any Claim to enforce the Shareholders' covenant of indemnity provided pursuant to this Article VII) under this Section 7.2(b) at any time after the date that is 365 days after the Closing Date and provided further that no Claim may be made against any Shareholder arising out of any breach or non-performance by any other Shareholder of any representation, warranty, covenant or agreement of such other Shareholder contained in this Agreement or any other Transaction Document. (c) The Corporation shall indemnify and hold harmless Conexant and each of the officers, directors, shareholders, affiliates, employees, financial advisors, legal counsel and agents of Conexant (for whom it is expressly agreed that Conexant is holding the benefit of this indemnity and the rights of enforcement thereof in trust) from and against any and all Damages directly or indirectly resulting from relating to or arising out of: (i) any breach of or inaccuracy in any representation or warranty contained in Article III or in any Transaction Document; and 53 (ii) any breach of or non-performance by the Corporation of any covenant or agreement of the Corporation contained in this Agreement or in any Transaction Document. (d) Conexant shall indemnify and hold harmless each of the Shareholders, the Corporation and the officers and directors of the Corporation (for whom it is expressly agreed that the Corporation is holding the benefit of this indemnity and rights of enforcement thereof in trust) from and against any and all Damages directly or indirectly resulting from, relating to or arising out of: (i) any breach of or inaccuracy in any representation or warranty contained in Article IV; and (ii) any breach of or non-performance by Conexant of any covenant or agreement of Conexant contained in this Agreement or in any Transaction Document; provided, that no claim may be made by any Person against Conexant (excluding any Claim to enforce Conexant's covenant of indemnity provided pursuant to this Article VII under this Section 7.2(d)) at any time after the date which is 365 days after the Closing Date. Section 7.3 Escrow Fund and Procedure. (a) At the Time of Closing, there shall be deposited with the Trustee by the Shareholders (or by other shareholders of the Corporation) 10% of the aggregate number of Exchangeable Shares to be issued upon completion of the Reorganization pursuant to the Exchange Trust Agreement (such Exchangeable Shares being hereinafter referred to as the "Escrowed Shares"). The holders of such Escrowed Shares shall have the right to vote, and to receive dividends declared on, the Escrowed Shares during the Escrow Period. The Escrowed Shares are not subject to forfeiture or return in the event of any shareholders' death or bankruptcy, or the failure of any Shareholder to continue employment with the Corporation. (b) If a Claim by a third party is made against any Indemnitee or in the event that an Indemnitee determines, in good faith, that an event has occurred which gives rise to a Claim, and if such Indemnitee intends to seek indemnity with respect thereto under this Article VII, the Indemnitee shall notify the Representatives of such Claim in writing and shall provide to the Representatives such information as is necessary to identify the nature and validity of the Claim. Such notice must be given no later than 30 days after the assertion or determination of such Claim but in no event after the expiration of the Escrow Period. The Indemnitee shall include in its notice to the Representatives the basis for the Claim, the amount of the resulting Damages and the amount of cash and if applicable, the number of Escrowed Shares, which it intends to acquire in order to satisfy such Damages. For purposes of determining the number of Escrowed Shares to be acquired, any Claim should be satisfied from all of the Escrowed 54 Shares on a pro rata basis, and the number of such Escrowed Shares shall be equal to the number resulting upon the division of the amount of the Claim by the Canadian Dollar Equivalent of the Closing Price, regardless of the actual fair market value of the Conexant Shares at the time of such determination hereunder. If the Representatives wish to dispute the validity of any Claim or the amount of Damages for any Claim on behalf of the beneficial owners of the Escrowed Shares, the Representatives must give the Indemnitee requesting indemnification written notice of such dispute and the basis therefore, within 30 days of receiving the Indemnitee's notice. If the parties are unable to resolve any such dispute, the matter shall be submitted to binding arbitration, the costs of which shall be borne equally by the Indemnitee or Indemnitees and by the Shareholders. Any such arbitration shall be conducted by an independent firm mutually agreeable to the parties with expertise in matters of this kind, and shall be in a mutually agreeable location, or if the parties cannot agree upon an arbitrator or location, an arbitrator or place of arbitration shall be determined in accordance with the provisions of the Arbitration Act (Ontario). (c) Any cash or Escrowed Shares held by the Escrow Agent at the expiration of the Escrow Period which have not been applied against any Damages as provided herein, or which do not represent Damages for Claims whose validity or amount is still in dispute, shall be delivered to the beneficial owners of the Escrowed Shares promptly following the expiration of the Escrow Period. Any portion of the Escrow Fund withheld pending resolution of a dispute, shall be delivered or returned and canceled, as may be determined, upon final resolution of the dispute, in accordance with the escrow provisions of the Exchange Trust Agreement. (d) Conexant shall be entitled to control the defense of any Claim brought against Conexant or any Indemnitee, in its sole discretion, and to settle in good faith any such Claim without the consent of the Representatives or the beneficial owners of the Escrowed Shares, provided however that the Representatives, on behalf of the beneficial owners of the Escrowed Shares, shall be entitled to participate in any such defense at the expense of the Shareholders (pro rata determined by dividing the number of Escrowed Shares owned by each Shareholder by the total number of Escrowed Shares then remaining subject to escrow pursuant to the Exchange Trust Agreement). (e) Notwithstanding anything hereinabove to the contrary, the aggregate liability of the Shareholders under this Article VII, other than in the event of fraud or willful misrepresentation by the Corporation or any of the beneficial owners of the Escrowed Shares, shall not exceed the amount which is 10% of the number of Exchangeable Shares issued to the Shareholders under Section 2.1 hereof multiplied by the Canadian Dollar Equivalent of the Closing Price (calculated on the second Business Day preceding the Closing Date), and such liability shall be satisfied exclusively as provided in Section 7.5. In the event of any Claim based upon the fraud or willful misrepresentation of the Corporation, Conexant shall only be entitled to proceed against any Shareholder for such Shareholders' proportionate share of the resulting 55 Damages (determined pro rata on the basis of the number of Exchangeable Shares issued to such Shareholder on the Closing Date divided by the total number of Exchangeable Shares issued on the Closing Date) and each Shareholder's liability shall not exceed the product obtained by multiplying the number of Conexant Shares issuable upon exchange of the Exchangeable Shares issued to such Shareholder on the Closing Date by the Canadian Dollar Equivalent of the Closing Price calculated on the second Business Day prior to the Closing Date (less the aggregate number of such Shareholders Escrowed Shares which Conexant has withdrawn under the Escrow Agreement multiplied by the Canadian Dollar Equivalent of the Closing Price calculated on the second Business Day prior to the Closing Date). (f) No Indemnitee shall be entitled to make a Claim for indemnification under this Article VII: (i) until the Damages that are the subject of such Claim (aggregated with the amount of Damages in respect of any previous Claim or Claims made by an Indemnitee or barred by this clause (f)) exceeds $200,000; and (ii) after the date that is 365 days after the Closing Date. (g) The Shareholders hereby appoint Messrs. Antoine Paquin and Graham Matthews to be the Representatives of the Shareholders for the purpose of this Section 7.3 until either is replaced by a successor representative approved in writing by the holders of not less than 66-2/3% of the Escrowed Shares. Section 7.4 No Third Party Beneficiaries. The foregoing indemnification is given solely for the purpose of protecting the parties to this Agreement and the Indemnitees and shall not be deemed extended to, or interpreted in a manner to confer any benefit, right or cause of action upon, any other Person. Section 7.5 Exclusive Remedy. Conexant's right to acquire Escrowed Shares in order to satisfy a Claim pursuant to Section 7.3 shall be the exclusive remedy for any Claim arising after the time of Closing under Section 7.2(a), except in the case of fraud or willful misrepresentation by the Corporation or any Shareholder. If the Closing shall not occur because of circumstances giving rise to a Claim under Section 7.2(a) or 7.2(c)(i), or because of a breach of covenant by the Corporation, Conexant's exclusive remedy shall be against the Corporation. Any Claim brought by Conexant pursuant to Section 7.2(b) based on misrepresentation, whether or not fraudulent or willful, or breach of covenant of a Shareholder shall be brought exclusively against the Shareholders committing misrepresentation or breach of covenant. However, nothing herein shall limit any rights or remedies Conexant may have under this Agreement, applicable Law or otherwise; (i) in respect of any breach of covenant of the Shareholders prior to the Closing, which shall be pursued exclusively against any Shareholder in breach of a covenant and not against any other Shareholder not in breach; (ii) in respect of fraud or willful misrepresentation of the Corporation (subject to the procedural limitations and the limitations as to amount contained in Sections 7.3(e) and (f); or (iii) in respect of any Claim under the covenant of indemnification contained in this Article VII, but subject to the limitations contained in this Article VII. 56 Section 7.6 Limitations of Liability. For greater certainty, Conexant hereby expressly agrees that: (a) it shall have no recourse whatsoever against either the Corporation or any shareholder thereof if, despite the Corporation's reasonable efforts, the Corporation shall have been unable to amend all of the outstanding Employee Stock Options, Convertible Debenture Options and Warrants as described in Section 2.1(1) prior to the Closing Time, other than as a result of failure of any Shareholder to approve such amendment; and (b) after the Time of Closing, it shall have no recourse whatsoever against either the Corporation or any shareholder thereof with respect to any covenant, representation or warranty of the Corporation that is or becomes untrue due exclusively to the exercise of statutory dissent rights by any shareholder (other than a Shareholder) of the Corporation in respect of the votes at meetings of shareholders to approve the Reorganization and the resulting obligation of the Corporation to purchase such shareholder's shares for their fair market value in accordance with the CBCA. ARTICLE VIII GENERAL Section 8.1 Further Assurances. Each of the parties shall from time to time execute and deliver all such further documents and instruments and do all acts and things as the other party may, either before or after the Closing Date, reasonably require to effectively carry out or better evidence or perfect the full intent and meaning of this Agreement. Section 8.2 Time of the Essence. Time shall be of the essence of this Agreement. Section 8.3 Commissions. The Shareholders shall indemnify and save harmless Conexant and the Corporation from and against any claims whatsoever for any commission or other remuneration payable or alleged to be payable to any person in respect of the transactions contemplated herein, whether such person purports to act or have acted for the Shareholders, the Corporation or Conexant in connection with the transactions contemplated herein. Section 8.4 Fees. Each of the parties hereto shall pay their respective legal and accounting costs and expenses incurred in connection with the preparation, execution and delivery of this Agreement and all documents and instruments executed pursuant hereto and any other costs and expenses whatsoever and howsoever incurred, except that Philsar shall pay its investment banking, legal and accounting fees, and the fees of a single counsel to the Shareholders in each of Canada and the United States, to a maximum of the lesser of the equivalent of U.S. $6 million or the cash on hand reflected on Philsar's balance sheet at the Time of Closing, and the remainder of any such fees shall be payable by the Shareholders, or if not 57 paid by the End Date, may be deducted from the Escrow Fund as "Damages" pursuant to Section 7.2 hereof. Section 8.5 Public Announcements. No public announcement or press release concerning the transactions contemplated herein shall be made by the Shareholders or the Corporation without the prior consent and approval of Conexant. Section 8.6 Benefit of the Agreement. This Agreement shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and permitted assigns of the parties hereto. Section 8.7 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, express, implied or statutory, between the parties other than as expressly set forth in this Agreement. Section 8.8 Amendments and Waiver. No modification of or amendment to this Agreement shall be valid or binding unless set forth in writing and duly executed by all of the parties hereto and no waiver of any breach of any term or provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided, shall be limited to the specific breach waived. Section 8.9 Assignment. This Agreement may not be assigned by the Shareholders without the written consent of Conexant but may be assigned by Conexant without the consent of the Shareholders to an affiliate of Conexant, provided that such affiliate enters into a written agreement with the Shareholders to be bound by the provisions of this Agreement in all respects and to the same extent as Conexant is bound and provided that Conexant shall continue to be bound by all the obligations hereunder as if such assignment had not occurred and perform such obligations to the extent that such affiliate fails to do so. Section 8.10 Notices. Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and shall be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows: 58 To the Shareholders and the Corporation (prior to the Closing Time): Mr. Antoine Paquin 146 Colonnade Road South Nepean, Ontario K2E 7Y1 Facsimile: (613) 274-0915 To the Representatives (after the Closing Time): Mr. Antoine Paquin c/o LaBarge Weinstein Xerox Tower 333 Preston Street, 11th Floor Ottawa, Ontario K1S 5N4 Facsimile: (613) 231-9000 To Conexant and the Corporation (after the Closing Time): c/o Conexant Systems Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 U.S.A. Attention: Dennis E. O'Reilly Senior Vice President, General Counsel and Secretary Facsimile: (949) 483-3206 or to such other address, individual or electronic communication number as may be designated by notice given by either party to the other. Any demand, notice or other communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof and, if given by registered mail, on the third Business Day following the deposit thereof in the mail and, if given by electronic communication, on the day of transmittal thereof if given during the normal business hours of the recipient and on the Business Day during which such normal business hours next occur if not given during such hours on any day. If the party giving any demand, notice or other communication knows or ought reasonably to know of any difficulties with the postal system which might affect the delivery of mail, any such demand, notice or other communication shall not be mailed but shall be given by personal delivery or by electronic communication. Section 8.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. Section 8.12 Tax Effect of Transaction. Neither the Shareholders nor Conexant have made nor do any of them make herein any representation or warranty as to the tax consequences of the Transaction to any party. It is understood and agreed that each party has looked to its own advisors for advice and counsel as to such tax effects. Section 8.13 Severability. In the event that any provision contained in this Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and the remaining provisions of this Agreement shall not, at the election of the party for whose benefit the provision exists, be in any way impaired. Section 8.14 Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one Agreement. Section 8.15 Shareholders' Signatures. The Shareholders are signing this Agreement solely to confirm their agreement with, and to be bound by, Sections 2.1(k), 2.2, 2.3, 2.4, 5.2(c), 5.2(i), 5.2(l) and Articles VII and VIII hereof (collectively, the "Shareholder Provisions") and to obtain the benefit of the representations, warranties and covenants of Conexant in this Agreement and the conditions set forth in Section 6.2. Except as specifically set forth in the Shareholder Provisions, the Shareholders shall not be liable to Conexant or responsible for the performance of any obligations contained in this Agreement. The next page is the first signature page. 60 Section 8.16 Facsimile Signatures. The signature of any party to this Agreement may be evidenced on this Agreement and any other agreement or instrument contemplated herein by facsimile. Without prejudice to the effectiveness of such facsimile signature, such party agrees to forward promptly following the transmission by facsimile of such party's signature, such agreement or instrument bearing an original signature to the other parties hereto. IN WITNESS WHEREOF the parties have executed this Agreement as of the date first written above. CONEXANT SYSTEMS, INC. By: /s/ Moiz Beguwala -------------------------------- Name: Moiz Beguwala ------------------------------ Title: Sr. VP & General Manager WCD ------------------------------ PHILSAR SEMICONDUCTOR INC. By: /s/ Antoine Paquin ---------------------------- Name: Antoine Paquin -------------------------- Title: President and CEO ------------------------- Prism Venture Partners II, L.P. By: /s/ Robert C. Fleming ---------------------------- Name: Robert C. Fleming -------------------------- Title: General Partner ------------------------- Working Ventures Canadian Fund Inc. By: /s/ Jim Hall ---------------------------- Name: Jim Hall -------------------------- Title: SVP, Investments ------------------------- 61 JAFCO Usit Fund III, L.P. By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: Executive Managing Director ---------------------------------------- General Partner, JAV Management Associates JAFCO Co., Ltd. By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: President, JAFCO America Ventures, Inc. ---------------------------------------- Attorney-In-Fact JAFCO G-7A Investment Enterprise Partnership By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: President, JAFCO America Ventures, Inc. ---------------------------------------- Attorney-In-Fact JAFCO G-7 (A) Investment Enterprise Partnership By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: President, JAFCO America Ventures, Inc. ---------------------------------------- Attorney-In-Fact JAFCO G-7 (B) Investment Enterprise Partnership By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: President, JAFCO America Ventures, Inc. ---------------------------------------- Attorney-In-Fact 62 U.S. Information Technology No. 3 Investment Enterprise Partnership By: /s/ Barry J. Schiffman ---------------------------- Name: Barry J. Schiffman -------------------------- Title: Executive Managing Director ---------------------------------------- General Partner, JAV Management Associates Lucent Venture Partners Inc. By: /s/ N.S. Vasant ---------------------------- Name: N.S. Vasant -------------------------- Title: Partner ------------------------- The VenGrowth Investment Fund Inc. By: /s/ Allen Luphyrpa ---------------------------- Name: Allen Luphyrpa -------------------------- Title: ------------------------- The VenGrowth Investment II Fund Inc. By: /s/ Allen Luphyrpa ---------------------------- Name: Allen Luphyrpa -------------------------- Title: ------------------------- Luc Lussier /s/ Luc Lussier -------------------------------- /s/ Marie-Josie Begin - ------------------------ Witness 64 Business Development Bank of Canada By: /s/ G. R. Cornwall ---------------------------- Name: G. R. Cornwall -------------------------- Title: Managing Director ------------------------- Dr. John Davies /s/ Dr. John Davies -------------------------------- [Signature Illegible] - ------------------------ Witness Paul C. LaBarge /s/ Paul C. LaBarge -------------------------------- [Signature Illegible] - ------------------------ Witness Deborah L. Weinstein /s/ Deborah L. Weinstein -------------------------------- [Signature Illegible] - ------------------------ Witness Lawrence Weinstein /s/ Lawrence Weinstein -------------------------------- [Signature Illegible] - ------------------------ Witness Furneaux & Company (Canada) LLC By: /s/ David A. Furneaux ---------------------------- Name: David A. Furneaux -------------------------- Title: Member ------------------------- 64 Antoine Paquin /s/ Antoine Paquin -------------------------------- /s/ Charles A. Norris - ------------------------ Witness Luke Smith /s/ Luke Smith -------------------------------- /s/ Charles A. Norris - ------------------------ Witness Mike O'Neill /s/ Mike O'Neill -------------------------------- /s/ Charles A. Norris - ------------------------ Witness Mark Cloutier /s/ Mark Cloutier -------------------------------- /s/ Charles A. Norris - ------------------------ Witness STOCKHOLDERS ------------- JAFCO Usit Fund III, L.P. JAFCO Co., Ltd. JAFCO G-7A Investment Enterprise Partnership JAFCO G-7B Investment Enterprise Partnership By: /s/ Barry J. Schiffman ------------------------------- Name: Barry J. Schiffman ----------------------------- Title: Executive Managing Director ---------------------------- JAV Management Associates III, L.L.C. 505 Hamilton Avenue Palo Alto, CA 94301 65 EX-5 3 0003.txt OPINION OF DENNIS E. O'REILLY Exhibit 5 Dennis E. O'Reilly 4311 Jamboree Road Newport Beach, CA 92660 June 8, 2000 Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, CA 92660 Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933, as amended (the "Act"), by Conexant Systems, Inc., a Delaware corporation (the "Company"), of the offer and sale by the Company of shares of common stock, par value $1 per share, of the Company (together with the associated Preferred Share Purchase Rights, the "Common Stock") issuable or deliverable upon (i) the exchange for the exchangeable shares (the "Exchangeable Shares") of Philsar Semiconductor Inc. ("Philsar") issued in connection with the acquisition by the Company of Philsar (the "Acquisition") and (ii) the exercise of warrants (the "Warrants") and options (other than employee stock options) (the "Options") originally issued by Philsar which were amended in connection with the Acquisition to become warrants and options to purchase Common Stock, I advise as follows: I am Senior Vice President, General Counsel and Secretary of the Company. I have reviewed the Restated Certificate of Incorporation and By-Laws of the Company, each as amended to the date hereof, the Registration Statement on Form S-3 (the "Registration Statement") to be filed by the Company under the Act with respect to the Common Stock to be issued or delivered upon the exchange for Exchangeable Shares or upon exercise of the Warrants and Options and the corporate proceedings taken by the Company in connection with the authorization of the Common Stock. I have also examined originals, or copies Conexant Systems, Inc. -2- June 8, 2000 certified to my satisfaction, of such corporate records of the Company and other instruments, certificates of public officials and representatives of the Company, and other documents as I have deemed necessary as a basis for the opinion hereinafter expressed. In such examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity with the originals of all documents submitted to me as copies. As to questions of fact material to this opinion, I have, when relevant facts were not independently established, relied upon certificates of officers of the Company and appropriate public officials. On the basis of the foregoing, and having regard for such legal considerations as I deem relevant, I am of the opinion that when the Registration Statement becomes effective under the Act, the Common Stock that has been duly reserved for issuance or delivery upon the exchange for Exchangeable Shares or the exercise of Warrants and Options will be, when so issued or delivered, duly authorized, validly issued, fully paid and non-assessable. I express no opinion herein as to any laws other than the laws of the State of California, the Delaware General Corporation Law (including the applicable provisions of the Delaware Constitution and the applicable reported judicial decisions related thereto) and the Federal laws of the United States. Conexant Systems, Inc. -3- June 8, 2000 I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. I also consent to the reference to me under the caption "Legal Matters" in the Prospectus constituting a part of the Registration Statement. Very truly yours, /s/ Dennis E. O'Reilly, Esq. ---------------------------- Dennis E. O'Reilly, Esq. Senior Vice President, General Counsel and Secretary EX-23.A 4 0004.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.a INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Conexant Systems, Inc. on Form S-3 of our report dated October 29, 1999, appearing in the Annual Report on Form 10-K of Conexant Systems, Inc. for the fiscal year ended September 30, 1999, and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. DELOITTE & TOUCHE LLP Costa Mesa, California June 8, 2000 EX-23.B 5 0005.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.b CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement on Form S-3 of Conexant Systems, Inc. of our report dated January 18, 2000 on the consolidated financial statements of Maker Communications, Inc. included in Conexant Systems, Inc.'s Form 8-K dated April 3, 2000 and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Boston, Massachusetts June 7, 2000 EX-23.D 6 0006.txt CONSENT OF CHADBOURNE & PARKE LLP EXHIBIT 23.d CONSENT OF COUNSEL We hereby consent to the reference to this firm and to the inclusion of the summary of our opinion under the caption "Income Tax Considerations Regarding Our Common Stock and the Exchange of Exchangeable Shares -- United States Federal Tax Considerations" in the Prospectus, which is a part of this Registration Statement on Form S-3 of Conexant Systems, Inc. CHADBOURNE & PARKE LLP New York, New York June 8, 2000 EX-23 7 0007.txt CONSENT OF MCCARTHY TETRAULT EXHIBIT 23.e CONSENT OF COUNSEL We consent to the reference to this firm and to the inclusion of the summary of our opinion under the caption "Income Tax Considerations Regarding Our Common Stock and the Exchange of Exchangeable Shares -- Canadian Federal Income Tax Considerations" in the Prospectus, which is a part of this Registration Statement on Form S-3 of Conexant Systems, Inc. McCARTHY TETRAULT Toronto, Ontario June 7, 2000 EX-24 8 0008.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY I, the undersigned Director and/or Officer of Conexant Systems, Inc., a Delaware corporation (the "Company"), hereby constitute DENNIS E. O'REILLY, JASMINA A. THEODORE and PETER R. KOLYER, and each of them singly, my true and lawful attorneys with full power to them and each of them to sign for me, and in my name and in the capacity or capacities indicated below (a) the Registration Statement on Form S-3 (the "Form S-3") to be filed by the Company with the Securities and Exchange Commission (the "Commission") for the purpose of registering under the Securities Act of 1933, as amended (the "Securities Act"), the offer and sale by the Company of shares of common stock, par value $1.00 per share, of the Company (including the associated preferred share purchase right, the "Common Stock") issuable or deliverable upon (i) the exchange for the exchangeable shares of Philsar Semiconductor Inc. ("Philsar") issued in connection with the acquisition by the Company of Philsar (the "Acquisition") and (ii) the exercise of warrants and options (other than employee stock options) originally issued by Philsar which were amended in connection with the Acquisition to become warrants and options to purchase Common Stock, and any and all amendments (including post-effective amendments) and supplements to the Form S-3; (b) a Registration Statement on Form S-8 (the "Philsar Form S-8") for the purpose of registering under the Securities Act the offer and sale of Common Stock under the Company's Philsar Semiconductor Inc. Stock Option Plan, and any and all amendments (including post-effective amendments) and supplements to the Philsar Form S-8; and (c) a Registration Statement on Form S-8 (the "ATI Form S-8") for the purpose of registering under the Securities Act, the offer and sale of Common Stock under the Company's Applied Telecom, Inc. 2000 Stock Option Plan, and any and all amendments (including post-effective amendments) and supplements to the ATI Form S-8.
Signature Title Date --------- ----- ---- /s/ Dwight W. Decker Chairman of the Board -------------------- and Chief Executive Officer (principal Dwight W. Decker executive officer) and Director May 31, 2000 /s/ Donald R. Beall - --------------------- Donald R. Beall Director May 26, 2000 - --------------------- Richard M. Bressler Director May , 2000
/s/ F. Craig Farrill - --------------------- F. Craig Farrill Director May 31, 2000 /s/ Jerre L. Stead - --------------------- Jerre L. Stead Director May 31, 2000 /s/ Balakrishnan S. Iyer Senior Vice President and - ------------------------ Chief Financial Officer Balakrishnan S. Iyer (principal financial officer) May 31, 2000 /s/ Steven M. Thomson - ------------------------ Vice President and Controller Steven M. Thomson (principal accounting officer) May 31, 2000
2 EX-99.A 9 0009.txt PROVISIONS ATTACHING TO EXCHANGEABLE SHARES EXHIBT 99.a SCHEDULE 1 ---------- ARTICLE 1 INTERPRETATION --------------- For the purposes of these rights, privileges, restrictions and conditions: Section 1.1 Definitions. "Act" means the Canada Business Corporations Act, as amended, consolidated or reenacted from time to time. "Automatic Redemption Date" means the date for the automatic redemption by the Corporation of Exchangeable Shares pursuant to Article 7 of these share provisions, which date shall be the earlier of (i) the fifth anniversary date of the Effective Date, unless such date shall be extended by the Board of Directors at any time or from time to time to a specified later date being not later than the tenth anniversary of the Effective Date, upon at least 60 days' prior written notice of any such extension to the registered holders of the Exchangeable Shares, in which case the Automatic Redemption Date shall be the later date designated in such notice, and (ii) the date which is 150 days after a determination by the Corporation that fewer than 150,000 Exchangeable Shares remain outstanding and registered in the share register of the Corporation in a name other than ParentCo or its subsidiaries. "Board of Directors" means the Board of Directors of the Corporation and any committee thereof acting within its authority. "Business Day" means any day other than a Saturday, a Sunday or a day when banks are not open for business in Toronto, Ontario. "Class A Common Shares" means the multiple voting common shares in the capital of the Corporation. "Corporation" means Philsar Semiconductor Inc., a corporation incorporated and existing under the Act. "Current Market Price" means, in respect of a ParentCo Common Share on any date, the average of the closing bid and ask prices of ParentCo Common Shares during a period of 10 consecutive trading days ending not more than five trading days before such date on the NASDAQ Stock Exchange, or, if ParentCo Common Shares are not then traded on the NASDAQ Stock Exchange, on such other principal U.S. stock exchange or automated quotation system on which the ParentCo Common Shares are listed or quoted, as the case may be, as may be selected by the Board of Directors for such purpose; provided, however, that if in the opinion of the Board of Directors the public distribution or trading activity of ParentCo Common Shares during such period does not create a market which reflects the fair market value of ParentCo Common Shares, then the Current Market Price of a ParentCo Common Share shall be determined by the Board of Directors based upon the advice of such qualified independent financial advisors as the Board of Directors may deem to be appropriate, and provided further than any such selection, opinion or determination by the Board of Directors shall be conclusive and binding. "Effective Date" means the date of the completion of the Reorganization. "Exchange Put Right" has the meaning provided in Article 8. "Exchangeable Share Consideration" means, with respect to each Exchangeable Share, for any acquisition of, or redemption of, or distribution of assets of the Corporation in respect of, or purchase pursuant to the Exchange Put Right of, Exchangeable Shares pursuant to these share provisions, the Reorganization, the Support Agreement or the Voting and Exchange Trust Agreement, for that part of the consideration which is: (a) the Current Market Price of a ParentCo Common Share, such consideration shall be fully paid and satisfied by the delivery of one ParentCo Common Share, as evidenced by certificates representing the aggregate number of such ParentCo Common Shares; (b) the amount of all declared and unpaid and undeclared but payable cash dividends deliverable in connection with such action, a cheque or cheques payable at par at any branch of the bankers of the payor; and (c) all declared and unpaid non-cash dividends deliverable in connection with such action, such consideration shall be fully satisfied by the delivery of such non-cash items; provided that (i) any such share shall be duly issued as fully paid and non-assessable and any such property shall be delivered free and clear of any lien, claim, encumbrance, security interest or adverse claim or interest created by or through the Corporation or ParentCo; and (ii) such consideration shall be paid less any tax required to be deducted and withheld therefrom, unless the holder provides to the Corporation a certificate or such other assurance as is provided for under applicable legislation as is required to ensure that the Corporation is not liable for such tax, and without interest. "Exchangeable Share Price" means, for each Exchangeable Share, at any given date, an amount equal to the aggregate of: (a) the Current Market Price of a ParentCo Common Share; plus (b) an additional amount equal to the full amount of all cash dividends declared and unpaid on such Exchangeable Share; plus 2 (c) an additional amount equal to all dividends declared on a ParentCo Common Share which have not been declared on each Exchangeable Share in accordance herewith; plus (d) an additional amount representing the value of non-cash dividends declared and unpaid on such Exchangeable Share. "Exchangeable Shares" means the Exchangeable Shares of the Corporation having the rights, privileges, restrictions and conditions set forth herein. "Liquidation Amount" has the meaning provided in Section 5.1 hereof. "Liquidation Call Right" has the meaning provided in the Support Agreement. "Liquidation Date" has the meaning provided in Section 5.1 hereof. "ParentCo" means Conexant Systems, Inc., a corporation organized and existing under the laws of the State of Delaware and includes any successor corporation. "ParentCo Call Notice" has the meaning provided in Section 6.3 hereof. "ParentCo Common Shares" means the shares of common stock of ParentCo, with a par value of $1.00 per share, and any other securities in substitution therefor as provided in Section 2.6 of the Support Agreement. "ParentCo Dividend Declaration Date" means the date on which the board of directors of ParentCo declares any dividend on the ParentCo Common Shares. "Purchase Price" has the meaning provided in Section 6.3 hereof. "Redemption Call Purchase Price" has the meaning provided in the Support Agreement. "Redemption Call Right" has the meaning provided in the Support Agreement. "Redemption Price" has the meaning provided in Section 7.1 hereof. "Reorganization" means the reorganization of the capital structure of the Corporation pursuant to which the Corporation issued certain Exchangeable Shares. "Reorganization Agreement" means the agreement between the Corporation, certain shareholders thereof, and ParentCo contemplating the Reorganization. "Retracted Shares" has the meaning provided in Subsection 6.1(i) hereof. 3 "Retraction Call Right" has the meaning provided in Subsection 6.1(iii) hereof. "Retraction Date" has the meaning provided in Subsection 6.1(ii) hereof. "Retraction Price" has the meaning provided in Section 6.1 hereof. "Retraction Request" has the meaning provided in Section 6.1 hereof. "Subsidiary", in relation to any person, means any body corporate, partnership, joint venture, association or other entity of which more than 50% of the total voting power of shares or units of ownership or beneficial interest entitled to vote in the election of directors (or members of a comparable governing body) is owned or controlled, directly or indirectly, by such person. "Support Agreement" means the Support Agreement between ParentCo and the Corporation made as of the Effective Date. "Trustee" means CIBC Mellon Trust Company and any successor trustee appointed under the Voting and Exchange Trust Agreement. "Voting and Exchange Trust Agreement" means the Voting and Exchange Trust Agreement between the Corporation, ParentCo and the Trustee made as of the Effective Date. ARTICLE 2 RANKING OF EXCHANGEABLE SHARES ------------------------------ Section 2.1 The Exchangeable Shares shall rank junior to the Class C Preference Shares, and shall be entitled to a preference over the Class A Common Shares and any other shares ranking junior to the Exchangeable Shares, with respect to (i) priority in payment of dividends, and (ii) the distribution of assets in the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs. ARTICLE 3 DIVIDENDS --------- Section 3.1 A holder of an Exchangeable Share shall be entitled to receive and the Board of Directors shall, subject to applicable law, on each ParentCo Dividend Declaration Date, declare a dividend on each Exchangeable Share (a) in the case of a cash dividend declared on the ParentCo Common Shares, in an amount in cash for each Exchangeable Share equal to the cash dividend declared on each ParentCo Common Share or (b) in the case of a share dividend declared on the 4 ParentCo Common Share to be paid in ParentCo Common Shares, in such number of Exchangeable Shares for each Exchangeable Share as is equal to the number of ParentCo Common Shares to be paid on each ParentCo Common Share or (c) in the case of a dividend declared on the ParentCo Common Shares in property (other than cash or ParentCo Common Shares) in such type and amount of property for each Exchangeable Share as is the same as the type and amount of property declared as a dividend on each ParentCo Common Share. Such dividends shall be paid out of money, assets or property of the Corporation properly applicable to the payment of dividends, or out of authorized but unissued shares of the Corporation. Section 3.2 Cheques of the Corporation payable at par at any branch of the bankers of the Corporation shall be issued in respect of any cash dividends contemplated by Subsection 3.1(a) hereof and the sending of such a cheque to each holder of an Exchangeable Share (less any tax required to be deducted and withheld from such dividends paid or credited by the Corporation) at the address of such holder according to the share register of the Corporation shall satisfy the cash dividends represented thereby unless the cheque is not paid on presentation. Certificates registered in the name of the registered holder of Exchangeable Shares shall be issued or transferred in respect of any share dividends contemplated by Subsection 3.1(b) hereof and the sending of such a certificate to each holder of an Exchangeable Share at the address for such holder according to the share register of the Corporation shall satisfy the share dividend represented thereby. Such other type and amount of property in respect of any dividends contemplated by Subsection 3.1(c) hereof shall be issued, distributed or transferred by the Corporation in such manner as it shall determine and the issuance, distribution or transfer thereof by the Corporation to each holder of an Exchangeable Share at the address for such holder according to the share register of the Corporation shall satisfy the dividend represented thereby. In all cases any such dividends shall be subject to any reduction or adjustment for tax required to be deducted and withheld from such dividends paid or credited by the Corporation. No holder of an Exchangeable Share shall be entitled to recover by action or other legal process against the Corporation any dividend which is represented by a cheque that has not been duly presented to the Corporation's bankers for payment or which otherwise remains unclaimed for a period of six years from the date on which such dividend was payable. Section 3.3 The record date for the determination of the holders of Exchangeable Shares entitled to receive payment of, and the payment date for, any dividend declared on the Exchangeable Shares under Section 3.1 hereof shall be the same dates as the record date and payment date, respectively, for the corresponding dividend declared on the ParentCo Common Shares. Section 3.4 If on any payment date for any dividends declared on the Exchangeable Shares under Section 3.1 hereof the dividends are not paid in full on all of the Exchangeable Shares then outstanding, any such dividends which remain unpaid shall be paid on a subsequent date or dates determined by the Board of Directors on which the Corporation shall have sufficient moneys, assets or property properly applicable to the payment of such dividends. 5 Section 3.5 Except as provided in this Article 3, the holders of Exchangeable Shares shall not be entitled to receive dividends in respect thereof. ARTICLE 4 CERTAIN RESTRICTIONS -------------------- Section 4.1 So long as any of the Exchangeable Shares are outstanding, the Corporation shall not without, but may at any time with, the approval of the holders of the Exchangeable Shares given as specified in Section 10.2 of these share provisions: (a) at any time amend the articles or by-laws of the Corporation in a manner which would prejudicially affect the holders of Exchangeable Shares in any material respect; or (b) at any time amalgamate with any other corporation, initiate the voluntary liquidation, dissolution or winding-up of the Corporation nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of the Corporation. Section 4.2 So long as any of the Exchangeable Shares are outstanding and the Corporation is in default in the declaration and payment of dividends on the outstanding Exchangeable Shares corresponding to dividends declared with a record date on or following the Effective Date on the ParentCo Common Shares, the Corporation shall not at any time without, but may at any time with, the approval of the holders of the Exchangeable Shares given as specified in Section 10.2 of these share provisions: (a) pay any dividends on the Class A Common Shares, or any other shares ranking junior to the Exchangeable Shares, other than share dividends payable in any such other shares ranking junior to the Exchangeable Shares; (b) redeem or purchase or make any capital distribution in respect of Class A Common Shares or any other shares ranking junior to the Exchangeable Shares with respect to the payment of dividends or on any liquidation distribution; or (c) redeem or purchase any other shares of the Corporation ranking equally with the Exchangeable Shares with respect of the payment of dividends or on any liquidation distribution. ARTICLE 5 DISTRIBUTION ON LIQUIDATION --------------------------- 6 Section 5.1 In the event of the liquidation, dissolution or winding-up of the Corporation or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs, a holder of Exchangeable Shares shall be entitled, subject to applicable law, to receive from the assets of the Corporation in respect of each Exchangeable Share held by such holder on the effective date of such liquidation, dissolution or winding-up (the "Liquidation Date"), before any distribution of any part of the assets of the Corporation to the holders of the Class A Common Shares or any other shares ranking junior to the Exchangeable Shares, an amount equal to the Exchangeable Share Price applicable on the last Business Day prior to the Liquidation Date (the "Liquidation Amount") which, as set forth in section 5.2, shall be fully paid and satisfied by the delivery by or on behalf of the Corporation of the Exchangeable Share Consideration representing such holder's total Liquidation Amount. In connection with payment of the Exchangeable Share Consideration representing the total Liquidation Amount, the Corporation shall be entitled to liquidate some of the ParentCo Common Shares which would otherwise be deliverable to the particular holder of Exchangeable Shares in order to fund any statutory withholding tax obligation. Section 5.2 Within 10 Business Days after the Liquidation Date, and subject to the exercise by ParentCo of the Liquidation Call Right, and receipt by the Corporation of appropriate certificates or other assurances in respect of applicable taxes related to the payment of the Exchangeable Share Consideration, the Corporation shall cause to be delivered to the holders of the Exchangeable Shares the Exchangeable Share Consideration representing the Liquidation Amount for each such Exchangeable Share upon presentation and surrender of the certificates representing such Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Act and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, at the registered office of the Corporation or such other office in Ontario, Canada as may be specified by the Corporation by notice to the holders of the Exchangeable Shares. The Exchangeable Share Consideration representing the total Liquidation Amount for such Exchangeable Shares shall be delivered to each holder, at the address of the holder recorded in the securities register of the Corporation for the Exchangeable Shares or by holding for pick up by the holder at the registered office of the Corporation or at such other office in Ontario, Canada as may be specified by the Corporation by notice to the holders of Exchangeable Shares. On and after the Liquidation Date, the holders of the Exchangeable Shares shall cease to be holders of such Exchangeable Shares and shall not be entitled to exercise any of the rights of holders in respect thereof, other than the right to receive their respective Exchangeable Share Consideration, unless payment of the Exchangeable Share Consideration representing the total Liquidation Amount for such Exchangeable Shares shall not be made upon presentation and surrender of share certificates in accordance with the foregoing provisions, in which case the rights of the holders shall remain unaffected until the Exchangeable Share Consideration representing the total Liquidation Amount has been paid in the manner hereinbefore provided. The Corporation shall have the right at any time on or after the Liquidation Date to deposit or cause to be deposited the Exchangeable Share Consideration in respect of the Exchangeable Shares represented by certificates that have not at the Liquidation Date been surrendered by the 7 holders thereof in a custodial account or for safekeeping, in the case of non-cash items, with any chartered bank or trust company in Canada. Upon such deposit being made, the rights of the holders of Exchangeable Shares after such deposit shall be limited to receiving their proportionate share of the Exchangeable Share Consideration representing the total Liquidation Amount for such Exchangeable Shares so deposited, against presentation and surrender of the said certificates held by them, respectively, in accordance with the foregoing provisions. Upon such payment or deposit of such Exchangeable Share Consideration, the holders of the Exchangeable Shares shall thereafter be considered and deemed for all purposes to be the holders of the ParentCo Common Shares delivered to them. Notwithstanding the foregoing, until such payment or deposit of such Exchangeable Share Consideration, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. Section 5.3 After the Corporation has satisfied its obligations to pay the holders of the Exchangeable Shares the Exchangeable Share Consideration representing the Liquidation Amount per Exchangeable Share, such holders shall not be entitled to share in any further distribution of the assets of the Corporation. Section 5.4 If ParentCo exercises the Liquidation Call Right, each holder of Exchangeable Shares shall be obligated to sell all the Exchangeable Shares held by such holder to ParentCo on the Liquidation Date on payment by ParentCo to the holder of the Exchangeable Share Consideration representing the Liquidation Call Purchase Price for each such share. ARTICLE 6 RETRACTION OF EXCHANGEABLE SHARES BY HOLDER ------------------------------------------- Section 6.1 A holder of Exchangeable Shares shall be entitled at any time, subject to the exercise by ParentCo of the Retraction Call Right which, if exercised by ParentCo, shall be binding on the holders of Exchangeable Shares, and otherwise upon compliance with the provisions of this Article 6, to require the Corporation to redeem any or all of the Exchangeable Shares registered in the name of such holder for an amount equal to the Exchangeable Share Price applicable on the last Business Day prior to the Retraction Date (the "Retraction Price"), which as set forth in section 6.4, shall be fully paid and satisfied by the delivery by or on behalf of the Corporation of the Exchangeable Share Consideration representing such holder's total Retraction Price. In connection with payment of the Exchangeable Share Consideration representing the total Retraction Price, the Corporation shall be entitled to liquidate some of the ParentCo Common Shares that would otherwise be deliverable to the particular holder of Exchangeable Shares in order to fund any statutory withholding tax obligation. To effect such redemption, the holder shall present and surrender at the registered office of the Corporation or at such other office in Ontario, Canada as may be specified by the Corporation by notice to the holders of Exchangeable Shares the certificate or certificates representing the Exchangeable 8 Shares which the holder desires to have the Corporation redeem, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Act and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, and together with a duly executed statement (the "Retraction Request") in the form of Schedule A hereto or in such other form as may be acceptable to the Corporation: (a) specifying that the holder desires to have all or any number specified therein of the Exchangeable Shares represented by certificate or certificates (the "Retracted Shares") redeemed by the Corporation; (b) stating the Business Day on which the holder desires to have the Corporation redeem the Retracted Shares (the "Retraction Date"), provided that such date shall be not less than ten Business Days nor more than fifteen Business Days after the date on which the Retraction Request is received by the Corporation and further provided that, in the event that no such Business Day is specified by the holder in the Retraction Request, the Retraction Date shall be deemed to be the tenth Business Day after the date on which the Retraction Request is received by the Corporation, and further provided that in the event that such Retraction Date is earlier than the earlier of: a) 120 days from the date of the signing of the Reorganization Agreement; and b) 2 days after the Registration Statement (as defined in the Reorganization Agreement) becomes effective, the Retraction Date shall be the earlier of such two dates; and (c) acknowledging the overriding right (the "Retraction Call Right") of ParentCo to purchase all but not less than all the Retracted Shares directly from the holder and that the Retraction Request shall be deemed to be a revocable offer by the holder to sell the Retracted Shares in accordance with the Retraction Call Right on the terms and conditions set out in Section 6.3 below. Section 6.2 Subject to the exercise by ParentCo of the Retraction Call Right, upon receipt by the Corporation in the manner specified in Section 6.1 hereof of a certificate or certificates representing the number of Exchangeable Shares which the holder desires to have the Corporation redeem, together with a Retraction Request as well as appropriate certificates or other assurances in respect of applicable taxes related to the payment of the Exchange Share Consideration, and provided that the Retraction Request is not revoked by the holder in the manner specified in Section 6.7 hereof, the Corporation shall redeem the Retracted Shares effective at the close of business on the Retraction Date and shall cause to be delivered on the Retraction Date to such holder the Exchangeable Share Consideration representing the total Retraction Price with respect to such shares in accordance with Section 6.4 hereof. If only a part of the Exchangeable Shares represented by any certificate are redeemed or purchased by ParentCo pursuant to the Retraction Call Right, a new certificate for the balance of such Exchangeable Shares shall be issued on the Retraction Date to the holder at the expense of the Corporation. 9 Section 6.3 Upon receipt by the Corporation of a Retraction Request, the Corporation shall immediately notify ParentCo thereof. In order to exercise the Retraction Call Right, ParentCo must notify the Corporation in writing of its determination to do so (the "ParentCo Call Notice") within five Business Days of such notification. If ParentCo does not so notify the Corporation within five Business Days, the Corporation will notify the holder as soon as possible thereafter that ParentCo will not exercise the Retraction Call Right. If ParentCo delivers the ParentCo Call Notice within such five Business Days, and provided that the Retraction Request is not revoked by the holder in the manner specified in Section 6.7, the Retraction Request shall thereupon be considered only to be an offer by the holder to sell the Retracted Shares to ParentCo in accordance with the Retraction Call Right. In such event, the Corporation shall not redeem the Retracted Shares and ParentCo shall purchase from such holder and such holder shall sell to ParentCo on the Retraction Date the Retracted Shares for a purchase price (the "Purchase Price") per share equal to the Retraction Price per share, which as set forth in Section 6.4, shall be fully paid and satisfied by the delivery by or on behalf of ParentCo of the Exchangeable Share Consideration representing such holder's total Purchase Price. For the purposes of completing a purchase pursuant to the Retraction Call Right, ParentCo shall deposit with the Corporation, on or before the Retraction Date, the Exchangeable Share Consideration for each Exchangeable Share to be purchased. Provided that such Exchangeable Share Consideration has been so deposited with the Corporation, the closing of the purchase and sale of the Retracted Shares pursuant to the Retraction Call Right shall be deemed to have occurred as at the close of business on the Retraction Date and, for greater certainty, no redemption by the Corporation of such Retracted Shares shall take place on the Retraction Date. In the event that ParentCo does not deliver a ParentCo Call Notice within five Business Days or otherwise comply with these Exchangeable Share provisions in respect thereto, and provided that the Retraction Request is not revoked by the holder in the manner specified in Section 6.7 hereof, the Corporation shall redeem the Retracted Shares on the Retraction Date and in the manner otherwise contemplated in this Article 6. Section 6.4 Subject to receipt by the Corporation or ParentCo of appropriate certificates or other assurances in respect of applicable taxes related to the payment of the Exchangeable Share Consideration, the Corporation or ParentCo, as the case may be, shall deliver on the Retraction Date the Exchangeable Share Consideration representing the total Retraction Price or the total Purchase Price, as the case may be, to the relevant holder, at the address of the holder recorded in the securities register of the Corporation for the Exchangeable Shares or at the address specified in the holder's Retraction Request or by holding for pick up by the holder at the registered office of the Corporation or at such other office in Ontario, Canada as may be specified by the Corporation by notice to the holders of Exchangeable Shares and such delivery of such Exchangeable Share Consideration shall be deemed to be payment of and shall satisfy and discharge all liability under this Article 6, except as to any cheque included therein which is not paid on due presentation. Section 6.5 On and after the close of business on the Retraction Date, the holder of the Retracted Shares shall not be entitled to exercise any of the rights of a holder in respect thereof, 10 other than the right to receive the Exchangeable Share Consideration representing the total Retraction Price or total Purchase Price, as the case may be, unless upon presentation and surrender of certificates in accordance with the foregoing provisions, payment of the Exchangeable Share Consideration representing the total Retraction Price or the total Purchase Price, as the case may be, shall not be made, in which case the rights of such holder shall remain unaffected until the Exchangeable Share Consideration representing the total Retraction Price or the total Purchase Price, as the case may be, has been paid in the manner hereinbefore provided. On and after the close of business on the Retraction Date, provided that presentation and surrender of certificates and payment of the total Retraction Price or the total Purchase Price, as the case may be, has been made in accordance with the foregoing provisions, the holder of the Retracted Shares so redeemed by the Corporation or purchased by ParentCo shall thereafter be considered and deemed for all purposes to be a holder of the ParentCo Common Shares delivered to it. Notwithstanding the foregoing, until payment of such Exchangeable Share Consideration to the holder, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. Section 6.6 Notwithstanding any other provision of this Article 6, the Corporation shall not be obligated to redeem Retracted Shares specified by a holder in a Retraction Request to the extent that such redemption of Retracted Shares would be contrary to liquidity or solvency requirements or other provisions of applicable law. If the Corporation believes that on any Retraction Date it would not be permitted by any of such provisions to redeem the Retracted Shares tendered for redemption on such date, and provided that ParentCo shall not have exercised the Retraction Call Right with respect to the Retracted Shares, the Corporation shall only be obligated to redeem Retracted Shares specified by a holder in a Retraction Request to the extent of the maximum number that may be so redeemed (rounded down to a whole number of shares) as would not be contrary to such provisions and shall notify the holder at least two Business Days prior to the Retraction Date as to the number of Retracted Shares which will not be redeemed by the Corporation. In any case in which the redemption by the Corporation of Retracted Shares would be contrary to liquidity or solvency requirements or other provisions of applicable law, the Corporation shall redeem Retracted Shares in accordance with Section 6.2 of these share provisions on a pro rata basis in respect of Exchangeable Shares to be redeemed on the applicable Retraction Date, and shall issue on the Retraction Date to each holder of Retracted Shares a new certificate, at the expense of the Corporation, representing the Retracted Shares not redeemed by the Corporation pursuant to Section 6.2 hereof. Provided that the Retraction Request is not revoked by the holder in the manner specified in Section 6.7 hereof, the holder of any such Retracted Shares not redeemed by the Corporation pursuant to Section 6.2 of these share provisions as a result of liquidity or solvency requirements or applicable law shall be deemed by giving the Retraction Request to require ParentCo to purchase such Retracted Shares from such holder on the Retraction Date or as soon as practicable thereafter on payment by ParentCo to such holder of the Exchangeable Share Consideration representing the Purchase Price for each such Retracted Share, all as more specifically provided in the Voting and Exchange Trust Agreement, and ParentCo shall make such purchase. 11 Section 6.7 A holder of Retracted Shares may, by notice in writing given by the holder to the Corporation before the close of business on the Business Day immediately preceding the Retraction Date, withdraw its Retraction Request in which event such Retraction Request shall be null and void and, for greater certainty, the revocable offer constituted by the Retraction Request to sell the Retracted Shares to ParentCo shall be deemed to have been revoked. ARTICLE 7 REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION ---------------------------------------------------- Section 7.1 Subject to applicable law, and if ParentCo does not exercise the Redemption Call Right which, if exercised by ParentCo, shall be binding on the holders of Exchangeable Shares the Corporation shall on the Automatic Redemption Date redeem the whole of the then outstanding Exchangeable Shares for an amount for each Exchangeable Share equal to the Exchangeable Share Price applicable on the last Business Day prior to the Automatic Redemption Date (the "Redemption Price"), which as set forth in Section 7.3 below, shall be fully paid and satisfied by the delivery by or on behalf of the Corporation of the Exchangeable Share Consideration representing the total Redemption Price. In connection with payment of the Exchangeable Share Consideration representing the Redemption Price, the Corporation shall be entitled to liquidate some of the ParentCo Common Shares which would otherwise be deliverable to the particular holder of Exchangeable Shares in order to fund any statutory withholding tax obligation. Section 7.2 In any case of a redemption of Exchangeable Shares under this Article 7, the Corporation shall, at least 120 days before the Automatic Redemption Date, send or cause to be sent to each holder of Exchangeable Shares a notice in writing of the redemption by the Corporation or the purchase by ParentCo under the Redemption Call Right, as the case may be, of the Exchangeable Shares held by such holder. Such notice shall set out the Automatic Redemption Date and, if applicable, particulars of the Redemption Call Right. Section 7.3 On the Automatic Redemption Date and subject to the exercise by ParentCo of the Redemption Call Right, and receipt by the Corporation of appropriate certificates or other assurances in respect of applicable taxes related to the payment of the Exchangeable Share Consideration, the Corporation shall cause to be delivered to the holders of the Exchangeable Shares to be redeemed the Exchangeable Share Consideration representing the Redemption Price for each such Exchangeable Share upon presentation and surrender at the registered office of the Corporation or at such other office in Ontario, Canada as may be specified by the Corporation in such notice of the certificates representing such Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Act and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require. The Exchangeable Share Consideration representing the total Redemption Price for such Exchangeable Shares shall be delivered to each holder, at the address of the holder recorded in the securities register for the Exchangeable Shares. On the Automatic Redemption Date, the holders of the Exchangeable Shares called for redemption shall 12 cease to be holders of such Exchangeable Shares and shall not be entitled to exercise any of the rights of holders in respect thereof, other than the right to receive their respective Exchangeable Share Consideration unless payment of the Exchangeable Share Consideration representing the total Redemption Price for such Exchangeable Shares shall not be made upon presentation and surrender of certificates in accordance with the foregoing provisions, in which case the rights of the holders shall remain unaffected until such Exchangeable Share Consideration has been paid in the manner hereinbefore provided. The Corporation shall have the right at any time after the automatic Redemption Date to deposit or cause to be deposited the Exchangeable Share Consideration with respect to the Exchangeable Shares so called for redemption, or of such of the said Exchangeable Shares represented by certificates that have not at the date of such deposit been surrendered by the holders thereof in connection with such redemption, in a custodial account or for safe keeping, in the case of non-cash items, with any chartered bank or trust company in Canada named in such notice. Upon the later of such deposit being made and the Automatic Redemption Date, the Exchangeable Shares in respect whereof such deposit shall have been made shall be redeemed and the rights of the holders thereof after such deposit or Automatic Redemption Date, as the case may be, shall be limited to receiving their respective Exchangeable Share Consideration so deposited, against presentation and surrender of the said certificates held by them, respectively, in accordance with the foregoing provisions. Upon such payment or deposit of such Exchangeable Share Consideration, the holders of the Exchangeable Shares shall thereafter be considered and deemed for all purposes to be holders of the ParentCo Common Shares delivered to them. Notwithstanding the foregoing, until such payment or deposit of such Exchangeable Share Consideration is made, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. Section 7.4 If ParentCo exercises the Redemption Call Right, each holder of Exchangeable Shares shall be obligated to sell all the Exchangeable Shares held by the Holder to ParentCo on the Automatic Redemption Date on payment by ParentCo to the holder of the Exchangeable Share consideration representing the Redemption Call Purchase Price for each such share. ARTICLE 8 EXCHANGE PUT RIGHT ------------------ Section 8.1 Upon and subject to the terms and conditions contained in these Exchangeable Share Provisions and the Voting and Exchange Trust Agreement: (a) a holder of Exchangeable Shares shall have the right (the "Exchange Put Right") at any time to require ParentCo to purchase all or any part of the Exchangeable Shares of the holder; and (b) upon the exercise by the holder of the Exchange Put Right, the holder shall be required to sell to ParentCo, and ParentCo shall be required to purchase from the holder, that number 13 of Exchangeable Shares in respect of which the Exchange Put Right is exercised, in consideration of the payment by ParentCo of the Exchangeable Share Price applicable thereto (which shall be the Exchangeable Share Price applicable on the last Business Day prior to receipt of notice required under Section 8.2 hereof), to be satisfied by delivery by or on behalf of ParentCo of the Exchangeable Share Consideration. Section 8.2 The Exchange Put Right provided in Section 8.1 hereof and in Article VII of the Voting and Exchange Trust Agreement may be exercised at any time by notice in writing in the form of Schedule B hereto or in such other form as may be acceptable to ParentCo (the "Notice of Exercise of Exchange Put Right") given by the holder to and received by the Corporation (the date of such receipt, the "Exchange Put Date") accompanied by presentation and surrender of the certificates representing such Exchangeable Shares, together with such documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Act and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, at the registered office of the Corporation or at such other office in Ontario, Canada as may be specified by the Corporation. The Notice of Exercise of Exchange Put Right shall be irrevocable unless the exchange is not completed in accordance herewith and shall constitute the holder's authorization to the Corporation (and such other persons aforesaid) to effect the exchange on behalf of the holder. Section 8.3 The surrender by the holder of Exchangeable Shares under Section 8.2 shall constitute the representation, warranty and covenant of the holder that the Exchangeable Shares so purchased are sold free and clear of any lien, encumbrance, security interest or adverse claim or interest. Section 8.4 If a part only of the Exchangeable Shares represented by any certificate are to be sold and purchased pursuant to the exercise of the Exchange Put Right, a new certificate for the balance of such Exchangeable Shares shall be issued to the holder at the expense of the Corporation within ten Business Days of the Exchange Put Right. Section 8.5 Upon receipt by the Corporation of the notice, certificates and other documents or instruments required by Section 8.2, and receipt by the Corporation of appropriate certificates or other assurances in respect of applicable taxes related to the payment of the Exchangeable Share Consideration, the Corporation shall deliver or cause to be delivered on or before the day which is the later of (i) the tenth (10th) Business Day after the Exchange Put Date; and (ii) the earlier of: a) 120 days from the date of the signing of the Reorganization Agreement; and b) 2 days after the Registration Statement (as defined in the Reorganization Agreement) becomes effective, on behalf of ParentCo and subject to receipt by the Corporation from ParentCo of the applicable Exchangeable Share Consideration, to the relevant holder at the address of the holder specified in the notice or by holding for pick-up by the holder at the registered office of the Corporation, or at such other office in Ontario, Canada as may be specified by the Corporation, the Exchangeable Share Consideration representing the total applicable Exchangeable Share Price. Delivery by ParentCo to the Corporation and by the Corporation to the holder of such Exchangeable Share 14 Consideration shall be deemed to be payment of and shall satisfy and discharge all liability for the total applicable Exchangeable Share Price, except as to any cheque included therein which is not paid on due presentation. Section 8.6 On and after the close of business on the day on which the Exchangeable Share Consideration is delivered to the holder of Exchangeable Shares in accordance with Section 8.5, the holder of the Exchangeable Shares in respect of which the Exchange Put Right is exercised shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive the Exchangeable Share Consideration representing the total applicable Exchangeable Share Price, unless upon presentation and surrender of certificates in accordance with the foregoing provisions, payment of such total price shall not be made, in which case the rights of such holder shall remain unaffected until such payment has been made. On and after the close of business on the day on which the Exchangeable Share Consideration is delivered to the holder of Exchangeable Shares in accordance with Section 8.5, provided that presentation and surrender of certificates and payment of such total price has been made in accordance with the foregoing provisions, the holder of the Exchangeable Shares so purchased by ParentCo shall thereafter be considered and deemed for all purposes to be a holder of the ParentCo Common Shares delivered to it. Notwithstanding the foregoing, until delivery of such Exchangeable Share Consideration representing such total price to the holder, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. ARTICLE 9 VOTING RIGHTS ------------- Section 9.1 The holders of the Exchangeable Shares shall be entitled to receive notice of and to attend and vote, and to one (1) vote for each Exchangeable Share held by them, at all shareholders' meetings. ARTICLE 10 AMENDMENT AND APPROVAL ---------------------- Section 10.1 The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares may be added to, changed or removed but, except as hereinafter provided, only with the approval of the holders of the Exchangeable Shares given as hereinafter specified. Section 10.2 Any approval given by the holders of the Exchangeable Shares to add to, change or remove any right, privilege, restriction or condition attaching to the Exchangeable Shares or any other matter requiring the approval or consent of the holders of the Exchangeable Shares shall be deemed to have been sufficiently given if it shall have been given in accordance with applicable law subject to a minimum requirement that such approval be evidenced by resolution 15 passed by not less than 66 2/3% of the votes cast on such resolution by persons represented in person or by proxy at a meeting of holders of Exchangeable Shares duly called and held at which the holders of at least 50% of the outstanding Exchangeable Shares at that time are present or represented by proxy (excluding Exchangeable Shares beneficially owned by ParentCo or its Subsidiaries). If at any such meeting the holders of at least 50% of the outstanding Exchangeable Shares at that time are not present or represented by proxy within one-half hour after the time appointed for such meeting then the meeting shall be adjourned to such date not less than 10 days thereafter and to such time and place as may be designated by the Chairman of such meeting. At such adjourned meeting the holders of Exchangeable Shares present or represented by proxy thereat may transact the business for which the meeting was originally called and a resolution passed thereat by the affirmative vote of not less than 66 2/3% of the votes cast on such resolution by persons represented in person or by proxy at such meeting shall constitute the approval or consent of the holders of the Exchangeable Shares. For the purposes of this section, any spoiled votes, illegible votes, defective votes and abstinences shall be deemed to be votes not cast. ARTICLE 11 RECIPROCAL CHANGES, ETC. IN RESPECT OF PARENTCO COMMON SHARES ---------------------- Section 11.1 Notwithstanding the provisions of Article 10, the Exchangeable Shares shall be automatically adjusted to fully reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into ParentCo Common Shares), reorganization, recapitalization or other like change with respect to ParentCo Common Stock occurring after the Effective Date. ARTICLE 12 ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT ----------------- Section 12.1 The Corporation will take all such actions and do all such things as shall be necessary or advisable to perform and comply with and to ensure performance and compliance by ParentCo with all provisions of the Support Agreement and the Voting and Exchange Trust Agreement in accordance with the terms thereof including, without limitation, taking all such actions and doing all such things as shall be necessary or advisable to enforce to the fullest extent possible for the direct benefit of the Corporation or the holders of the Exchangeable Shares all rights and benefits in favour of the Corporation or the holders of the Exchangeable Shares under or pursuant thereto. Section 12.2 The Corporation shall not propose, agree to or otherwise give effect to any amendment to, or waive or forgive its rights or obligations under, the Support Agreement or the 16 Voting and Exchange Trust Agreement without the approval of the holders of the Exchangeable Shares given in accordance with Section 10.1 of these share provisions other than such amendments, waivers and/or forgiveness as may be necessary or advisable for the purpose of: (a) adding to the covenants of the other party or parties to such agreement for the protection of the Corporation or the holders of Exchangeable Shares; or (b) making such provisions or modifications not inconsistent with such agreement or certificate as may be necessary or desirable with respect to matters or questions arising thereunder which, in the opinion of the Board of Directors, it may be expedient to make, provided that the Board of Directors shall be of the opinion, after consultation with counsel, that such provisions and modifications will not be prejudicial to the interests of the holders of the Exchangeable Shares; or (c) making such changes in or corrections to such agreement or certificate which, on the advice of counsel to the Corporation, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error contained therein, provided that the Board of Directors shall be of the opinion, after consultation with counsel, that such changes or corrections will not be prejudicial to the interests of the holders of the Exchangeable Shares. ARTICLE 13 LEGEND ------ Section 13.1 The certificates evidencing the Exchangeable Shares shall containor have affixed thereto a legend, in form and on terms approved by the Board of Directors, with respect to the Support Agreement, the Liquidation Call Right and the Redemption Call Right, and the Voting and Exchange Trust Agreement (including the provisions with respect to the voting rights, exchange right and automatic exchange thereunder). ARTICLE 14 MISCELLANEOUS ------------- Section 14.1 Any notice, request or other communication to be given to the Corporation by a holder of Exchangeable Shares shall be in writing and shall be valid and effective if given by mail (postage prepaid) or by telecopy or by delivery to the registered office of the Corporation and addressed to the attention of the President. Any such notice, request or other communication, if given by mail, telecopy or delivery, shall only be deemed to have been given and received upon actual receipt thereof by the Corporation. 17 Section 14.2 Any presentation and surrender by a holder of Exchangeable Shares to the Corporation of certificates representing Exchangeable Shares in connection with the liquidation, dissolution or winding-up of the Corporation or the retraction or redemption of Exchangeable Shares shall be made by registered mail (postage prepaid) or by delivery to the registered office of the Corporation or to such other office in Ontario, Canada as may be specified by the Corporation, in each case addressed to the attention of the President of the Corporation. Any such presentation and surrender of certificates shall only be deemed to have been made and to be effective upon actual receipt thereof by the Corporation and the method of any such presentation and surrender of certificates shall be at the sole risk of the holder. Section 14.3 Any notice, request or other communication to be given to a holder of Exchangeable Shares by or on behalf of the Corporation shall be in writing and shall be valid and effective if given by mail (postage prepaid) or by delivery to the address of the holder recorded in the securities register of the Corporation or, in the event of the address of any such holder not being so recorded, then at the last known address of such holder. Any such notice, request or other communication, if given my mail, shall be deemed to have been given and received on the fifth Business Day following the date of mailing and, if given by delivery, shall be deemed to have been given and received on the date of delivery. Accidental failure or omission to give any notice, request or other communication to one or more holders of Exchangeable Shares shall not invalidate or otherwise alter or affect any action or proceeding to be or intended to be taken by the Corporation. Section 14.4 For greater certainty, the Corporation shall not be required for any purpose under these share provisions to recognize or take account of persons who are not so recorded in such securities register. Section 14.5 All Exchangeable Shares acquired by the Corporation upon the redemption or retraction thereof shall be cancelled. CLASS A COMMON SHARES --------------------- The holders of the Class A Common Shares shall be entitled: 1.1. to receive notice of, and to attend and to vote at all meetings of shareholders of the Corporation except meetings at which only holders of a specified class of shares other than the Class A Common Shares are entitled to vote, and to cast at all such meetings 1,000 votes per Class A Common Share; 1.1. subject to the rights of the holders of Exchangeable Shares, to receive and the Corporation shall pay thereon, as and when declared by the directors out of monies of the Corporation properly applicable to the payment of dividends, such amounts as may from time to time be declared by the directors; and 18 1.1. subject to the rights of the holders of Exchangeable Shares, to receive, subject to the rights of the holders of any other classes of shares, the remaining property of the Corporation on the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 19 EX-99.B 10 0010.txt SUPPORT AGREEMENT EXHIBIT 99.b SUPPORT AGREEMENT THIS SUPPORT AGREEMENT is entered into as of May 30, 2000, between Conexant Systems Inc., a corporation existing under the laws of the State of Delaware ("ParentCo"), and Philsar Semiconductor Inc., a corporation incorporated under the laws of Canada (the "Corporation"). WHEREAS, pursuant to a reorganization agreement dated as of April 11, 2000, (such agreement as it may be amended or restated is hereinafter referred to as the "Reorganization Agreement") by and between ParentCo, the Corporation and certain shareholders of the Corporation, the parties agreed that on the closing of the transaction contemplated under the Reorganization Agreement, ParentCo and the Corporation would execute and deliver a Support Agreement containing the terms and conditions set forth in an Exhibit to the Reorganization Agreement together with such other terms and conditions as may be agreed to by the parties to the Reorganization Agreement acting reasonably. AND WHEREAS, pursuant to a reorganization of the capital structure of the Corporation (the "Reorganization") contemplated in the Reorganization Agreement, the Corporation issued certain exchangeable shares (the "Exchangeable Shares") having attached thereto certain rights, privileges, restrictions and conditions (collectively, the "Exchangeable Share Provisions"). AND WHEREAS, the parties hereto desire to make appropriate provision and to establish a procedure whereby ParentCo will take certain actions and make certain payments and deliveries necessary to ensure that the Corporation will be able to make certain payments and to deliver or cause to be delivered ParentCo Common Shares in satisfaction of the obligations of the Corporation under i) the Exchangeable Share Provisions with respect to the payment and satisfaction of dividends, Liquidation Amounts, Retraction Prices and Redemption Prices, all in accordance with the Exchangeable Share Provisions and ii) pursuant to the Share Option Plan, the Convertible Debenture and the Warrants as defined below. NOW, THEREFORE, in consideration of the respective covenants and agreements provided in this agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Defined Terms. Except as expressed in the following sentence, each term denoted herein by initial capital letters and not otherwise defined herein shall have the meaning attributed thereto in the Exchangeable Share Provisions, unless the context requires otherwise. The terms "Share Option Plan", "Employee Stock Options", Convertible Debentures", "Convertible Debenture Options" and "Warrants" shall have the meaning ascribed to them in the Reorganization Agreement (in each case giving effect to the amendments thereof contemplated by the Reorganization Agreement). 1.2 Interpretation Not Affected by Headings, Etc. The division of this agreement into articles, sections and paragraphs and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this agreement. 1.3 Number, Gender, Etc. Words importing the singular number only shall include the plural and vice versa. Words importing the use of any gender shall include all genders. 1.4 Date for Any Action. If any date on which any action is required to be taken under this agreement is not a Business Day, such action shall be required to be taken on the next succeeding Business Day. ARTICLE 2 COVENANTS OF PARENTCO AND THE CORPORATION 2.1 Covenants of ParentCo Regarding Exchangeable Shares. So long as any Exchangeable Shares are outstanding, ParentCo will: (a) not declare or pay any dividend on ParentCo Common Shares unless (A) the Corporation will have sufficient assets, funds and other property available to enable the due declaration and the due and punctual payment in accordance with applicable law of an equivalent dividend on the Exchangeable Shares and (B) subsection 2.1(b) shall be complied with in connection with such dividend; (b) cause the Corporation to declare simultaneously with the declaration of any dividend on ParentCo Common Shares an equivalent dividend on the Exchangeable Shares and, when such dividend is paid on ParentCo Common Shares, cause the Corporation to pay simultaneously therewith such equivalent dividend on the Exchangeable Shares, in each case in accordance with the Exchangeable Share Provisions; (c) advise the Corporation sufficiently in advance of the declaration by ParentCo of any dividend on ParentCo Common Shares and take all such other actions as are necessary, in cooperation with the Corporation, to ensure that the respective declaration date, record date and payment date for a dividend on the Exchangeable Shares shall be the same as the record date, declaration date and payment date for the corresponding dividend on ParentCo Common Shares; (d) take all such actions and do all such things as are necessary or desirable to enable and permit the Corporation, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the Exchangeable Share Consideration representing the Liquidation Amount in respect of each issued and outstanding Exchangeable Share upon the liquidation, dissolution or winding-up of the Corporation or any other distribution of the assets of the Corporation for the purpose of winding up its affairs, including without limitation all such actions and all such things as are necessary or desirable to enable and permit the Corporation to cause to be delivered ParentCo 2 Common Shares to the holders of Exchangeable Shares in accordance with the provisions of Article 5 of the Exchangeable Share Provisions; (e) take all such actions and do all such things as are necessary or desirable to enable and permit the Corporation, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the Exchangeable Share Consideration representing the Retraction Price and the Redemption Price, including without limitation all such actions and all such things as are necessary or desirable to enable and permit the Corporation to cause to be delivered ParentCo Common Shares to the holders of Exchangeable Shares, upon the retraction or redemption of the Exchangeable Shares in accordance with the provisions of Article 6 or Article 7 of the Exchangeable Share Provisions, as the case may be; (f) not exercise its vote as a shareholder to initiate the amalgamation or voluntary liquidation, dissolution or winding-up of the Corporation nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of the Corporation; and (g) take all such actions and do all such things as are necessary or desirable to enable and permit the Corporation, in accordance with applicable law, to perform its obligations under the provisions of the Share Option Plan, the Convertible Debenture Options and the Warrants, including without limitation all such actions and all such things as are necessary or desirable to enable and permit the Corporation to cause to be delivered ParentCo Common Shares to i) the holders of Employee Stock Options upon exercise of such options, ii) the holders of the Convertible Debenture Options upon the exercise of such options and iii) the holders of the Warrants upon exercise by such holders of their rights thereunder. 2.2 Reservation of ParentCo Common Shares. ParentCo hereby represents, warrants and covenants that it has irrevocably reserved for issuance, or will hold in treasury for issuance, and will at all times keep available, free from pre-emptive and other rights, out of its authorized and unissued capital shares such number of ParentCo Common Shares (or other shares or securities into or shares held in treasury, which ParentCo Common Shares may be reclassified or changed as contemplated by section 2.6 hereof) (a) as is equal to the sum of (i) the number of Exchangeable Shares issued and outstanding from time to time, and (ii) the number of ParentCo Common Shares necessary to satisfy the Corporation's obligation to issue Parentco Common Shares under the Employee Share Options, the Convertible Debenture Options and the Warrants, and (b) as are now and may hereafter be required to enable and permit the Corporation to meet its obligations hereunder, under the Voting and Exchange Trust Agreement and under the Exchangeable Share Provisions. 2.3 Notification of Certain Events. In order to assist ParentCo to comply with its obligations hereunder, the Corporation will give ParentCo notice of each of the following events at the times set forth below: 3 (a) in the event of any determination by the Board of Directors of the Corporation in accordance with the Articles of the Corporation to institute voluntary liquidation, dissolution or winding-up proceedings with respect to the Corporation or to effect any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs, at least 30 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; (b) immediately, upon the earlier of (i) receipt by the Corporation of notice of, and (ii) the Corporation otherwise becoming aware of, any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the Corporation or to effect any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs; (c) immediately, upon receipt by the Corporation of a Retraction Request (as defined in the Exchangeable Share Provisions); (d) at least 30 days prior to any accelerated Automatic Redemption Date determined by the Board of Directors of the Corporation in accordance with the Exchangeable Share Provisions; (e) as soon as practicable upon the issuance by the Corporation of any Exchangeable Shares; and (f) as soon as practicable upon the exercise of any Employee Stock Options, Convertible Debenture Options and Warrants. 2.4 Delivery of ParentCo Common Shares. In furtherance of its obligations hereunder, upon notice of any event which requires the Corporation to cause to be delivered ParentCo Common Shares to i) any holder of Exchangeable Shares, or ii) in connection with the exercise of Employee Share Options, the Convertible Debenture Options and the Warrants ParentCo shall forthwith issue and deliver the requisite ParentCo Common Shares to or to the order of the former holder of the surrendered Exchangeable Shares, or the holders of Employee Stock Options, Convertible Debenture Options or Warrants as the case may be, on any exercise thereof as the Corporation shall direct. All such ParentCo Common Shares shall be duly issued as fully paid and non-assessable and shall be free and clear of any lien, claim, encumbrance, security interest or adverse claim or interest created by or through ParentCo. 2.5 Qualification of ParentCo Common Shares. ParentCo covenants that if any ParentCo Common Shares to be issued and delivered hereunder (including for greater certainty, pursuant to the Employee Share Option, the Convertible Debenture Option and the Warrants and Exchangeable Share Provisions, or pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights (both as defined in the Voting and Exchange Trust Agreement)) require registration or qualification with or approval of or the filing of any document including 4 any prospectus or similar document, the taking of any proceeding with or the obtaining of any order, ruling or consent from any governmental or regulatory authority under any Canadian or United States federal, provincial or state law or regulation or pursuant to the rules and regulations of any regulatory authority, or the fulfilment of any other legal requirement (collectively, the "Applicable Laws") before such shares may be issued and delivered by ParentCo to the initial holder thereof (other than the Corporation) or in order that such shares may be freely traded thereafter (other than any restrictions on transfer by reason of a holder being a "control person" of ParentCo for purposes of Canadian federal or provincial securities law or an "affiliate" of ParentCo for purposes of United States federal or state securities law), ParentCo will in good faith expeditiously take all such actions and do all such things as are reasonably necessary to cause such ParentCo Common Shares to be and remain duly registered, qualified or approved to the extent and in the manner provided in the Reorganization Agreement. ParentCo will in good faith expeditiously take all such actions and do all such things as are reasonably necessary to cause all ParentCo Common Shares to be delivered hereunder (including, for greater certainty, pursuant to Employee Share Options, the Convertible Debenture Option and the Warrants and the Exchangeable Share Provisions or pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights) to be listed, quoted or posted for trading on the principal stock exchanges and quotation systems on which shares of such class are listed, quoted or posted for trading at such time. 2.6 Equivalence. ParentCo hereby covenants and agrees to cause the Corporation to effect the necessary amendments to the Articles of the Corporation to ensure that the Exchangeable Shares are adjusted to fully reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into ParentCo Common Shares), reorganization, recapitalization or other like change with respect to ParentCo Common Stock occurring after the Effective Date. 2.7 Tenders Offers, Etc. In the event that a tender offer, share exchange offer, issuer bid, take-over bid or similar transaction with respect to ParentCo Common Shares (an "Offer") is proposed by ParentCo or is proposed to ParentCo or its shareholders and is recommended by the Board of Directors of ParentCo, or is otherwise effected or to be effected with the consent or approval of the Board of Directors of ParentCo, ParentCo shall, in good faith, take all such actions and do all such things as are necessary or desirable to enable and permit holders of Exchangeable Shares to participate in such Offer to the same extent and on an equivalent basis as the holders of ParentCo Common Shares, without discrimination, including, without limiting the generality of the foregoing, ParentCo will use its good faith efforts expeditiously to (and shall, in the case of a transaction proposed by ParentCo or where ParentCo is a participant in the negotiation thereof) ensure that holders of Exchangeable Shares may participate in all such Offers without being required to retract Exchangeable Shares as against the Corporation (or, if so required, to ensure that any such retraction shall be effective only upon, and shall be conditional upon, the closing of the Offer and only to the extent necessary to tender or deposit to the Offer). 2.8 Ownership of Outstanding Shares. Without the prior approval of the Corporation and the prior approval of the holders of the Exchangeable Shares given in accordance with Section 10.1 5 of the Exchangeable Share Provisions, ParentCo covenants and agrees in favour of the Corporation that, as long as any outstanding Exchangeable Shares are owned by any person or entity other than ParentCo or any of its Subsidiaries, and for so long as any holders of rights to acquire ParentCo Common Shares pursuant to the Employee Share Option Plan, the Convertible Debenture Options and the Warrants remain outstanding ParentCo will be and remain the direct or indirect beneficial owner of securities of the Corporation carrying or entitled to not less than 51% of the voting rights for the election of directors, in each case other than the Exchangeable Shares. Notwithstanding the foregoing sentence, ParentCo shall not be in violation of this section 2.8 if any person or group of persons acquires ParentCo Common Shares pursuant to any merger of ParentCo in which ParentCo was not the surviving corporation. 2.9 ParentCo Not to Vote Exchangeable Shares. ParentCo covenants and agrees that it will appoint and cause to be appointed proxy holders with respect to all Exchangeable Shares held by ParentCo and its Subsidiaries for the sole purpose of attending each meeting of holders of Exchangeable Shares in order to be counted as part of the quorum for each such meeting. ParentCo further covenants and agrees that it will not, and will cause its Subsidiaries not to, exercise any voting rights which may be exercisable by holders of Exchangeable Shares from time to time pursuant to the Exchangeable Share Provisions or pursuant to the provisions of the Act with respect to any Exchangeable Shares held by it or by its Subsidiaries in respect of any matter considered at any meeting of holders of Exchangeable Shares. 2.10 Due Performance. On and after the Effective Date, ParentCo shall duly and timely perform all of its obligations under the Reorganization Agreement and related agreements in respect of the Reorganization, including any obligations that may arise upon the exercise of ParentCo's rights under the Exchangeable Share Provisions. ARTICLE 3 CERTAIN RIGHTS OF PARENTCO TO ACQUIRE EXCHANGEABLE SHARES 3.1 ParentCo Liquidation Call Right. (a) ParentCo shall have the overriding right (the "Liquidation Call Right"), in the event of and notwithstanding the proposed liquidation, dissolution or winding-up of the Corporation as referred to in Article 5 of the Exchangeable Share Provisions, to purchase from all, but not less than all, of the holders of Exchangeable Shares on the Liquidation Date all but not less than all of the Exchangeable Shares held by each such holder on delivery by ParentCo to each holder of the Exchangeable Share Price applicable on the last Business Day prior to the Liquidation Date (the "Liquidation Call Purchase Price"), which as provided in this section 3.1, shall be fully paid and satisfied by the delivery by or on behalf of ParentCo of the Exchangeable Share Consideration representing the Liquidation Call Purchase Price. In the event of the exercise of the Liquidation Call Right by ParentCo, it is intended that each holder shall be obligated to sell all the Exchangeable Shares held by the holder to ParentCo on the Liquidation Date on payment by ParentCo to the holder of the Exchange Share Consideration representing the Liquidation Call Purchase Price for each such share, as provided in section 5.4 of the 6 Exchangeable Share Provisions. The Corporation agrees, for the benefit of ParentCo, to enforce against the holders of Exchangeable Shares the provisions of section 5.4 of the Exchangeable Share Provisions to such effect. (b) To exercise the Liquidation Call Right, ParentCo must notify the Corporation of Parentco's intention to exercise such right at least 60 days before the Liquidation Date in the case of a voluntary liquidation, dissolution or winding-up of the Corporation and at least five Business Days before the Liquidation Date in the case of an involuntary liquidation, dissolution or winding-up of the Corporation. The Corporation will notify the holders of Exchangeable Shares as to whether or not ParentCo has exercised the Liquidation Call Right forthwith after the expiry of the date by which the same may be exercised by ParentCo. If ParentCo exercises the Liquidation Call Right, on the Liquidation Date, ParentCo will purchase all of the Exchangeable Shares then outstanding for the Exchangeable Share Consideration representing the total Liquidation Call Purchase Price. (c) For the purposes of completing the purchase of the Exchangeable Shares pursuant to the Liquidation Call Right, ParentCo shall deposit with the Corporation, on or before the Liquidation Date, the Exchangeable Share Consideration for all of the Exchangeable Shares. Provided that such Exchangeable Share Consideration has been so deposited with the Corporation, on and after the Liquidation Date the right of each holder of Exchangeable Shares will be limited to receiving such holder's proportionate share of such Exchangeable Share Consideration representing the total Liquidation Call Purchase Price payable by ParentCo without interest upon presentation and surrender by the holder of certificates representing the Exchangeable Shares held by such holder and the holder shall on and after the Liquidation Date be considered and deemed for all purposes to be the holder of the ParentCo Common Share delivered to it. Upon surrender to the Corporation of a certificate or certificates representing the Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the CBCA and the by-laws of the Corporation and such additional documents and instruments as the Corporation may reasonably require, the holder of such surrendered certificate or certificates shall be entitled to receive in exchange therefor, and the Corporation on behalf of ParentCo shall deliver to such holder, the Exchangeable Share Consideration to which the holder is entitled. If ParentCo does not exercise the Liquidation Call Right in the manner described above, on the Liquidation Date the holders of the Exchangeable Shares will be entitled to receive in exchange therefor the Exchangeable Share Consideration representing the Liquidation Amount otherwise payable by the Corporation in connection with the liquidation, dissolution or winding-up of the Corporation pursuant to Article 5 of the Exchangeable Share Provisions. Notwithstanding the foregoing, until such Exchangeable Share Consideration is delivered to the holder, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. 7 3.2 ParentCo Redemption Call Right. (a) ParentCo shall have the overriding right ( the "Redemption Call Right"), notwithstanding the proposed redemption of the Exchangeable Shares by the Corporation pursuant to Article 7 of the Exchangeable Share Provisions, to purchase from all, but not less than all, of the holders of Exchangeable Shares on the Automatic Redemption Date all but not less than all of the Exchangeable Shares held by each such holder, other than any Subsidiary of ParentCo, on payment by ParentCo to the holder of the Exchangeable Share Price applicable on the last Business Day prior to the Automatic Redemption Date (the "Redemption Call Purchase Price"), which as provided in this section 3.2, shall be fully paid and satisfied by the delivery by or on behalf of ParentCo of the Exchangeable Share Consideration representing the Redemption Call Purchase Price. In the event of the exercise of the Redemption Call Right by ParentCo, it is intended that each holder shall be obligated to sell all the Exchangeable Shares held by the holder to ParentCo on the Automatic Redemption Date on payment by ParentCo to the holder of the Exchangeable Share Consideration representing the Redemption Call Purchase Price for each such share as provided in section 7.4 of the Exchangeable Share Provisions. The Corporation agrees, for the benefit of ParentCo, to enforce against the holders of Exchangeable Shares the provisions of section 7.4 of the Exchangeable Share Provisions to such effect. (b) To exercise the Redemption Call Right, ParentCo must notify the Corporation of ParentCo's intention to exercise such right at least 60 days before the Automatic Redemption Date. The Corporation will notify the holders of the Exchangeable Shares as to whether or not ParentCo has exercised the Redemption Call Right forthwith after the date by which the same may be exercised by ParentCo. If ParentCo exercises the Redemption Call Right, on the Automatic Redemption Date, ParentCo will purchase all of the Exchangeable Shares then outstanding for the Exchangeable Share Consideration representing the total Redemption Call Purchase Price. (c) For the purposes of completing the purchase of the Exchangeable Shares pursuant to the Redemption Call Right, ParentCo shall deposit with the Corporation, on or before the Automatic Redemption Date, the Exchangeable Share Consideration for all the then outstanding Exchangeable Shares representing the total Redemption Call Purchase Price. Provided that such Exchangeable Share Consideration has been so deposited with the Corporation, on and after the Automatic Redemption Date the rights of each holder of Exchangeable Shares will be limited to receiving such holder's proportionate share of the Exchangeable Share Consideration representing the total Redemption Call Purchase Price payable by ParentCo upon presentation and surrender by the holder of certificates representing the Exchangeable Shares held by such holder and the holder shall on and after the Automatic Redemption Date be considered and deemed for all purposes to be the holder of the Exchangeable Share Consisderation delivered to such holder. Upon surrender to the Corporation of a certificate or certificates representing Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the CBCA and the by-laws of the Corporation 8 and such additional documents and instruments as the Corporation may reasonably require, the holder of such surrendered certificate or certificates shall be entitled to receive in exchange therefor, and the Corporation shall deliver to such holder, the Exchangeable Share Consideration to which the holder is entitled. If ParentCo does not exercise the Redemption Call Right in the manner described above, on the Automatic Redemption Date, the holders of the Exchangeable Shares will be entitled to receive in exchange therefor the Exchangeable Share Consideration representing the Redemption Price otherwise payable by the Corporation in connection with the redemption of the Exchangeable Shares pursuant to Article 7 of the Exchangeable Share Provisions. Notwithstanding the foregoing, until such Exchangeable Share Consideration is delivered to the holder, the holder shall be deemed to still be a holder of Exchangeable Shares for purposes of all voting rights with respect thereto under the Voting and Exchange Trust Agreement. 3.3 Exchange Put Right. Upon and subject to the terms and conditions contained in the Exchangeable Share Provisions and the Voting and Exchange Trust Agreement: (a) a holder of Exchangeable Shares shall have the right (the "Exchange Put Right") at any time to require ParentCo to purchase all or any part of the Exchangeable Shares of the holder; and (a) upon the exercise by the holder of the Exchange Put Right, it is intended that the holder shall be required to sell to ParentCo, and ParentCo shall be required to purchase from the holder, that number of Exchangeable Shares in respect of which the Exchange Put Right is exercised, in consideration of the payment by ParentCo of the Exchangeable Share Price for each Exchangeable Share in respect of which the Exchange Put Right has been exercised by such holder. The Corporation agrees, for the benefit of ParentCo, to enforce against the holders of Exchangeable Shares the provisions of section 8.1 of the Exchangeable Share Provisions to such effect. 3.4 ParentCo shall have the unqualified right, at any time and from time to time, to assign any or all of its rights under this Article 3 to any Canadian Subsidiary of ParentCo (other than the Corporation), and if any such assignment is made, such Canadian Subsidiary may exercise all of ParentCo's rights hereunder and perform all of ParentCo's obligations hereunder arising from the exercise of such rights as fully as ParentCo might; provided, however, that nothing herein shall affect in any way the obligation of ParentCo, which obligation shall be absolute and continuing notwithstanding any such assignment, to provide ParentCo Common Shares, in the amounts and at times required hereunder, in order to permit such Canadian Subsidiary to exercise ParentCo's rights and to perform ParentCo's obligations hereunder. ParentCo hereby, as primary obligor, unconditionally and irrevocably guarantees the prompt and complete payment and performance, as and when due, by any such Canadian Subsidiary of any obligations of ParentCo arising from any such assignment that may be made by ParentCo hereunder. ARTICLE 4 GENERAL 9 4.1 Term. This agreement shall come into force and be effective as of the date hereof and shall terminate and be of no further force and effect at such time as no Exchangeable Shares (or securities or rights convertible into or exchangeable for or carrying rights to acquire Exchangeable Shares) are held by any party other than ParentCo and any of its Subsidiaries. 4.2 Changes in Capital of ParentCo and the Corporation. Notwithstanding the provisions of section 4.4 hereof, at all times after the occurrence of any event effected pursuant to Section 2.6 or 2.7 hereof, as a result of which either ParentCo Common Shares or the Exchangeable Shares or both are in any way changed, this agreement shall forthwith be amended and modified as necessary in order that it shall apply with full force and effect, mutatis mutandis, to all new securities into which ParentCo Common Shares or the Exchangeable Shares or both are so changed, and the parties hereto shall execute and deliver an agreement in writing giving effect to and evidencing such necessary amendments and modifications. 4.3 Severability. If any provision of this agreement is held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder of this agreement shall not in any way be affected or impaired thereby and this agreement shall be carried out as nearly as possible in accordance with its original terms and conditions. 4.4 Amendments, Modifications, Etc. This agreement may not be amended or modified except by an agreement in writing executed by the Corporation and ParentCo and approved by the holders of the Exchangeable Shares in accordance with Section 10.1 of the Exchangeable Share Provisions. 4.5 Ministerial Amendments. Notwithstanding the provisions of Section 4.4 hereof, the parties to this agreement may in writing, at any time and from time to time, without the approval of the holders of the Exchangeable Shares, amend or modify this agreement for the purposes of: (a) adding to the covenants of either or both parties for the protection of the holders of the Exchangeable Shares; (b) making such amendments or modifications not inconsistent with this agreement as may be necessary or desirable with respect to matters or questions which, in the opinion of the board of directors of each of the Corporation and ParentCo, it may be expedient to make, provided that each such board of directors shall be of the opinion that such amendments or modifications will not be prejudicial to the interests of the holders of the Exchangeable Shares; or (c) making such changes or corrections which, on the advice of counsel to the Corporation and ParentCo, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error; provided that the boards of directors of each of the Corporation and ParentCo shall be of the opinion that such changes or corrections will not be prejudicial to the interests of the holders of the Exchangeable Shares. 10 4.6 Meeting to Consider Amendments. The Corporation, at the request of ParentCo, shall call a meeting or meetings of the holders of the Exchangeable Shares for the purpose of considering any proposed amendment or modification requiring approval of such shareholders. Any such meeting or meetings shall be called and held in accordance with the by-laws of the Corporation, the Exchangeable Share Provisions and all applicable laws. 4.7 Amendments Only in Writing. No amendment to or modification or waiver of any of the provisions of this agreement otherwise permitted hereunder shall be effective unless made in writing and signed by both of the parties hereto. 4.8 Enurement. This agreement shall be binding upon and enure to the benefit of the parties hereto and the holders, from time to time, of Exchangeable Shares and each of their respective heirs, successors and assigns. 4.9 Notices to Parties. All notices and other communications between the parties shall be in writing and shall be deemed to have been given if delivered personally or by confirmed telecopy to the parties at the following addresses (or at such other address for either such party as shall be specified in like notice): (a) if to ParentCo to: Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 U. S. A. Attn: Dennis E. O'Reilly Senior Vice-President, General Counsel & Secretary Fax: (949) 483-3018 Tel: (949) 483-6388 (b) if to the Corporation to: Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 U. S. A. Any notice or other communication given personally shall be deemed to have been given and received upon delivery thereof and if given by telecopy shall be deemed to have been given and 11 received on the date of confirmed receipt thereof, unless such day is not a Business Day, in which case it shall be deemed to have been given and received upon the immediately following Business Day. 4.10 Counterparts. This agreement may be executed in counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 4.11 Jurisdiction. This agreement shall be construed and enforced in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. 12 4.12 Attornment. ParentCo agrees that any action or proceeding arising out of or relating to this agreement may be instituted in the courts of Ontario, waives any objection which it may have now or hereafter to the venue of any such action or proceeding, irrevocably submits to the jurisdiction of such courts in any such action or proceeding, agrees to be bound by any judgment of such courts and not to seek, and hereby waives, any review of the merits of any such judgment by the courts of any other jurisdiction and hereby appoints the Corporation at its registered office in the Province of Ontario as ParentCo's attorney for service of process. IN WITNESS WHEREOF, ParentCo and the Corporation have caused this agreement to be signed by their respective officers thereunder duly authorized, all as of the date first written above. PHILSAR SEMICONDUCTOR INC. By: /s/ Charles Norris -------------------------------- Name: Charles Norris Title: VP Finance / Administration and CFO CONEXANT SYSTEMS INC. By: /s/ Dennis E. O'Reilly ------------------------------- Name: Dennis E. O'Reilly Title: Senior Vice President General Counsel and Secretary EX-99.C 11 0011.txt VOTING AND EXCHANGE TRUST AGREEMENT EXHIBIT 99.c VOTING AND EXCHANGE TRUST AGREEMENT BETWEEN CONEXANT SYSTEMS, INC. AND PHILSAR SEMICONDUCTOR INC. AND CIBC MELLON TRUST COMPANY MADE AS OF MAY 30, 2000 VOTING AND EXCHANGE TRUST AGREEMENT THIS VOTING AND EXCHANGE TRUST AGREEMENT is entered into as of, May 30, 2000, by and between CONEXANT SYSTEMS, INC., a corporation existing under the laws of Delaware ("ParentCo"), and PHILSAR SEMICONDUCTOR INC., a corporation incorporated under the laws of Canada (the "Corporation"), and CIBC MELLON TRUST COMPANY, a Canadian trust company ("Trustee"). WHEREAS pursuant to a Reorganization Agreement dated as of April 11, 2000, made between ParentCo and the Corporation (such agreement as it may be amended or restated is hereinafter referred to as the "Reorganization Agreement") the parties thereto agreed that on the closing of the Transactions (as defined in the Reorganization Agreement), ParentCo, the Corporation and the Trustee would execute and deliver a Voting and Exchange Trust Agreement containing the terms and conditions set forth in an Exhibit to the Reorganization Agreement, together with such other terms and conditions as may be agreed to by the parties to the Reorganization Agreement; WHEREAS pursuant to a reorganization of the capital structure of the Corporation (the "Reorganization") contemplated in the Reorganization Agreement, all of the outstanding Common Shares, Class A Preferred Shares and Class B Preferred Shares of the Corporation were reclassified as exchangeable shares (the "Exchangeable Shares") having the rights, privileges, restrictions and conditions attached hereto as Schedule A (collectively, the "Exchangeable Share Provisions"); WHEREAS the parties desire to make appropriate provision and to establish a procedure whereby voting rights in ParentCo shall be exercisable by holders (other than ParentCo and its Subsidiaries) from time to time of Exchangeable Shares by and through the Trustee, which will hold legal title to and a share certificate in respect of one share of Series B Preferred Voting Stock in the capital of ParentCo (the "ParentCo Preferred Share"), to which voting rights are intended to be granted for the benefit of the holders of Exchangeable Shares in such number as is equal to the number of Exchangeable Shares from time to time issued and outstanding, excluding Exchangeable Shares held by ParentCo and its Subsidiaries, and whereby the rights to require ParentCo or, at the option of ParentCo, ParentCo Sub (as hereinafter defined) to purchase Exchangeable Shares from the holders thereof (other than ParentCo and its Subsidiaries) shall be exercisable by such holders of Exchangeable Shares by and through the Trustee, which will hold the covenant of ParentCo to purchase the Exchangeable Shares for the benefit of such holders; WHEREAS the Reorganization Agreement requires that the shareholders of the Corporation on the date hereof deposit with the Trustee 10% of the Exchangeable Shares (the "Escrowed Shares") issued on the date hereof; WHEREAS the Escrowed Shares will be held by the Trustee in escrow in accordance with Article 6 hereof, pending determination of the correctness of the representations and warranties given by the Corporation pursuant to the Reorganization Agreement; and 2 WHEREAS, these recitals and any statements of fact in this agreement are made by ParentCo and the Corporation and not by the Trustee. NOW, THEREFORE, in consideration of the respective covenants and agreements provided in this agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows: ARTICLE 1 - DEFINITIONS AND INTERPRETATION ------------------------------------------ 1.1 Definitions. ------------ In this agreement, the following terms shall have the following meanings: "Automatic Exchange Rights" means the obligation of ParentCo to effect the automatic exchange of ParentCo Common Shares for Exchangeable Shares pursuant to Section 7.12 hereof; "Board of Directors" means the Board of Directors of the Corporation; "Business Day" has the meaning provided in the Exchangeable Share Provisions; "Canadian Dollar Equivalent" means in respect of any amount expressed in a foreign currency (the "Foreign Currency Amount") at any date, the product obtained by multiplying the Foreign Currency Amount by the official noon spot rate of exchange on such date for such foreign currency, as reported by the Bank of Canada; "Cautioned Shares" has the meaning provided in Section 6.1(b) hereof; "Claim" has the meaning provided in Section 7.3(a) of the Reorganization Agreement; "Closing Price" means U.S. $34.4375; "Contingent Holders" has the meaning provided in Section 5.2 hereof; "Contingent Proportion" has the meaning provided in Section 5.2 hereof; "Convertible Debenture Options" has the meaning provided in Section 1.1 of the Reorganization Agreement; "Disbursement Notice" has the meaning provided in Section 6.1 hereof; "Employee Stock Options" has the meaning provided in Section 1.1 of the Reorganization Agreement; "Equivalent Vote Amount" means, with respect any matter, proposition or question on which holders of ParentCo Common Shares are entitled to vote, consent or otherwise act, the number of 3 votes to which a holder of one share of ParentCo Common Shares is entitled with respect to such matter, proposition or question; "Escrowed Shares" has the meaning provided in the recitals hereto; "Exchange Put Right" has the meaning provided in the Exchangeable Share Provisions; "Exchange Right" has the meaning provided in Section 7.1(b) hereof; "Exchangeable Share Consideration" has the meaning provided in the Exchangeable Share Provisions; "Exchangeable Share Price" has the meaning provided in the Exchangeable Share Provisions; "Exchangeable Share Provisions" has the meaning provided in the recitals hereto; "Exchangeable Shares" has the meaning provided in the recitals hereto; "Holder Votes" has the meaning provided in Section 4.2 hereof; "Holders" means the registered holders from time to time of Exchangeable Shares, other than ParentCo and its Subsidiaries; "Indemnitee" has the meaning provided in Section 7.2(a) of the Reorganization Agreement; "Insolvency Event" means the institution by the Corporation of any proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or wound-up, or the consent of the Corporation to the institution of bankruptcy, insolvency, dissolution or winding-up proceedings against it, or the filing of a petition, answer or consent seeking dissolution or winding-up under any bankruptcy, insolvency or analogous laws, including without limitation the Companies Creditors' Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the failure by the Corporation to contest in good faith any such proceedings commenced in respect of the Corporation within 15 days of becoming aware thereof, or the consent by the Corporation to the filing of any such petition or to the appointment of a receiver, or the making by the Corporation of a general assignment for the benefit of creditors, or the admission in writing by the Corporation of its inability to pay its debts generally as they become due, or the Corporation's not being permitted, pursuant to liquidity or solvency requirements of applicable law, to redeem any Retracted Shares pursuant to Section 6.6 of the Exchangeable Share Provisions; "Liquidation Call Right" has the meaning provided in the Exchangeable Share Provisions; "Liquidation Event" has the meaning provided in subsection 7.12(b) hereof; "Liquidation Event Effective Time" has the meaning provided in subsection 7.12(c) hereof; "Officer's Certificate" means, with respect to ParentCo or the Corporation, as the case may be, a certificate signed by any one of the Chairman of the Board, the Vice-Chairman of the Board (if there be one), the President or any Vice-President of ParentCo or the Corporation, as the case may be; 4 "ParentCo Common Share" has the meaning provided in the Exchangeable Share Provisions; "ParentCo Consent" means any written consent sought by ParentCo from the holders of ParentCo Common Shares; "ParentCo Meeting" means any meeting of Shareholders of ParentCo at which the holders of ParentCo Common Shares or the ParentCo Preferred Shares are entitled to vote; "ParentCo Preferred Share" has the meaning provided in the recitals hereto; "ParentCo Subsidiary" means any Subsidiary of ParentCo incorporated under the Canada Business Corporations Act for the purpose of delivering ParentCo Common Shares as provided in this agreement, the Exchangeable Share Provisions or the Support Agreement; "Successor" has the meaning provided in Section 12.1 hereof; "Person" includes an individual, body corporate, partnership, company, unincorporated syndicate or organization, trust, trustee, executor, administrator and other legal representative; "Redemption Call Right" has the meaning provided in the Exchangeable Share Provisions; "Reorganization" has the meaning provided in the recitals hereto; "Reorganization Agreement" has the meaning provided in the recitals hereto and a copy thereof is attached hereto as Schedule B; "Representatives" means the Persons appointed from time to time pursuant to Section 7.3(g) of the Reorganization Agreement to represent the Contingent Holders for the purposes of Article 6 hereof; "Retracted Shares" has the meaning provided in Section 7.7 hereof; "Retraction Call Right" has the meaning provided in the Exchangeable Share Provisions; "Subsidiary" has the meaning provided in the Exchangeable Share Provisions; "Support Agreement" means that certain support agreement made as of the date hereof by and between ParentCo and the Corporation; "Trust" means the trust created by this agreement; "Trust Estate" means the ParentCo Preferred Share, the Exchange Right, the Automatic Exchange Rights, the Escrowed Shares and any money or other property which may be held by the Trustee from time to time pursuant to this agreement; 5 "Trustee" means CIBC Mellon Trust Company and, subject to the provisions of Article 11 hereof, includes any successor trustee or permitted assigns; "US$" means the lawful currency of the United States of America; "Voting List" has the meaning provided in Section 4.6 hereof; "Voting Rights" means the voting rights with respect to ParentCo attached to the ParentCo Preferred Share; and "Warrants" has the meaning provided in Section 1.1 of the Reorganization Agreement. 1.2 Integration Not Affected by Headings, Etc. ------------------------------------------ The division of this agreement into articles, sections and paragraphs and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this agreement. 1.3 Number, Gender, Etc. -------------------- Words importing the singular number only shall include the plural and vice versa. Words importing the use of any gender shall include all genders. 1.4 Date for Any Action. -------------------- If any date on which any action is required to be taken under this agreement is not a Business Day, such action shall be required to be taken on the next succeeding Business Day. 1.5 Exhibits and Schedules ---------------------- The following are the Exhibits and Schedules annexed hereto and incorporated by reference in this agreement: Exhibit A - List of Escrowed Shares (Second recital) Exhibit B - Form of Disbursement Notice (Section 5.1(a)) Exhibit C - Form of Caution Notice (Section 6.1(b)) Exhibit D - Form of Disbursment Notice (Section 6.1(d)) Schedule A - Exchangeable Share Provisions Schedule B - Reorganization Agreement (excluding schedules and exhibits) Schedule C - Support Agreement. ARTICLE 2 - PURPOSE OF AGREEMENT -------------------------------- The purpose of this agreement is to create the Trust for the benefit of the Holders, as herein provided. The Trustee will hold the ParentCo Preferred Share in order to enable the 6 Trustee to exercise the Voting Rights and will hold the Exchange Right, the Exchange Put Right and the Automatic Exchange Rights in order to enable the Trustee to exercise such rights, in each case as trustee for and on behalf of the Holders as provided in this agreement. The Trustee shall hold the Escrowed Shares pursuant to the provisions of Article 6 hereof, for the benefit of the Holders or ParentCo as therein provided. ARTICLE 3 - PARENTCO PREFERRED SHARE ------------------------------------ 3.1 Issuance and Ownership of the ParentCo Preferred Share. ------------------------------------------------------- ParentCo hereby issues to and deposits with the Trustee the ParentCo Preferred Share to be hereafter held of record by the Trustee as trustee for and on behalf of the Holders in accordance with the provisions of this agreement. ParentCo hereby acknowledges receipt from the Trustee as trustee for and on behalf of the Holders of good and valuable consideration (and acknowledges the sufficiency or adequacy thereof) for the issuance of the ParentCo Preferred Share to the Trustee. During the term of the Trust and subject to the terms and conditions of this agreement, the Trustee shall possess and be vested with full legal ownership of the ParentCo Preferred Share and shall be entitled to exercise all of the rights and powers of an owner with respect to the ParentCo Preferred Share, provided that the Trustee shall: (a) hold the ParentCo Preferred Share and the legal title thereto as trustee solely for the use and benefit of the Holders in accordance with the provisions of this agreement; and (b) except as specifically authorized by this agreement, have no power or authority to sell, transfer, vote or otherwise deal in or with the ParentCo Preferred Share, and the ParentCo Preferred Share shall not be used or disposed of by the Trustee for any purpose other than the purposes for which this Trust is created pursuant to this agreement. 3.2 Safe Keeping of Certificate. ---------------------------- The certificate representing the ParentCo Preferred Share outstanding from time to time shall at all times be held in safe keeping by the Trustee or its agent. The Trustee shall store the certificate in its vault or in the vault of a Schedule I Canadian chartered bank. 3.3 Holders' Benefit. ----------------- For greater certainty, the Trustee holds the benefit of the Voting Rights for the Holders but all other rights in respect of the ParentCo Preferred Share, including without limitation any right to dividends on the ParentCo Preferred Share, are for the benefit of ParentCo. ARTICLE 4 - EXERCISE OF VOTING RIGHTS ------------------------------------- 4.1 Voting Rights. -------------- 7 The Trustee, as the holder of record of the ParentCo Preferred Share, shall be entitled to all of the Voting Rights, including the right to consent to or to vote in person or by proxy the ParentCo Preferred Share, on any matter, question or proposition whatsoever that may properly come before the holders of ParentCo Common Shares at a ParentCo Meeting or in connection with a ParentCo Consent. The Voting Rights shall be and remain vested in and exercised by the Trustee. Subject to Section 8.15 hereof, the Trustee shall exercise the Voting Rights only on the basis of instructions received pursuant to this Article 4 from Holders entitled to instruct the Trustee as to the voting thereof in connection with which a ParentCo Consent is sought or a ParentCo Meeting is held. To the extent that no instructions are received from a Holder with respect to the Voting Rights to which such Holder is entitled, the Trustee shall not exercise or permit the exercise of such Holder's Voting Rights. 4.2 Number of Votes. ---------------- With respect to all ParentCo Meetings and with respect to all ParentCo Consents, each Holder shall be entitled to instruct the Trustee to cast and exercise, in the manner instructed, a number of votes equal to the Equivalent Vote Amount for each Exchangeable Share owned of record by such Holder on the record date established by ParentCo or by applicable law for such ParentCo Meeting or ParentCo Consent, as the case may be, (the "Holder Votes") in respect of each matter, question or proposition to be voted on at such ParentCo Meeting or to be consented to in connection with such ParentCo Consent. 4.3 Mailings to Shareholders. ------------------------- With respect to each ParentCo Meeting and ParentCo Consent, the Trustee will mail or cause to be mailed (or otherwise communicate in the same manner as ParentCo uses in communications to holders of ParentCo Common Shares, subject to the Trustee's ability to provide such other method of communication and upon being advised in writing of such method) to each of the Holders named in the Voting List on the same day as the initial mailing or notice (or other communication) with respect thereto is given by ParentCo to holders of ParentCo Common Shares: (a) a copy of such notice, together with any proxy or information statement and related materials to be provided to holders of ParentCo Common Shares; (b) a statement as to the number of Holder Votes which the Holder is entitled to exercise; (c) a statement as to the manner in which such instructions may be given to the Trustee, including an express indication that instructions may be given to the Trustee to give: (i) a proxy to such Holder or his designee to exercise personally the Holder Votes; or 8 (ii) a proxy to a designated agent or other representative of the management of ParentCo to exercise such Holder Votes; (d) a statement that if no voting instructions are received from the Holder, the Holder Votes to which such Holder is entitled will not be exercised; (e) a form of direction whereby the Holder may so direct and instruct the Trustee as contemplated herein; and (f) a statement of (i) the time and date by which voting instructions must be received by the Trustee in order to be binding upon it, which in the case of a ParentCo Meeting shall not be earlier than the close of business on the Business Day prior to such voting meeting, and (ii) the method for revoking or amending such voting instructions. ParentCo hereby covenants to provide to the Trustee, in a timely manner and for the benefit of the Holders, the shareholder materials referred to above. For the purpose of determining Holder Votes to which a Holder is entitled in respect of any such ParentCo Meeting or ParentCo Consent, the number of Exchangeable Shares owned of record by the Holder shall be determined at the close of business on the record date established by ParentCo or by applicable law for purposes of determining shareholders entitled to vote at such ParentCo Meeting or to give written consent in connection with such ParentCo Consent. ParentCo will notify the Trustee in writing of any decision of the board of directors of ParentCo with respect to the calling of any such ParentCo Meeting or the seeking of any such ParentCo Consent and, together with the Corporation, shall provide all necessary information and materials to the Trustee in each case promptly and in any event in sufficient time to enable the Trustee to perform its obligations contemplated by this Section 4.3. The Corporation shall provide to the Trustee, in a timely manner, a current list of the Holders, and the number of Exchangeable Shares held of record by each Holder, in order to make such calculation of Holder Votes and give the information required by Section 4.3(b). 4.4 Copies of Shareholder Information. ---------------------------------- ParentCo will deliver to the Trustee copies of all proxy materials, (including notices of ParentCo Meetings, but excluding proxies to vote ParentCo Common Shares), information statements, reports (including without limitation all interim and annual financial statements) and other written communications that are to be distributed from time to time to holders of ParentCo Common Shares in sufficient quantities and in sufficient time, to the extent possible, so as to enable the Trustee to send those materials to each Holder at the same time as such materials are first sent to holders of ParentCo Common Shares. The Trustee will mail or otherwise send to each Holder, at the expense of ParentCo, copies of all such materials (and all materials specifically directed to the Holders or to the Trustee for the benefit of the Holders by ParentCo) received by the Trustee from ParentCo, to the extent possible, at the same time as such materials 9 are first sent to holders of ParentCo Common Shares. The Trustee will make copies of all such materials available for inspection by any Holder at the Trustee's principal transfer office in the City of Toronto. 4.5 Other Materials. ---------------- Immediately after receipt by ParentCo of any material sent or given generally to the holders of ParentCo Common Shares by or on behalf of a third party, including without limitation dissident proxy and information circulars (and related information and material) and tender or exchange offer circulars (and related information and material), ParentCo shall obtain and deliver to the Trustee copies thereof in sufficient quantities so as to enable the Trustee to forward such material (unless the same has been provided directly to Holders by such third party) to each Holder as soon as possible thereafter. As soon as practicable after receipt thereof, the Trustee will mail or otherwise send to each Holder, at the expense of ParentCo, copies of all such materials received by the Trustee from ParentCo. The Trustee will also make copies of all such materials available for inspection by any Holder at the Trustee's principal transfer office in the City of Toronto. 4.6 List of Persons Entitled to Vote. --------------------------------- The Corporation shall, (i) prior to each annual, general and special ParentCo Meeting or the seeking of any ParentCo Consent and (ii) forthwith upon each request made at any time by the Trustee in writing, prepare or cause to be prepared a list (a "Voting List") of the names and addresses of the Holders arranged in alphabetical order and showing the number of Exchangeable Shares held of record by each such Holder, in each case at the close of business on the date specified by the Trustee in such request or, in the case of a Voting List prepared in connection with a ParentCo Meeting or a ParentCo Consent, at the close of business on the record date established by ParentCo or pursuant to applicable law for determining the holders of ParentCo Common Shares entitled to receive notice of and/or to vote at such ParentCo Meeting or to give consent in connection with such ParentCo Consent. Each such List shall be delivered to the Trustee promptly after receipt by the Corporation of such request or the record date for such meeting or seeking of consent, as the case may be, and in any event within sufficient time as to enable the Trustee to perform its obligations under this agreement. ParentCo agrees to give the Corporation written notice (with a copy to the Trustee) of the calling of any ParentCo Meeting or the seeking of any ParentCo Consent, together with the record dates therefor, sufficiently prior to the date of the calling of such meeting or seeking of such consent so as to enable the Corporation to perform its obligations under this Section 4.6. 4.7 Entitlement to Direct Votes. ---------------------------- Any Holder named in a Voting List prepared in connection with any ParentCo Meeting or any ParentCo Consent will be entitled (i) to instruct the Trustee in the manner described in Section 4.3 hereof with respect to the exercise of the Holder Votes to which such Holder is entitled or (ii) to attend such meeting and personally to exercise thereat (or to exercise with 10 respect to any written consent), as the proxy of the Trustee, the Holder Votes to which such Holder is entitled. 4.8 Voting by Trustee and Attendance of Trustee Representatives at Meeting. ----------------------------------------------------------------------- (a) In connection with each ParentCo Meeting and ParentCo Consent, the Trustee shall exercise, either in person or by proxy, in accordance with the instructions received from a Holder pursuant to Section 4.3 hereof, the Holder Votes as to which such Holder is entitled to direct the vote (or any lesser number thereof as may be set forth in the instructions); provided, however, that such written instructions are received by the Trustee from the Holder prior to the time and date fixed by it for receipt of such instructions in the notice given by the Trustee to the Holder pursuant to Section 4.3 hereof. (b) The Trustee shall cause such representatives as are empowered by it to sign and deliver, on behalf of the Trustee, proxies for Voting Rights to attend each ParentCo Meeting. Upon submission by a Holder (or its designee) of identification satisfactory to the Trustee's representatives, and at the Holder's request, such representatives shall sign and deliver to such Holder (or its designee) a proxy to exercise personally the Holder Votes as to which such Holder is otherwise entitled hereunder to direct the vote, if such Holder either: (i) has not previously given the Trustee instructions pursuant to Section 4.3 hereof in respect of such meeting, or (ii) submits to the Trustee's representatives written revocation of any such previous instructions. At such meeting, the Holder exercising such Holder Votes shall have the same rights as the Trustee to speak at the meeting in respect of any matter, question or proposition, to vote by way of ballot at the meeting in respect of any matter, question or proposition and to vote at such meeting by way of a show of hands in respect of any matter, question or proposition. 4.9 Distribution of Written Materials. ---------------------------------- Any written materials to be distributed by the Trustee to the Holders pursuant to this agreement shall be delivered or sent by mail (or otherwise communicated in the same manner as ParentCo uses in communications to holders of ParentCo Common Shares), and shall be delivered or sent to each Holder at its address as shown on the books of the Corporation. The Corporation shall provide or cause to be provided to the Trustee for this purpose, on a timely basis and without charge or other expense: (a) current lists of the Holders; and 11 (b) on the request of the Trustee, mailing labels to enable the Trustee to carry out its duties under this agreement. 4.10 Termination of Voting Rights. ----------------------------- Except as otherwise provided herein, all of the rights of a Holder and the Trustee with respect to the Holder Votes exercisable on the basis of the number of Exchangeable Shares held by such Holder, including the right to instruct the Trustee as to the voting of or to vote personally such Holder Votes, shall be deemed to be surrendered by the Holder to ParentCo, the Trustee's right to exercise the Holder Votes in respect of such Holder shall terminate automatically and such Holder Votes and the Voting Rights represented thereby shall cease immediately, upon the delivery by such Holder to the Trustee of the certificates representing such Exchangeable Shares in connection with the exercise by the Holder of the Exchange Right or the occurrence of the automatic exchange of Exchangeable Shares for ParentCo Common Shares, as described in Article 7 hereof (unless in either case ParentCo shall not have delivered the Exchangeable Share Consideration deliverable in exchange therefor to the Holders), or upon the redemption of Exchangeable Shares pursuant to Article 6 or Article 7 of the Exchangeable Share Provisions, or upon the effective date of the liquidation, dissolution or winding-up of the Corporation or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs pursuant to Article 5 of the Exchangeable Share Provisions, or upon the purchase of Exchangeable Shares from the holder thereof by ParentCo pursuant to the exercise by ParentCo of the Retraction Call Right, the Redemption Call Right or the Liquidation Call Right. ARTICLE 5 - ESCROWED SHARES --------------------------- 5.1 Issuance and Ownership of Escrowed Shares. ------------------------------------------ As provided in the Reorganization Agreement, the Holders have deposited a single certificate representing all of the Escrowed Shares with the Trustee. Such share certificate is registered in the name of the Trustee, in trust. The Escrowed Shares shall be held by the Trustee and released by the Trustee to the Holders or to ParentCo in accordance with the provisions of this agreement. During the period in which the Escrowed Shares are held in escrow, as herein provided, the Trustee shall hold the certificates representing the Escrowed Shares in safe keeping by the Trustee or its agent, and shall have no power to sell, transfer, vote or otherwise deal with the Escrowed Shares for any purpose, except as provided in Article 6 hereof. 5.2 Contingent Entitlement to Escrowed Shares. ------------------------------------------ Subject to the provisions of Article 6, it is acknowledged and agreed that the contingent entitlement to the Escrowed Shares, including the rights to vote, receive dividends and receive certificates for the Escrowed Shares upon expiry of the escrow as provided in Section 6.1(d), shall belong to those Persons, and in the number of Escrowed Shares, as set out in Exhibit A hereto (such holders being herein referred to as the "Contingent Holders" and the proportion of each Contingent Holder's holding to the number of Escrowed Shares as held by the Trustee from time to time being referred to as such Contingent Holder's "Contingent Proportion"). 12 A Contingent Holder's Contingent Proportion shall be calculated, at any date, by multiplying: (a) the aggregate number of Escrowed Shares remaining in escrow on such date, by (b) the fraction obtained by dividing the aggregate number of Escrowed Shares then remaining in escrow in respect of such Contingent Holder by the amount determined in Section 5.2 (a) hereof. ARTICLE 6 - ENTITLEMENTS RELATING TO ESCROWED SHARES ---------------------------------------------------- 6.1 Entitlement to Escrowed Shares. ------------------------------- (a) Upon receipt by the Trustee, prior to the first anniversary of the date of this agreement, from ParentCo of a Disbursement Notice in the form of Exhibit B hereto, stipulating: (i) that a Claim has been made by an Indemnitee in accordance with Section 7.3 of the Reorganization Agreement and either (a) such Claim has not been disputed within 30 days of the Indemnitee providing notice of such Claim to the Representatives pursuant to Section 7.3(b) of the Reorganization Agreement, or (b) any dispute with respect to such Claim has been settled by the parties or by arbitration as provided in Section 7.3 of the Reorganization Agreement (and in such case attaching a copy of a settlement agreement signed by the Representatives and ParentCo or a certified copy of the applicable arbitration award); (ii) the amount of such Claim as made in the case of clause (i)(a), or as settled or resolved in the case of clause (i)(b); (iii) the Closing Price and the numbers of Escrowed Shares to be released from escrow to the ParentCo, calculated by dividing the dollar amount of the Claim or settlement or resolved amount by such Closing Price; the Trustee shall release to ParentCo certificates representing the number of Escrowed Shares stipulated for release to ParentCo in such Disbursement Notice, calculated in accordance with clause (ii). Within five Business Days of receipt of the Disbursement Notice, the Trustee shall deliver to the Corporation certificates for sufficient of the Escrowed Shares to permit such transfer to ParentCo, and the Corporation shall issue to the Trustee, for delivery to ParentCo, a certificate for the appropriate number of Escrowed Shares, and shall deliver to the Trustee a certificate in the name of the Trustee for any balance of Escrowed Shares representing the difference between the shares evidenced by the certificates delivered by the Trustee to the Corporation and the certificates issued in the name of ParentCo. 13 (b) If a Claim has been made pursuant to Section 7.3 of the Reorganization Agreement and such Claim, its validity or a settlement by Conexant thereof is being disputed by the Representatives, or else the time for disputing such Claim has not expired pursuant to Section 7.3(b) of the Reorganization Agreement, ParentCo shall be entitled to deliver to the Trustee a Caution Notice in the form of Exhibit C hereto, stipulating the amount of the Claim, the Closing Price on the Business Day immediately prior to the date of the Caution Notice, and the number of Escrowed Shares calculated by dividing the dollar amount of the Claim by the Closing Price on such date. Upon delivery of such Caution Notice, the number of Escrowed Shares, relating to each Contingent Holder, stipulated therein shall become "Cautioned Shares", subject to the provisions of Article 6 in respect of Cautioned Shares, as set out below. (c) The Trustee shall release to each of the Contingent Holders on June 7, 2001, certificates representing all of such Contingent Holder's Contingent Proportion of the Escrowed Shares then held by the Trustee, less the aggregate number of such Contingent Holder's Contingent Proportion of Cautioned Shares as at such date. The Corporation shall forthwith deliver to the Trustee certificates for the Escrowed Shares to permit such release to the Contingent Holders as provided in this clause (c), along with a list of each Contingent Holder and the number of Escrowed Shares to be delivered to each Contingent Holder, representing such Contingent Holder's Contingent Proportion of Escrowed Shares to be released, and the Corporation shall also deliver to the Trustee a certificate in the name of the Trustee for any balance of Escrowed Shares represented by the Cautioned Shares; (d) The Trustee shall release certificates representing Cautioned Shares (i) to ParentCo, or (ii) to the Contingent Holders, upon receipt by the Trustee of a Disbursement Notice in the form of Exhibit D hereto referencing the notice given pursuant to clause (b) of this Section 6.1 pursuant to which Escrowed Shares became Cautioned Shares and the number of Cautioned Shares subject to the relevant Caution Notice, and attaching a copy of a settlement agreement signed by the Representatives and ParentCo or a certified copy of the applicable arbitration award in respect of the matter for which the Claim was made giving rise to the Escrowed Shares becoming Cautioned Shares. Within five Business Days of receipt of the relevant Disbursement Notice from ParentCo or the Representatives, the Corporation shall deliver to the Trustee certificates for sufficient of the Escrowed Shares to permit the relevant transfer or transfers to ParentCo or the Contingent Holders, as the case may be, and the Trustee shall deliver certificates for any Escrowed Shares to be released to ParentCo, or to each Contingent Holder for each Contingent Holders' Contingent Proportion of Escrowed Shares to be released, in the names of the Contingent Holders, 14 or ParentCo, as the case may be, and the Corporation shall also deliver to the Trustee a certificate in the name of the Trustee for any balance of Escrowed Shares. (e) Each release of Escrowed Shares to the Contingent Holders shall be in the Contingent Proportion for each Contingent Holder, as set forth in the Disbursement Notice. The Trustee shall be entitled to, and shall, send all share certificates to the address indicated beside each of the Contingent Holders name as set out in Exhibit A unless otherwise instructed by the Contingent Holder in writing. 6.2 Dividends. ---------- The Contingent Holders shall be entitled to receive any and all dividends on the Escrowed Shares declared payable to the Trustee until certificates for such shares are issued in the name of ParentCo or the Contingent Holders pursuant to Section 6.1, except that dividends in respect of Cautioned Shares received by the Trustee or having a record date on or after the date that Escrowed Shares became Cautioned Shares shall be retained by the Trustee and shall be paid by cheque of the Trustee to the ultimate recipient of certificates for the Cautioned Shares in conjunction with the delivery of certificates for the Cautioned Shares pursuant to Section 6.1. Any dividend amounts so received by the Trustee may be invested by the Trustee in obligations of or guaranteed by Canada or any province thereof, having a term to maturity of not greater than 91 days, or may be deposited in an interest bearing account with a Canadian bank named in Schedule I to the Bank Act (Canada), and any return on such investment shall be paid to the recipient of the dividend amount, proportionately to the entitlement to the amount of dividend of each recipient. 6.3 Voting. ------- The Contingent Holders shall be entitled to vote the Escrowed Shares at each meeting of holders of the Escrowed Shares, until any such shares shall become Cautioned Shares, in which case such shares shall not be voted. The Trustee shall execute all necessary proxies or such other documents as may be requested to facilitate this entitlement. The Trustee shall also treat each Contingent Holder as the "Holder" of the number of Escrowed Shares indicated in Exhibit A for purposes of voting ParentCo Preferred Share at ParentCo Meetings and with respect to ParentCo Consents pursuant to Article 4 hereof, until such shares shall become Cautioned Shares, in which case the voting rights on applicable ParentCo Preferred Share shall not be exercisable. For this purpose, the Trustee shall provide to the Contingent Holders all information and materials as provided in Article 4, and the Contingent Holders shall be entitled to direct votes with respect to ParentCo Preferred Share, as if the Contingent Holder were the registered holder of the number of Escrowed Shares as set out under Exhibit A, as reduced from time to time upon releases of shares as provided in Section 6.2 hereof. 15 ARTICLE 7 - EXCHANGE RIGHT AND AUTOMATIC EXCHANGE ------------------------------------------------- 7.1 Grant and Ownership of the Exchange Right. ------------------------------------------ ParentCo hereby grants to the Trustee as trustee for and on behalf of, and for the use and benefit of, the Holders: (a) the Exchange Put Right, (b) the right (the "Exchange Right"), upon the occurrence and during the continuance of an Insolvency Event, to require ParentCo to purchase or to cause ParentCo Sub to purchase from each or any Holder all or any part of the Exchangeable Shares held by the Holders, and (c) the Automatic Exchange Rights, all in accordance with the provisions of this agreement and the Exchangeable Share Provisions, as the case may be. ParentCo hereby acknowledges receipt from the Trustee as trustee for and on behalf of the Holders of good and valuable consideration (and the sufficiency and adequacy thereof) for the grant of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights by ParentCo to the Trustee. During the term of the Trust and subject to the terms and conditions of this agreement, the Trustee shall possess and be vested with full legal ownership of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights and shall be entitled to exercise and enforce for the benefit of the Holders all of the rights and powers of an owner with respect to the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights, provided that the Trustee shall: (d) hold the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights and the legal title thereto as trustee solely for the use and benefit of the Holders in accordance with the provisions of this agreement; and (e) except as specifically authorized by this agreement, have no power or authority to exercise or otherwise deal in or with the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, and the Trustee shall not exercise any such rights for any purpose other than the purposes for which this Trust is created pursuant to this agreement. 7.2 Legended Share Certificates. ---------------------------- The Corporation will cause each certificate representing Exchangeable Shares to bear an appropriate legend notifying the Holders of: (a) their right to instruct the Trustee with respect to the exercise of the Exchange Put Right and the Exchange Right in respect of the Exchangeable Shares held by a Holder; and 16 (b) the Automatic Exchange Rights. 7.3 General Exercise of Exchange Put Right and Exchange. ---------------------------------------------------- The Exchange Put Right and the Exchange Right shall be and remain vested in and exercised by the Trustee. Subject to Section 8.15 hereof, the Trustee shall exercise the Exchange Put Right and the Exchange Right only on the basis of instructions received pursuant to this Article 7 from Holders entitled to instruct the Trustee as to the exercise thereof. To the extent that no instructions are received from a Holder with respect to the Exchange Put Right and the Exchange Right, the Trustee shall not exercise or permit the exercise of the Exchange Put Right and the Exchange Right. 7.4 Purchase Price. --------------- The purchase price payable by ParentCo or ParentCo Sub for each Exchangeable Share to be purchased by ParentCo or ParentCo Sub (a) under the Exchange Put Right shall be the amount determined under the Exchangeable Share Provisions, and (b) under the Exchange Right shall be an amount equal to the Exchangeable Share Price on the last Business Day prior to the day of closing of the purchase and sale of such Exchangeable Share under the Exchange Right. In connection with each exercise of the Exchange Right, ParentCo will provide to the Trustee an Officer's Certificate setting forth the calculation of the applicable Exchangeable Share Price for each Exchangeable Share. The applicable Exchangeable Share Price for each such Exchangeable Share so purchased may be satisfied only by ParentCo or ParentCo Sub delivering or causing to be delivered to the Trustee, on behalf of the relevant Holder, the applicable Exchangeable Share Consideration representing the total applicable Exchangeable Share Price. 7.5 Exercise Instructions. ---------------------- Subject to the terms and conditions herein set forth, a Holder shall be entitled, upon the occurrence and during the continuance of an Insolvency Event, to instruct the Trustee to exercise the Exchange Right with respect to all or any part of the Exchangeable Shares registered in the name of such Holder on the books of the Corporation. To cause the exercise of the Exchange Right by the Trustee, the Holder shall deliver to the Trustee, in person or by certified or registered mail, at its principal transfer office in Toronto, Ontario or at such other places in Canada as the Trustee may from time to time designate by written notice to the Holders, the certificates representing the Exchangeable Shares which such Holder desires ParentCo to purchase, duly endorsed in blank, and accompanied by such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the Canada Business Corporations Act and the by-laws of the Corporation and such additional documents and instruments as the Trustee may reasonably require, together with: (a) a duly completed form of notice of exercise of the Exchange Right, contained on the reverse of or attached to the Exchangeable Share certificates, stating: 17 (i) that the Holder thereby instructs the Trustee to exercise the Exchange Right so as to require ParentCo to purchase from the Holder the number of Exchangeable Shares specified therein, (ii) that such Holder has good title to and owns all such Exchangeable Share to be acquired by ParentCo free and clear of all liens, claims, encumbrances, security interests and adverse claims or interests, (iii) the names in which the certificates representing ParentCo Common Shares issuable in connection with the exercise of the Exchange Right are to be issued, and (iv) the names and addresses of the persons to whom the Exchangeable Share Consideration should be delivered; and (b) payment (or evidence satisfactory to the Trustee, the Corporation and ParentCo of payment) of the taxes (if any) payable as contemplated by Section 7.8 of this agreement. If only a part of the Exchangeable Shares represented by any certificate or certificates delivered to the Trustee are to be purchased by ParentCo or ParentCo Sub under the Exchange Right, the Corporation shall issue a new certificate for the balance of such Exchangeable Shares to the Holder at the expense of the Corporation. 7.6 Delivery of Exchangeable Share Consideration; Effect of Exercise. ----------------------------------------------------------------- Promptly after receipt of the certificates representing the Exchangeable Shares which the Holder desires ParentCo to purchase under the Exchange Put Right or the Exchange Right (together with such documents and instruments of transfer and a duly completed form of notice of exercise of the Exchange Put Right or the Exchange Right), duly endorsed for transfer to ParentCo, the Trustee shall notify ParentCo and the Corporation of its receipt of the same, which notice to ParentCo and the Corporation shall constitute exercise of the Exchange Put Right or the Exchange Right by the Trustee on behalf of the Holder of such Exchangeable Shares, and ParentCo shall immediately thereafter deliver or cause ParentCo Sub to deliver to the Trustee, for delivery to the Holder of such Exchangeable Shares (or to such other persons, if any, properly designated by such Holder), the Exchangeable Share Consideration deliverable in connection with the exercise of the Exchange Put Right or the Exchange Right; provided, however, that no such delivery shall be made unless and until the Holder requesting the same shall have paid (or provided evidence satisfactory to the Trustee, the Corporation and ParentCo of the payment of) the taxes (if any) payable as contemplated by Section 7.8 of this agreement. Immediately upon the giving of notice by the Trustee to ParentCo and the Corporation of the exercise of the Exchange Put Right or the Exchange Right, as provided in this Section 7.6, the closing of the transaction of purchase and sale contemplated by the Exchange Put Right or the Exchange Right shall be deemed to have occurred, and the Holder of such Exchangeable Shares shall be deemed to have transferred to ParentCo (or at ParentCo's option, to ParentCo Sub) all of its right, title and interest in and to such Exchangeable Shares and the related interest in the Trust Estate, shall 18 cease to be a holder of such Exchangeable Shares and shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive his proportionate part of the total purchase price therefor, unless such Exchangeable Share Consideration is not delivered by ParentCo or ParentCo Sub to the Trustee, for delivery to such Holder (or to such other persons, if any, properly designated by such Holder), within five Business Days of the date of the giving of such notice by the Trustee, in which case the rights of the Holder shall remain unaffected until such Exchangeable Share Consideration is delivered by ParentCo or ParentCo Sub and any cheque included therein is paid. Concurrently with such Holder ceasing to be a holder of Exchangeable Shares, the Holder shall be considered and deemed for all purposes to be the holder of the ParentCo Common Shares delivered to it pursuant to the Exchange Put Right or the Exchange Right and no longer to be the holder of the sold Exchangeable Shares for purposes of having voting rights with respect to ParentCo Preferred Share pursuant to Article 4 hereof. Notwithstanding the foregoing until the Exchangeable Share Consideration is delivered to the Holder, the Holder shall be deemed to still be a holder of the sold Exchangeable Shares for purposes of voting rights with respect to ParentCo Preferred Share pursuant to Article 4 hereof. 7.7 Exercise of Exchange Right Subsequent to Retraction. ---------------------------------------------------- In the event that a Holder has exercised its right under Article 6 of the Exchangeable Share Provisions to require the Corporation to redeem any or all of the Exchangeable Shares held by the Holder (the "Retracted Shares") and is notified by the Corporation pursuant to Section 6.6 of the Exchangeable Share Provisions that the Corporation will not be permitted as a result of liquidity or solvency requirements of applicable law to redeem all such Retracted Shares, subject to receipt by the Trustee of written notice to that effect from the Corporation and provided that ParentCo shall not have exercised the Retraction Call Right with respect to the Retracted Shares and that the Holder has not revoked the retraction request delivered by the Holder to the Corporation pursuant to Section 6.1 of the Exchangeable Share Provisions, the retraction request will constitute and will be deemed to constitute notice from the Holder to the Trustee instructing the Trustee to exercise the Exchange Right with respect to those Retracted Shares which the Corporation is unable to redeem. In any such event, the Corporation hereby agrees with the Trustee and in favour of the Holder immediately to notify the Trustee of such prohibition against the Corporation's redeeming all of the Retracted Shares and immediately to forward or cause to be forwarded to the Trustee all relevant materials delivered by the Holder to the Corporation (including without limitation a copy of the retraction request delivered pursuant to Section 6.1 of the Exchangeable Share Provisions) in connection with such proposed redemption of the Retracted Shares, and the Trustee will thereupon exercise the Exchange Right with respect to the Retracted Shares which the Corporation is not permitted to redeem and will require ParentCo or ParentCo Sub to purchase such shares in accordance with the provisions of this Article 7. 19 7.8 Stamp or Other Transfer Taxes. ------------------------------ Upon any sale of Exchangeable Shares to ParentCo pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, the share certificate or certificates representing ParentCo Common Shares to be delivered in connection with the payment of the total purchase price therefor shall be issued in the name of the Holder of the Exchangeable Shares so sold or in such names as such Holder may otherwise direct in writing without charge to the holder of the Exchangeable Shares so sold, provided, however, that such Holder: (a) shall pay (and none of ParentCo, ParentCo Sub, the Corporation or the Trustee shall be required to pay) any documentary, stamp, transfer or other similar taxes that may be payable in respect of any transfer involved in the issuance or delivery of such shares to a person other than such Holder; or (b) shall have established to the satisfaction of the Trustee, ParentCo and the Corporation that such taxes, if any, have been paid. The Corporation and the Trustee (as directed in writing by the Corporation) shall be entitled to deduct and withhold from any consideration otherwise payable under this Agreement to any Holder such amounts as the Corporation or the Trustee is required or permitted to deduct and withhold with respect to such payment under the Income Tax Act (Canada), the United States Internal Revenue Code of 1986 or any provision of provincial, state, local or foreign tax law, in each case as amended or succeeded unless such Holder provides to the Corporation certificates or such other assurances as are provided for under the Income Tax Act (Canada) , the United States Internal Revenue Code of 1986 or such other applicable taxation provisions. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes as having been paid to the Holder in respect of which such deduction and withholding was made, provided that such withheld amounts are actually remitted to the appropriate taxing authority as and when required. To the extent that the amount so required or permitted to be deducted or withheld from any payment to a Holder exceeds the cash portion, if any, of the consideration otherwise payable to the Holder, the Corporation and the Trustee are hereby authorized to sell or otherwise dispose of such portion of the consideration as is necessary to provide sufficient funds to the Corporation or the Trustee, as the case may be, to enable it to comply with such deduction or withholding requirement and the Corporation or the Trustee shall notify the Holder and remit to such Holder any unapplied balance of the net proceeds of such sale. 7.9 Notice of Insolvency Event. --------------------------- Immediately upon the occurrence of an Insolvency Event or any event which with the giving of notice or the passage of time or both would be an Insolvency Event, the Corporation shall give written notice thereof to the Trustee and ParentCo. As soon as practicable after receiving notice from the Corporation of the occurrence of an Insolvency Event, the Trustee will mail to each Holder, at the expense of ParentCo, a notice of such Insolvency Event in the form provided by ParentCo, which notice shall contain a brief statement of the right of the Holders with respect to the Exchange Right. 20 7.10 Qualification of ParentCo Common Shares. ---------------------------------------- ParentCo covenants with the Trustee for the benefit of the Holders that if any ParentCo Common Shares to be issued and delivered pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights require registration or qualification with or approval of or the filing of any document including any prospectus or similar document, the taking of any proceeding with or the obtaining of any order, ruling or consent from any governmental or regulatory authority under any Canadian or United States federal, provincial or state law or regulation or pursuant to the rules and regulations of any regulatory authority, or the fulfilment of any other legal requirement (collectively, the "Applicable Laws") before such shares may be issued and delivered by ParentCo to the initial holder thereof (other than the Corporation) or in order that such shares may be freely traded thereafter (other than any restrictions on transfer by reason of a holder being a "control person" of ParentCo for purposes of Canadian federal or provincial securities law or an "affiliate" of ParentCo for purposes of United States federal or state securities law), ParentCo will in good faith expeditiously take all such actions and do all such things as are necessary to cause such ParentCo Common Shares to be and remain duly registered, qualified or approved to the extent expressly provided in the Reorganization Agreement. ParentCo will in good faith expeditiously take all such actions and do all such things as are necessary to cause all ParentCo Common Shares to be delivered pursuant to the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights to be listed, quoted or posted for trading on all major stock exchanges and quotation systems on which such shares are listed, quoted or posted for trading at such time. 7.11 Reservation of ParentCo Common Shares. -------------------------------------- ParentCo hereby represents, warrants and covenants with the Trustee for the benefit of the Holders that it has irrevocably reserved for issuance, or will keep available in treasury, and will at all times keep available, free from pre-emptive and other rights, out of its authorized and unissued capital shares (or shares in treasury) such number of ParentCo Common Shares: (a) as is equal to the sum of (i) the number of Exchangeable Shares issued and outstanding from time to time and (ii) the number of ParentCo Common Shares issuable upon the exercise of the Employee Stock Options, Convertible Debenture Options and Warrants outstanding on the date hereof; and (b) as are now and may hereafter be required to enable and permit the Corporation to meet its obligations hereunder, under the Support Agreement and under the Exchangeable Share Provisions. 7.12 Automatic Exchange on Liquidation of ParentCo. ---------------------------------------------- 21 (a) ParentCo will give the Trustee written notice of each of the following events at the time set forth below: (i) in the event of any determination by the board of directors of the ParentCo to institute voluntary liquidation, dissolution or winding-up proceedings with respect to ParentCo or to effect any other distribution of assets of ParentCo among its shareholders for the purpose of winding up its affairs, at least 60 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; and (ii) immediately, upon the earlier of A. receipt by ParentCo of notice of; and B. ParentCo's otherwise becoming aware of; any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of ParentCo or to effect any other distribution of assets of ParentCo among its shareholders for the purpose of winding up its affairs. (b) Immediately following receipt by the Trustee from ParentCo of notice of any event (a "Liquidation Event") contemplated by Section 7.12(a) above, the Trustee will give notice thereof to the Holders. Such notice will be provided by ParentCo to the Trustee and shall include a brief description of the automatic exchange of Exchangeable Shares for ParentCo Common Shares provided for in Section 7.12(c) below. (c) In order that the Holders will be able to participate on a pro rata basis with the holders of ParentCo Common Shares in the distribution of assets of ParentCo in connection with a Liquidation Event, immediately prior to the effective time (the "Liquidation Event Effective Time") of a Liquidation Event, all of the then outstanding Exchangeable Shares shall be automatically exchanged for ParentCo Common Shares. To effect such automatic exchange, ParentCo shall be deemed to have purchased each Exchangeable Share held by Holders outstanding immediately prior to the Liquidation Event Effective Time, and each Holder shall be deemed to have sold the Exchangeable Shares held by it at such time, for a purchase price per share equal to the Exchangeable Share Price applicable at such time. In connection with such automatic exchange, ParentCo will provide to the Trustee an Officer's Certificate setting forth the calculation of the purchase price for each Exchangeable Share. 22 (d) The closing of the transaction of purchase and sale contemplated by Section 7.12(c) above shall be deemed to have occurred immediately prior to the Liquidation Event Effective Time, and each Holder of Exchangeable Shares shall be deemed to have transferred to ParentCo all of the Holder's right, title and interest in and to such Exchangeable Shares and shall cease to be a holder of such Exchangeable Shares, and ParentCo shall deliver to the Holder the Exchangeable Share Consideration deliverable upon the automatic exchange of Exchangeable Shares. Concurrently with such Holder's ceasing to be a holder of Exchangeable Shares, the Holder shall be considered and deemed for all purposes to be the holder of the right to receive ParentCo Common Shares to be issued to it pursuant to the automatic exchange of Exchangeable Shares for ParentCo Common Shares, and the certificates held by the Holder previously representing the Exchangeable Shares exchanged by the Holder with ParentCo pursuant to such automatic exchange shall thereafter be deemed to represent a right to receive the ParentCo Common Shares to be issued to the Holder by ParentCo pursuant to such automatic exchange. Upon the request of a Holder and the surrender by the Holder of Exchangeable Share certificates deemed to represent ParentCo Common Shares, duly endorsed in blank and accompanied by such instruments of transfer as ParentCo may reasonably require, ParentCo shall deliver or cause to be delivered to the Holder certificates representing the ParentCo Common Shares of which the Holder is the holder. Notwithstanding the foregoing, until each Holder is actually entered on the register of holders of ParentCo Common Shares, such Holder shall be deemed to still be a holder of the transferred Exchangeable Shares for purposes of having voting rights with respect to ParentCo Preferred Share pursuant to Article 4 hereof. ARTICLE 8 - CONCERNING THE TRUSTEE ---------------------------------- 8.1 Powers and Duties of the Trustee. --------------------------------- The rights, powers and authorities of the Trustee under this agreement, in its capacity as trustee of the Trust, shall include: (a) receipt and deposit of the ParentCo Preferred Share from ParentCo as trustee for and on behalf of the Holders in accordance with the provisions of this agreement; (b) granting proxies and distributing materials in relation to the ParentCo Preferred Share to Holders as provided in this agreement; (c) voting the Holder Votes in relation to the ParentCo Preferred Share in accordance with the provisions of this agreement; 23 (d) receipt and deposit of the Escrowed Shares in accordance with this agreement; (e) releasing certificates representing the Escrowed Shares and certain dividend and investment amounts related thereto in accordance with the provisions of this agreement; (f) voting Escrowed Shares in accordance with the provisions of this agreement; (g) receiving the grant of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights from ParentCo as trustee for and on behalf of the Holders in accordance with the provisions of this agreement; (h) exercising the Exchange Put Right and the Exchange Right and enforcing the benefit of the Automatic Exchange Rights, in each case in accordance with the provisions of this agreement, and in connection therewith receiving from Holders certificates representing Exchangeable Shares and other requisite documents, and distributing to such Holders the ParentCo Common Shares and cheques, if any, to which such Holders are entitled upon the exercise of the Exchange Put Right and the Exchange Right or pursuant to the Automatic Exchange Rights, as the case may be; (i) holding title to the Trust Estate; (j) investing any moneys forming, from time to time, a part of the Trust Estate as provided in this agreement; (k) taking action at the direction of a Holder or Holders to enforce the obligations of ParentCo under this agreement; and (l) taking such other actions and doing such other things as are specifically provided in this agreement. In the exercise of such rights, powers and authorities the Trustee shall have (and is granted) such incidental and additional rights, powers and authority not in conflict with any of the provisions of this agreement as the Trustee, acting in good faith and in the reasonable exercise of its discretion, may deem necessary, appropriate or desirable to effect the purpose of the Trust. Any exercise of such discretionary rights, powers and authorities by the Trustee shall be final, conclusive and binding upon all persons. For greater certainty, the Trustee shall have only those duties as are set out specifically in this agreement. The Trustee in exercising its rights, powers, duties and authorities hereunder shall act honestly and in good faith with a view to the best interests of the Holders and the terms of this agreement and shall exercise the care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. The Trustee shall not be bound to give any notice or do or take any act, action or proceeding by virtue of the powers conferred on it hereby unless and until it shall be specifically required to do 24 so under the terms hereof; nor shall the Trustee be required to take any notice of, or to do or to take any act, action or proceeding as a result of, any default or breach of any provision hereunder, unless and until notified in writing of such default or breach, which notices shall distinctly specify the default or breach desired to be brought to the attention of the Trustee and in the absence of such notice the Trustee may for all purposes of this agreement conclusively assume that no default or breach has been made in the observance or performance of any of the representations, warranties, covenants, agreements or conditions contained herein. 8.2 No Conflict of Interest. ------------------------ The Trustee represents to the Corporation and ParentCo that at the date of execution and delivery of this agreement there exists no material conflict of interest in the role of the Trustee as a fiduciary hereunder and the role of the Trustee in any other capacity. The Trustee shall, within 90 days after it becomes aware that such a material conflict of interest exists, either eliminate such material conflict of interest or resign in the manner and with the effect specified in Article 11 hereof. If, notwithstanding the foregoing provisions of this Section 8.2, the Trustee has such a material conflict of interest, the validity and enforceability of this agreement shall not be affected in any manner whatsoever by reason only of the existence of such material conflict of interest. If the Trustee contravenes the foregoing provisions of this Section 8.2, any interested party may apply to the superior court of the province in which the Corporation has its registered office for an order that the Trustee be replaced as trustee hereunder. 8.3 Dealings with Transfer Agents, Registrars, Etc. ----------------------------------------------- The Corporation and ParentCo irrevocably authorize the Trustee, from time to time, to: (a) consult, communicate and otherwise deal with the respective registrars and transfer agents, and with any such subsequent registrar or transfer agent, of the ParentCo Common Shares; and (b) requisition, from time to time, (i) from the Corporation or any such registrar or transfer agent of the Exchangeable Shares any information readily available from the records maintained by it and any certificates representing the Exchangeable Shares which the Trustee may reasonably require for the discharge of its duties and responsibilities under this agreement; and (ii) from the transfer agent of ParentCo Common Shares, and any subsequent transfer agent of such shares, to complete the exercise from time to time of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights in the manner specified in Article 7 hereof, the share certificates issuable upon such exercise. 25 The Corporation and ParentCo irrevocably authorize their respective registrars and transfer agents to comply with all such requests. ParentCo covenants that it will supply its transfer agent with duly executed share certificates for the purpose of completing the exercise from time to time of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights, in each case pursuant to Article 7 hereof. 8.4 Books and Records. ------------------ The Trustee shall keep available for inspection by ParentCo and the Corporation, at the Trustee's principal transfer office in Toronto, Ontario, correct and complete books and records of account relating to the Trustee's actions under this agreement, including without limitation all information relating to mailings and instructions to and from Holders and all transactions pursuant to the Voting Rights, the Escrowed Shares, the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights for the term of this agreement. On or before March 31 in every year after the date hereof, so long as the ParentCo Preferred Share or the Escrowed Shares are on deposit with the Trustee, the Trustee shall transmit to ParentCo and the Corporation a brief report, dated as of the preceding December 31, with respect to: (a) property and funds comprising the Trust Estate as of that date; (b) the number of Escrowed Shares held by the trustee and released hereunder, and the number of Escrowed Shares which have been designated as Cautioned Shares; (c) the number of exercises of the Exchange Put Right and the Exchange Right, if any, and the aggregate number of Exchangeable Shares received by the Trustee on behalf of Holders in consideration of the issue and delivery by ParentCo of ParentCo Common Shares in connection with the Exchange Put Right and the Exchange Right, during the calendar year ended on such date; and (d) all other actions taken by the Trustee in the performance of its duties under this agreement which it had not previously reported. 8.5 Income Tax Returns and Reports. ------------------------------- The Corporation shall, to the extent necessary, prepare and file on behalf of the Trust appropriate United States and Canadian income tax returns and any other returns or reports as may be required by applicable law or pursuant to the rules and regulations of any securities exchange or other trading system through which the ParentCo Shares are traded and, in connection therewith, may obtain the advice and assistance of such experts as the Trustee may consider necessary or advisable. If requested by the Trustee, ParentCo shall retain such experts for purposes of providing such advice and assistance. 8.6 Indemnification Prior to Certain Actions by Trustee. ---------------------------------------------------- 26 The Trustee shall exercise any or all of the rights, duties, powers or authorities vested in it by this agreement at the written request, order or direction of any Holder upon such Holder's furnishing to the Trustee reasonable funding, security and indemnity against the costs, expenses and liabilities which may be incurred by the Trustee therein or thereby; provided that no Holder shall be obligated to furnish to the Trustee any such funding, security or indemnity in connection with the exercise by the Trustee of any of its rights, duties, powers and authorities with respect to the ParentCo Preferred Share pursuant to Article 3 hereof, subject to Section 8.15 hereof, and with respect to the Exchange Put Right and the Exchange Right as specifically provided for in Article 7 hereof, subject to Section 8.15 hereof, and with respect to the Automatic Exchange Rights pursuant to Article 7 hereof. None of the provisions contained in this agreement shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the exercise of any of its rights, powers, duties or authorities unless funded, given funds, security and indemnified as aforesaid. 8.7 Actions by Holders. ------------------- No Holder shall have the right to institute any action, suit or proceeding or to exercise any other remedy authorized by this agreement for the purpose of enforcing any of its rights or for the execution of any trust or power hereunder unless the Holder has requested the Trustee to take or institute such action, suit or proceeding and furnished the Trustee with the funding, security and indemnity referred to in Section 8.6 hereof and the Trustee shall have failed to act within a reasonable time thereafter. In such case, but not otherwise, the Holder shall be entitled to take proceedings in any court of competent jurisdiction such as the Trustee might have taken; it being understood and intended that no one or more Holders shall have any right in any manner whatsoever to affect, disturb or prejudice the rights hereby created by any such action, or to enforce any right hereunder or under the Voting Rights, the escrow provisions, the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, except subject to the conditions and in the manner herein provided, and that all powers and trusts hereunder shall be exercised and all proceedings at law shall be instituted, had and maintained by the Trustee, except only as herein provided, and in any event for the equal benefit of all Holders. 8.8 Reliance Upon Declarations. --------------------------- The Trustee shall not be considered to be in contravention of any of its rights, powers, duties and authorities hereunder if, when required, it acts and relies in good faith upon lists, mailing labels, notices, statutory declarations, certificates, opinions, reports or other papers or documents furnished pursuant to the provisions hereof or required by the Trustee to be furnished to it in the exercise of its rights, powers, duties and authorities hereunder, and such lists, mailing labels, notices, statutory declarations, certificates, opinions, reports or other papers or documents comply with the provisions of Section 8.9 hereof, if applicable, and with any other applicable provisions of this agreement. 8.9 Evidence and Authority to Trustee. ---------------------------------- 27 The Corporation and/or ParentCo shall furnish to the Trustee evidence of compliance with the conditions provided for in this agreement relating to any action or step required or permitted to be taken by the Corporation and/or ParentCo or the Trustee under this agreement or as a result of any obligation imposed under this agreement, including, without limitation, in respect of the Voting Rights, the escrow provisions or the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights and the taking of any other action to be taken by the Trustee at the request of or on the application of the Corporation and/or ParentCo forthwith if and when: (a) such evidence is required by any other section of this agreement to be furnished to the Trustee in accordance with the terms of this Section 8.9; or (b) the Trustee, in the exercise of its rights, powers, duties and authorities under this agreement, gives the Corporation and/or ParentCo written notice requiring it to furnish such evidence in relation to any particular action or obligation specified in such notice. Such evidence shall consist of an Officer's Certificate of the Corporation and/or ParentCo or a statutory declaration or a certificate made by persons entitled to sign an Officer's Certificate stating that any such condition has been complied with in accordance with the terms of this agreement. Whenever such evidence relates to a matter other than the Voting Rights, the escrow provisions or the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, and except as otherwise specifically provided herein, such evidence may consist of a report or opinion of any solicitor, auditor, accountant, appraiser, valuer, engineer or other expert or any other person whose qualifications give authority to a statement made by him, provided that if such report or opinion is furnished by a director, officer or employee of the Corporation and/or ParentCo it shall be in the form of an Officer's Certificate or a statutory declaration. Each statutory declaration, certificate, opinion or report furnished to the Trustee as evidence of compliance with a condition provided for in this agreement shall include a statement by the person giving the evidence: (i) declaring that he has read and understands the provisions of this agreement relating to the condition in question; (ii) describing the nature and scope of the examination or investigation upon which he based the statutory declaration, certificate, statement or opinion; and (iii) declaring that he has made such examination or investigation as he believes is necessary to enable him to make the statements or give the opinions contained or expressed therein. 28 8.10 Experts, Advisers and Agents. ----------------------------- The Trustee may: (a) in relation to these presents act and rely, and shall be protected in acting and relying, on the opinion or advice of or information obtained from or prepared by any solicitor, auditor, accountant, appraiser, valuer, engineer or other expert, whether retained by the Trustee or by the Corporation and/or ParentCo or otherwise, and may employ such assistants as may be necessary to the proper determination and discharge of its powers and duties and determination of its rights hereunder and may pay proper and reasonable compensation for all such legal and other advice or assistance as aforesaid; and (b) employ such agents and other assistants as it may reasonably require for the proper determination and discharge of its powers and duties hereunder, and may pay reasonable remuneration for all services performed for it (and shall be entitled to receive reasonable remuneration for all services performed by it) in the discharge of the trusts hereof and compensation for all disbursements, costs and expenses made or incurred by it in the determination and discharge of its duties hereunder and in the management of the Trust. 8.11 Investment of Moneys Held by Trustee. ------------------------------------- Unless otherwise provided in this agreement, any moneys held by or on behalf of the Trustee which under the terms of this agreement may or ought to be invested or which may be on deposit with the Trustee or which may be in the hands of the Trustee, may be invested and reinvested in the name or under the control of the Trustee in securities in which, under the laws of the Province of Ontario, trustees are authorized to invest trust moneys; provided that such securities are stated to mature within two years after their purchase by the Trustee, and the Trustee shall so invest such moneys on the timely written direction of the Corporation. Pending the investment of any moneys as hereinbefore provided, such moneys may be deposited in the name of the Trustee in any chartered bank in Canada or, with the consent of the Corporation, in the deposit department of the Trustee or any other loan or trust company authorized to accept deposits under the laws of Canada or any province thereof at the rate of interest then current on similar deposits. 29 8.12 Trustee Not Required to Give Security. -------------------------------------- The Trustee shall not be required to give any bond or security in respect of the execution of the trusts, rights, duties, powers and authorities of this agreement or otherwise in respect of the premises. 8.13 Trustee Not Bound to Act on Request. ------------------------------------ Except as in this agreement otherwise specifically provided, the Trustee shall not be bound to act in accordance with any direction or request of the Corporation and/or ParentCo or of the directors thereof until a duly authenticated copy of the instrument or resolution containing such direction or request shall have been delivered to the Trustee, and the Trustee shall be empowered to act and rely upon any such copy purporting to be authenticated and believed by the Trustee to be genuine. 8.14 Authority to Carry on Business. ------------------------------- The Trustee represents to the Corporation and ParentCo that at the date of execution and delivery by it of this agreement it is authorized to carry on the business of a trust company in the Province of Ontario but if, notwithstanding the provisions of this Section 8.14, it ceases to be so authorized to carry on business, the validity and enforceability of this agreement and the Voting Rights, the escrow provisions, the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights shall not be affected in any manner whatsoever by reason only of such event; provided, however, the Trustee shall, within 90 days after ceasing to be authorized to carry on the business of a trust company in the Province of Ontario, either become so authorized or resign in the manner and with the effect specified in Article 11 hereof. 8.15 Conflicting Claims. ------------------- If conflicting claims or demands are made or asserted with respect to any interest of any Holder in any Exchangeable Shares, including any disagreement between the heirs, representatives, successors or assigns succeeding to all or any part of the interest of any Holder in any Exchangeable Shares resulting in conflicting claims or demands being made in connection with such interest, then the Trustee shall be entitled, at its sole discretion, to refuse to recognize or to comply with any such claim or demand. In so refusing, the Trustee may elect not to exercise any Voting Rights, Exchange Put Right, Exchange Right or Automatic Exchange Rights subject to such conflicting claims or demands and, in so doing, the Trustee shall not be or become liable to any person on account of such election or its failure or refusal to comply with any such conflicting claims or demands. The Trustee shall be entitled to continue to refrain from acting and to refuse to act until: (a) the rights of all adverse claimants with respect to the Voting Rights, Exchange Put Right, Exchange Right or Automatic change Rights subject to such conflicting claims or demands have been adjudicated by a final judgment of a court of competent jurisdiction; or 30 (b) the differences with respect to the Voting Rights, Exchange Put Right, Exchange Right or Automatic Exchange Rights subject to such conflicting claims or demands have been conclusively settled by a valid written agreement binding on all such adverse claimants, and the Trustee shall have been furnished with an executed copy of such agreement. If the Trustee elects to recognize any claim or comply with any demand made by any such adverse claimant, it may in its discretion require such claimant to furnish such surety bond or other security satisfactory to the Trustee as it shall deem appropriate fully to indemnify it as between all conflicting claims or demands. 8.16 Acceptance of Trust. -------------------- The Trustee hereby accepts the Trust created and provided for by and in this agreement and agrees to perform the same upon the terms and conditions herein set forth and to hold all rights, privileges and benefits conferred hereby and by law in trust for the various persons who shall from time to time be Holders, subject to all the terms and conditions herein set forth. ARTICLE 9 - COMPENSATION ------------------------ ParentCo and the Corporation jointly and severally agree to pay to the Trustee reasonable compensation for all of the services rendered by it under this agreement and will reimburse the Trustee for all reasonable expenses (including but not limited to taxes, compensation paid to experts, agents and advisors and travel expenses) and disbursements, including the cost and expense of any suit or litigation of any character and any proceedings before any governmental agency, reasonably incurred by the Trustee in connection with its rights and duties under this agreement; provided that ParentCo and the Corporation shall have no obligation to reimburse the Trustee for any expenses or disbursements paid, incurred or suffered by the Trustee in any suit or litigation in which the Trustee is determined to have acted in bad faith or with negligence or wilful misconduct. ARTICLE 10 - INDEMNIFICATION AND LIMITATION OF LIABILITY 10.1 Indemnification of the Trustee. ------------------------------- ParentCo and the Corporation jointly and severally agree to indemnify and hold harmless the Trustee, and each of its directors, officers, employees and agents appointed and acting in accordance with this agreement (for whom it is expressly agreed that the Trustee is holding the benefit of this indemnity and rights of enforcement thereof in trust) (collectively, the "Indemnified Parties") against all claims, losses, damages, costs, penalties, fines and reasonable expenses (including reasonable expenses of the Trustee's legal counsel) which, without fraud, negligence, wilful misconduct or bad faith on the part of such Indemnified Party, may be paid, incurred or suffered by the Indemnified Party by reason of or as a result of the Trustee's acceptance or administration of the Trust, its compliance with and completion of its duties set forth in this agreement, or any written or oral instructions delivered to the Trustee by ParentCo or the Corporation pursuant hereto. In no case shall ParentCo or the Corporation be liable under 31 this indemnity for any claim against any of the Indemnified Parties unless ParentCo and the Corporation shall be notified by the Trustee of the written assertion of a claim or of any action commenced against the Indemnified Parties, promptly after any of the Indemnified Parties shall have received any such written assertion of a claim or shall have been served with a summons or other first legal process giving information as to the nature and basis of the claim and such failure prejudices the ability of the ParentCo or the Corporation to respond to any such claim or action. Subject to (i) below, ParentCo and the Corporation shall be entitled to participate at their own expense in the defense and, if ParentCo or the Corporation so elect at any time after receipt of such notice, either of them may assume the defense of any suit brought to enforce any such claim. The Trustee shall have the right to employ separate counsel in any such suit and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Trustee unless: (i) the employment of such counsel has been authorized by ParentCo or the Corporation, such authorization not to be unreasonably withheld; or (ii) the named parties to any such suit include both the Trustee and ParentCo or the Corporation and the Trustee shall have been advised by counsel acceptable to ParentCo or the Corporation that there may be one or more legal defenses available to the Trustee that are different from or in addition to those available to ParentCo or the Corporation and that an actual or potential conflict of interest exists (in which case ParentCo and the Corporation shall not have the right to assume the defense of such suit on behalf of the Trustee, but shall be liable to pay the reasonable fees and expenses of counsel for the Trustee). 10.2 Limitation of Liability. ------------------------ The Trustee shall not be held liable for any loss which may occur by reason of depreciation of the value of any part of the Trust Estate or any loss incurred on any investment of funds pursuant to this agreement, except to the extent that such loss is attributable to the fraud, negligence, wilful misconduct or bad faith on the part of the Trustee. ARTICLE 11 - CHANGE OF TRUSTEE ------------------------------ 11.1 Resignation. ------------ The Trustee, or any trustee hereafter appointed, may at any time resign by giving written notice of such resignation to ParentCo and the Corporation specifying the date on which it desires to resign, provided that such notice shall never be given less than 60 days before such desired resignation date unless ParentCo and the Corporation otherwise agree and provided further that such resignation shall not take effect until the date of the appointment of a successor trustee and the acceptance of such appointment by the successor trustee. Upon receiving such notice of resignation, ParentCo and the Corporation shall promptly appoint a successor trustee by written instrument in duplicate, one copy of which shall be delivered to the resigning trustee and one copy to the successor trustee. Failing acceptance by a successor trustee, a successor trustee may be appointed by an order of the superior court of the province in which the Corporation has its registered office upon application of one or more of the parties hereto at the Corporation's expense. 32 11.2 Removal. -------- The Trustee, or any trustee hereafter appointed, may be removed with or without cause, at any time on 60 days' prior notice by written instrument executed by ParentCo and the Corporation, in duplicate, one copy of which shall be delivered to the trustee so removed and one copy to the successor trustee, provided that, in connection with such removal, provision is made for a replacement trustee similar to that contemplated in Section 11.1. 11.3 Successor Trustee. ------------------ Any successor trustee appointed as provided under this agreement shall execute, acknowledge and deliver to ParentCo and the Corporation and to its predecessor trustee an instrument accepting such appointment. Thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor under this agreement, with like effect as if originally named as trustee in this agreement. However, on the written request of ParentCo and the Corporation or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of the agreement, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon the request of any such successor trustee, ParentCo, the Corporation and such predecessor trustee shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. 11.4 Notice of Successor Trustee. ---------------------------- Upon acceptance of appointment by a successor trustee as provided herein, ParentCo and the Corporation shall cause to be mailed notice of the succession of such trustee hereunder to each Holder specified in a List. If ParentCo or the Corporation shall fail to cause such notice to be mailed within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of ParentCo and the Corporation. ARTICLE 12 - SUCCESSORS TO PARENTCO OR THE CORPORATION ------------------------------------------------------ 12.1 Certain Requirements in Respect of Combination, Etc. ---------------------------------------------------- If either ParentCo or the Corporation shall enter into any transaction (whether by way of reconstruction, reorganization, consolidation, merger, transfer, sale, lease or otherwise) whereby all or substantially all of its undertaking, property and assets would become the property of any other Person or, in the case of a merger, of the continuing corporation resulting therefrom, it shall ensure that: (a) such other Person or continuing corporation (the "Successor"), by operation of law, becomes, without more, bound by the terms and provisions of this agreement or, if not so bound, executes, prior to or contemporaneously with the consummation of such transaction an 33 agreement supplemental hereto and such other instruments (if any) are necessary or advisable to evidence the assumption by the Successor of liability for all moneys payable and property deliverable hereunder, the covenant of such Successor to pay and deliver or cause to be delivered the same and its agreement to observe and perform all the covenants and obligations of ParentCo under this agreement; and (b) such transaction shall be upon such terms which substantially preserve and do not impair in any material respect any of the rights, duties, powers and authorities of the Trustee or of the Holders hereunder. 12.2 Vesting of Powers in Successor. ------------------------------- In the event that Section 12.1 applies, the Trustee, the Successor and the Corporation shall execute and deliver the supplemental agreement provided for in Article 13 hereof, and thereupon the Successor shall possess and from time to time may exercise each and every right and power of ParentCo under this agreement in the name of ParentCo or otherwise and any act or proceeding by any provision of this agreement required to be done or performed by the board of directors of ParentCo or any officers of ParentCo may be done and performed with like force and effect by the directors or officers of such Successor. 12.3 Wholly-owned Subsidiaries. -------------------------- Nothing herein shall be construed as preventing the amalgamation or merger of any wholly-owned subsidiary of ParentCo with or into ParentCo or the winding-up, liquidation or dissolution of any wholly-owned subsidiary of ParentCo provided that all of the assets of such subsidiary are transferred to ParentCo or another wholly-owned subsidiary of ParentCo, and any such transactions are expressly permitted by this Article 12. ARTICLE 13 - AMENDMENTS AND SUPPLEMENTAL AGREEMENTS --------------------------------------------------- 13.1 Amendments, Modifications, Etc. ------------------------------- Subject to Section 13.4, this agreement may not be amended, modified or waived except by an agreement in writing executed by the Corporation, ParentCo and the Trustee and approved by the Holders in accordance with Section 10.1 of the Exchangeable Share Provisions. No amendment to or modification or waiver of any of the provisions of this agreement otherwise permitted hereunder shall be effective unless made in writing and signed by all of the parties hereto. 13.2 Ministerial Amendments. ----------------------- Notwithstanding the provisions of Section 13.1 hereof, the parties to this agreement may in writing, at any time and from time to time, without the approval of the Holders, amend or modify this agreement for the purposes of: 34 (a) adding to the covenants of any or all of the parties hereto for the protection of the Holders hereunder; (b) making such amendments or modifications not inconsistent with this agreement as may be necessary or desirable with respect to matters or questions which, in the opinion of the board of directors of each of ParentCo and the Corporation and in the opinion of the Trustee, relying upon its counsel, having in mind the best interests of the Holders as a whole, it may be expedient to make, provided that such boards of directors and the Trustee, relying on its counsel, shall be of the opinion that such amendments and modifications will not be prejudicial to the interests of the Holders as a whole; (c) making such changes or corrections which, on the advice of counsel to the Corporation, ParentCo and the Trustee, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error; provided that the Trustee and, relying on its counsel, and the board of directors of each of the Corporation and ParentCo shall be of the opinion that such changes or corrections will not be prejudicial to the interests of the Holders as a whole; or (d) making such changes as may be necessary or appropriate to implement or give effect to any assignment or assumption made pursuant to Section 15.8 hereof. 13.3 Meeting to Consider Amendments. ------------------------------- The Corporation, at the request of ParentCo, shall call a meeting or meetings of the Holders for the purpose of considering any proposed amendment or modification requiring approval pursuant hereto. Any such meeting or meetings shall be called and held in accordance with the by-laws of the Corporation, the Exchangeable Share Provisions and all applicable laws. 13.4 Changes in Capital of ParentCo and the Corporation. --------------------------------------------------- At all times after the occurrence of any event effected pursuant to Section 2.6 or Section 2.7 of the Support Agreement, as a result of which either ParentCo Common Shares, the ParentCo Preferred Share or the Exchangeable Shares or any of them are in any way changed, this agreement shall forthwith be amended and modified as necessary in order that it shall apply with full force and effect, mutatis mutandis, to all new securities into which ParentCo Common Shares, the ParentCo Preferred Share or the Exchangeable Shares or any of them are so changed, and the parties hereto shall execute and deliver a supplemental agreement giving effect to and evidencing such necessary amendments and modifications. 13.5 Execution of Supplemental Agreements. ------------------------------------- 35 From time to time the Corporation (when authorized by a resolution of its Board of Directors), ParentCo (when authorized by a resolution of its board of directors) and the Trustee may, subject to the provisions of these presents, and they shall, when so directed by these presents, execute and deliver by their proper officers, agreements or other instruments supplemental hereto, which thereafter shall form part hereof, for any one or more of the following purposes: (a) evidencing the succession of any Successors to ParentCo and the covenants of and obligations assumed by each such Successor in accordance with the provisions of Article 12 and the successor of any successor trustee in accordance with the provisions of Article 11; (b) making any additions to, deletions from or alterations of the provisions of this agreement or the Voting Rights, the escrow provisions, the Exchange Put Right, the Exchange Right or the Automatic Exchange Rights which, in the opinion of the Trustee and its counsel, will not be prejudicial to the interests of the Holders as a whole or are in the opinion of counsel to the Trustee necessary or advisable in order to incorporate, reflect or comply with any legislation the provisions of which apply to ParentCo, the Corporation, the Trustee or this agreement; and (c) for any other purposes not inconsistent with the provisions of this agreement, including without limitation to make or evidence any amendment or modification to this agreement as contemplated hereby, provided that, in the opinion of the Trustee and its counsel, the rights of the Trustee and the Holders as a whole will not be prejudiced thereby. ARTICLE 14 - TERMINATION ------------------------ 14.1 Term. ----- The Trust created by this agreement shall continue until the earliest to occur of the following events: (a) no outstanding Exchangeable Shares are held by a Holder and no Escrowed Shares or Cautioned Shares are held by the Trustee; (b) each of the Corporation and ParentCo elects in writing to terminate the Trust and such termination is approved by the Holders of the Exchangeable Shares in accordance with Section 10.2 of the Exchangeable Share Provisions; and (c) 21 years after the death of the last survivor of the descendants of Her Majesty Queen Elizabeth II of the United Kingdom of Great Britain and Northern Ireland living on the date of the creation of the Trust. 36 14.2 Survival of Agreement. ---------------------- This agreement shall survive any termination of the Trust and shall continue until there are no Exchangeable Shares outstanding held by a Holder and no Escrowed Shares are held by the Trustee; provided, however, that the provisions of Articles 10 and 11 hereof shall survive any such termination of this agreement. ARTICLE 15 - GENERAL -------------------- 15.1 Severability. ------------- If any provision of this agreement is held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder of this agreement shall not in any way be affected or impaired thereby, and the agreement shall be carried out as nearly as possible in accordance with its original terms and conditions. 15.2 Enurement. ---------- This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns and to the benefit of the Holders. 15.3 Notices to Parties. ------------------- All notices and other communications between the parties hereunder shall be in writing and shall be deemed to have been given if delivered personally or by confirmed telecopy to the parties at the following addresses (or at such other address for such party as shall be specified in like notice): (a) if to ParentCo to: Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660 - 3095 Attention: Dennis E. O'Reilly, Esq. Fax: (949) 483-3206 Tel: (949) 483-3018 with copies to: McCarthy Tetrault Suite 4700 Toronto Dominion Bank Tower Toronto, Ontario M5K 1E6 37 Attention: Robert E. Forbes Fax: (416) 601-8250 Tel: (416) 601-7542 (b) if to the Corporation to: Philsar Semiconductor Inc. c/o Conexant Systems, Inc. 4311 Jamboree Road Newport Beach, California 92660-3095 Attention: Dennis E. O'Reilly, Esq. Fax: (949) 483-3206 Tel: (949) 483-3018 with copies to: LaBarge Weinstein Xerox Tower 333 Preston Street, 11th Floor Ottawa, ON K1S 5N4 Attention: Lawrence Weinstein Fax: (613) 231-9000 Tel: (613) 231-3000 (c) if to the Trustee to: CIBC Mellon Trust Company 320 Bay Street P.O. Box 1 Toronto, Ontario M5H 4A6 Attention: Vice President, Client Services Facsimile No. (416) 643-5570 Any notice or other communication given personally shall be deemed to have been given and received upon delivery thereof, and if given by telecopy shall be deemed to have been given and received on the date of receipt thereof unless such day is not a Business Day in which case it shall be deemed to have been given and received upon the immediately following Business Day. 15.4 Notice to Holders. ------------------ 38 Any and all notices to be given and any documents to be sent to any Holders may be given or sent to the address of such Holder shown on the register of Holders of Exchangeable Shares in any manner permitted by the Exchangeable Share Provisions and shall be deemed to be received (if given or sent in such manner) at the time specified in such Exchangeable Share Provisions, the provisions of which Exchangeable Share Provisions shall apply mutatis mutandis to notices or documents as aforesaid sent to such Holders. 15.5 Risk of Payments by Post. ------------------------- Whenever payments are to be made or documents are to be sent to any Holder by the Trustee, by the Corporation or by ParentCo or by such Holder to the Trustee or to ParentCo or the Corporation, the making of such payment or sending of such document sent through the post shall be at the risk of the Corporation or ParentCo, in the case of payments made or documents sent by the Trustee or the Corporation or ParentCo, and the Holder, in the case of payments made or documents sent by the Holder. 15.6 Counterparts. ------------- This agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15.7 Governing Law. -------------- This agreement shall be construed and enforced in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. 15.8 Permitted Assignment -------------------- ParentCo may assign any or all of its rights and obligations under this agreement to any Subsidiary of ParentCo, organized under the laws of Canada or any province thereof, provided that each of ParentCo and such Subsidiary shall thereafter be jointly and severally liable for the performance by such Subsidiary of the obligations of ParentCo pursuant to this Agreement. Any and all of the obligations of ParentCo may be performed and satisfied by any such Subsidiary of ParentCo, except that nothing in this Section 15.8 shall permit any change to the rights, privileges, restrictions and conditions attaching to the ParentCo Preferred Share, the ParentCo Common Shares or the Exchangeable Shares. 39 IN WITNESS WHEREOF, the parties hereby have caused this agreement to be duly executed as of the date first above written. CONEXANT SYSTEMS INC. By: /s/ Dennis E. O'Reilly ------------------------------- Name: Dennis E. O'Reilly Title: Senior Vice President General Counsel and Secretary PHILSAR SEMICONDUCTOR INC. By: /s/ Charles Norris -------------------------------- Name: Charles Norris Title: VP Finance / Administration and CFO CIBC MELLON TRUST COMPANY By: /s/ Warren Jansen ----------------------------- Name: Warren Jansen Title: Authorized Officer By: /s/ Helen Kim ----------------------------- Name: Helen Kim Title: Authorized Officer -----END PRIVACY-ENHANCED MESSAGE-----