<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ISE LABS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
CALIFORNIA 3674 77-047-0213
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OF IDENTIFICATION NO.)
INCORPORATION)
2095 RINGWOOD AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 954-8378
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------
SAEED A. MALIK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ISE LABS, INC.
2095 RINGWOOD AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 954-8378
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------
COPIES TO:
WARREN T. LAZAROW, ESQ. JEFFREY D. SAPER, ESQ.
H. RICHARD HUKARI, ESQ. JEFFREY A. HERBST, ESQ.
MICHAEL C. DORAN, ESQ. CAINE T. MOSS, ESQ.
ALAN K. TSE, ESQ. STEPHANIE L. RUBY, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(650) 424-0160 (650) 493-9300
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................. 6,900,000 $14.00 $96,600,000 $28,497
- ------------------------------------------------------------------------------
</TABLE>
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(1) Includes 900,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 8, 1998
PROSPECTUS
, 1998
6,000,000 SHARES
ISE LABS, INC.
COMMON STOCK
Of the 6,000,000 shares of Common Stock offered hereby, 5,000,000 are being
offered and sold by ISE Labs, Inc. (which, together with its subsidiaries,
shall be referred to herein as "ISE" or the "Company") and 1,000,000 are being
offered by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for information relating to the method of
determining the initial public offering price. It is currently anticipated that
the initial public offering price per share will be between $12.00 and $14.00.
Application has been made to list the shares on the Nasdaq National Market
under the symbol "ISET."
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1)(2) COMPANY(2)(3) SHAREHOLDERS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total(4).................... $ $ $ $
- -----------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Does not include additional compensation to be received by Donaldson,
Lufkin & Jenrette Securities Corporation in the form of a nonaccountable
expense allowance. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $1,000,000.
(4) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 900,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters, subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made in New York, New
York, on or about , 1998.
DONALDSON, LUFKIN & JENRETTE BT ALEX. BROWN
SECURITIES CORPORATION
<PAGE>
[INSIDE FRONT COVER GRAPHICS: SEE APPENDIX]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and reflects a
series of amendments to the Company's Articles of Incorporation to, among other
things, increase the number of authorized shares of Common Stock to 50,000,000
and create a class of undesignated Preferred Stock of 3,000,000 shares.
THE COMPANY
ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent
integrated circuit ("IC") testing and evaluation companies in the world. Unlike
many of its competitors, the Company offers a broad range of IC testing,
evaluation and other services throughout the entire semiconductor manufacturing
process. These services include software development, electrical verification,
reliability analysis, failure analysis, wafer sort, production monitoring and
quickturn and prototype packaging. A significant portion of the Company's
revenues from testing services is derived from testing complex, high-
performance logic and mixed-signal products, which are typically the higher-
margin, faster growing segments of the testing services market.
The production of ICs is an extremely complex process that requires
substantial investment in specialized equipment and facilities and
sophisticated engineering and manufacturing expertise. As a result, many
semiconductor companies have begun to rely on outsourcing various steps of the
production process. Virtually every step of the semiconductor manufacturing
process can now be effectively outsourced. By outsourcing their IC testing
requirements, semiconductor companies can (i) focus on core business
activities; (ii) access leading edge testing technologies; (iii) react more
quickly to rapidly changing market conditions and reduce time to market for new
products; and (iv) reduce capital expenditures, fixed costs and operating
expenses.
While a substantial majority of IC testing is still performed in-house by
semiconductor companies, the Company believes that the overall growth of the
market for ICs and the trend towards outsourcing services by both vertically
integrated and fabless semiconductor companies are driving increasing demand
for independent test services. Currently, wafer foundry services and IC
packaging are the largest segments of the market for outsourced semiconductor
manufacturing services. A leading industry research organization estimates that
the number of ICs packaged by independent contractors will grow from 7.7
billion units in 1996 to 18.8 billion units in 2001, or nearly 20% per year.
The Company believes that the market for independent test services has grown
and will continue to grow at a faster rate than the market for independent
semiconductor packaging services.
The Company's strategy is to become the leading independent provider of IC
testing and evaluation services in the world. The principal components of the
Company's strategy are to (i) maintain its technological leadership; (ii)
provide the broadest range of services; (iii) leverage strong relationships
with its diversified customer base; (iv) expand capacity worldwide; and (v)
focus on testing complex, high-performance logic ICs.
In contrast to all of its major independent competitors, the Company's
headquarters is located in the Silicon Valley. In addition to its significant
United States presence, the Company has established substantial test capacity
in Hong Kong and has more recently commenced testing operations in Singapore.
The Company's proximity to a large number of the world's leading semiconductor
companies, together with its broad service offerings, enables the Company to
establish close working relationships with its customers' design engineers
early in the IC development process. By establishing such early stage
relationships with its customers, the Company believes it has a significant
competitive advantage in competing for high volume future testing business. In
order to address the increasing demand for independent testing services, the
Company has made significant investments to increase its testing capacity. As
of October 31, 1995, 1996 and 1997 and January 31, 1998, the number of testers
operated by the Company was 38, 55, 91 and 96, respectively.
3
<PAGE>
To expand its capacity and broaden its range of services, in September 1997,
the Company purchased for approximately $31.2 million, including acquisition
costs, certain assets of Alphatec USA, Inc. ("Alphatec") (the "Alphatec
Acquisition"). These assets included 100% of the capital stock of Digital
Testing Services, Inc. ("DTS") and selected assets of Alphatec relating to its
Manteca, California operations (the "Manteca Operation"). DTS provides a broad
range of IC testing and validation services throughout the semiconductor
production process, with a primary focus on the initial development stage. The
Manteca Operation provides semiconductor packaging services, including
quickturn and prototype packaging.
During the last twelve months, the Company has provided services to more than
250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National
Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and Xilinx.
ISE Labs, Inc. was incorporated in the State of California in November 1983.
The Company currently has locations in San Jose, Santa Clara and Manteca,
California and in Hong Kong and Singapore. The Company's principal executive
offices are located at 2095 Ringwood Avenue, San Jose, California 95131, and
its telephone number at this location is (408) 954-TEST.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 5,000,000 shares
Common Stock offered by the Selling Shareholders... 1,000,000 shares
Common Stock to be outstanding after the offering.. 22,500,000 shares(1)
Use of proceeds.................................... Repayment of bank
indebtedness, capital
expenditures and for
general corporate
purposes, including
working capital. See "Use
of Proceeds."
Nasdaq National Market symbol...................... ISET
</TABLE>
- --------------------
(1) Based on the number of shares of Common Stock outstanding at April 8, 1998.
Excludes as of April 8, 1998: (i) 2,674,800 shares of Common Stock issuable
upon exercise of options currently outstanding under the Company's 1998
Stock Incentive Plan (the "1998 Plan") at a weighted average exercise price
of $8.01 per share; (ii) 1,825,200 shares of Common Stock issuable upon
exercise of options reserved for future issuance under the 1998 Plan; and
(iii) 600,000 shares of Common Stock reserved for future issuance under the
Company's 1998 Employee Stock Purchase Plan. See "Management--1998 Stock
Incentive Plan" and "--1998 Employee Stock Purchase Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
--------------------------------------- --------------
1993 1994 1995 1996 1997(1) 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $13,440 $15,548 $22,321 $25,354 $35,532 $6,198 $20,291
Gross profit.......... 6,883 8,788 13,368 13,260 17,582 2,768 10,808
Income from
operations........... 3,441 4,335 8,477 8,217 9,256 1,616 5,146
Income before income
taxes................ 3,340 4,359 8,597 8,191 9,319 1,551 4,244
Net income............ 1,986 2,468 4,930 4,848 5,740 955 2,631
Basic and diluted net
income per share(2).. $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
Basic shares
outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted shares
outstanding.......... 17,500 17,500 17,500 17,500 17,500 17,500 17,768
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
-------------------------
ACTUAL AS ADJUSTED (3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 6,077 $ 41,095
Working capital (deficiency)....................... (12,282) 35,468
Total assets....................................... 81,749 116,767
Short-term debt, including current portion of long-
term debt......................................... 15,015 2,283
Long-term debt, less current portion............... 18,483 7,533
Retained earnings.................................. 25,589 25,589
Total shareholders' equity......................... 26,153 84,853
</TABLE>
- --------------------
(1) Statement of operations data for fiscal 1997 include the post acquisition
results of operations of DTS and the Manteca Operation, which were acquired
in September 1997 and accounted for under the purchase method of
accounting. See Note 2 of Notes to Consolidated Financial Statements of the
Company.
(2) See Note 1 of Notes to Consolidated Financial Statements of the Company for
an explanation of the method used to determine the number of shares used in
computing net income per share.
(3) Adjusted to give effect to the sale of 5,000,000 shares of Common Stock by
the Company, at an assumed initial public offering price of $13.00 per
share, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
The discussion in this Prospectus may contain forward-looking statements.
Future events anticipated in any such forward-looking statements contained in
this Prospectus are uncertain. Actual events, and the Company's actual
results, may differ materially from those that may be predicted, assumed or
discussed in any such forward-looking statements. Factors that may cause or
contribute to such differences include those discussed below, as well as in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus. The cautionary
statements made in this Prospectus should be read as being applicable to any
related forward-looking statements, wherever they appear in this Prospectus.
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
A variety of factors have materially affected, and are expected to continue
to materially affect, the Company's operating results. These factors include
the cyclical nature of the semiconductor, personal computer ("PC") and related
industries and the various markets that serve consumers of products
incorporating semiconductors; absence of purchase contracts and the resulting
lack of backlog from the Company's customers; price competition; timing and
volume of orders received by the Company; reschedulings, delays, deferrals and
cancellations of orders; evolutions in the life cycles of customers' products;
erosion of semiconductor unit prices; changes in capacity utilization;
allocation of testing capacity between the Company's facilities and those of
its customers; availability, price and changes in advanced testing equipment;
effectiveness in managing production processes; fluctuations in manufacturing
yields; changes in product and service mix or devices tested or assembled;
product obsolescence; availability of financing for expansion; the ability to
develop and implement new technologies on a timely basis; the loss of key
personnel or the shortage of available skilled workers; international
political or economic events; and currency and interest rate fluctuations.
Furthermore, the Company has historically experienced, and may continue to
experience, seasonality in its revenues and operating results. This
seasonality, combined with other factors including those described above, has
resulted and is likely to continue to result in significant variability in
quarterly and annual operating results. The Company's revenues increased
significantly in the quarters ended October 31, 1997 and January 31, 1998, due
primarily to revenues generated by DTS and the Manteca Operation, which were
acquired in September 1997. The Company does not believe that recent growth
rates are indicative of future operating results and there can be no assurance
that profitability or significant revenue growth on a quarterly or annual
basis will occur in the future. The Company anticipates that due to prevailing
conditions in the semiconductor market, its quarterly revenues in the near
future will remain relatively flat and may possibly decline from levels
experienced in recent periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In connection with its efforts to increase testing capacity, the Company
intends to continue to make substantial capital investments in equipment for
testing advanced ICs, invest in additional manufacturing facilities and
recruit and train additional personnel. Such expenditures are typically made
in advance of anticipated increases in sales. Therefore, the Company
anticipates that its gross margin and other operating results will be
adversely affected from time-to-time due to poor or non-utilization of
capacity associated with such additions of capital equipment, facilities or
personnel. There can be no assurance that any anticipated increases in sales
will result from such expenditures. Any failure of the Company to increase
sales following such expenditures would have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, a large portion of the Company's operating expenses, including
depreciation, rent and salaries, are significant, fixed and difficult to
reduce or modify. If the Company's revenues do not meet its expectations, the
material adverse effect of any revenue shortfall will be magnified by the
significant and fixed nature of these operating expenses.
The average selling prices for the Company's services, calculated on a
hourly basis, historically have not fluctuated to a significant degree. There
can be no assurance that said prices will not fluctuate in the future.
However, the average selling price per device tested has varied and is
expected to continue to vary due to a number of factors, including the level
of device complexity and the time required to test each device. The Company
expects that average selling prices for its services may decline in the
future, principally due to intense
6
<PAGE>
competitive conditions and other factors. A decline in average selling prices
of the Company's services, if not offset by reductions in the cost of
providing those services or by a shift to testing higher margin products,
would decrease the Company's gross margin and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company believes there is a trend toward customers requesting turnkey
testing and packaging services. In February 1998, the Company entered into an
arrangement with one of its customers to provide such turnkey services. In
providing such turnkey services, the Company intends to use the services of
independent assembly contractors to perform the assembly functions. The
Company currently anticipates that, for the foreseeable future, the
incremental costs incurred by it in utilizing the services of such independent
assembly contractors will substantially offset the incremental revenues
derived by it for providing assembly services under these turnkey
arrangements. Consequently, the Company believes, while these arrangements may
favorably impact its revenues, they will have a negative impact on its
margins.
Based on the foregoing or other factors, it is possible that in some future
periods the Company's reported or anticipated operating results will fail to
meet or exceed the expectations of analysts or investors. In such event, the
price of the Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIGNIFICANT CUSTOMER CONCENTRATION; ABSENCE OF CUSTOMER CONTRACTS
The Company has historically derived, and expects to continue to derive, a
significant percentage of its revenues from a limited but often different
group of customers. In fiscal 1995, 1996 and 1997 and the first quarter of
fiscal 1998, 58.4%, 60.4% 54.2% and 45.2% of the Company's revenues,
respectively, were derived from sales to the Company's top five customers,
with 29.5%, 21.4%, 30.2% and 19.0% of the Company's revenues, respectively,
derived from sales to the Company's largest customer in each respective
period. The Company's future financial results are dependent in large part
upon its ability to maintain relationships with such customers and attract new
customers. Any failure to maintain its relationships with existing customers
or to attract new customers would have a material adverse effect on the
Company's business, financial condition and results of operations.
Until recently, the Company's Manteca Operation had been almost entirely
dependent on two customers. However, in January 1998, one of these customers
notified the Company that by the end of the second quarter of fiscal 1998, it
will no longer be a customer of the Company. Accordingly, the Company's
Manteca Operation (which accounted for approximately 10% of the Company's
revenues in the first quarter of fiscal 1998) is dependent upon one customer
for substantially all of its revenues. In addition, the Company's Hong Kong
subsidiary is dependent on Hana Technologies Limited, formerly Swire
Technologies ("Hana Technologies"), the Company's largest customer, for
substantially all of its revenues. Furthermore, a significant portion of the
business that the Company derives from Hana Technologies relates to testing
services for LSI Logic, which has historically been a significant customer of
the Company's domestic test operations. There can be no assurance that any one
or more of the Company's significant customers, including the major customers
of the Company's Manteca Operation or Hong Kong subsidiary, will not reduce,
cancel or delay orders or seek other suppliers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
None of the Company's customers, including its largest customer, Hana
Technologies, is presently obligated pursuant to any contractual commitment or
otherwise to purchase any amount of the Company's test or packaging services
or to provide the Company with binding forecasts for any period. As a result,
the Company has no significant backlog. The lack of backlog makes it difficult
for the Company to forecast its revenues in any future period. The Company
expects that in the future, revenues in any quarter will continue to be
substantially dependent on sales made within that quarter. Moreover, customer
orders can be cancelled and volume levels can be changed or delayed with no
penalties. Furthermore, all of the Company's customers operate in the cyclical
semiconductor industry and have varied and may continue to vary order levels
significantly from period to period. Accordingly, there can be no assurance
that any of the Company's customers will continue to place orders with the
Company in the future at the same levels as in prior periods.
7
<PAGE>
DEPENDENCE ON THE HIGHLY CYCLICAL SEMICONDUCTOR AND PERSONAL COMPUTER
INDUSTRIES
The Company's business depends substantially upon revenue generated from
semiconductor companies, which in turn depends upon market conditions in the
semiconductor, PC and related industries. These industries are generally
characterized by rapid technological change, rapid and significant erosion of
selling prices, high cyclicality, intense competition, significant shifts in
product standards and evolving industry demand. From time-to-time, these
industries have also experienced significant production overcapacity. The
effect of these conditions has resulted in, and may result in, significantly
reduced demand for the Company's services. For example, a general slowdown in
the semiconductor industry in late 1996 and early 1997 caused customers to
reduce their orders with the Company. There can be no assurance that there
will be no further downturns or slowdowns in any of the markets in which the
Company's customers compete. More recently, the Asian financial markets have
experienced significant turmoil. There can be no assurance that turmoil in
financial markets will not negatively impact the growth of the semiconductor
industry and the demand for the Company's services. Any significant or
prolonged reduction in orders resulting from a downturn or slowdown in the
semiconductor, PC or related industries would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Industry Background" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EXPANSION OF TESTING CAPACITY; RESULTS OF OPERATIONS AFFECTED BY CAPACITY
UTILIZATION RATES
The Company believes that its competitive position depends substantially on
its ability to expand its testing capacity in the United States and
internationally. Accordingly, the Company is continuing to make significant
investments to expand its capacity, particularly through the acquisition of
capital equipment and additional facilities, and the training of new
personnel. In order to more fully utilize such capacity, the Company intends
to enter into turnkey relationships with wafer foundries and complementary
semiconductor services subcontractors in Asia, similar to its existing
relationship with Hana Technologies. There can be no assurance that the
Company will be able to successfully enter into or maintain such turnkey
relationships, adequately utilize its expanded capacity or continue to expand
its testing capacity in a timely manner or at all. In addition, there can be
no assurance that the cost of any capacity expansions will not exceed
management's current estimates. In addition, the Company expects to continue
to incur substantial additional depreciation and other expenses in connection
with the acquisition of new equipment and facilities and, consequently, to
increase its fixed costs. Any inability of the Company to generate the
additional orders necessary to adequately utilize its expanded capacity would
have a material adverse effect on the Company's business, financial condition
and results of operations.
As a result of the capital intensive nature of the Company's business, the
Company's operations are characterized by high fixed costs. Consequently,
decreases in capacity utilization rates and declines in average selling prices
of the Company's services can have a material adverse effect on the Company's
gross margin. Therefore, the Company's ability to maintain or increase its
gross margin will continue to be dependent, in large part, upon its ability to
maintain high capacity utilization rates and to offset decreases in average
selling prices by improving production efficiency, or by a shift to testing
higher margin products. Any inability of the Company to maintain or increase
capacity utilization rates or to offset decreases in average selling prices by
improving production efficiency or by a shift to testing higher margin
products, which could have a material adverse affect on the Company's
business, financial condition and results of operations.
Capacity utilization rates may be affected by a number of factors and
circumstances, including overall industry conditions, operating efficiencies,
the level of customer orders, mechanical failure, disruption of operations due
to expansion of operations or relocation of equipment, fire or other natural
disasters, employee strikes or work stoppages or other circumstances. For
example, in late 1996 and early 1997, the Company's capacity utilization rates
were negatively affected by a downturn in the semiconductor industry. There
can be no assurance that the Company's capacity utilization rates will not be
materially adversely affected by future declines in the semiconductor, PC or
related industries or for any other reason. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business--
Facilities" and "--Services."
8
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RISKS OF INTERNATIONAL OPERATIONS
In fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998, the
Company derived 1.2%, 21.4%, 30.2% and 19.0% of its revenues from its
international operations. Current international operations include the
Company's IC testing facility in Hong Kong and its Singapore operations, which
commenced operations in March 1998. The Company's current expansion plans
include increasing testing capacity in its Hong Kong and Singapore operations,
and opening additional facilities or joint ventures internationally. There can
be no assurance that such expansion plans will materialize or that the
Company's anticipated revenues from such expansion will materialize or cover
the Company's increased costs relating to such expansion.
The Company's business, financial condition and results of operations may be
affected by economic and political conditions in each of the countries in
which it operates or intends to operate and certain other risks of doing
business abroad, including import duties, changes to import and export
regulations (including quotas), restrictions on the transfer of funds,
employee turnover, labor or civil unrest, potential risk of foreign currency
fluctuations, long payment cycles, greater difficulty in collecting accounts
receivable, and the burdens and cost of compliance with a variety of foreign
laws. Moreover, changes in policies by the United States or foreign
governments could result in increased duties, higher taxation, currency
conversion limitations, hostility toward United States-owned operations,
limitations on imports or exports, or the expropriation of private
enterprises, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
In particular, the Company's Hong Kong operations and assets are subject to
significant political, economic, legal and other uncertainties in China. Under
its current leadership, the Chinese government has been pursuing economic
reform policies, including the encouragement of foreign trade and investment
and greater economic decentralization. The Company cannot provide any
assurance that the Chinese government will continue to pursue such policies,
that such policies will be successful if pursued, or that such policies will
not be significantly altered from time-to-time. Moreover, despite progress in
developing its legal system, China does not have a comprehensive and highly
developed system of laws, particularly with respect to foreign investment
activities and foreign trade. Enforcement of existing and future laws and
contracts is uncertain, and implementation and interpretation thereof may be
inconsistent. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local regulations by
national laws may adversely affect the Company's foreign operations in Hong
Kong. This in turn could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, in
recent months, capital markets in Hong Kong and other parts of Asia have been
highly volatile, resulting in significant fluctuations in Asian currencies and
other economic instabilities. These instabilities may continue or worsen,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, decreases in the
value of Asian currencies relative to the U.S. dollar could make the Company's
services more expensive in relation to its competitors, placing the Company at
a disadvantage with respect to such competitors.
HIGHLY COMPETITIVE INDUSTRY
The Company operates in a highly competitive industry. The Company's
competitors include large independent IC services providers, small independent
IC testing and packaging companies offering niche services, and vertically
integrated semiconductor manufacturers which have in-house testing and
packaging capabilities. Large independent IC services providers with which the
Company competes include Anam Industrial Co., Ltd., ASAT Limited, a subsidiary
of QPL Holdings, ASE Test Limited, a subsidiary of Advanced Semiconductor
Engineering, Inc., Siliconware Precision Industries Co., Ltd., ST Assembly
Test Services Pte Ltd and Taiwan Semiconductor Manufacturing Company Ltd.,
many of which have significantly larger financial, marketing, distribution and
other resources than the Company. Many of these companies have also
established relationships with current or potential customers of the Company
and have developed strategic relationships with third party providers of
complementary semiconductor services to enlarge their businesses. The Company
may be at a competitive disadvantage with such competitors that have fostered
such relationships if the Company does not continue to develop such strategic
relationships in the future. The small independent IC testing and
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<PAGE>
packaging companies with which the Company competes generally offer a limited
range of services and typically compete on the basis of price. Vertically
integrated semiconductor manufacturers that are customers of the Company
continuously evaluate the Company's services against developing or using their
own in-house capabilities, and most of these customers also obtain testing
services from other sources. Vertically integrated customers may have more
advanced testing technologies and typically have greater financial, marketing,
distribution and other resources than the Company.
The Company believes that its primary competitors in the test portion of its
business are located in Asia, particularly in Korea, Taiwan, Malaysia,
Singapore and Japan. Certain of such competitors may locate testing facilities
in North America in the future. In addition, several companies have announced
plans to commence independent testing operations in Asia, and several
independent testing companies in Asia which currently offer only memory
testing services could add logic testing and wafer sort. These operations
would compete directly with the Company. Although in recent years
semiconductor companies have increasingly outsourced portions of the IC
production process, including testing, to independent companies to reduce
costs and shorten production cycles, there can be no assurance that this
outsourcing trend will continue. From time-to-time, the Company has lost
business from customers who have chosen to perform their testing operations
in-house. See "Business--Competition." A reversal of, or a slowdown in, this
outsourcing trend would have a material adverse effect on the Company's
business, financial condition and results of operations.
HISTORY OF SIGNIFICANT LOSSES AT MANTECA OPERATIONS; NEW MANAGEMENT IN MANTECA
OPERATIONS
For a number of years prior to being acquired by the Company, the Manteca
Operation had generated significant losses from operations, had
disproportionately high operating expenses, had experienced delays in paying
creditors and suppliers and had difficulties satisfying customer demand. In
response to these conditions, prior to the Company's acquisition of the
Manteca Operation, Alphatec reduced its workforce at the Manteca facility by
approximately 75% and significantly reduced operating expenses to attempt to
align more closely with revenue levels. The Company expects to invest the
necessary resources in the Manteca Operation in order to offer its IC testing
customers a wider range of services, and is currently in the process of
strengthening relationships with key suppliers and customers. In addition, the
Company has successfully renewed the ISO 9002 certification for the Manteca
Operation, which had lapsed under Alphatec's ownership. If the revenues
generated by the Manteca Operation are not maintained at a level necessary to
offset operating expenses, if relationships with creditors, suppliers and
customers do not improve or if the ISO 9002 certification is not obtained, the
Company's overall business, financial condition and results of operations
could be materially adversely affected.
Prior to the acquisition of the Manteca Operation by the Company, the
Company and its personnel had no experience in providing semiconductor
packaging services. Moreover, in February 1998, the Company transferred one of
its founders to oversee the Manteca Operation. This individual has no
experience in operating a provider of semiconductor packaging services. Any
prolonged inability to attract and retain qualified personnel to manage the
Manteca Operation could cause the Company to divert significant management
resources from its testing business, which has historically represented
substantially all of the Company's revenue. Any such diversion could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS; MANAGEMENT OF RECENT
GROWTH
The Company has experienced and is continuing to experience growth in the
number of its employees, the scope of its operations and the complexity of its
business and operations. This growth, which has included the acquisitions of
DTS and the Manteca Operation in September 1997 and the expansion of the
Company's operations in Hong Kong and Singapore, is expected to continue to
strain the Company's managerial, financial, manufacturing and other resources.
The Company's ability to manage any future growth effectively will require it
to attract, train, motivate and manage new employees successfully, to
integrate new employees into its overall operations and to continue to
implement and improve its financial and operational systems. In this regard,
the Company hired its first full time Chief Financial Officer in late 1997.
Neither the Company's Chief Financial
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<PAGE>
Officer, nor any of the employees in its finance department, has worked in a
similar capacity for a public company. The Company may experience certain
inefficiencies as it integrates new operations and manages geographically
dispersed operations. In addition, certain customers have required and may
continue to require rapid increases in services from the Company, which have
placed and may continue to place a significant burden on the Company's
resources. The Company will continue to be required to manage its assets and
operations efficiently. There can be no assurance that the Company will be
able to manage its expansion effectively. Any failure to increase and improve
its operational, financial and management systems could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Employees."
FUTURE ACQUISITIONS
The Company's business strategy includes the expansion of its business
capabilities, including potentially through acquisitions, joint ventures and
other corporate alliances. Acquisitions involve numerous risks, including
difficulties in assimilating the operations and financial condition, products,
personnel and cultures of the acquired companies; difficulties in managing
geographically disparate units effectively; diverting management attention
from other day-to-day business concerns; difficulties entering markets or
business in which the Company has limited or no direct experience; and the
potential loss of key employees of the acquired companies. In addition,
acquisitions may result in dilutive issuances of equity securities; the
incurrence of additional debt; a reduction of existing cash balances;
amortization expenses related to goodwill and other intangible assets; and
other charges to operations that may have a material adverse effect on the
Company's business, results of operations and financial condition. For
example, the Alphatec Acquisition resulted in the incurrence of significant
debt and amortization expenses related to goodwill and other intangible
assets, and other charges to operations. Moreover, there can be no assurance
that any equity or debt financings proposed in connection with any acquisition
would be available to the Company on acceptable terms, or at all. Although the
Company intends to carefully analyze any acquisition opportunity before
committing its resources, there can be no assurance that any acquisition that
is completed will result in long-term benefits to the Company or that the
Company will be able to manage the resulting businesses effectively.
LIMITED INDEMNIFICATION PROTECTION RELATED TO THE ALPHATEC ACQUISITION
In connection with the Alphatec Acquisition, Alphatec contractually agreed
to retain certain potential liabilities relating to the Manteca Operation and
DTS and to indemnify the Company for damages that may be incurred by the
Company with respect to such potential liabilities, including, without
limitation, liabilities relating to environmental matters, litigation, trade
payables, and tax and employment matters. If the Company were unable to
enforce such indemnification obligations against Alphatec, or if Alphatec did
not have sufficient assets to pay for Alphatec's obligations, third parties
could assert claims for retained or other liabilities against the Company. In
addition, it is possible that creditors of Alphatec may pursue the Company for
the liabilities of Alphatec on a "successor liability" theory or otherwise.
The inability to successfully seek recourse and recover against Alphatec and
the inability of the Company to defend itself against claims of third parties,
could cause the Company to incur significant damages, fees and expenses, could
divert significant management time and attention and could materially
adversely affect relationships with its customers and suppliers. Any such
outcome would have a material adverse effect on the Company's business,
financial condition and results of operations.
EXPOSURE TO RAPID TECHNOLOGICAL CHANGE
The semiconductor, PC and related industries are characterized by rapid
technological change, including rapid increases in the diversity and
complexity of ICs. This in turn requires rapid changes in the services offered
by IC testing companies. Accordingly, the Company expects that it will need to
continue to offer increasingly advanced IC testing procedures and services to
its customers. The Company's efforts to develop advanced testing programs and
procedures and to obtain and maintain advanced testing equipment will require
significant capital expenditures in future years. Any failure by the Company
to develop and enhance advanced testing procedures, or to obtain advanced
testing equipment as technology changes, would have a material adverse effect
on the
11
<PAGE>
Company's business, financial conditions and results of operations. In
addition, advances in technology typically lead to rapid and significant price
erosion of ICs, which may lead to pricing pressure on testing services for
these ICs. Any failure by the Company to increase its testing efficiencies in
response to such pricing pressures would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS RELATING TO COMPLEXITY OF TESTING PROCESSES
IC testing is a complex process involving significant technological and
process expertise. In order to improve capacity utilization rates and
efficiencies, the Company maintains advanced and costly equipment and develops
conversion software programs which enable it to test certain ICs on multiple
equipment platforms. Any failure by the Company to successfully develop
conversion software programs could materially adversely affect its operating
efficiencies. In addition, the Company's testing operations take place in test
areas where air purity, temperature and humidity are controlled. The inability
of the Company to control its testing environment could cause tested ICs or
wafers to become nonfunctional. The Company has from time-to-time experienced,
and may in the future experience, production interruptions due to technical
problems occurring during the semiconductor testing process. Any interruption
in the Company's operations resulting from prolonged production interruptions
could have a material adverse effect on its business, financial condition and
results of operations. See "Business--Facilities."
NEW TESTING FACILITY IN SINGAPORE
The Company is currently utilizing a temporary facility in Singapore, where
it currently operates two of its testers for its one customer in such
facility. The Company anticipates that it will move its current Singapore
testing operations to a larger leased facility in Singapore in late 1998. The
Company plans to continue to increase its testing capacity and to secure
additional customers in Singapore. There can be no assurance that the Company
will attract new customers in Singapore. If the Company's revenues do not
increase commensurate with anticipated increases in capacity and expenses in
Singapore, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business--Facilities".
ABILITY TO OBTAIN TESTING EQUIPMENT IN A TIMELY MANNER
The semiconductor testing and packaging business is capital intensive and
requires investment in highly automated, expensive capital equipment
manufactured by a limited number of suppliers, many of which are located in
Asia or Europe. The market for capital equipment used in semiconductor testing
has been, from time-to-time, characterized by intense demand, limited supply
and long delivery cycles. The Company's operations and expansion plans are
highly dependent upon its ability to obtain a significant amount of such
capital equipment from a limited number of suppliers, including Credence
Systems Corporation, Hewlett-Packard Company, LTX Corporation and Teradyne
Corporation. The Company has no binding supply agreements with any such
suppliers and acquires its testing equipment on a purchase order basis, which
exposes the Company to substantial risks. For example, increased levels of
demand in the capital equipment market may cause an increase in the price of
equipment and may lengthen delivery cycles, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, adverse fluctuations in foreign currency
exchange rates, particularly the Japanese yen, could result in increased
prices for certain equipment purchased by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Services."
DEPENDENCE ON KEY PERSONNEL AND AVAILABILITY OF SKILLED WORKFORCE
The Company's future operating results depend to a large extent upon the
continued services of its key executives and other skilled personnel. The
Company is not the beneficiary of any "key person" life insurance policy on
any such person. Moreover, none of the Company's key personnel is a party to
any employment agreement or noncompetition agreement with the Company, except
certain personnel of DTS who joined the
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<PAGE>
Company in connection with the Alphatec Acquisition. There can be no assurance
that any such agreements are enforceable against such persons. Further, all of
the Company's founders are fully vested in their ownership interests in the
Company. Although the Company has granted stock options to certain of its key
employees who are not founders in order to provide incentives for such
employees to remain with the Company, there can be no assurance that the
Company will be able to retain its key employees.
The Company's future operating results also depend in significant part upon
the Company's ability to attract and retain qualified management,
manufacturing, quality assurance, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. There may be only a limited number of persons with the requisite
skills to serve in these positions, and it may be increasingly difficult for
the Company to hire such personnel over time. The loss of some or all of such
personnel, the loss of key engineers or other professionals, or the failure of
the Company to recruit, train and retrain employees could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company may experience employee turnover due to several factors,
including an expanding economy within the geographic area in which the Company
maintains its principal business offices. High levels of employee turnover
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Employees."
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT
The Company's future results of operations are dependent in part upon its
proprietary technology. The Company has no patents and relies principally on
confidentiality procedures, contractual provisions and trade secret laws to
protect its intellectual property rights. There can be no assurance that any
intellectual property rights owned by the Company will not be invalidated,
circumvented or challenged or that the rights granted thereunder will provide
competitive advantages to the Company. Further, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or that duplicate the Company's technology. As the
Company expands its international operations, effective intellectual property
protection may be unavailable or limited in certain foreign countries. There
can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. Litigation may be necessary in the future
to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
ENVIRONMENTAL REGULATIONS
Federal, state and local regulations in the United States and regulations in
other countries in which the Company operates impose various controls on the
storage, handling, discharge and disposal of chemicals used in the
manufacturing processes. The Company believes that its activities conform to
present environmental and land use regulations applicable to its operations
and current facilities. Increasing public attention has, however, been focused
on the environmental impact of semiconductor manufacturing operations, and the
risk to neighbors of chemical releases from such operations. The adoption of
new ordinances or similar measures, or any failure by the Company to comply
with applicable environmental and land use regulations or to restrict the
discharge of hazardous substances, could subject the Company to future
liability, require increased capital expenditures, curtail expansion plans or
suspend the Company's operations. Compliance with such laws could result in
significant costs which could have a material adverse effect on the Company's
business, financial condition and results of operations.
LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS
The Company plans to continue to incur substantial costs associated with the
expansion of its testing capacity and facilities. The Company believes that
the net proceeds from the sale of the Common Stock in this
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<PAGE>
offering, together with existing cash balances, anticipated cash flow from
operations and potentially available equipment lease financing, will be
sufficient to meet its projected capital expenditures, working capital and
other cash requirements for at least the next twelve months. There can be no
assurance, however, that lower than expected revenues, increased expenses,
increased costs associated with the purchase or maintenance of capital
equipment, decisions to increase planned capacity or other events will not
cause the Company to seek additional capital, or to seek capital earlier than
currently expected. The timing and amount of the Company's actual capital
requirements cannot be precisely determined and will depend upon a number of
factors, including demand for the Company's services, availability of capital
equipment, fluctuations in foreign currency exchange rates, changes in the
condition of, and competitive factors in, the semiconductor, PC and related
industries. There can be no assurance that additional capital will be
available to the Company when needed or at all, or, if available, will be
available on satisfactory terms. The Company's ability to incur additional
indebtedness will be significantly limited as substantially all of its assets
are secured by its principal bank lenders. Failure to obtain any additional
capital in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONTINUED CONTROL BY EXISTING SHAREHOLDERS; EFFECTS OF CERTAIN ANTI-TAKEOVER
PROVISIONS
The Company's officers and directors and their respective affiliates will,
in the aggregate, own approximately 73.3% of the Company's outstanding shares
of Common Stock after this offering. As a result, such shareholders, acting
together, will be able to effectively control all matters requiring approval
by the shareholders of the Company, including the election of at least a
majority of the members of the Board of Directors, proxy contests, mergers or
asset sales involving the Company, tender offers, open market purchase
programs or other purchases of Common Stock that could give shareholders of
the Company the opportunity to realize a premium over the then prevailing
market price for their shares of Common Stock. In addition, such continued
control, together with certain provisions of the Company's Articles of
Incorporation, including the Company's classified Board structure, equity
incentive plans and bylaws and California law, could also have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price and
may adversely affect the market price of the Common Stock. The rights of
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of holders of preferred stock that may be issued from time to time.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire control of the Company. See "Principal
and Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 22,500,000 shares of Common Stock, assuming the issuance of the
5,000,000 shares of Common Stock offered hereby and no exercise of the
Underwriters' over-allotment option. Of the total outstanding shares of Common
Stock, all 6,000,000 shares of Common Stock sold in this offering will be
freely tradeable without restriction or further registration under the Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Act. The remaining 16,500,000 shares will be "restricted
securities" as defined in Rule 144 (the "Restricted Shares"). The Restricted
Shares may be sold in the public market beginning 90 days after the date of
this prospectus. Furthermore, the Company intends to register on a
Registration Statement on Form S-8 at the date of this Prospectus, a total of
4,500,000 shares of Common Stock subject to outstanding options or reserved
for issuance under the 1998 Stock Incentive Plan, and 600,000 shares of Common
Stock reserved for issuance under the 1998 Employee Stock Purchase Plan. See
"Management--1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase
Plan." The Company, its directors and executive officers and each of its
shareholders have agreed with the representatives of the Underwriters, subject
to certain limited exceptions, not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or securities convertible
into or exchangeable or exercisable for shares of Common Stock, for a period
of 180 days after the date of this Prospectus without the written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, which consent may be
given in such institution's sole discretion. The number of outstanding shares
that will be available for sale in the public market, after giving effect to
the lock-up agreements, will be as follows: (i) no shares of
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Common Stock, other than the 6,000,000 shares offered hereby, will be eligible
for sale as of the effective date of this offering, (ii) 16,500,000 shares
will be eligible for sale beginning 180 days after the effective date of this
offering and (iii) approximately 903,375 shares issuable upon the exercise of
vested options will be eligible for sale beginning 180 days after the
effective date of this offering. Sales of substantial amounts of such Common
Stock or other securities, or the prospect of such sales, could materially
adversely affect the market price of the Common Stock and the Company's
ability to raise capital through an offering of securities. See "Shares
Eligible for Future Sale."
ABSENCE OF PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF COMMON STOCK
PRICE
Prior to the consummation of this offering, there has been no public market
for the Common Stock. There can be no assurance that an active trading market
will develop or, if developed, will be maintained. The initial public offering
price of the Common Stock will be determined by negotiations among the
Company, the Selling Shareholders and the representatives of the Underwriters
based on several factors, and may not be indicative of the market price of the
Common Stock after the offering. See "Underwriting." In addition, the market
price of the Common Stock is likely to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's results of operations, the introduction of new services by
the Company or its competitors, conditions and trends in the semiconductor, PC
and related industries or the market for testing and packaging services,
changes in or failure by the Company to meet securities analysts' expectations
and general market conditions. In addition, the stock market from time-to-time
has experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology and
other comparable companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has been brought against that company.
There can be no assurance that such litigation will not occur in the future
with respect to the Company. Such litigation could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
MATERIAL BENEFIT TO INSIDERS
Directors and executive officers of the Company are selling an aggregate of
1,000,000 shares in this offering, for aggregate gross proceeds of $13.0
million. See "Management--Executive Officers, Directors and Key Employee,"
"Principal and Selling Shareholders" and "Certain Relationships and Related
Transactions."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed its software and advanced testing equipment and does not
currently expect that any significant modifications will be required for such
software or equipment. Moreover, the Company does not currently believe that
the total cost of any potential modifications will be material. There can be
no assurance, however, that the Company or its vendors will be able to modify
timely and successfully their respective services and systems to comply with
year 2000 requirements. Any failure to become year 2000 compliant on the part
of the Company or its vendors, or the incurrence by the Company or its vendors
of any costs associated with related litigation, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
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<PAGE>
LIMITATIONS ON DIVIDENDS
The Company has not declared or paid cash dividends on its Common Stock, and
the Company anticipates that any future earnings will be retained for
investment in its business. Any payment of cash dividends in the future will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, extent of indebtedness and contractual restrictions. The
Company's agreements with its lenders prohibits the payment of cash dividends.
See "Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
IMMEDIATE SUBSTANTIAL DILUTION
Investors participating in this offering will incur an immediate substantial
dilution of approximately 71.8% of their investment in the Common Stock in
that the net tangible book value of the Common Stock after the offering will
be approximately $3.67 per share as compared to an assumed initial public
offering price of $13.00 per share. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered hereby are estimated to be approximately $58,700,000,
assuming an initial public offering price of $13.00 per share and after
deduction of the underwriting discounts and commissions and estimated related
offering expenses payable by the Company.
The Company currently intends to use the net proceeds from this offering to
repay an aggregate of approximately $23.7 million of existing indebtedness
(plus accrued interest) outstanding under various term loans, promissory notes
and its line of credit, which bear interest at the prime rate plus applicable
margins of up to 0.75% and mature from 1998 to 2003. The remaining proceeds
will be used for other working capital and general corporate purposes,
including capital expenditures to expand capacity. A portion of the net
proceeds may also be used for strategic acquisitions of businesses, products
or technologies complementary to those of the Company. There are currently no
negotiations, commitments or agreements with respect to any acquisitions.
Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest-bearing securities.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. In addition, the Company is prohibited
by certain agreements from paying cash dividends. See Note 4 of Notes to
Consolidated Financial Statements of the Company.
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CAPITALIZATION
The following table sets forth at January 31, 1998: (i) the actual short-
term debt, including current portion of long-term debt, and the capitalization
of the Company and (ii) the short-term debt, including current portion of
long-term debt, and the capitalization of the Company as adjusted to reflect
the sale by the Company of 5,000,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $13.00 per share, after deduction
of the underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the application of a portion of the proceeds
therefrom to retire $23.7 million of outstanding indebtedness. This table
should be read in conjunction with the consolidated financial statements of
the Company, including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Short-term debt, including current portion of long-
term debt............................................ $ 15,015 $ 2,283
=========== ==========
Long-term debt, less current portion.................. $ 18,483 $ 7,533
----------- ----------
Shareholders' equity:
Preferred Stock, 3,000,000 shares, $.001 par value
per share, authorized; none issued and outstanding
actual and as adjusted ............................ -- --
Common Stock, 50,000,000 shares, $.001 par value per
share, authorized; 17,500,000 shares issued and
outstanding actual(1); 22,500,000 shares issued and
outstanding as adjusted............................ 18 23
Additional paid-in capital.......................... 546 59,241
Retained earnings................................... 25,589 25,589
----------- ----------
Total shareholders' equity........................ 26,153 84,853
----------- ----------
Total capitalization.................................. $ 44,636 $ 92,386
=========== ==========
</TABLE>
- ---------------------
(1) Based on the number of shares of Common Stock outstanding as of January
31, 1998. Excludes as of January 31, 1998: (i) 2,648,400 shares of Common
Stock issuable upon exercise of options currently outstanding under the
Company's 1998 Stock Incentive Plan at a weighted average exercise price
of $7.98 per share; (ii) 1,851,600 shares of Common Stock issuable upon
exercise of options reserved for future issuance under the Company's 1998
Stock Incentive Plan and other stock incentives plans of the Company; and
(iii) 600,000 shares of Common Stock reserved for issuance under the
Company's 1998 Employee Stock Purchase Plans. Also excludes options to
purchase 26,400 shares of Common Stock issued by the Company subsequent to
January 31, 1998. See "Management--1998 Stock Incentive Plan" and "--1998
Employee Stock Purchase Plan" and Note 5 of Notes to Consolidated
Financial Statements of the Company.
18
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock.
The net tangible book value of the Company as of January 31, 1998 was
$23,864,000, or $1.36 per share of Common Stock. "Net tangible book value" per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities and divided by the total number of shares
of Common Stock outstanding. Without taking into account any other changes in
such net tangible book value after January 31, 1998, other than to give effect
to the sale by the Company of 5,000,000 shares offered hereby at an assumed
initial public offering price of $13.00 per share resulting in estimated net
proceeds of $58,700,000 to the Company. The pro forma net tangible book value
of the Company as of January 31, 1998 would have been approximately
$82,564,000, or $3.67 per share. This represents an immediate increase in such
net tangible book value of $2.31 per share to existing shareholders and an
immediate dilution of $9.33 per share to new shareholders. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Net tangible book value per share as of January 31, 1998.... $1.36
Increase attributable per share attributable to new
investors.................................................. 2.31
-----
Pro forma net tangible book value per share after the
offering..................................................... 3.67
------
Dilution to new investors..................................... $ 9.33
======
</TABLE>
The following table summarizes, on a pro forma basis as of January 31, 1998,
the differences between the existing shareholders and the new shareholders
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share, based upon an assumed public offering price of $13.00 per
share (before deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
AMOUNT PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ 17,500,000 77.8% $ 564,000 0.9% $ 0.03
New public
investors(1)........... 5,000,000 22.2 65,000,000 99.1 13.00
---------- ----- ----------- -----
Total................. 22,500,000 100.0% $65,564,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares of Common Stock held by existing shareholders to 16,500,000
shares or to approximately 73.3% of the total number of shares of Common
Stock outstanding after this offering (16,500,000 shares or approximately
70.5% of the total number of shares of Common Stock outstanding after this
offering if the Underwriters' over-allotment option is exercised in full)
and will increase the number of shares held by new investors to 6,000,000
or to approximately 26.7% of the total number of shares of Common Stock
outstanding after this offering (6,900,000 shares, or approximately 29.5%
of the total number of shares of Common Stock outstanding after this
offering, if the Underwriters' over-allotment option is exercised in
full). See "Principal and Selling Shareholders."
The above computations are based on the number of shares of Common Stock
outstanding as of January 31, 1998. Excludes as of January 31, 1998: (i)
2,648,400 shares of Common Stock issuable upon exercise of options currently
outstanding under the Company's 1998 Stock Incentive Plan at a weighted
average exercise price of $7.98 per share; (ii) 1,851,600 shares of Common
Stock issuable upon exercise of options available for future issuance under
the Company's 1998 Stock Incentive Plan; and (iii) 600,000 shares of Common
Stock reserved for issuance under the Company's 1998 Employee Stock Purchase
Plan. Also excludes options to purchase 26,400 shares of Common Stock issued
by the Company subsequent to January 31, 1998. See "Management--1998 Stock
Incentive Plan" and "--1998 Employee Stock Purchase Plan" and Note 5 of Notes
to Consolidated Financial Statements of the Company.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company, including the notes thereto,
which appear elsewhere in this Prospectus. The selected consolidated statement
of operations data presented below for each of the years ended October 31,
1995, 1996 and 1997 and the consolidated balance sheet data presented below as
of October 31, 1996 and 1997 are derived from the audited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
consolidated statement of operations data for the year ended October 31, 1994
and the consolidated balance sheet data as of October 31, 1995 are derived
from audited consolidated financial statements of the Company not included
herein. The consolidated statements of operations data for the year ended
October 31, 1993 and the consolidated balance sheet data as of October 31,
1993 and 1994 are derived from unaudited consolidated financial statements not
included herein. The consolidated statement of operations data for the three
months ended January 31, 1997 and 1998 and the consolidated balance sheet data
as of January 31, 1998 are derived from unaudited consolidated financial
statements of the Company included elsewhere in this Prospectus. The unaudited
consolidated financial statements of the Company include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. The consolidated statement of operations data
for the three months ended January 31, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending October 31, 1998.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------------------- -------------------
1993 1994 1995 1996 1997(1) 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $13,440 $15,548 $22,321 $25,354 $35,532 $6,198 $20,291
Cost of revenues....... 6,557 6,760 8,953 12,094 17,950 3,430 9,483
------- ------- ------- ------- ------- ------ -------
Gross profit........... 6,883 8,788 13,368 13,260 17,582 2,768 10,808
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Research and
development.......... 571 601 1,048 1,111 1,097 227 673
Selling, general and
administrative....... 2,871 3,852 3,843 3,932 7,229 925 4,989
------- ------- ------- ------- ------- ------ -------
Total operating
expenses............ 3,442 4,453 4,891 5,043 8,326 1,152 5,662
------- ------- ------- ------- ------- ------ -------
Income from
operations............ 3,441 4,335 8,477 8,217 9,256 1,616 5,146
Other income (expense):
Interest and other
income (expense),
net.................. 311 398 523 504 804 79 (33)
Interest expense...... (412) (374) (403) (530) (741) (144) (869)
------- ------- ------- ------- ------- ------ -------
Total other income
(expense)........... (101) 24 120 (26) 63 (65) (902)
------- ------- ------- ------- ------- ------ -------
Income before income
taxes................. 3,340 4,359 8,597 8,191 9,319 1,551 4,244
Provision for income
taxes................. 1,354 1,891 3,667 3,343 3,579 596 1,613
------- ------- ------- ------- ------- ------ -------
Net income............. $ 1,986 $ 2,468 $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631
======= ======= ======= ======= ======= ====== =======
Basic and diluted net
income per share(2)... $ 0.11 $ 0.14 $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
======= ======= ======= ======= ======= ====== =======
Number of shares used
in per share
calculations:(2)
Basic................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted............... 17,500 17,500 17,500 17,500 17,500 17,500 17,768
<CAPTION>
AS OF OCTOBER 31, AS OF
------------------------------------------- JANUARY 31,
1993 1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 1,759 $ 2,457 $ 6,130 $ 4,655 $ 4,969 $ 6,077
Working capital
(deficiency).......... 13 2,679 2,937 3,020 (8,665) (12,282)
Total assets........... 12,975 14,658 24,713 29,995 70,843 81,749
Short-term debt,
including current
portion of long-term
debt.................. -- 451 880 1,414 14,861 15,015
Long-term debt, less
current portion....... 3,800 3,756 4,534 4,595 17,189 18,483
Retained earnings...... 4,975 7,440 12,370 17,218 22,958 25,589
Total shareholders'
equity................ 5,515 8,004 12,934 17,782 23,522 26,153
</TABLE>
- -------------------
(1) Results of operations data for fiscal 1997 include the results of
operations of DTS and the Manteca Operation, which were acquired in
September 1997 and accounted for under the purchase method of accounting.
See Note 2 of Notes to Consolidated Financial Statements of the Company.
(2) See Note 1 of Notes to Consolidated Financial Statements of the Company
for an explanation of the method used to determine the number of shares
used in computing net income per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the other information in this Prospectus, the following
discussion should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
Sections of this Prospectus, including this section and the sections entitled
"Business" may contain forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
The Company provides a broad range of integrated circuit ("IC") testing and
evaluation services. The Company also offers semiconductor packaging services
at its Manteca, California facility. Historically, the Company has focused on
final testing of primarily logic and mixed-signal ICs. The Company also
provides a variety of additional services related to IC testing, including
wafer sort, production monitoring, reliability analysis and software
development. The Company began providing testing services in the United States
in 1983 and significantly increased its testing capacity in 1997. In order to
address international opportunities, the Company established a testing
presence in Hong Kong in 1995 and began testing operations in Singapore in
March 1998. In the first quarter of fiscal 1998, approximately 81.0% of the
Company's revenues were derived from operations in the United States, with the
remainder derived from the Company's operations in Hong Kong.
To expand its capacity and broaden its range of services, effective
September 11, 1997, the Company purchased for approximately $31.2 million,
including acquisition costs, certain assets of Alphatec USA, Inc. ("Alphatec")
(the "Alphatec Acquisition"). The Alphatec Acquisition was financed by various
term loans and short-term borrowings. The transaction was accounted for using
the purchase method of accounting and, on this basis, the excess purchase
price over the estimated fair value of the tangible assets acquired and
liabilities assumed was allocated to goodwill in the amount of $1.6 million
and a covenant not to compete in the amount of $1.0 million. The assets
acquired in the Alphatec Acquisition included 100% of the capital stock of
Digital Testing Services, Inc. ("DTS"), and selected assets and liabilities of
Alphatec relating to its Manteca, California packaging operation (the "Manteca
Operation"). DTS provides a broad range of semiconductor testing and
validation services throughout the semiconductor production process, with a
primary focus on the initial development stage. The Manteca Operation provides
semiconductor packaging services, including quickturn and prototype packaging.
The consolidated financial statements of the Company include the results of
the operations acquired in the Alphatec Acquisition from the date of
acquisition.
The Company has made significant investments to increase its testing
capacity. As of October 31, 1995, 1996 and 1997 and January 31, 1998, the
number of testers operated by the Company was 38, 55, 91 and 96, respectively.
From time-to-time, the Company operates testers on consignment from its
customers. As of January 31, 1998, ten of the testers operated by the Company
were on consignment from customers. The Company's focus has primarily been on
increasing capacity for testing higher complexity ICs. Since the Company
generally charges for its services per hour of tester time, testing more
complex, high-performance devices tends to generate higher revenues and
margins, because testing services related to such products are priced
significantly higher per CPU second and involve longer testing times than
testing less complex or lower performance products. The Company expects to
continue to make substantial investments in expanding its capacity in the
future.
As a result of the capital intensive nature of the Company's business, the
Company's operations are characterized by high fixed costs. Consequently,
gross margins can be significantly impacted by capacity utilization rates. As
the Company expands its capacity, margins can be negatively affected for a
period of time until utilization rates can be optimized. The Company attempts
to improve its capacity utilization rates by (i) repositioning older test
equipment to test less complex and lower performance products; (ii) developing
test conversion programs, which allow the Company to test ICs on multiple
platforms; (iii) developing internal maintenance capabilities, which help to
decrease down time of the Company's testing equipment; and (iv) using
22
<PAGE>
existing test equipment to provide other services, such as wafer sort. The
Company's ability to maintain or enhance its gross margins will continue to be
dependent, in part, on its ability to effectively manage capacity utilization
rates.
The average selling price for the Company's services, calculated on a hourly
basis, historically has not fluctuated to a significant degree. However, the
average selling price per device tested has varied and is expected to continue
to vary due to a number of factors, including the level of device complexity
and the time required to test each device. The Company expects that average
selling prices for its services may decline in the future, principally due to
intense competitive conditions and other factors. A decline in average selling
prices of the Company's services, if not offset by reductions in the cost of
providing those services or by a shift to testing higher margin products,
would decrease the Company's gross margin and could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company believes there is a trend toward customers requesting turnkey
testing and packaging services. In February 1998, the Company entered into an
arrangement with one of its customers to provide such turnkey services. In
providing such turnkey services, the Company intends to use the services of
independent assembly contractors to perform the assembly functions. The
Company currently anticipates that, for the foreseeable future, the
incremental costs incurred by it in utilizing the services of such independent
assembly contractors will substantially offset the incremental revenues
derived by it for providing assembly services under these turnkey
arrangements. Consequently, the Company believes, while these arrangements
will favorably impact its revenues, they will have a negative impact on its
margins.
The Company's customer base is comprised primarily of vertically integrated
semiconductor companies and fabless semiconductor companies. The Company's
customers include C-Cube Microsystems, Inc., Cirrus Logic, Inc. ("Cirrus
Logic"), Hana Technologies, Hewlett-Packard Company, LSI Logic Corporation
("LSI Logic"), Motorola, Inc., National Semiconductor Corporation, Philips
Electronics, N.V., S3 Incorporated and Xilinx, Inc. Hana Technologies
accounted for 21.4%, 30.2% and 19.0% of the Company's revenues in fiscal 1996,
fiscal 1997 and the three months ended January 31, 1998, respectively. A
significant portion of the business that the Company derives from Hana
Technologies relates to testing services for LSI Logic. Additionally, LSI
Logic directly accounted for 29.5% and 16.1% of the Company's revenue in
fiscal 1995 and fiscal 1996, respectively. Cirrus Logic accounted for 13.4% of
the Company's revenues in the three months ended January 31, 1998. No other
customer accounted for more than 10% of the Company's revenues during these
periods.
The United States dollar is the functional currency of the Company's foreign
subsidiaries and substantially all of its revenues are collected in United
States dollars. Exchange gains and losses resulting from transactions
denominated in currencies other than the United States dollar are included in
the Company's results of operations. To date, such amounts have not been
material, and the Company has not undertaken any foreign currency hedging
activities.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statement of
operations data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED OCTOBER 31, ENDED JANUARY 31,
------------------------- ------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................ 40.1 47.7 50.5 55.3 46.7
------- ------- ------- -------- --------
Gross profit.................... 59.9 52.3 49.5 44.7 53.3
------- ------- ------- -------- --------
Operating expenses:
Research and development...... 4.7 4.4 3.1 3.7 3.3
Selling, general and
administrative............... 17.2 15.5 20.3 14.9 24.6
------- ------- ------- -------- --------
Total operating expenses.... 21.9 19.9 23.4 18.6 27.9
------- ------- ------- -------- --------
Income from operations.......... 38.0 32.4 26.1 26.1 25.4
Other income (expense):
Interest and other income
(expense), net............... 2.3 2.0 2.3 1.3 (0.1)
Interest expense.............. (1.8) (2.1) (2.1) (2.4) (4.3)
------- ------- ------- -------- --------
Total other income
(expense).................. 0.5 (0.1) 0.2 (1.1) (4.4)
------- ------- ------- -------- --------
Income before income taxes...... 38.5 32.3 26.3 25.0 21.0
Provision for income taxes...... 16.4 13.2 10.1 9.6 8.0
------- ------- ------- -------- --------
Net income...................... 22.1% 19.1% 16.2% 15.4% 13.0%
======= ======= ======= ======== ========
</TABLE>
REVENUES
Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's revenues
are comprised of revenue from final test, wafer sort, engineering, packaging,
qualification, burn-in and related services. Revenues increased from $22.3
million in fiscal 1995 to $25.4 million in fiscal 1996 and to $35.5 million in
fiscal 1997. The increase in revenues of 13.6% from fiscal 1995 to fiscal 1996
was due primarily to revenues derived from the Company's Hong Kong operations,
which were established in late fiscal 1995. This increase was partially offset
by a decline in revenues from the Company's domestic operations due to market
conditions in the semiconductor industry. The increase in revenues of 40.1%
from fiscal 1996 to fiscal 1997 was due primarily to the expansion of the
Company's testing capacity and utilization thereof, primarily in its Hong Kong
operations. In addition, fiscal 1997 revenues increased due to the inclusion
of revenues from DTS and the Manteca Operation for the period subsequent to
the Alphatec Acquisition.
Three Months Ended January 31, 1997 and 1998. Revenues increased by over
227% from $6.2 million in the three months ended January 31, 1997 to $20.3
million in the three months ended January 31, 1998. Revenues in the three
months ended January 31, 1998 include a full quarter of revenues generated by
DTS and the Manteca Operation. In addition, revenues increased due to the
continued expansion and utilization of the Company's testing capacity at all
of its locations. The Company anticipates that due to prevailing conditions in
the semiconductor market, its quarterly revenues in the near future will
remain relatively flat and may possibly decline from current levels.
GROSS PROFIT
Fiscal Years Ended October 31, 1995, 1996 and 1997. Cost of revenues
includes depreciation, direct and indirect labor, materials and overhead
costs. Gross profit was $13.4 million in fiscal 1995, $13.3 million in fiscal
1996 and $17.6 million in fiscal 1997. Gross profit as a percentage of
revenues, or gross margin, was 59.9% in fiscal 1995, 52.3% in fiscal 1996 and
49.5% in fiscal 1997. The decrease in gross margin from fiscal 1995 to
24
<PAGE>
fiscal 1996 was due primarily to lower capacity utilization rates in the
Company's domestic operations, partially offset by higher capacity utilization
in its Hong Kong operations. The decrease in gross margin from fiscal 1996 to
fiscal 1997 was due primarily to an increase in capacity that was under-
utilized due to a general slowdown in the semiconductor industry.
Three Months Ended January 31, 1997 and 1998. Gross profit increased by 290%
from $2.8 million in the three months ended January 31, 1997 to $10.8 million
in the three months ended January 31, 1998. This increase was due primarily to
increased capacity at the Company's domestic and Hong Kong operations and the
utilization thereof, and the inclusion of a full quarter of results of DTS.
Gross margin increased from 44.7% in the three months ended January 31, 1997
to 53.3% in the three months ended January 31, 1998, reflecting an improvement
in capacity utilization rates at all of the Company's locations. The Company's
gross margin has tended to fluctuate due to timing of costs associated with
the acquisition of additional equipment to expand capacity and the delay
associated with utilizing such expanded capacity. As the Company continues to
expand capacity, the Company expects that its gross margin will continue to
fluctuate.
RESEARCH AND DEVELOPMENT
Fiscal Years Ended October 31, 1995, 1996 and 1997. Research and development
expenses consist primarily of salaries, bonuses, facilities and other employee
related costs. Research and development expenses were $1.0 million in fiscal
1995, $1.1 million in fiscal 1996 and $1.1 million in fiscal 1997. As a
percentage of revenues, research and development expenses were 4.7%, 4.4% and
3.1% in fiscal 1995, 1996 and 1997, respectively. Research and development
expenses remained relatively flat from fiscal 1995 to fiscal 1997, but
decreased as a percentage of revenues as revenues increased.
Three Months Ended January 31, 1997 and 1998. Research and development
expenses increased from $227,000 in the three months ended January 31, 1997 to
$673,000 in the three months ended January 31, 1998. This increase was
primarily a result of the inclusion of a full quarter of the results of DTS.
As a percentage of revenues, research and development expenses decreased from
3.7% in the three months ended January 31, 1997 to 3.3% in the three months
ended January 31, 1998, primarily as a result of an increase in revenues
between such periods. The Company expects that research and development
expenses may increase in absolute dollars over historical levels.
Additionally, such expenses will continue to fluctuate as percentage of
revenues from period to period.
SELLING, GENERAL AND ADMINISTRATIVE
Fiscal Years Ended October 31, 1995, 1996 and 1997. Selling, general and
administrative expenses consist primarily of salaries, bonuses, facilities
maintenance expenses, selling and marketing expenses, other employee related
costs and amortization of goodwill and other intangibles. Selling, general and
administrative expenses were $3.8 million in fiscal 1995, $3.9 million in
fiscal 1996 and $7.2 million in fiscal 1997. As a percentage of revenues,
selling, general and administrative expenses were 17.2%, 15.5% and 20.3% in
fiscal 1995, 1996 and 1997, respectively. The increase in selling, general and
administrative expenses in fiscal 1997 compared to fiscal 1996 was due
primarily to the inclusion of the results of DTS and the Manteca Operation and
charges related to certain employment related bonuses aggregating $2.0
million.
Three Months Ended January 31, 1997 and 1998. Selling, general and
administrative expenses increased from $925,000 in the three months ended
January 31, 1997 to $5.0 million in the three months ended January 31, 1998.
As a percentage of revenues, selling, general and administrative expenses
increased from 14.9% in the three months ended January 31, 1997 to 24.6% in
the three months ended January 31, 1998. These increases were primarily a
result of the inclusion of a full quarter of the results of DTS and the
Manteca Operation and a charge of $1.8 million related to certain employment
bonuses during the three months ended January 31, 1998. The Company expects
that selling, general and administrative expenses may increase in absolute
dollars over historical levels. Additionally, such expenses will continue to
fluctuate as a percentage of revenues from period to period.
25
<PAGE>
EXECUTIVE PERFORMANCE RELATED AND OTHER EMPLOYMENT RELATED COMPENSATION
Historically, the Company has awarded significant amounts of performance
related and other employment related compensation to its key executives.
Performance and other employment related bonuses awarded to executives
aggregated $2.1 million, $1.9 million, $3.3 million and $1.8 million in fiscal
1995, 1996, 1997 and the three months ended January 31, 1998, respectively. In
October 1997, the Company introduced stock-based compensation for its
executives and other employees. Consequently, the Company currently
anticipates that executive performance and other employment related bonuses
awarded to executives in future periods will be lower than historical levels.
INTEREST AND OTHER INCOME (EXPENSE)
Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest income includes
income from certificates of deposits and other interest bearing deposits.
Other income (expense) includes rental income and capital gains or losses from
the sale of equipment. Interest and other income was $523,000, $504,000 and
$804,000 in fiscal 1995, 1996 and 1997, respectively. The increase in fiscal
1997 compared to fiscal 1996 resulted primarily from capital gains on
disposition of equipment.
Three Months Ended January 31, 1997 and 1998. Interest and other income
(expense) for the three months ended January 31, 1997 was a net income of
$79,000. Interest and other income (expense) in the three months ended January
31, 1998 was a net expense of $33,000, due primarily to a loss on disposition
of certain assets.
INTEREST EXPENSE
Fiscal Years Ended October 31, 1995, 1996 and 1997. Interest expense
consists primarily of interest payable on capital leases and term loans
secured by the Company's facilities and equipment. The Company has
historically financed the acquisition of equipment primarily through funds
generated by operations and with limited use of capital leases. The Company
financed the Alphatec Acquisition through various term loans and short-term
lines of credit, which carry interest rates at prime plus applicable margins
of up to 0.75%. Interest expense increased from $403,000 in fiscal 1995 to
$530,000 in fiscal 1996 and to $741,000 in fiscal 1997. The increase in fiscal
1997 compared to fiscal 1996 was due primarily to the increased indebtedness
incurred in connection with the Alphatec Acquisition.
Three Months Ended January 31, 1997 and 1998. Interest expense in the three
months ended January 31, 1997 and 1998 was $144,000 and $869,000,
respectively. This increase was due primarily to an increase in indebtedness
incurred in connection with the Alphatec Acquisition.
PROVISION FOR INCOME TAXES
Fiscal Years Ended October 31, 1995, 1996 and 1997. The Company's provisions
for income taxes in fiscal 1995, 1996 and 1997 was $3.7 million, $3.3 million
and $3.6 million, respectively, reflecting effective tax rates of
approximately 43%, 41% and 38%, respectively. The decrease in the Company's
effective tax rate from fiscal 1995 to fiscal 1997 primarily reflects the
increase in operations in Hong Kong, where income tax rates are typically
lower than those in the United States.
Three Months Ended January 31, 1997 and 1998. The provision for income taxes
in the three months ended January 31, 1997 and 1998 was $596,000 and $1.6
million, respectively, reflecting an effective tax rate of 38% for both
periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of An Enterprise and Related Information" ("SFAS
131"). SFAS 130 established rules for reporting and displaying comprehensive
income. SFAS 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1998. The Company does not believe that the adoption of either
SFAS 130 or SFAS 131 will have a material impact on the financial statement
disclosures made by the Company.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statement of
operations data, both in dollar amounts and as a percentage of revenues, for
the nine quarters in the period ended January 31, 1998. The data set forth
below have been derived from unaudited consolidated financial statements of
the Company and have been prepared on the same basis as the audited financial
statements, and in the opinion of management, include all necessary
adjustments, consisting of only normal recurring adjustments, that the Company
considers necessary for a fair presentation of the results of interim periods.
The quarterly statement of operations data should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus. The Company's results of operations
have varied and will continue to vary significantly from quarter to quarter
and are not necessarily indicative of the results of any future period. In
addition, as a result of the Alphatec Acquisition in September 1997, the
Company believes that historical period-to-period comparisons should not be
relied upon as an indication of future performance.
<TABLE>
<CAPTION>
FISCAL
1998
FISCAL 1996 QUARTERS ENDED FISCAL 1997 QUARTERS ENDED QUARTER
----------------------------------- ----------------------------------- ENDED
JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $6,285 $7,048 $6,488 $5,533 $6,198 $6,477 $7,707 $15,150 $20,291
Cost of revenues........ 3,072 3,155 3,156 2,711 3,430 3,487 3,797 7,236 9,483
------ ------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 3,213 3,893 3,332 2,822 2,768 2,990 3,910 7,914 10,808
Operating expenses...... 1,208 1,319 1,256 1,260 1,152 1,144 1,260 4,770 5,662
------ ------ ------ ------ ------ ------ ------ ------- -------
Income from operations.. 2,005 2,574 2,076 1,562 1,616 1,846 2,650 3,144 5,146
Other income (expense),
net.................... (20) 166 (45) (127) (65) 41 (72) 159 (902)
------ ------ ------ ------ ------ ------ ------ ------- -------
Income before income
taxes.................. 1,985 2,740 2,031 1,435 1,551 1,887 2,578 3,303 4,244
Provision for income
taxes.................. 810 1,119 829 585 596 724 990 1,269 1,613
------ ------ ------ ------ ------ ------ ------ ------- -------
Net income.............. $1,175 $1,621 $1,202 $ 850 $ 955 $1,163 $1,588 $ 2,034 $ 2,631
====== ====== ====== ====== ====== ====== ====== ======= =======
Basic and diluted net
income per share....... $ 0.07 $ 0.09 $ 0.07 $ 0.05 $ 0.05 $ 0.07 $ 0.09 $ 0.12 $ 0.15
====== ====== ====== ====== ====== ====== ====== ======= =======
Number of shares used in
per share calculations:
Basic.................. 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500
Diluted................ 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,500 17,768
<CAPTION>
AS A PERCENTAGE OF REVENUES
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 48.9 44.8 48.6 49.0 55.3 53.8 49.3 47.8 46.7
------ ------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 51.1 55.2 51.4 51.0 44.7 46.2 50.7 52.2 53.3
Operating expenses...... 19.2 18.7 19.4 22.8 18.6 17.7 16.3 31.4 27.9
------ ------ ------ ------ ------ ------ ------ ------- -------
Income from operations.. 31.9 36.5 32.0 28.2 26.1 28.5 34.4 20.8 25.4
Other income (expense),
net.................... (0.3) 2.4 (0.7) (2.3) (1.1) 0.6 (0.9) 1.0 (4.4)
------ ------ ------ ------ ------ ------ ------ ------- -------
Income before income
taxes.................. 31.6 38.9 31.3 25.9 25.0 29.1 33.5 21.8 21.0
Provision for income
taxes.................. 12.9 15.9 12.8 10.6 9.6 11.2 12.9 8.4 8.0
------ ------ ------ ------ ------ ------ ------ ------- -------
Net income.............. 18.7% 23.0% 18.5% 15.3% 15.4% 17.9% 20.6% 13.4% 13.0%
====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
27
<PAGE>
The Company's quarterly revenues are affected by the timing and size of the
orders received from customers. Revenues in the two quarters ended October 31,
1996 and January 31, 1997 were negatively impacted by a slowdown in the
semiconductor industry which adversely affected utilization at the Company's
domestic testing facility. The Company's revenues increased significantly in
the two most recent quarters ended October 31, 1997 and January 31, 1998, due
primarily to revenues generated by DTS and the Manteca Operation, which were
acquired in September 1997, and increased revenues derived from the Company's
other facilities.
As a result of the capital intensive nature of the Company's business, the
Company's cost structure is characterized by high fixed costs. The Company's
gross margin has tended to fluctuate due to timing of costs associated with
the acquisition of additional equipment to expand capacity and the delay
associated with utilizing such expanded capacity. In the quarter ended January
31, 1997, the Company's gross margin decreased to 44.7% from 51.0% in the
prior quarter, primarily due to lower capacity utilization rates and pricing
pressures as a result of a slowdown in the semiconductor industry. The
Company's gross margin improved gradually in fiscal 1997 primarily as a result
of improved capacity utilization rates. As the Company continues to expand
capacity, the Company expects that its gross margin will continue to
fluctuate.
The Company's quarterly operating expenses increased only nominally on a
quarterly basis through the quarter ended July 31, 1997. Operating expense in
the quarters ended October 31, 1997 and January 31, 1998 increased
significantly due primarily to the inclusion of a full quarter of the results
of DTS and the Manteca Operation. In addition, in the quarters ended October
31, 1997 and January 31, 1998, the Company incurred certain employment related
bonuses aggregating $2.0 million and $1.8 million, respectively, which
resulted in a corresponding increase in operating costs.
A variety of factors have materially affected, and are expected to continue
to materially affect, the Company's operating results. These factors include
the cyclical nature of the semiconductor, PC and related industries and the
various markets that serve consumers of products incorporating semiconductors;
absence of long-term contracts and the resulting lack of backlog from the
Company's customers; price competition; timing and volume of orders received
by the Company; reschedulings, delays, deferrals and cancellations of orders;
evolutions in the life cycles of customers' products; erosion of semiconductor
unit prices; changes in capacity utilization; allocation of testing capacity
between the Company's facilities and those of its customers; availability,
price and changes in advanced testing equipment; effectiveness in managing
production processes; fluctuations in manufacturing yields; changes in product
and service mix or devices tested or assembled; product obsolescence;
availability of financing for expansion; the ability to develop and implement
new technologies on a timely basis; the loss of key personnel or the shortage
of available skilled workers; international political or economic events; and
currency and interest rate fluctuations. Furthermore, the Company has
historically experienced, and may continue to experience, seasonality in its
sales and operating results. This seasonality, combined with other factors
including those described above, has resulted and is likely to continue to
result in significant variability in quarterly and annual operating results.
The Company believes that due to prevailing conditions in the semiconductor
market, its quarterly revenues in the near future will remain relatively flat
and may possibly decline from current levels. See "Risk Factors--Significant
Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its liquidity needs principally from
the cash generated from operations and equipment financing arrangements. At
January 31, 1998, the Company had cash and cash equivalents of $6.1 million.
In fiscal 1995, 1996 and 1997 and the three months ended January 31, 1998,
cash generated from operating activities was $10.2 million, $6.0 million,
$12.8 million and $10.4 million, respectively.
In fiscal 1995, 1996 and 1997 and the three months ended January 31, 1998,
capital expenditures were $8.0 million, $8.8 million, $17.1 million and $7.5
million, respectively. These capital expenditures related primarily
28
<PAGE>
to the acquisition of advanced test equipment. The industry in which the
Company operates is capital intensive, and the Company expects to continue to
make significant capital expenditures to expand its capacity in the future.
In fiscal 1995, 1996 and 1997, proceeds from financing activities, net of
repayments, were $1.2 million, $595,000 and $25.5 million, respectively. The
Alphatec Acquisition, which occurred in September 1997, was accounted for as a
purchase and, on this basis, the excess purchase price over the estimated fair
value of the tangible assets acquired and liabilities assumed has been
allocated to goodwill and a covenant not to compete. The Alphatec Acquisition
was financed by various term loans and short-term borrowings under the
Company's lines of credit, which are repayable at various dates through
September 2002. Approximately $5.4 million of such borrowings were originally
due on March 31, 1998, however the lender has extended the due date to
September 30, 1998. The Company's outstanding borrowings are secured by all of
its assets and require compliance with certain financial covenants, including
those which restrict payment of dividends. In the three months ended January
31, 1998, net cash used by financing activities totalled $1.8 million for debt
repayments.
At January 31, 1998, the Company had a working capital deficiency of
approximately $12.3 million, resulting primarily from its short-term
borrowings of approximately $9.8 million and accounts payable associated with
its purchase of capital equipment. In March 1998, the Company entered into a
$10.0 million line of credit for capital equipment expiring March 1999.
Additionally, the Company is currently negotiating to finance recently
purchased capital equipment through a combination of lease and long-term
equipment note borrowings.
The Company believes that the net proceeds from the sale of Common Stock in
this offering, a portion of which will be used to repay existing indebtedness,
together with existing cash balances, anticipated cash flow from operations
and available equipment lease financing and bank borrowings, will be
sufficient to meet its projected working capital and other cash requirements
for at least the next 12 months. There can be no assurance, however, that
lower than expected revenues, increased expenses, increased costs associated
with the purchase or maintenance of capital equipment, or other events will
not cause the Company to seek more capital, or capital sooner than currently
expected. The timing and amount of the Company's actual capital requirements
will depend on a number of factors, including demand for the Company's
services, availability of capital equipment, adverse fluctuations in foreign
currency exchange rates, changes in semiconductor industry conditions and
competitive factors. There can be no assurance that such additional financing
will be available when needed or, if available, will be available on
satisfactory terms.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. The Company
has assessed its software and advanced testing equipment and does not
currently expect that any significant modifications will be required for such
software or equipment. Moreover, the Company does not believe that the total
cost of any potential modifications will be material. There can be no
assurance, however, that the Company or its vendors will be able to modify
timely and successfully their respective services and systems to comply with
year 2000 requirements. Any failure to become year 2000 compliant on the part
of the Company or its vendors or the incurrence of any costs associated with
related litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--
Year 2000 Compliance."
29
<PAGE>
BUSINESS
GENERAL
ISE is one of the leading independent integrated circuit ("IC") testing and
evaluation companies in the world. Unlike many of its competitors, the Company
offers a broad range of IC testing, evaluation and other services throughout
the entire semiconductor manufacturing process. These services include
software development, electrical verification, reliability analysis, failure
analysis, wafer sort, production monitoring and quickturn and prototype
packaging. A significant portion of the Company's revenues from testing
services is derived from testing complex, high-performance logic and mixed-
signal products, which are typically the higher-margin, faster growing
segments of the testing services market.
During the last twelve months, the Company has provided services to more
than 250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hewlett-Packard, LSI Logic, Motorola, National
Semiconductor, NeoMagic, Philips Electronics, S3, Wyle Laboratories and
Xilinx.
INDUSTRY BACKGROUND
GENERAL
Continual improvements in semiconductor process and design technologies have
enabled the production of complex, highly integrated circuits with improved
price/performance, functionality and reliability. This has enabled the rapid
proliferation of a variety of semiconductor intensive applications in such
areas as the Internet, multimedia and wireless communications. In addition,
semiconductor content has increased significantly in a wide range of products,
including consumer electronic devices, automotive products and industrial
automation and control systems. As a result of these and other factors,
Dataquest, a leading industry research organization, estimates that total
worldwide semiconductor sales were over $150 billion in 1996 and will grow to
approximately $300 billion by 2001. Further, according to Dataquest, sales of
complex, high-performance logic products are expected to outpace the annual
growth of the overall semiconductor market.
SEMICONDUCTOR PRODUCTION PROCESS
The production of semiconductors is a complex process that requires
increasingly sophisticated engineering and manufacturing expertise. The major
steps involved in the production of semiconductors can be characterized as
circuit design development, wafer fabrication, wafer sort, packaging and final
test. Throughout the semiconductor production process, ICs are subjected to a
variety of analyses and comprehensive tests. Such continuous analysis and
testing is critical to optimizing manufacturing process efficiencies and
product yield. The following diagram illustrates the major steps in the
semiconductor production process:
[GRAPHIC: SEE APPENDIX]
The design of an IC is developed by laying out circuit components and
interconnections using computer automated design and computer automated
engineering methodologies. During the circuit design process, design and test
engineers develop the parameters of the testing methodology and may also
develop a customized software program to test the IC for functionality and
performance. Wafer fabrication begins with the creation of
30
<PAGE>
a photomask, where each layer of the circuit pattern is exposed on a
photographic negative, known as a "mask," by an electron beam or laser beam
writer. These circuit patterns are transferred to the wafers using various
advanced processes. A fabricated wafer contains numerous die, or individual
ICs. Following wafer fabrication, a wafer sort is performed whereby each die
is individually and comprehensively tested for integrity and excluded from the
packaging process if it is non-conforming. The tested wafers are then sent for
packaging, where the processed silicon wafers are diced into separate chips
and encapsulated in plastic, ceramic or other forms of packaging. Following
packaging, each packaged device is submitted to a final electrical test to
verify that the product meets published specifications prior to shipment.
The analysis and testing that occurs during the semiconductor production
process may be broadly segmented into two stages: the Inventive Stage and the
Production Stage.
THE INVENTIVE STAGE
The Inventive Stage of IC analysis and testing occurs during the initial
development of the IC and includes (i) software development; (ii) electrical
verification; (iii) reliability analysis; and (iv) failure analysis.
Software Development. Prior to the electrical verification process, design
and test engineers develop a customized software program and related hardware
to test the IC on advanced test equipment. A customized software program is
required to test the conformance of each particular IC type to its unique
functionality and specification. As ICs continue to become increasingly
complex, testing programs have become critical to the IC design and
verification process.
Electrical Verification. During the electrical verification process, a
prototype of the designed IC (in either wafer or packaged form) is submitted
to electrical tests using advanced test equipment, customized software
programs and related hardware. These tests assess whether the prototype IC
complies with a variety of different operating specifications, including
functionality, frequency, voltage, current, timing and temperature range. This
process is essential in order to avoid costly production runs of faulty
products.
Reliability Analysis. In addition to the electrical verification process,
prototype ICs are frequently subjected to reliability testing designed to
assess the long-term reliability of the IC and its suitability of use for
intended applications. Reliability testing can include "burn-in" services,
which electrically stress a device, usually at high temperature and voltage,
for a period of time long enough to cause the failure of marginal devices.
Reliability testing improves field reliability, reduces warranty costs and
minimizes the shipment of marginal products.
Failure Analysis. In the event that the prototype IC or wafer does not
function to specifications during either the electrical verification or
reliability testing processes, it is typically subjected to failure analysis,
in which it is analyzed to determine why it did not perform as anticipated. As
part of such failure analysis, the prototype IC or wafer may be subjected to a
variety of analyses, including electron beam probing and electrical testing.
The results of these analyses are critical to improve or remedy the IC design.
Once a circuit design has been successfully validated through the above
tests and analyses the prototype is released for production.
THE PRODUCTION STAGE
The Production Stage of IC analysis and testing occurs after a prototype IC
has been released for manufacture. During this stage, all or a subset of the
analyses and testing procedures performed on the prototype IC during the
Inventive Stage are repeated throughout the volume production of the IC. For
example, electrical verification may be performed during the Production Stage
at the wafer level, whereby each individual die is electrically tested to
determine if it is acceptable for packaging (wafer sort). Conforming die are
then packaged and subjected to final electrical verification (final test). In
addition to these tests, semiconductor manufacturers may monitor production
quality and reliability on an ongoing basis.
31
<PAGE>
Production monitoring is the periodic monitoring of the integrity of the IC
fabrication and packaging processes after volume manufacturing of an IC has
commenced. Production monitoring includes: (i) fab/design validation, in which
the integrity of the circuit design is tested to determine if changes in
fabrication processes adversely affect the IC's performance; (ii) packaging
reliability monitoring, in which the packaged product is environmentally and
mechanically screened on an ongoing basis with respect to thermal, humidity
and mechanical stresses; and (iii) yield monitoring, in which failures
identified during the wafer sort and final electrical tests are analyzed to
improve the fabrication yield. Production monitoring permits products to be
monitored to commercial and industrial specifications, as well as to more
rigorous military, space and other high reliability specifications.
THE IC TESTING OPPORTUNITY
Improvements in semiconductor manufacturing process technologies have played
a key role in achieving low-cost, high volume production of highly integrated
circuits. However, the production of ICs is an extremely complex process that
requires substantial investment in specialized equipment and facilities and
sophisticated engineering and manufacturing expertise. As a result, many
semiconductor companies have begun to rely on outsourcing various steps of the
production process. Virtually every step of the semiconductor manufacturing
process can now be effectively outsourced. Wafer foundry services and IC
packaging are currently the largest segments of the market for outsourced
semiconductor manufacturing services, while the testing services segment has
only recently emerged as a major market opportunity.
The Company believes that nearly all of the world's major vertically
integrated semiconductor companies now use independent manufacturing services
to maintain a strategic mix of internal and external manufacturing capacity.
In addition, the availability of advanced manufacturing services has enabled
the rapid growth of fabless semiconductor companies which focus on IC design
and marketing. These companies typically outsource almost all of their
manufacturing, packaging and testing requirements to focused service
providers. According to industry estimates, sales by fabless semiconductor
companies have grown from $3.2 billion in 1993 to more than $8 billion in
1997, representing 3.7% and 5.3%, respectively, of the worldwide market for
semiconductors.
By outsourcing their IC testing requirements, semiconductor companies can
(i) focus on core business activities; (ii) access leading edge testing
technologies; (iii) react more quickly to rapidly changing market conditions
and reduce time to market for new products; and (iv) reduce capital
expenditures, fixed costs and operating expenses. Several fundamental industry
trends are increasing the demand for outsourced IC testing services.
First, semiconductor companies are increasingly seeking to shorten their
time to market for new products. As testing needs are identified for a
specific product, semiconductor companies frequently do not have the equipment
or expertise to implement such testing in the volumes required, nor sufficient
time to develop these capabilities before introducing a product to market. In
addition, faster new product introductions have made it increasingly difficult
for semiconductor companies to maintain adequate internal capacity utilization
levels necessary for cost effective IC testing. For these reasons,
semiconductor companies are increasingly leveraging the resources and
capabilities of independent test companies to deliver new products to market
quickly.
Second, as ICs continue to increase in pincount, complexity and speed, they
require more sophisticated testing software programs and testing procedures
and new generations of advanced test equipment. Equipment used to test
advanced logic or mixed-signal devices, which can cost several million dollars
per tester, can become obsolete for the most advanced ICs in as little as two
years. Compared to in-house testing, an independent provider of IC testing
services can allocate its fixed cost investment across a wider portfolio of
customers and products to maximize capacity utilization. Testing service
providers can also extend the useful life of test equipment by using test
equipment which has become obsolete for testing complex high-performance
products to test lower performance products. In addition, testing companies
can gain substantial efficiencies from building specialized expertise in
software program development and procedures for IC testing, and can also take
advantage of economies of scale in purchasing equipment.
32
<PAGE>
While a substantial majority of IC testing is still performed in-house by
semiconductor companies, the Company believes that the overall growth of the
market for ICs and the trend towards outsourcing services by both vertically
integrated and fabless semiconductor companies are driving increasing demand
for independent test services, such as those provided by the Company. A
leading industry research organization estimates that the number of ICs
packaged by independent contractors will grow from 7.7 billion units in 1996
to 18.8 billion units in 2001, or nearly 20% per year. The Company believes
that the market for independent test services has grown and will continue to
grow at a faster rate than the market for independent semiconductor packaging
services.
In the past, the market for testing services was comprised of independent IC
testing companies which were relatively small in size and unable to offer the
range of test services and advanced equipment necessary to perform high volume
testing of complex ICs for major customers. Even today, most test service
providers do not offer a full range of services in both the Inventive and
Production Stages. The Company believes a substantial market opportunity
exists for an independent IC testing company that can efficiently meet the
needs of semiconductor companies by offering a broad range of advanced test
services in both the Inventive and Production Stages.
THE ISE SOLUTION
As a result of the Company's broad range of IC testing services and its
position as one of the largest independent testing companies in the world, the
Company believes it is uniquely positioned to provide semiconductor companies
with the ability to outsource a substantial amount of their testing
requirements throughout the Inventive and Production Stages of the IC
development and production process. In contrast to all of its major
independent competitors, the Company's headquarters is located in the Silicon
Valley. In addition to its significant United States presence, the Company has
established substantial test capacity in Hong Kong and has more recently
commenced testing operations in Singapore. The Company's proximity to a large
number of the world's leading semiconductor companies, together with its broad
service offerings, enables the Company to establish close working
relationships with its customers' design engineers early in the IC development
process. By establishing such early stage relationships with its customers,
the Company believes it has a significant competitive advantage in competing
for high volume future testing business.
STRATEGY
The Company's strategy is to become the leading independent provider of IC
testing and evaluation services in the world. The principal components of the
Company's strategy to achieve this objective are set forth below.
Maintain Technological Leadership. Since the Company commenced operations in
1983, it has provided testing services involving technology and expertise that
are among the most advanced in the global semiconductor industry. The Company
was a pioneer in offering parallel testing of multiple logic ICs, complex test
vector generation methodologies and cross-platform translators. The Company
intends to maintain its leading technological position by continuing to invest
in the latest and most advanced testing equipment and by recruiting qualified
engineers and technical personnel. Through its close working relationships
with customers and test equipment suppliers, the Company is also regularly
involved in the modification and initial rollout of new testing platforms, and
is often involved in the actual development of such platforms. For example,
the Company currently offers testing services on the highest pincount (512
pins) and frequency (330 MHz) testers available from Credence and Hewlett-
Packard, and was chosen as the initial rollout site for the Credence RF
testing system. The Company also provides failure analysis and circuit pattern
correction services using the latest EBEAM and Focused Ion Beam systems. The
Company believes that maintaining its leading technological position is
critical to its success and its ability to attract and retain customers.
Provide Broadest Range of Services. The Company intends to continue to
provide the broadest range of independent testing and related services to its
customers throughout the Inventive and Production Stages of the semiconductor
development and production process. These services include electrical
verification, reliability analysis, failure analysis, wafer sort and
production monitoring. In addition, during the Inventive Stage, the Company
draws upon the extensive test engineering experience of its founders and
engineers and uses its proprietary software tools to help its customers
develop optimized test programs for verification of circuit
33
<PAGE>
designs. The Company also facilitates the prototype and quickturn packaging
needs of its customers through its Manteca Operation. The Company believes
that offering a broad range of services beginning at the Inventive Stage and
continuing throughout the Production Stage provides significant benefits to
its customers, including reduced time to market and lower manufacturing costs.
Leverage Strong Relationships with Diversified Customer Base. The Company's
goal is to be the leading global provider of independent IC testing services
to a diversified group of customers. The Company's customers include companies
which have a long term strategic need to outsource their IC testing
requirements and companies which use external suppliers to meet overflow or
specialized testing needs. The Company believes that its diversified customer
base enhances the stability of its operations, increases efficiencies and
maximizes capacity utilization rates. The Company intends to leverage its
geographical proximity to its customers and the relationships formed during
the Inventive Stage to capture an increasing share of its customers' higher
volume production business.
Expand Capacity Worldwide. To take advantage of increasing demand for IC
testing services and the continued outsourcing of IC testing by semiconductor
companies, the Company plans to further expand its capacity worldwide. In
1997, the Company more than doubled its testing capacity through the
acquisition of DTS and internal growth. The Company plans to continue to
expand by increasing testing capacity in the Silicon Valley, Hong Kong and
Singapore, and by opening additional facilities outside of North America in
1998 and thereafter. The Company believes that by expanding its capacity in
international locations, it will be able to increase its participation in the
significant Asian test market. In addition, the Company intends to enter into
turnkey relationships with wafer foundries and complementary semiconductor
services subcontractors in Asia.
Focus on Testing Complex, High-Performance Logic ICs. The Company intends to
maintain its primary focus on the market for testing complex, high-performance
logic ICs, which is expected to outpace the growth of the overall
semiconductor market. Due to the increasing complexity of high-performance
ICs, and the increasing cost of advanced test equipment, the Company believes
that it is becoming less cost-effective for its customers to test these
products internally. Shorter product life cycles for high-performance ICs
discourage customers from investing in expensive test equipment that will
rapidly become obsolete. By focusing its resources on testing complex, high-
performance ICs, the Company has developed significant technical expertise and
is able to achieve economies of scale in equipment purchases and effective
equipment utilization rates. In addition, to satisfy its customers'
requirements, the Company also provides testing of lower performance products.
SERVICES
The Company offers a broad range of services, including software
development, electrical verification, reliability analysis, failure analysis,
wafer sort, production monitoring and quickturn and prototype packaging. The
Company provides its testing and test-related services on all major types of
ICs, including logic, mixed-signal, RF and memory ICs. Such products are used
in a broad range of applications, including automotive, consumer electronics,
the Internet, intranets, mass storage, military/aerospace, medical, multimedia
and wireless communications. Further, the Company is able to provide testing
services on all major IC package types. Certain of the Company's testing
facilities are qualified by U.S., European and Japanese industry standards
organizations. The Company's San Jose facility is also a military certified
facility for test and certification of components used by the U.S. Department
of Defense, military and aerospace suppliers, and the National Security
Administration for classified programs.
Advanced testing equipment is critical to providing leading edge testing
services. The Company obtains advanced testing equipment from all major test
equipment manufacturers, including Credence Corporation, Hewlett-Packard
Company, LTX Corporation and Teradyne Corporation. The Company works closely
with its vendors to evaluate and obtain the latest testing equipment and has
long-term order forecasts in place to shorten the effective lead time
necessary for the delivery of new equipment. In addition, certain of the
Company's test equipment suppliers frequently use the Company's training
facilities and staff to provide training to such suppliers' existing and
prospective customers. Further, the Company works with its customers to ensure
that it is
34
<PAGE>
aware of the latest IC development trends, thereby allowing the Company to
anticipate its customers' future testing needs and obtain the appropriate
advanced test equipment.
INVENTIVE STAGE SERVICES
During the Inventive Stage, the Company provides a variety of services,
including software development, electrical verification, reliability analysis
and failure analysis.
Software Development. The Company works closely with its customers to
develop test software that comprehensively tests the functionality of ICs. The
Company provides sophisticated software engineering services including test
program development, conversion and optimization, and related hardware design.
Generally, testing requires customized testing software and related hardware
to be developed for each particular product. The Company's proprietary tool,
ISEasyTest, facilitates rapid generation of test programs for digital-CMOS
ICs. These test programs incorporate multiple IDD (static) measurements of the
current contributed by the core of the IC, thereby enhancing the thoroughness
of the test. The Company also develops customized software tools for
converting programs from one equipment platform to another. In addition, the
Company focuses its efforts on developing test software with rapid execution
times. By utilizing high quality test software with rapid test execution on
the latest advanced test equipment, the Company believes it is able to offer
low per unit costs for testing.
Electrical Verification. The Company tests wafers and/or a prototype of a
packaged device to verify compliance with a variety of different operating
specifications, including functionality, frequency, voltage, timing and
temperature range. If the device functions to specification during this
process, it is released for reliability testing. In the event that the
functionality of the tested IC does not meet published specifications, the
Company works with its customers' design and test engineers to determine the
cause of the failure. If it is determined that the failure occurred due to a
defect in the circuit design, the product is subjected to failure analysis.
The Company is capable of testing ICs with up to 512 I/O pins and ICs
operating at data rates of up to 330 MHz. Electrical verification may be
provided to commercial or industrial specifications, as well as to more
rigorous military, space and other high reliability specifications.
Reliability Analysis. To ensure the continued functionality of an IC over
time and under varying conditions, the Company offers reliability testing
services during the Inventive Stage. The Company's reliability services assess
the long-term reliability of ICs and their suitability of use for intended
applications. Reliability testing provides data to improve field reliability,
reduce warranty costs and minimize the shipment of marginal products. The
Company is a leader in providing reliability test techniques that allow a
rapid evaluation, thus reducing cycle time and facilitating the rapid time to
market requirements of its customers. The Company offers reliability tests
including burn-in services, highly accelerated stress testing (HAST),
electrostatic discharge (ESD) and other accelerated shock testing techniques,
such as latch-up, gross and fine leak, 85/85, mechanical shock and thermal
shock. Once testing establishes the reliability of the IC, it is released for
manufacture. The Company also issues reliability reports on customer ICs,
which are often used by its customers as a benchmark for the IC's overall
reliability.
Failure Analysis. In the event that an IC does not meet the criteria
established by design engineers during electrical verification or reliability
testing, the Company offers its customers failure analysis services. Using the
latest in non-contact EBEAM imaging equipment, which illustrates the flow of
electrons through a device, the Company is able to aid design engineers in
determining where an error in the IC design exists. The Company then assists
the design engineers to correct the circuit design with Focused Ion Beam
equipment, which removes and replaces the defective portion of the IC,
allowing the prompt continuation of the testing process for the product.
Additional tools used by the Company for failure analysis include acoustic x-
ray and SEM imaging.
PRODUCTION STAGE SERVICES
The majority of the IC testing performed by the Company occurs during the
Production Stage, once volume manufacturing of the IC has commenced. During
this stage, the Company continues to provide electrical
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verification services (wafer sort and final test), reliability analysis and
failure analysis on ICs after they are released for manufacture. In addition,
the Company provides a variety of additional production monitoring services.
Wafer Sort. The Company commenced wafer sort services in 1984. Wafer sort
occurs immediately prior to packaging ICs and involves the electrical testing
of each die on the processed wafer to ensure conformance to customer
specifications and to improve final yields of packaged ICs. The Company also
offers performance sorting, in which die with different performance
characteristics are identified and separated. This service allows customers to
make a performance distinction prior to packaging. After the wafer sort has
been completed, conforming die are packaged.
Final Test. The Company commenced final test services in 1983. Final test
occurs after ICs are packaged and involves electrical testing and inspection
of the packaged ICs to ensure that they conform to customer specifications.
After the final test has been completed, packaged ICs are either drop-shipped
to the end-user or returned to the Company's customers.
Production Monitoring. The Company production monitoring services are
designed to assess the integrity of its customer's IC designs, wafer
fabrication and packaging processes. Such integrity is measured by performing
a subset of the reliability tests performed by the Company during the
Inventive Stage on a sample of production ICs. The results of the Company's
production monitoring services enable its customers to improve production
yields and quality by remedying, where necessary, their IC designs and wafer
fabrication and packaging processes.
OTHER SERVICES
Semiconductor Packaging Services. The Company provides a range of
semiconductor packaging services through its facility located in Manteca,
California. During the IC packaging process, an individual die is encapsulated
in plastic or other material to protect the die from damage and to facilitate
electrical connections and thermal dissipation. The Company's packaging
capabilities include three package types: MQUAD; quad flat packages ("QFP");
and ball grid array ("BGA") packages. In addition, through ISE HK, the Company
provides turnkey packaging services and high volume testing in collaboration
with Hana Technologies, an independent semiconductor packaging service
provider.
The Company's Manteca Operation is focused on providing high value-added
quickturn and prototype packaging services. Because semiconductor
manufacturers continually attempt to shorten their time to market for new
products, many semiconductor manufacturers require quickturn and rapid
prototype packaging services like those provided by the Company. The Company's
geographical proximity to Silicon Valley facilitates such quick turnaround
design and prototype production. The Company believes that its ability to
offer such packaging services will become an increasingly important
competitive advantage by enabling the Company to develop close relationships
with customers early in the development process.
In addition to its quickturn and prototype business, the Company operates a
captive packaging line for Delphi Electronics, a subsidiary of General Motors
("Delphi"). Delphi owns the equipment used in its packaging line, while the
Company provides materials and staffing. The Delphi line packages sensors used
in automotive applications.
CUSTOMERS AND MARKETING
During the last twelve months, the Company has provided services to more
than 250 customers worldwide, consisting primarily of vertically integrated
semiconductor companies and fabless semiconductor companies. In the aggregate,
the top five customers accounted for 58.4%, 60.4%, 54.2% and 45.2% of total
revenues in fiscal 1995, 1996 and 1997 and the first quarter of fiscal 1998,
respectively. Hana Technologies accounted for 21.4%, 30.2% and 19.0% of the
Company's revenues in fiscal 1996, fiscal 1997 and the three months ended
January 31, 1998, respectively. A significant portion of the business that the
Company derives from Hana Technologies relates to testing services for LSI
Logic. Additionally, LSI Logic directly accounted for 29.5% and 16.1% of the
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Company's revenue in fiscal 1995 and fiscal 1996, respectively. Cirrus Logic
accounted for 13.4% of the Company's revenues in the three months ended
January 31, 1998. No other customer accounted for more than 10% of the
Company's revenues during these periods. The following table sets forth
certain of the Company's major customers:
8x8, Inc. ESS Technology, Inc. Oak Technology, Inc.
Actel Corporation European Silicon Orbit Semiconductor
Adaptec, Inc. Structures Inc.
Advansys Inc. Gadzoox Microsystems, Inc. Pantronix
AHA, Inc. Hamilton Hallmark Corporation
Alliance Semiconductor Technologies Philips Electronics
Corporation Hana Technologies, Limited N.V.
Altera Corporation Hewlett-Packard Company Quality
AMI Instruments, Inc. Honeywell Inc. Semiconductor, Inc.
Amkor Anam Test Services Hughes Defense Quantum Effect
Inc. Communications Design Inc.
Analog Devices, Inc. I-Cube, Inc. Rendition, Inc.
Atmel Corporation ICS, Inc. S3 Incorporated
Auravision Corporation Integrated Silicon Silicon Graphics,
C-Cube Microsystems, Solution, Inc. Inc.
Inc. Intel Corporation Silicon Image Inc.
Chip Express Corporation Lattice Semiconductor SMC Corporation
Chips and Technologies, Corporation Solectron
Inc. Level One Technologies, Corporation
Cirrus Logic, Inc. Inc. Synergy
Credence Systems LSI Logic Corporation Microsystems, Inc.
Corporation Marvel Semiconductor, Inc. Synopsys, Inc.
Cypress Semiconductor Matra Design Semiconductor Trident Corporation
Corporation Micro Devices Technology, Triquint
Delphi (a subsidiary of Inc. Semiconductor, Inc.
General Motors Minimed Technologies, Inc. TRW Inc.
Corporation) Mosys International, Inc. Tseng Labs, Inc.
Durel Corporation Motorola, Inc. Vitesse
DynaChip Corporation NChip, Inc. Semiconductor
Epic Corporation National Semiconductor Corporation
Corporation WSI Corporation
NeoMagic Corporation Wyle Laboratories,
Novalog, Inc. Inc.
Xilinx, Inc.
Zoran Corporation
Zycad Corporation
The Company has based and will continue to base its marketing efforts on the
established expertise and experience of its founders and senior management,
their level of participation in the semiconductor market, and the contacts
that such founders and senior management have developed among existing and
potential customers within the semiconductor industry. The Company believes
that its advanced testing technology and its reputation for high quality and
reliable services have been important factors in attracting and retaining
customers. The Company has received numerous awards from its customers
recognizing the quality of its services.
The Company's customer service group provides technical support to
customers, aids in problem solving and provides product scheduling and
tracking information before and during the processing cycles. The Company
works closely with its customers during product development by providing
technical input and guidance to assist in the development of product test
programs, whether developed by the Company or the customer. In addition, the
founders and the engineers of the Company continue to work with customers at
the engineering level throughout the semiconductor development and production
process. The Company has developed proprietary work in progress ("WIP")
software that enables its customers to obtain real-time production status of
products via the Internet. The Company believes that customer satisfaction has
been critical to its past success and will continue to be critical to
achieving future growth.
Customers frequently require that the Company's facilities and procedures
undergo a stringent vendor qualification process. The qualification process
typically takes from two to six weeks, and can take longer depending on the
requirements of the customer. After the Company has been qualified by a
customer and before such customer delivers ICs to the Company for volume
testing during the Production Stage, a process known as "correlation" is
undertaken. During the correlation process, which typically takes from two
days to two weeks, the customer provides the Company with sample ICs to be
tested and either provides the Company with the test
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program or requests that the Company develop a conversion program. In certain
cases, the customer also provides the Company with a data log of results of
any testing of the IC which the customer may have conducted previously.
The ability of the Company to maintain close, satisfactory relationships
with its customers is important to the ongoing success and profitability of
its business. The Company expects that it will continue to be dependent upon a
relatively limited number of customers for a significant portion of its
revenues in future periods. None of the Company's customers is presently
obligated pursuant to any contractual commitment or otherwise to purchase any
amount of the Company's test or packaging services or to provide the Company
with binding forecasts of product or service purchases for any period.
Moreover, all of the Company's customers operate in the cyclical semiconductor
industry and may vary order levels significantly from period to period.
Accordingly, there can be no assurance that any of the Company's customers
will continue to place orders with the Company in the future at the same
levels as in prior periods. See "Risk Factors--Dependence on the Highly
Cyclical Semiconductor and Personal Computer Industries" and "--Significant
Customer Concentration; Absence of Long-Term Customer Contracts."
Until recently, the Company's Manteca Operation has been almost entirely
dependent on two customers. However, in January 1998 one of these customers
notified the Company that by the end of the second quarter of fiscal 1998, it
will no longer be a customer of the Company. Accordingly, the Company's
Manteca Operation (which accounted for approximately 10% of the Company's
revenues in the first quarter of fiscal 1998) is dependent on one customer,
for substantially all of its revenues. In addition, the Company's Hong Kong
subsidiary is dependent on Hana Technologies Limited, formerly Swire
Technologies ("Hana Technologies"), the Company's largest customer, for
substantially all of its revenues. Furthermore, a significant portion of the
business that the Company derives from Hana Technologies relates to testing
services for LSI Logic, which has historically been a significant customer of
the Company's domestic test operations. There can be no assurance that any one
or more of the Company's significant customers, including the major customers
of the Company's Manteca Operation or Hong Kong subsidiary, will not reduce,
cancel or delay orders or seek other suppliers, which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company does not typically operate with any material backlog and, as a
result, the Company expects that in the future, revenues in any quarter will
be substantially dependent upon orders received in that quarter. The Company's
expense levels are based in part on its expectations of future revenues and
the Company may be unable to adjust costs in a timely manner to compensate for
any revenue shortfall. See "Risk Factors--Significant Customer Concentration;
Absence of Long-Term Customer Contracts."
QUALITY CONTROL AND ASSURANCE
The Company believes that its advanced testing technology and its reputation
for high quality and reliable services have been important factors in
attracting and retaining leading international semiconductor companies as
customers. The quality requirements imposed by the diversified product markets
served by the Company require the implementation and execution of quality
assurance systems that impose strict process controls, statistical in-line
monitors, supplier control, data review and management, quality controls and
corrective action systems. The Company's quality control systems are designed
to ensure that all test procedures adhere to the customer's specifications.
These systems include, among other things, quality control stations along
production lines, monitoring of the test area environment and product
inspections prior to shipment. These quality control systems are designed to
ensure high quality service to customers and testing reliability at the
Company's facilities. Certain of the Company's testing operations are
qualified by U.S., European and Japanese industry standards organizations. The
Company's San Jose facility is also military certified for test and
certification of components used by the U.S. Department of Defense, military
and aerospace suppliers, and the National Security Administration for
classified programs. See "--Customers and Marketing."
The Company's facilities in San Jose and Santa Clara have been certified as
meeting the ISO 9002 quality standards by the International Standards
Organization (ISO). Although the ISO 9002 certification for the Manteca
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Operation lapsed under its previous owner, the Company has renewed such
certification. ISO 9002 standards apply to installation and production
operations. The ISO certification process involves an evaluation of a
company's production processes and its management systems.
COMPETITION
The Company competes in the independent semiconductor testing and packaging
markets principally on the basis of engineering skills, quality, reliability,
price, responsiveness and flexibility, delivery cycles and range of services
available. The Company's competitors include large independent IC services
providers, small independent IC testing and packaging companies offering niche
services, and vertically integrated semiconductor manufacturers which have in-
house testing and packaging capabilities. Large independent IC services
providers with which the Company competes include Anam Industrial Co., Ltd.,
ASAT Limited, a subsidiary of QPL Holdings, ASE Test Limited, a subsidiary of
Advanced Semiconductor Engineering, Inc., Siliconware Precision Industries
Co., Ltd., ST Assembly Test Services Pte Ltd and Taiwan Semiconductor
Manufacturing Company Ltd., many of which have significantly larger financial,
marketing, distribution and other resources than the Company. Many of these
companies have also established relationships with current or potential
customers of the Company and have developed strategic relationships with third
party providers of complementary semiconductor services to enlarge their
businesses. The Company may be at a competitive disadvantage with such
competitors that have fostered such relationships if the Company does not
continue to develop such strategic relationships in the future. The small
independent IC testing and packaging companies with which the Company competes
generally offer a limited range of services and typically compete on the basis
of price. Vertically integrated semiconductor manufacturers that are customers
of the Company continuously evaluate the Company's services against developing
or using their own in-house capabilities, and most of these customers also
obtain testing services from other sources. Vertically integrated customers
may have more advanced testing technologies and typically have greater
financial, marketing, distribution and other resources than the Company.
The Company believes that its primary competitors in the test portion of its
business are located in Asia, particularly in Korea, Taiwan, Malaysia,
Singapore and Japan. Certain of such competitors may locate testing facilities
in North America in the future. In addition, several companies have announced
plans to commence independent testing operations in Asia, and several
independent testing companies in Asia which currently offer only memory
testing services could add logic testing and wafer sort. These operations
would compete directly with the Company. Although in recent years
semiconductor companies have increasingly outsourced portions of the IC
production process, including testing, to independent companies to reduce
costs and shorten production cycles, there can be no assurance that this
outsourcing trend will continue. From time-to-time, the Company has lost
business from customers who have chosen to perform their testing operations
in-house. A reversal of, or a slowdown in, this outsourcing trend would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Highly Competitive Industry."
RESEARCH AND DEVELOPMENT
The Company believes that its research and development program is an
integral component of its business strategy. The Company's research and
development efforts have focused on improving the efficiency and technology of
its testing processes. The Company's current projects include continuing
development of software tools that enable rapid automatic generation and
cross-platform conversion of test programs to test logic and mixed signal ICs.
The Company is also continuing to improve its existing programs that provide
its customers with access to a variety of technical and operational data via
the Internet. The Company's research and development efforts also include
continuing development of interface designs to provide for high-frequency
testing by minimizing electrical noise. In addition, the Company works closely
with its customers in designing and modifying testing software and works with
equipment vendors to increase the efficiency and reliability of testing
equipment.
The Company incurred research and development expenses of $1.0 million, $1.1
million, $1.1 million and $673,000, in fiscal 1995, 1996 and 1997 and the
first quarter of fiscal 1998, respectively, representing approximately 4.7%,
4.4%, 3.1% and 3.3% of revenues, respectively. The Company has historically
expensed all research and development costs as incurred and none are currently
capitalized.
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The semiconductor industry is characterized by rapid increases in the
diversity and complexity of semiconductor products. As a result, the Company
expects that it will need to offer, on an ongoing basis, more advanced testing
technologies and procedures in order to respond to competitive industry
conditions and customer requirements. The failure by the Company to achieve
advances in its testing technology or process or to obtain access to advanced
testing technology could have a material adverse effect on its business,
financial condition and results of operations.
FACILITIES
The Company's testing operations are conducted in facilities located in San
Jose and Santa Clara, California, and in Hong Kong and Singapore. These
facilities have a total floor space of approximately 183,000 square feet and
typically operate 24 hours per day in two or three shifts, seven days per
week. The Company's packaging operations are conducted at its facility located
in Manteca, California. Substantially all of the Company's other operations,
including its principal executive offices, are located at its testing
facilities.
The Company owns two facilities totaling 86,000 square feet in San Jose,
California, its 85,000 square foot facility in Manteca, California, and 20,000
square feet of its Hong Kong facility. The Company currently leases its 71,000
square foot facility in Santa Clara, California. The lease on this facility
expires in September 2000. The Company also leases an additional 4,000 square
foot office facility in Hong Kong. The lease on this facility expires in April
1999. Currently, the Company is temporarily utilizing approximately 1,000
square feet at a customer's facility in Singapore. However, the Company is
currently negotiating a lease for a 10,000 square foot testing facility in
Singapore. The Company expects that this lease will be effective in May 1998
and will terminate in May 2001. The Company believes that it has adequate
facilities to accommodate its needs for at least the next 12 months.
While the Company believes that it has effectively managed its expansion in
recent years, there can be no assurance that it will be able to do so in the
future. Failure of the Company to implement its expansion plans in a timely
manner could materially adversely affect its ability to maintain, expand and
diversify its customer base, and there can be no assurance that the
implementation by the Company of its expansion plans will not materially
adversely affect its existing operations. See "Risk Factors--Expansion of
Testing Capacity; Results of Operations Affected by Capacity Utilization
Rates" and "--No Assurance of Successful Expansion of Operations; Management
of Recent Growth."
The Company's testing operations take place in testing areas where air
purity, temperature, humidity and electrostatic discharge are controlled. The
inability of the Company to control its testing environment could cause some
tested ICs or wafers to be nonfunctional. The Company has from time-to-time
experienced, and may in the future experience, production interruptions due to
technical problems in the testing process. Any interruption in the Company's
operations could have a material adverse effect on its business, financial
condition and results of operations. See "Risk Factors--Risks Relating to
Complexity of Testing Processes."
EMPLOYEES
As of October 31, 1997, the Company had 561 employees, with 415 in general
operations, 42 in engineering (including research and development), 51 in
quality assurance, 31 in sales, administration and finance and 22 in other
capacities. The Company has not entered into collective bargaining agreements
with any of its employees. The Company has not experienced any strikes or work
stoppages by its employees and believes that its relationship with its
employees is good. See "Risk Factors--Dependence on Key Personnel and
Availability of Skilled Workforce."
LEGAL PROCEEDINGS
From time-to-time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Prospectus, the Company is not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition and
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE
The executive officers, directors and key employee of the Company, and their
ages and positions as of January 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers and
Directors
Saeed A. Malik.......... 45 President, Chief Executive Officer and Director
Sassan Raissi........... 53 President of Digital Testing Services, Inc.
Ray G. Grammer.......... 60 Chief Financial Officer and Treasurer
Laurence F. Jorstad..... 50 Vice President, Engineering and Director
Alex M. Barrios......... 47 Vice President, Operations and Director
Zafar A. Malik.......... 42 President of Integrated Qualification Labs Division
Patrick H. Yu........... 44 Vice President, Applications Engineering
Dharam V. Ahuja......... 56 Vice President, Business Development
Muneer A. Malik......... 47 Director(1)
Terry N. Holdt.......... 54 Director(1)
Key Employee
Rabbi-ul-Islam.......... 31 General Manager, ISE Hong Kong Limited
</TABLE>
- ---------------------
(1) Member of the Compensation and Audit Committees.
Saeed A. Malik is a founder of the Company and has served as President and
Chief Executive Officer and a Director of the Company since 1983. From 1980 to
1983, Mr. Malik was a partner of International Semiconductor Engineering
("IS"), a test-engineering consulting service. Prior thereto, Mr. Malik served
in various management and test engineering capacities at American
Microsystems, Inc., Fairchild Semiconductor Corporation ("Fairchild") and
Raytheon Semiconductor, Inc. Mr. Malik is the brother of Messrs. Zafar A. and
Muneer A. Malik. Mr. Malik holds a B.S. in Physics from the University of
Karachi, an M.S. in Solid-State Physics from the University of Karachi, and an
M.A. in Political Science from California State University, San Jose.
Sassan Raissi has served as President of DTS since 1995. Dr. Raissi is a
founder of DTS and from 1987 to 1995, served as its Vice President of
Engineering and General Manager and from 1984 to 1986, served as its
President. From 1977 to 1984, Dr. Raissi served in various positions at
Fairchild, including Operations Manager for the Microprocessor Group. Dr.
Raissi holds a B.A. in Mathematics from California State University,
Sacramento, an M.S. in Mathematics from California State University, San Jose
and a doctorate in Applied Mathematics from Washington State University.
Ray G. Grammer has served as Chief Financial Officer of the Company since
November 1997. From June 1991 to October 1997, Mr. Grammer served in various
executive positions at Alphatec USA, Inc., including Chief Financial Officer
and Vice President of Business Development. From 1989 to 1991, Mr. Grammer
served as Vice President of Finance for Headland Technology, Inc., a
subsidiary of LSI Logic, Inc. From 1984 to 1990, Mr. Grammer served as
Corporate Controller of Signetics Corporation, a semiconductor manufacturer.
Mr. Grammer holds a B.S. in Business from the University of Illinois.
Laurence F. Jorstad is a founder of the Company and has served as Vice
President of Engineering, and a Director of the Company since 1983. From 1980
to 1983, Mr. Jorstad was a partner at IS. Prior thereto, Mr. Jorstad served in
various engineering capacities, including Test Engineer, at National
Semiconductor Corporation, the camera and instrument division of Fairchild and
Boeing Co. Mr. Jorstad holds a B.S. in Electrical Engineering from California
State University, San Jose.
Alex M. Barrios is a founder of the Company and has served as Vice President
of Operations and a director of the Company since 1983. From 1980 to 1983, Mr.
Barrios was a partner at IS. From 1978 to 1980, Mr. Barrios
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was an independent consultant developing test software and hardware. Prior
thereto, Mr. Barrios served in various engineering capacities at American
Microsystems, Inc. including Test Engineer from 1975 to 1978. From 1972 to
1975 he served as an Assistant Engineer at Motorola, Inc. Mr. Barrios holds an
A.A. in Electronics from Maricopa Technical Junior College.
Zafar A. Malik has served as President of the Company's Integrated
Qualification Labs Division ("IQL") since 1989. From 1985 to 1989, Mr. Malik
served as the Director of Quality at LSI Logic. From 1982 to 1985, Mr. Malik
served as Manager of Product Assurance at Ferranti Interdesign, Inc., a
semiconductor manufacturer. Mr. Malik is the brother of Messrs. Saeed A. and
Muneer A. Malik. Mr. Malik holds a B.S.C. in Finance from California State
University, San Jose and an M.B.A. from the University of Phoenix.
Patrick H. Yu is a founder of the Company and has served as its Vice
President, Applications Engineering since 1996. From 1983 to 1996, Mr. Yu
served in various management positions at the Company, including Engineering
Manager and General Manager at ISE Hong Kong Limited. From 1980 to 1983, Mr.
Yu was a partner at IS. Mr. Yu holds a B.S. in Electrical Engineering from
Purdue University.
Dharam V. Ahuja has served as Vice President, Business Development of the
Company since March 1997. Since 1987, Mr. Ahuja has served as President of
Strategic Alliance Inc., a consulting firm. From January 1997 to August 1997,
Mr. Ahuja served as Vice President of Corporate Finance of Janda, Phillips and
Garrington, an investment banking firm. Mr. Ahuja is a founder and served as
Chief Executive Officer of Hypervision, Inc., a semiconductor equipment
company, from 1989 to 1991. Mr. Ahuja is a founder and served as Chief
Executive Officer of Shiva Multisystems, Inc., a software company, from 1984
to 1987. From 1983 to 1984, Mr. Ahuja served as Executive Vice President of
Marketing and Sales for North Star Computers. From 1977 to 1982, Mr. Ahuja
served in various positions at National Semiconductor Corporation, including
Vice President of Worldwide Marketing of National Advanced Systems (now
Hitachi Data Systems Corporation). From 1967 to 1975, Mr. Ahuja served in
various positions at International Business Machines Corporation. Mr. Ahuja
holds a B.S. in Chemical Engineering from the University of Delhi and an
M.B.A. from the University of California, Los Angeles.
Muneer A. Malik has served as a Director of the Company since December 1997.
Since 1997, Mr. Malik has been a partner of Muneer A. Malik & Co. Attorneys At
Law, Advocates in Karachi, Pakistan. From 1977 to 1997, Mr. Malik was a
partner in Ahmed & Malik Attorneys at Law in Pakistan. Since 1990, Mr. Malik
has served as an advocate of the Supreme Court of Pakistan. From 1990 to 1995,
Mr. Muneer was elected as a member of the Bar Counsel in Pakistan, the highest
authority regulating attorneys in Pakistan. From 1986 to 1987, Mr. Malik was
President of the Karachi Bar Association. From 1974 to 1975, Mr. Malik was an
associate at Price Waterhouse, LLP in San Jose, California. Mr. Malik is the
brother of Messrs. Saeed A. and Zafar A. Malik. Mr. Malik holds a B.S. in
Business Administration from California State University, San Jose and a J.D.
from Santa Clara University.
Terry N. Holdt has served as a Director of the Company since December 1997.
Since January 1998, Mr. Holdt has been President, Chief Executive Officer and
Chairman of the Board of Directors of S3 Incorporated, a multimedia and
graphics company. From August 1996 to January 1998, Mr. Holdt served as Vice
Chairman of S3 Incorporated. From January 1992 to August 1996, Mr. Holdt
served as President and Chief Executive Officer of S3 Incorporated. Mr. Holdt
was Chairman of the Board of Paradigm Technology, Inc., a semiconductor
company, from June 1991 to January 1992 and was its President and Chief
Executive Officer from June 1988 to May 1991. From 1986 to 1988, Mr. Holdt
held various executive positions, including President, at Linear Corporation,
a manufacturer of electronic telemetry and infrared security systems. From
1981 to 1985, Mr. Holdt held various executive positions at Western Digital
Corporation, a manufacturer of computer peripherals, where he was most
recently Executive Vice President and Chief Operating Officer. Mr. Holdt has
served as a Director of S3 Incorporated, since January 1992. Mr. Holdt holds a
B.S.E.E. and an M.S.E.E. from the University of Illinois.
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Rabbi-ul-Islam has served as General Manager of ISE Hong Kong Limited since
November 1997. From 1995 to 1997, Mr. Islam served in various positions at the
Company, including test engineer, staff engineer and operation manager. From
1993 to 1995, Mr. Islam served as a design engineer of Hong Kong Connector
Company Ltd. Mr. Islam holds a B.S. and an M.S. in Engineering from the
Beijing University of Posts and Telecommunications.
BOARD OF DIRECTORS
The Company's Board of Directors consists of five directors, including two
non-employee directors. Each director is elected for a period of one year at
the Company's annual meeting of shareholders and serves until the next annual
meeting or until his successor is duly elected and qualified. The executive
officers serve at the discretion of the Board of Directors. Messrs. Saeed A.
Malik, Zafar A. Malik and Muneer A. Malik are brothers. In addition to their
participation in the 1998 Incentive Plan, directors are reimbursed for
expenses incurred in connection with attending Board and committee meetings
and receive $1,000 for each Board meeting attended and $250 for each committee
meeting attended (provided such committee meeting does not occur on the same
day as a Board meeting). Mr. Muneer A. Malik and Mr. Holdt will also receive a
per annum fee of $30,000 for serving on the Board of Directors. Effective upon
their election to the Board of Directors in December 31, 1997, each such non-
employee Board member received a nonqualified stock option grant for 52,500
shares of Common Stock at $10.40 per share. Directors are not otherwise
compensated for their services as directors.
Upon the closing of this offering, the Company's Amended and Restated
Articles of Incorporation will provide for a classified Board of Directors
consisting of two classes of directors, each serving staggered two-year terms.
As a result, approximately one-half of the Company's Board of Directors will
be elected each year. Under California law, in order to implement a classified
Board of Directors, the Company must satisfy numerous listing and trading
criteria, including the provision that the Company must have 800 or more
shareholders of record. Once the Company complies with such criteria, at the
Company's next ensuing Annual Meeting of Shareholders approximately one-half
of the nominees to the Board will be elected for one-year terms, and one-half
will be elected for two-year terms. Thereafter, all directors will be elected
for two-year terms.
In December 1997, the Board established an Audit Committee and a
Compensation Committee. The Audit Committee, which reviews the Company's
annual audit and meets with the Company's independent accountants to review
the Company's internal controls and financial management practices, currently
consists of Messrs. Muneer A. Malik and Holdt. The Compensation Committee,
which recommends to the Board compensation for certain of the Company's
personnel and administers the Company's stock plans, currently consists of
Messrs. Muneer A. Malik and Holdt. Prior to the formation of the Compensation
Committee, decisions regarding compensation of executive officers were made by
the Board of Directors as a whole.
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<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid or accrued by the Company and its subsidiaries to or on
behalf of the Company's Chief Executive Officer and each of the four other
most highly paid executive officers whose aggregate compensaton during the
last fiscal year exceeded, or would have exceeded on an annualized basis,
$100,000 officers of the Company (hereinafter referred to as the Named
Executive Officers) services rendered in all capacities to the Company and its
subsidiaries for the fiscal year ended October 31, 1997 (no option grants were
made to, and no options were exercised by, the Named Executive Officers during
the last fiscal year):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRESENT PRINCIPAL POSITION SALARY BONUS
<S> <C> <C>
Saeed A. Malik............................................. $ 217,800 $ 320,000
President and Chief Executive Officer
Laurence F. Jorstad........................................ 188,760 220,000
Vice President, Engineering
Alex M. Barrios............................................ 156,200 180,000
Vice President, Operations
Patrick H. Yu.............................................. 110,000 180,000
Vice President, Applications Engineering
Zafar A. Malik............................................. 72,589 220,000
President of IQL Division
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are Mr. Holdt and Mr. Muneer A. Malik. No executive officer of the
Company serves on the board of directors or compensation committee of any
entity which has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "1998 Plan") is intended to
serve as the successor equity incentive program to the Company's 1997 Stock
Option/Stock Issuance Plan (the "Predecessor Plan"). The 1998 Plan was adopted
by the Board of Directors and was approved by the shareholders on April 2,
1998. The 1998 Plan became effective on April 2, 1998 (the "Plan Effective
Date").
A total of 4,500,000 shares of Common Stock have been authorized for
issuance under the 1998 Plan. Such share reserve consists of the number of
shares available for issuance under the Predecessor Plan on the date the
Underwriting Agreement for this offering is executed (the "Underwriting
Date"), including the shares subject to outstanding options plus an additional
1,000,000 shares. In addition, the number of shares of Common Stock reserved
for issuance under the 1998 Plan will automatically be increased on the first
trading day of each calendar year, beginning in calendar year 1999, by an
amount equal to the lesser of three percent (3%) of the total number of shares
of Common Stock outstanding on the last trading day of the preceding calendar
year or 1,000,000 shares. In no event, however, may any one participant in the
1998 Plan receive after the Underwriting Date option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
500,000 shares of Common Stock in the aggregate per calendar year.
On the Underwriting Date, outstanding options and unvested shares issued
under the Predecessor Plan will be incorporated into the 1998 Plan, and no
further option grants will be made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to
44
<PAGE>
extend one or more features of the 1998 Plan to those options. Except as
otherwise noted below, the incorporated options have substantially the same
terms as will be in effect for grants made under the Discretionary Option
Grant Program of the 1998 Plan.
The 1998 Plan is divided into five separate components: (i) the
Discretionary Option Grant Program under which eligible individuals in the
Company's employ or service (including officers, non-employee Board members
and consultants) may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
100% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the
time of issuance or as a bonus tied to the performance of services, (iii) the
Salary Investment Option Grant Program which may, in the Plan Administrator's
sole discretion, be activated for one or more calendar years and, if so
activated, will allow executive officers and other highly compensated
employees the opportunity to apply a portion of their base salary to the
acquisition of special below-market stock option grants, (iv) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee Board members to purchase shares
of Common Stock at an exercise price equal to 100% of their fair market value
on the grant date and (v) the Director Fee Option Grant Program which may, in
the Plan Administrator's sole discretion, be activated for one or more
calendar years and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise payable to
them in cash each year to the acquisition of special below-market option
grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the Federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. However, any discretionary
option grants or stock issuances to members of the Compensation Committee
shall be made by a disinterested majority of the Board. The Compensation
Committee will also have the exclusive authority to select the executive
officers and other highly compensated employees who may participate in the
Salary Investment Option Grant Program in the event that such program is
activated for one or more calendar years, but neither the Compensation
Committee nor the Board will exercise any administrative discretion with
respect to option grants under the Salary Investment Option Grant Program or
under the Automatic Option Grant or Director Fee Option Grant Program for the
non-employee Board members. All grants under those three latter programs will
be made in strict compliance with the express provisions of each such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1998 Plan may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date. The option may also be
exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the Plan Administrator may provide financial assistance
to one or more optionees in the exercise of their outstanding options or the
purchase of their unvested shares by allowing such individuals to deliver a
full recourse, interest-bearing promissory note in payment of the exercise
price and any associated withholding taxes incurred in connection with such
exercise or purchase.
The Plan Administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from
the Company equal to the excess of (i) the fair market value of the vested
shares of Common Stock subject to
45
<PAGE>
the surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
Common Stock. None of the incorporated options from the Predecessor Plan
contain any stock appreciation rights.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not
to be assumed by the successor corporation will automatically accelerate in
full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have complete discretion to
grant one or more options under the Discretionary Option Grant Program which
will become fully exercisable for all of the option shares in the event those
options are assumed in the acquisition and the optionee's service with the
Company or the acquiring entity terminates within a designated period
following such acquisition. The vesting of outstanding shares under the Stock
Issuance Program may be accelerated upon similar terms and conditions. The
Plan Administrator will also have the authority to grant options which will
immediately vest upon an acquisition of the Company, whether or not those
options are assumed by the successor corporation. The Plan Administrator is
also authorized in its sole discretion under the Discretionary Option Grant
and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights may
immediately vest in connection with a change in control of the Company
(whether by successful tender offer for more than fifty percent (50%) of the
outstanding voting stock or a change in the majority of the Board by reason of
one or more contested elections for Board membership), with such vesting to
occur either at the time of such change in control or upon the subsequent
termination of the individual's service within a designated period (not to
exceed eighteen months) following such change in control. The options
incorporated from the Predecessor Plan have similar acceleration features. In
addition, the Plan Administrator will have the sole discretion to extend the
acceleration provisions of the 1998 Plan to those options.
In the event the Plan Administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer
and other highly compensated employee of the Company selected for
participation may elect, prior to the start of the calendar year, to reduce
his or her base salary for that calendar year by a specified dollar amount not
less than $10,000 nor more than $50,000. If such election is approved by the
Plan Administrator, the individual will automatically be granted, on the first
trading day in January of the calendar year for which that salary reduction is
to be in effect, a non-statutory option to purchase that number of shares of
Common Stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of Common Stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will vest in a series of twelve (12) equal monthly installments
over the calendar year for which the salary reduction is to be in effect and
will be subject to full and immediate vesting upon certain changes in the
ownership or control of the Company.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Underwriting Date will
automatically receive an option grant for 25,000 shares on the date such
individual joins the Board, provided such individual has not been in the prior
employ of the Company. In addition, on the date of each Annual Stockholders
Meeting held after the Underwriting Date, each non-employee Board member who
is to continue to serve as a non-employee Board member either before or after
the Underwriting Date will automatically be granted an option to purchase
2,500 shares of Common Stock, provided such individual has served on the Board
for at least six months.
Each automatic grant for the non-employee Board members will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all
of the option shares; however, any unvested shares purchased under the option
will be subject to repurchase by the Company, at the exercise price paid per
share, should the optionee cease Board service prior to vesting in those
shares. Each automatic option grant will vest over a four-year period as
follows: 25% of
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<PAGE>
the Option Shares will vest on the one (1) year anniversary of the option
grant date, and the balance of the Option Shares will vest in twelve (12)
successive and equal quarterly installments upon the individual's completion
of each quarter of continuous Board service measured from the one (1) year
anniversary of the option grant date. However, the shares subject to each
automatic grant will immediately vest in full upon certain changes in control
or ownership of the Company or upon the optionee's death or disability while a
Board member.
Should the Director Fee Option Grant Program be activated in the future,
each non-employee Board member will have the opportunity to apply all or a
portion of any annual retainer fee otherwise payable in cash to the
acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for
which the retainer fee would otherwise be payable in cash. The option will
have an exercise price per share equal to one-third of the fair market value
of the option shares on the grant date, and the number of shares subject to
the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of
Common Stock on the grant date. As a result, the total spread on the option
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable for the option shares in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon (i) certain changes in the ownership or control of the Company or
(ii) the death or disability of the optionee while serving as a Board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of the Company by merger or asset sale or (ii)
the successful completion of a tender offer for more than 50% of the Company's
outstanding voting stock or a change in the majority of the Board effected
through one or more contested elections for Board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option
Grant and Director Fee Option Grant Programs and may be granted to one or more
officers of the Company as part of their option grants under the Discretionary
Option Grant Program. Options with such a limited stock appreciation right may
be surrendered to the Company upon the successful completion of a hostile
tender offer for more than 50% of the Company's outstanding voting stock. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from the Company in an amount per surrendered option share equal
to the excess of (i) the highest price per share of Common Stock paid in
connection with the tender offer over (ii) the exercise price payable for such
share.
The Board may amend or modify the 1998 Plan at any time, subject to any
required stockholder approval. The 1998 Plan will terminate on the earliest of
(i) April 1, 2008, (ii) the date on which all shares available for issuance
under the 1998 Plan have been issued as fully-vested shares or (iii) the
termination of all outstanding options in connection with certain changes in
control or ownership of the Company.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board and approved by the shareholders on April 2, 1998 and
will become effective immediately upon the execution of the Underwriting
Agreement for this offering. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and an initial reserve of 600,000 shares
of Common Stock has been established for this purpose. The reserve will be
increased, beginning in calendar year 1999, by an amount equal to the lesser
of three percent (3%) of the total number of shares of Common Stock
outstanding on the last trading day of the preceding calendar year or
1,000,000 Shares.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration for 24 months. However, the initial
offering period will begin on the execution date of the Underwriting
47
<PAGE>
Agreement and will end on the last business day in July 2000. The next
offering period will commence on the first business day in August 2000, and
subsequent offering periods will commence as designated by the Plan
Administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than 5 calendar months per year) on the start date of any
offering period may enter the Purchase Plan on that start date or on any
subsequent semi-annual entry date (the first business day of February or
August each year). Individuals who become eligible employees after the start
date of the offering period may join the Purchase Plan on any subsequent semi-
annual entry date within that offering period.
Payroll deductions may not exceed 10% of base salary, and the accumulated
payroll deductions of each participant will be applied to the purchase of
shares on his or her behalf on each semi-annual purchase date (generally the
last business day in January and July each year) at a purchase price per share
equal to 85% of the lower of (i) the fair market value of the Common Stock on
the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. The initial purchase date under the
Purchase Plan will be January 29, 1999. In no event, however, may any one
participant purchase more than 1,500 shares, nor may all participants in the
aggregate purchase more than 150,000 shares on any one semi-annual purchase
date.
Should the fair market value per share of Common Stock on any purchase date
be less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
In the event the Company is acquired by merger or asset sale, all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of such acquisition. The purchase price will be equal to
85% of the lower of (i) the fair market value per share of Common Stock on the
participant's entry date into the offering period in which such acquisition
occurs or (ii) the fair market value per share of Common Stock immediately
prior to such acquisition.
The Purchase Plan will terminate on the earlier of (i) the last business day
of July 2008 (ii) the date on which all shares available for issuance under
the Purchase Plan shall have been sold pursuant to purchase rights exercised
thereunder or (iii) the date on which all purchase rights are exercised in
connection with an acquisition of the Company by merger or asset sale.
The Board may at any time alter, suspend or discontinue the Purchase Plan.
However, certain amendments to the Purchase Plan may require shareholder
approval.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
In October 1997, the Company entered into an employment and non-competition
agreement with Dr. Raissi for a term ending on September 30, 2000. The annual
base salary for Dr. Raissi is $175,000. The employment agreement provides that
the Board may increase the annual base salary of Dr. Raissi as appropriate.
The Company paid $2,000,000 to Dr. Raissi as a sign-on bonus pursuant to the
employment and non-competition agreement. In addition, the Company will pay
$1,500,000 to Dr. Raissi as a result of his completion by January 31, 1998 of
certain performance objectives relating to the integration of ISE and DTS. In
the event the Company terminates the agreement other than for cause, the
Company must pay to Dr. Raissi, in addition to all accrued and unpaid salary
and benefits, his salary and certain benefits for three months from the date
of such termination. If the Company terminates Dr. Raissi's employment for
cause or if Dr. Raissi terminates his employment for any reason whatsoever,
then Dr. Raissi will be entitled to receive only his accrued but unpaid salary
through the date of such termination.
In October 1997, the Company entered into an employment and non-competition
agreement with Mr. Grammer for a term ending on September 30, 2000. The annual
base salary of Mr. Grammer is $175,000. The
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<PAGE>
employment agreement provides that the Board may increase the annual base
salary of Mr. Grammer as appropriate. The Company paid $175,000 to Mr. Grammer
as a sign-on bonus pursuant to the employment and non-competition agreement.
In addition, the Company will pay $100,000 to Mr. Grammer as a result of his
completion by January 31, 1998 of certain performance objectives relating to
the integration of ISE and DTS. In the event the Company terminates the
agreement other than for cause, the Company must pay to Mr. Grammer, in
addition to all accrued and unpaid salary and benefits, his salary and certain
benefits for three months from the date of such termination. If the Company
terminates Mr. Grammer's employment for cause or if Mr. Grammer terminates his
employment for any reason whatsoever, then Mr. Grammer will be entitled to
receive only accrued but unpaid salary through the date of such termination.
DIRECTOR REMUNERATION
Non-employee directors elected to the Board of Directors prior to the
Underwriting Date receive an annual fee of $30,000, as well as $1,000 for each
Board meeting attended while serving on the Board of Directors, and $250 for
each committee meeting attended (provided such committee meeting does not
occur on the same day as a Board meeting), and are reimbursed for expenses
they incur in attending Board and committee meetings. Each non-employee Board
member elected or appointed after the Underwriting Date shall be entitled to
the same fees for attendance at Board and committee meetings, but not the
annual cash fee.
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member at any time after the Underwriting Date will
automatically be granted an option to purchase 25,000 shares on the date such
individual joins the Board, provided such individual has not been previously
employed by the Company. In addition, on the date of each annual shareholders
meeting held after the Plan Effective Date, each non-employee Board member who
is to continue to serve as a non-employee Board member will automatically be
granted an option to purchase 2,500 shares of Common Stock, provided such
individual has served on the Board for at least six months. Each granted
option will have an exercise price per share equal to the fair market value
per share on the grant date. Each automatic grant for the non-employee Board
members will have a term of 10 years, subject to earlier termination following
the optionee's cessation of Board service. Each automatic option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by the
Company, at the exercise price paid per share, should the optionee cease Board
service prior to the vesting of any such shares. Each 25,000-share and 2,500-
share automatic option grant will vest over a four-year period of continuous
service on the Board of Directors, twenty-five percent (25%) at the end of one
full year of continuous service from the option grant date and quarterly
thereafter for the following twelve (12) quarters in equal amounts until fully
vested four (4) years after the option grant date. However, the shares subject
to each automatic grant will immediately vest in full upon certain changes in
control or ownership of the Company or upon the optionee's death or disability
during such individual's service on the Board. For further information
concerning the Automatic Option Grant Program, see "Management--1998 Stock
Incentive Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers to the fullest extent permitted by California law. The Company is
also empowered under its Amended and Restated Articles of Incorporation to
enter into indemnification agreements with its directors, officers, employees
and agents and to purchase insurance on behalf of any person whom it is
required or permitted to indemnify. Pursuant to this provision, the Company
has entered into an indemnification agreement with each of its directors and
officers.
In addition, the Company's Amended and Restated Articles of Incorporation
provide that to the fullest extent permitted by California law, the Company's
directors will not be personally liable for monetary damages for breach of the
directors' fiduciary duty of care to the Company and its shareholders. This
provision in the Articles of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company, for
49
<PAGE>
acts or omissions involving intentional misconduct or knowing and culpable
violations of law, for acts or omissions that the director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to
the Company or its shareholders when the director was aware or should have
been aware of a risk of serious injury to the Company or its shareholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, for improper transactions between the director and the Company,
for improper distributions to shareholders and loans to directors and
officers, or for acts or omissions by the director as an officer. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, the Company agreed to pay $2,000,000 to Dr. Raissi as a
sign-on bonus pursuant to his employment agreement. In addition, the Company
will pay $1,500,000 to Dr. Raissi as a result of his completion by January 31,
1998 of certain performance objectives relating to the integration of ISE and
DTS. See "Management--Employment Contracts and Termination of Employment and
Change of Control Arrangements."
In October 1997, the Company agreed to pay $175,000 to Mr. Grammer as a
sign-on bonus pursuant to an employment and non-competition agreement. In
addition, the Company will pay $100,000 to Mr. Grammer as a result of his
completion by January 31, 1998 of certain performance objectives relating to
the integration of ISE and DTS. See "Management--Employment Contracts and
Termination of Employment and Change of Control Arrangements."
The Company has entered into an indemnification agreement with each of the
directors and officers of the Company pursuant to which the Company will
indemnify such directors and officers for all matters related to their status
or service as a director or officer to the maximum extent permissible under
California law.
Mr. Holdt, a director of the Company, is the President, Chief Executive
Officer and Chairman of the Board of S3 Incorporated. In the years ended
October 31, 1995, 1996, 1997 and the first quarter of fiscal 1998, the Company
sold approximately $1,907,000, $1,635,000, $2,552,000, and $749,000,
respectively, of products and services to S3 Incorporated. The accounts
receivable from S3 Incorporated was approximately $372,000, $646,000 and
$447,000 in the years ended October 31, 1996, 1997 and the first quarter of
fiscal 1998, respectively.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth at January 31, 1998 certain information with
respect to the beneficial ownership of the Common Stock, and as adjusted to
reflect the sale of Common Stock hereby for (i) each person who is known by
the Company to beneficially own more than 5% of the Common Stock, (ii) each of
the Company's directors, (iii) each of the executive officers named in the
Summary Compensation Table above, (iv) all directors named executive offciers
and current officers as a group, and (v) the Selling Shareholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1)(2) AFTER OFFERING(1)(2)
------------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES(3) PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Saeed A. Malik(3)....... 4,748,849 27.1% 271,600 4,477,247 19.9%
Laurence F. Jorstad..... 4,748,849 27.1 271,600 4,477,247 19.9
Alex M. Barrios......... 4,748,849 27.1 271,600 4,477,247 19.9
Zafar A. Malik.......... 1,582,969 9.0 90,100 1,492,867 6.6
Patrick H. Yu........... 1,582,969 9.0 90,100 1,492,867 6.6
Dharam V. Ahuja(4)...... 437,514 2.5 5,000 432,514 1.9
Muneer A. Malik(5)...... 52,500 * 0 52,500 *
Terry N. Holdt(6)....... 52,500 * 0 52,500 *
All directors, named
executive officers and
current officers as a
group (10 persons)(7).. 18,805,000 100.0% 1,000,000 17,805,000 74.8%
</TABLE>
- ---------------------
* Less than 1.0%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock deemed outstanding prior to and after
this offering includes the shares issuable pursuant to stock options that
may be exercised by the respective person or group within 60 days after
January 31, 1998. Shares issuable pursuant to such options are deemed
outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of
any other person. The number of shares of Common Stock outstanding after
this offering includes the 5,000,000 shares of Common Stock offered by the
Company hereby.
(3) Includes 545,249 shares issuable upon exercise of Common Stock purchase
warrants granted by Mr. Saeed A. Malik to his dependent children
exercisable within sixty (60) days of January 31, 1998. Shares
beneficially owned exclude shares held by Messrs. Zafar A. and Muneer A.
Malik.
(4) Includes 350,000 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of repurchase
in favor of the Company with respect to all 350,000 shares.
(5) Includes 52,500 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of repurchase
in favor of the Company with respect to all 52,500 shares.
(6) Includes 52,500 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of repurchase
in favor of the Company with respect to all 52,500 shares.
(7) Includes 1,305,000 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to a right of repurchase
in favor of the Company with respect to all 1,305,000 shares. Also see
Notes 3, 4, 5 and 6 above.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $.001 par value per
share and 3,000,000 shares of Preferred Stock, $.001 par value per share.
COMMON STOCK
As of January 31, 1998, there were 17,500,000 shares of Common Stock
outstanding which were held of record by 6 shareholders. There will be
22,500,000 shares of Common Stock outstanding after giving effect to the sale
by the Company of 5,000,000 shares of Common Stock offered hereby. The holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the shareholders, except that all such holders are entitled to
cumulate their votes in the election of directors. Each shareholder voting for
the election of directors may cumulate such shareholder's votes and give one
candidate the number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
entitled, or distribute such shareholder's votes on the same principle among
as many candidates as the shareholder may select, provided that votes cannot
be cast for more than the number of director positions subject to such
election. However, no shareholder shall be entitled to cumulate votes unless
the names of candidates for which votes are being cumulated have been placed
in nomination prior to the voting and the shareholder, or any other
shareholder, has given notice prior to the commencement of the voting of such
shareholder's intention to cumulate the shareholder's votes. These cumulative
voting provisions will terminate if and when the Company meets certain listing
and trading standards, including a requirement for 800 record holders of the
Company's securities as of the record date of the Company's most recent annual
meeting of shareholders. This provision may have the effect of delaying,
deferring or preventing a change in control of the Company. Subject to
preferences that may be applicable to any outstanding preferred stock that may
come into existence, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time-to-time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of any liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be outstanding upon completion of this offering will
be fully paid and nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes 3,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the shareholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may adversely affect the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock will be Boston
Equiserve Limited Partnership.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the shares of
Common Stock of the Company. Future sales of substantial number of shares of
Common Stock in the public market could materially adversely affect prevailing
market prices.
Upon completion of this offering, the Company will have outstanding an
aggregate of 22,500,000 shares of Common Stock, assuming the issuance of the
5,000,000 shares of Common Stock offered hereby and no exercise of the
Underwriters' over-allotment option. Of the total outstanding shares of Common
Stock, all 6,000,000 shares of Common Stock sold in this offering will be
freely tradeable without restriction or further registration under the Act,
unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Act. The remaining 16,500,000 shares will be "restricted
securities" as defined in Rule 144 (the "Restricted Shares"). The Restricted
Shares may be sold in the public market beginning 90 days after the date of
this prospectus.
The Company's executive officers and directors and all of its shareholders,
holding in the aggregate 17,500,000 shares of Common Stock, have agreed
pursuant to certain agreements (the "Lockup Agreement"), that they will not,
subject to certain exceptions, directly or indirectly, offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or in any manner transfer all or a portion of the economic consequences
associated with the ownership of the Common Stock, or cause a registration
statement covering any shares of Common Stock to be filed, without the prior
consent of Donaldson, Lufkin & Jenrette Securities Corporation for a period of
180 days following the date of this Prospectus (the "180 day Lockup Period"),
except that the Company may, without such consent, issue shares upon the
exercise of outstanding options or grant certain options pursuant to the 1998
Stock Incentive Plan or issue shares of Common Stock pursuant to the Company's
Employee Stock Purchase Plan. Following the expiration of the 180 day Lockup
Period, all 16,500,000 shares of outstanding Common Stock that are not being
sold in this offering will be available for sale in the public market subject
to compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least two (2) years, including
the holding period of any prior owner except an affiliate, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of one percent (1%) of the then outstanding shares of the
Company's Common Stock or the average weekly trading volume of the Company's
Common Stock on the Nasdaq Stock Market during the four (4) calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the ninety (90) days preceding a sale, and who has beneficially
owned shares for at least three (3) years (including any period of ownership
of preceding non-affiliated holders), would be entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company plans to file, upon the consummation of the offering made
hereby, a registration statement on Form S-8 under the Act covering the
5,100,000 shares of Common Stock reserved for issuance under its 1998 Stock
Incentive Plan and the 1998 Employee Stock Purchase Plan. See "Management--
1998 Stock Incentive Plan" and "--1998 Employee Stock Purchase Plan." Shares
registered under such registration statement would be available for sale in
the open market in the future unless such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of shares of Common Stock or any securities convertible into
Common Stock for a period of thirty days after the date of this Prospectus,
without the prior written consent of the Donaldson, Lufkin & Jenrette
Securities Corporation, subject to certain limited exceptions.
54
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), a syndicate of underwriters named
below (the "Underwriters") for whom Donaldson, Lufkin & Jenrette Securities
Corporation and BT Alex. Brown Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholders an aggregate of 6,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase
is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
BT Alex. Brown Incorporated...........................................
---------
Total............................................................... 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of
the shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the over-allotment option described below) must be
so purchased.
Prior to this offering, there has been no established trading market for the
Common Stock. The initial public offering price to the public for the Common
Stock offered hereby will be determined by negotiation among the Company, the
Selling Shareholders and the Representatives. The factors to be considered in
determining the initial public offering price to the public will include the
history of and the prospects for the industry in which the Company competes,
the Company's management, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the general condition of the securities markets at
the time of this offering and the recent market prices of securities of
generally comparable companies.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the price to the public set forth on the
cover page of this Prospectus and to certain dealers (who may include the
Underwriters) at such price less a concession not to exceed $ per share. The
Underwriters may allow, and such dealers may reallow, discounts not in excess
of $ per share to any other Underwriter and certain other dealers.
55
<PAGE>
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 900,000 additional shares of Common Stock at the initial public
offering price less underwriting discounts and commissions solely to cover
over-allotments, if any. Such option may be exercised in whole or in part from
time to time during the 30 day period after the date of this Prospectus. To
the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase a
number of option shares proportionate to such Underwriter's initial commitment
as indicated in the preceding table.
The Company, its officers and directors and all of the Company's
shareholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for Common Stock during the 180-day lockup period without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
provided that the Company may grant options and issue shares of Common Stock
upon the exercise of options under its 1998 Stock Incentive Plan and 1998
Employee Stock Purchase Plan. See "Shares Eligible for Future Sale."
The Company has agreed to pay to Donaldson, Lufkin & Jenrette Securities
Corporation a nonaccountable expense allowance of $750,000 in connection with
this offering. From time to time, in the ordinary course of business,
Donaldson, Lufkin & Jenrette Securities Corporation has provided and may in
the future provide financial advisory or other services to the Company. To
date, Donaldson, Lufkin & Jenrette Securities Corporation has not received any
fees in connection with such services.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholders by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California, is acting as counsel to the Underwriters in connection
with this offering.
EXPERTS
The consolidated financial statements of ISE Labs, Inc. as of October 31,
1996 and 1997 and for each of the three years in the period ended October 31,
1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated statements of operations, of shareholders deficit and of
cash flows, of Alphatec USA, Inc. for the years ended December 31, 1994, 1995
and 1996 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 (together with all amendments, schedules
and exhibits thereto, the "Registration Statement") under the Securities and
Exchange Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected, without
charge, at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 500 West
Madison Street, Chicago, IL 60661, and 7 World Trade Center, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration
Statement may also be accessed through the EDGAR terminals in the Commission's
public reference facilities in Washington, D.C. or through the Securities and
Exchange Commission's World Wide Web site at http://www.sec.gov.
The Company intends to furnish holders of the Common Stock with annual
reports containing consolidated financial statements audited by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited financial information.
57
<PAGE>
ISE LABS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ISE LABS, INC.
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
ALPHATEC USA, INC.
Report of Independent Accountants.......................................... F-16
Consolidated Statements of Operations...................................... F-17
Consolidated Statements of Shareholders' Deficit........................... F-18
Consolidated Statements of Cash Flows...................................... F-19
Notes to Consolidated Financial Statements................................. F-20
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Unaudited Pro Forma Combined Statement of Operations....................... F-27
Notes to Unaudited Pro Forma Combined Statement of Operations.............. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
ISE Labs, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of ISE Labs,
Inc. and its subsidiaries at October 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended October 31, 1997 in conformity with generally accepted accounting
principles. These consolidated financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP.
Price Waterhouse LLP
San Jose, California
December 12, 1997,
except for Note 10,
which is as of
April 2, 1998
F-2
<PAGE>
ISE LABS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
--------------- -----------
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 4,655 $ 4,969 $ 6,077
Accounts receivable, net of allowance for
doubtful accounts and returns of $96, $1,127 and
$1,127 (unaudited).............................. 4,475 12,743 15,339
Inventories--raw materials....................... -- 78 192
Prepaid expenses and other current assets........ 115 1,086 569
Deferred income taxes............................ 102 254 317
------- ------- -------
Total current assets........................... 9,347 19,130 22,494
Property, plant and equipment, net................. 19,161 49,222 56,966
Intangible assets, net............................. -- 2,491 2,289
Other non-current assets........................... 1,487 -- --
------- ------- -------
Total.......................................... $29,995 $70,843 $81,749
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt.................................. $ -- $ 9,812 $ 9,812
Accounts payable................................. 1,145 5,668 11,211
Accrued liabilities.............................. 2,892 6,186 6,937
Income taxes payable............................. 876 1,080 1,613
Current portion of long-term debt................ 1,414 5,049 5,203
------- ------- -------
Total current liabilities...................... 6,327 27,795 34,776
Deferred income taxes.............................. 1,291 2,337 2,337
Long-term debt, less current portion............... 4,595 17,189 18,483
------- ------- -------
Total liabilities.............................. 12,213 47,321 55,596
------- ------- -------
Commitments (Note 7)
Shareholders' Equity:
Common stock, $0.001 par value; 50,000,000 shares
authorized; 17,500,000 shares issued and
outstanding..................................... 18 18 18
Additional paid in capital....................... 546 546 546
Retained earnings................................ 17,218 22,958 25,589
------- ------- -------
Total shareholders' equity..................... 17,782 23,522 26,153
------- ------- -------
Total.......................................... $29,995 $70,843 $81,749
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ISE LABS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
------------------------- -------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $22,321 $25,354 $35,532 $ 6,198 $ 20,291
Cost of revenues.............. 8,953 12,094 17,950 3,430 9,483
------- ------- ------- -------- ---------
Gross profit.................. 13,368 13,260 17,582 2,768 10,808
------- ------- ------- -------- ---------
Operating expenses:
Research and development.... 1,048 1,111 1,097 227 673
Selling, general and
administrative............. 3,843 3,932 7,229 925 4,989
------- ------- ------- -------- ---------
Total operating expenses.. 4,891 5,043 8,326 1,152 5,662
------- ------- ------- -------- ---------
Income from operations........ 8,477 8,217 9,256 1,616 5,146
------- ------- ------- -------- ---------
Other income (expense):
Interest and other income
(expense), net............. 523 504 804 79 (33)
Interest expense............ (403) (530) (741) (144) (869)
------- ------- ------- -------- ---------
Total other income
(expense)................ 120 (26) 63 (65) (902)
------- ------- ------- -------- ---------
Income before income taxes.... 8,597 8,191 9,319 1,551 4,244
Provision for income taxes.... 3,667 3,343 3,579 596 1,613
------- ------- ------- -------- ---------
Net income.................... $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631
======= ======= ======= ======== =========
Net income per share:
Basic....................... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
======= ======= ======= ======== =========
Diluted..................... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
======= ======= ======= ======== =========
Shares used in computing net
income per share:
Basic....................... 17,500 17,500 17,500 17,500 17,500
======= ======= ======= ======== =========
Diluted..................... 17,500 17,500 17,500 17,500 17,768
======= ======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ISE LABS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES BALANCE CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance as of October 31,
1994.................... 17,500,000 $18 $546 $ 7,440 $ 8,004
Net income............. -- -- -- 4,930 4,930
---------- --- ---- ------- -------
Balance as of October 31,
1995.................... 17,500,000 18 546 12,370 12,934
Net income............. -- -- -- 4,848 4,848
---------- --- ---- ------- -------
Balance as of October 31,
1996.................... 17,500,000 18 546 17,218 17,782
Net income............. -- -- -- 5,740 5,740
---------- --- ---- ------- -------
Balance as of October 31,
1997.................... 17,500,000 18 546 22,958 23,522
Net income
(unaudited)........... -- -- -- 2,631 2,631
---------- --- ---- ------- -------
Balance as of January 31,
1998 (unaudited)........ 17,500,000 $18 $546 $25,589 $26,153
========== === ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ISE LABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
-------------------------- --------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................. $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631
Reconciliation to net cash
provided by operating
activities:
Depreciation and
amortization.............. 2,016 3,829 6,269 1,259 3,186
Deferred income taxes...... 243 141 242 (313) (63)
Changes in assets and
liabilities:
Accounts receivable....... (1,191) (1,212) (3,315) (311) (2,596)
Inventory................. -- -- 16 -- (114)
Prepaid expenses and other
current assets........... 544 (53) (821) 24 517
Other non-current assets.. -- (1,212) (363) 1,487 --
Accounts payable.......... 2,036 (1,216) 2,125 1,741 5,543
Accrued liabilities....... 1,382 (167) 2,035 (2,043) 751
Income taxes payable...... 236 997 857 917 533
------- ------- -------- --------- ---------
Net cash provided by
operating activities.... 10,196 5,955 12,785 3,716 10,388
------- ------- -------- --------- ---------
Cash flows from investing
activities:
Acquisition of property,
plant and equipment........ (7,984) (8,750) (17,089) (4,219) (7,508)
Proceeds from sale of
equipment.................. 254 725 4,202 -- --
Acquisition of certain
assets of Alphatec USA, net
of cash acquired........... -- -- (25,036) -- --
------- ------- -------- --------- ---------
Net cash used in
investing activities.... (7,730) (8,025) (37,923) (4,219) (7,508)
------- ------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from loans......... 1,820 1,684 29,074 1,473 --
Repayments of long-term
debt....................... (613) (1,089) (3,622) (413) (1,772)
------- ------- -------- --------- ---------
Net cash provided by
financing activities.... 1,207 595 25,452 1,060 (1,772)
------- ------- -------- --------- ---------
Net increase (decrease) in
cash and equivalents........ 3,673 (1,475) 314 557 1,108
Cash and equivalents at
beginning of period......... 2,457 6,130 4,655 4,655 4,969
------- ------- -------- --------- ---------
Cash and equivalents at end
of period................... $ 6,130 $ 4,655 $ 4,969 $ 5,212 $ 6,077
======= ======= ======== ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest...... $ 402 $ 501 $ 663 $ 144 $ 869
Cash paid for income taxes.. 2,630 2,205 1,525 -- --
Property, plant and
equipment acquired under
capital leases............. -- -- -- -- 3,220
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
ISE Labs, Inc. (the "Company") was incorporated in California in 1983 and is
engaged in providing testing and assembly of integrated circuits to customers
in the semiconductor industry. The Company has operations in Silicon Valley
and Manteca, California, and provides testing services to customers in Hong
Kong through its subsidiary, ISE Labs Hong Kong Limited.
Effective September 11, 1997, the Company acquired the semiconductor
assembly operations of Alphatec USA, Inc. and all of its equity in its wholly
owned subsidiary, Digital Testing Services, Inc., a provider of integrated
circuit test and engineering services to the semiconductor industry. The
acquisition was accounted for as a purchase. (See Note 2).
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of ISE Labs, Inc.
and its wholly owned subsidiaries, ISE Labs Hong Kong Limited, ISE Technology,
Inc. and Digital Testing Services, Inc. All significant intercompany balances
and transactions have been eliminated on consolidation.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts and expenses during the reported period.
Actual results could differ from these estimates.
FOREIGN CURRENCY
The functional currency of the Company's Hong Kong operations is U.S.
dollars. Gains and losses from foreign currency translation are included in
the results of operations and have not been material to date. The Company has
not undertaken any foreign currency hedging activities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less on the date of purchase to be cash equivalents. Cash
equivalents also include various certificates of deposit with maturities of
three months or less totaling $1,101,000 and $0 at October 31, 1996 and 1997,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue upon completion of assembly and test services
and shipment of the customer's products back to the customer.
INVENTORY
Inventories are stated at the lower of cost or market value, cost being
determined using the first in first out method.
F-7
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation on
equipment is computed using the straight-line method over estimated useful
lives of three to five years. Depreciation on buildings is computed using the
straight-line method over an estimated useful life of thirty one years.
Building improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the life of the building.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of the acquired
business over the fair value of the identifiable net assets acquired and is
amortized using the straight-line method over a period of five years.
Covenant not to compete is amortized using the straight-line basis over an
estimated useful life of three years.
LONG-LIVED ASSETS
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
disposed of" ("SFAS 121"), the Company reviews long-lived assets, including
the identifiable intangible assets and goodwill for recoverability and will
reserve for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable. Recoverability
of these assets is determined by comparing the forecasted undiscounted net
cash flows of the operation to which the assets relate to the carrying amount
including associated intangible assets of such operation. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations thereof. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the market price of the Company's stock at
the date of grant over the stock option exercise price. In addition, the
Company complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
INCOME TAXES
The Company utilizes the asset and liability approach for financial
accounting and reporting of income taxes. Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. No provision for U.S. deferred income taxes is made
for the undistributed earnings of the Company's foreign subsidiary to the
extent such earnings are deemed to be indefinitely reinvested in such
operations.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
major financial institutions. The Company's sales are derived from customers
in the semiconductor industry. The Company performs ongoing credit evaluations
of its customers and provides reserves for potential credit losses when
considered necessary. To date, the Company has not experienced any significant
losses as a result
F-8
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of uncollectible accounts. The Company holds product and certain equipment on
consignment from its customers while services are being performed and
maintains insurance against risk of loss.
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The carrying value of long-term debt approximates fair value as
the interest rates approximate current market rates of similar debt. The
Company does not hold or issue financial instruments for trading purposes.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). The Company has presented earnings per share for all periods to
comply with the new standard. SFAS 128 requires the presentation of basic and
diluted earnings per share. Basic net income per share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted net income per share includes the effect of dilutive potential common
shares (options) issued during the period (using the treasury stock method).
Options totaling 2,407,600 at an exercise price of $7.80 were excluded from
the computation of diluted earnings per share for the year ended October 31,
1997 as the exercise price was higher than the average fair value of the
common stock for the entire fiscal year. Approximately 268,000 shares of
potential common stock related to options were included in the computation of
diluted earnings per share for the three months ended January 31, 1998.
Supplemental net income per share to reflect the impact of retirement of
debt from the proceeds of the initial public offering has not been presented,
as the per share amounts are not materially different from those showing on
the income statement.
STOCK SPLIT
On November 4, 1997, the Company implemented a 54.524948 for 1 stock split.
The share and per share amounts have been retroactively restated for all
periods presented.
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130"). This statement will be
effective for the Company's fiscal year ending October 31, 1999. The statement
establishes presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges or credits to
equity that are not the result of transactions with shareholders. The Company
plans to adopt the disclosure requirements and report comprehensive income as
part of the Consolidated Statements of Shareholders' Equity as permitted under
SFAS 130, and currently expects there to be no material impact on the
Company's financial statements disclosures as a result of the adoption of this
new accounting standard.
SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement will be effective for the Company's fiscal year
ending October 31, 1999. The statement requires the Company to report certain
financial information about operating segments in financial statements of the
Company and in condensed financial statements for interim periods. It also
requires that the Company report certain information about its services, the
geographic areas in which it operates and its major customers. The method
specified in SFAS 131 for determining what information to report is referred
to as the "management approach". The management
F-9
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
approach is based on the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. The
adoption of SFAS 131 will not have a significant impact on segment disclosures
of the Company.
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of January 31, 1998, the
consolidated statements of income and of cash flows for the three months ended
January 31, 1997 and 1998 and the consolidated statement of shareholders'
equity for the three months ended January 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of interim periods. The data disclosed in notes to
the consolidated financial statements for these periods are unaudited.
NOTE 2--ACQUISITION OF ALPHATEC USA:
Effective September 11, 1997, the Company acquired certain assets of the
semiconductor assembly operations of Alphatec USA, Inc. ("Alphatec") and all
its equity in its wholly owned subsidiary Digital Testing Services Inc.
("DTS") a provider of integrated circuit test and engineering services to the
semiconductor industry. The transaction was accounted for as a purchase. The
consolidated financial statements of the Company include the results of
operations of Alphatec since the date of acquisition. The purchase price was
approximately $31.2 million, including acquisition costs. In connection with
the acquisition, the Company assumed certain liabilities and acquired cash of
Alphatec resulting in a net cash payment of approximately $25.0 million to
Alphatec. The purchase price was allocated based on an independent appraisal
of the property, plant and equipment to the fair value of assets acquired
which included $28.6 million of tangible assets. The excess of the purchase
price over the fair value of the net tangible assets acquired was allocated to
goodwill and a covenant not to compete of approximately $1.6 million and $1.0
million, respectively. Goodwill is being amortized over five years and the
covenant not to compete over three years, both using the straight-line basis.
The unaudited consolidated results of operations on a pro forma basis for
the years ended October 31, 1996 and 1997 prepared on the basis as if Alphatec
were acquired at the beginning of the Company's fiscal years 1996 and 1997 are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
1996 1997
<S> <C> <C>
Revenues............................................ $86,347 $ 74,602
Net income (loss)................................... 1,028 (13,162)
Net income (loss) per share (Basic and Diluted)..... 0.06 (0.75)
</TABLE>
F-10
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
------------------ -----------
1996 1997 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment:
Machinery and equipment.................. $ 24,041 $ 55,036 $ 65,966
Furniture and fixtures................... 95 297 297
Buildings................................ 4,665 7,445 7,445
Building improvements.................... 265 1,182 1,182
-------- -------- --------
29,066 63,960 74,890
Less accumulated depreciation and
amortization............................ (11,491) (17,124) (20,310)
-------- -------- --------
17,575 46,836 54,580
Land..................................... 1,586 2,386 2,386
-------- -------- --------
$ 19,161 $ 49,222 $ 56,966
======== ======== ========
Accrued liabilities:
Accrued employee compensation............ $ 2,217 $ 2,313 $ 2,871
Other.................................... 675 3,873 4,066
-------- -------- --------
$ 2,892 $ 6,186 $ 6,937
======== ======== ========
</TABLE>
NOTE 4--DEBT:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------
1996 1997
(IN THOUSANDS)
<S> <C> <C>
Equipment loans at prime rate (8.5% at October 31, 1997),
due through 2002........................................ $ 3,152 $ --
Mortgage loan at prime rate (8.5% at October 31, 1997),
due through August 2003................................. 2,857 2,454
Borrowings under line of credit of $8 million at 8.5% per
annum, which expires on September 30, 1998,............. -- 4,412
Note payable at prime rate plus applicable margin up to
0.75% (9.0% at October 31, 1997), due March 1998........ -- 5,400
Note payable at 9.97% per annum, due through April 1999.. -- 534
Note payable at prime rate (8.5% at October 31, 1997),
due through January 2001................................ -- 4,650
Note payable at prime rate plus applicable margin up to
0.75% (9.0% at October 31, 1997), due through September
2002.................................................... -- 14,600
------- --------
6,009 32,050
Current portion of long term debt and short term debt.... (1,414) (14,861)
------- --------
Long term debt, less current portion..................... $ 4,595 $ 17,189
======= ========
</TABLE>
Borrowings under the above arrangements are secured by all assets of the
Company and require compliance with certain financial tests and ratios,
dividend restrictions and maintenance of working capital requirements.
F-11
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the 9.0% Note Payable due 2002, beginning in March 1998
and continuing until June 1999, the Company is required to make payments on
account equaling 25% of the Company's consolidated net income after taxes
excluding depreciation and amortization for the preceding quarter, until the
Company has made principal payments totaling $6 million. The Company is also
required to make payments to bring the total principal paid to $6 million on
the earlier of June 1999, on the sale of equity securities of more than $10
million or in the event of sale of certain property, plant and equipment.
The following table summarizes future minimum principal payments on long
term debt as of October 31, 1997 (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING OCTOBER 31,
<S> <C>
1998................................................................ $ 5,049
1999................................................................ 5,016
2000................................................................ 4,750
2001................................................................ 3,789
2002................................................................ 3,172
Thereafter.......................................................... 462
-------
$22,238
=======
</TABLE>
NOTE 5--STOCK OPTIONS:
In October 1997, the Board of Directors and shareholders adopted the 1997
Stock Option/Stock Issuance Plan (the "1997 Plan") which provides for granting
of incentive stock options ("ISOs") and nonqualified stock options ("NSOs") to
purchase shares of common stock to employees, consultants and advisors of the
Company. In accordance with the 1997 Plan, the stated exercise price shall be
not less than 100% and 85% of the estimated fair market value of common stock
on the date of grant for ISOs and NSOs, respectively, as a determined by the
Board of Directors. The 1997 Plan provides that the options shall be
exercisable over a period not to exceed ten years. Options granted under the
1997 Plan are immediately exercisable and generally vest 25% one year after
the date of grant and in equal quarterly amounts thereafter for the subsequent
12 quarters months.
The following table summarizes activities under the 1997 Plan:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE STOCK OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
<S> <C> <C> <C>
Balance at October 31, 1996.................. -- -- --
Options authorized........................... 4,500,000 -- --
Options granted.............................. (2,407,600) 2,407,600 $7.80
---------- ---------
Balance at October 31, 1997.................. 2,092,400 2,407,600 $7.80
========== =========
Options vested at October 31, 1997........... --
</TABLE>
All options were granted with exercise prices equal to the estimated fair
market value of the Company's Common Stock at the date of grant, as determined
by its board of directors.
The following table summarizes the stock options outstanding and exercisable
at October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER CONTRACTUAL NUMBER CONTRACTUAL
OUTSTANDING LIFE EXERCISABLE LIFE
RANGE OF EXERCISE PRICES AT 10/31/97 (YEARS) AT 10/31/97 (YEARS)
<S> <C> <C> <C> <C>
$7.80...................... 2,407,600 10 2,407,600 10
</TABLE>
F-12
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE DISCLOSURES
The weighted average minimum value of options granted during fiscal 1997 was
$1.89 per share.
The minimum value of options at date of grant was estimated using the Black-
Scholes model with the following assumptions:
<TABLE>
<CAPTION>
1997
<S> <C>
Expected life (years)................................................. 5
Risk-free rate........................................................ 5.56%
Dividend yield........................................................ --
</TABLE>
Had compensation cost for the Company's stock options been determined based
on the minimum value of such options at the grant date as prescribed by SFAS
No. 123, the impact on the Company's net income and net income per share would
not have been materially different.
NOTE 6--INCOME TAXES:
Consolidated income before income taxes includes non U.S. income (loss) of
approximately $(32,000), $1,338,000, and $3,773,000 in fiscal 1995, 1996 and
1997, respectively.
The provision for income taxes for the years ended October 31, 1995, 1996
and 1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
---------------------
1995 1996 1997
<S> <C> <C> <C>
Current:
United States........................................ $3,424 $2,740 $2,639
Foreign.............................................. -- 105 46
------ ------ ------
3,424 2,845 2,685
------ ------ ------
Deferred:
United States........................................ 240 514 551
Foreign.............................................. 3 (16) 343
------ ------ ------
243 498 894
------ ------ ------
Total.................................................. $3,667 $3,343 $3,579
====== ====== ======
</TABLE>
The Company's net deferred tax assets and liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1996 1997
<S> <C> <C>
Deferred tax assets:
Provisions and reserves................................. $ 102 $ 254
Deferred tax liabilities:
Depreciation............................................ (934) (1,328)
Unremitted foreign income............................... (357) (1,009)
------- -------
(1,291) (2,337)
------- -------
Net deferred taxes...................................... $(1,189) $(2,083)
======= =======
</TABLE>
F-13
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the Company's effective tax rate to the
U.S. federal income tax rate of 34%:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1995 1996 1997
<S> <C> <C> <C>
Tax at statutory rates............................ 34% 34% 34 %
State income tax, net of federal benefit.......... 6% 6% 6 %
Benefit of lower tax rate on foreign income....... -- -- (2)%
Other............................................. 3% 1% --
------- ------- --------
43% 41% 38 %
======= ======= ========
</TABLE>
The Company has generated approximately $2.6 million of income from foreign
operations for which no U.S. tax has been provided. These earnings are
considered to be permanently reinvested outside of the United States.
NOTE 7--COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
lease agreements. The future minimum lease payments under these leases as of
October 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR ENDING OCTOBER 31, LEASE PAYMENTS
<S> <C>
1998.......................................................... $ 3,999
1999.......................................................... 4,006
2000.......................................................... 3,346
2001.......................................................... 1,228
2002.......................................................... 85
-------
$12,664
=======
</TABLE>
Rental expense for the years ended October 31, 1995, 1996 and 1997 was
$353,000, $124,000 and $516,000, respectively.
The Company rents certain of its owned land and buildings under a
noncancelable operating lease which expires in July 1998. Total rental income
related to this lease was $317,000, $291,000 and $226,000 for the years ended
October 31, 1995, 1996 and 1997, respectively, and is included in other
income. Rents receivable under this lease aggregate $113,000 for the year
ending October 31, 1998.
NOTE 8--MAJOR CUSTOMERS:
Revenues from one customer represented approximately 30% and 16% of total
revenues for the years ended October 31, 1995 and 1996, respectively. Revenues
from another customer represented approximately 21% and 30% of total revenues
for the years ended October 31, 1996 and 1997, respectively. Receivables from
two customers represented 24% and 26% of total receivables at October 31,
1996. Receivables from three customers represented 10%, 13% and 23% of total
receivables at October 31, 1997.
F-14
<PAGE>
ISE LABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--GEOGRAPHIC INFORMATION:
The Company's operations by geographical region were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------
1995 1996 1997
<S> <C> <C> <C>
Revenues:
United States..................................... $22,042 $19,929 $24,784
Hong Kong......................................... 279 5,425 10,748
------- ------- -------
$22,321 $25,354 $35,532
======= ======= =======
Operating income (loss):
United States..................................... $ 8,509 $ 6,879 $ 5,483
Hong Kong......................................... (32) 1,338 3,773
------- ------- -------
$ 8,477 $ 8,217 $ 9,256
======= ======= =======
<CAPTION>
OCTOBER 31,
---------------
1996 1997
<S> <C> <C> <C>
Identifiable assets:
United States..................................... $21,695 $57,840
Hong Kong......................................... 8,300 13,003
------- -------
$29,995 $70,843
======= =======
</TABLE>
Revenues are designated to the region which records the sales.
NOTE 10--SUBSEQUENT EVENTS:
On April 2, 1998, the Company's shareholders approved the 1998 Stock
Incentive Plan (the "1998 Plan") to succeed the Company's 1997 Plan. A total
of 4,500,000 shares of common stock have been authorized for issuance under
the 1998 Plan, including the options granted and outstanding under the 1997
Plan. The shareholders also approved the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan"). A total of 600,000 shares are reserved for future
issuance under the Stock Purchase Plan, which will become effective upon the
closing of the initial public offering.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Alphatec USA, Inc.
In our opinion, the accompanying consolidated statements of operations, of
shareholders' deficit and of cash flows of Alphatec USA, Inc. (a wholly-owned
subsidiary of Alphatec Electronics Co. Ltd.) and its subsidiary, present
fairly, in all material respects, the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Alphatec USA's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Jose, California
February 7, 1997
F-16
<PAGE>
ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $38,128 $55,038 $61,521 $30,342 $ 21,589
Cost of revenues................. 38,328 53,332 61,795 29,966 25,217
------- ------- ------- ------- --------
Gross profit (loss).............. (200) 1,706 (274) 376 (3,628)
------- ------- ------- ------- --------
Operating expenses:
Research and development....... 267 332 463 281 451
Selling and marketing.......... 959 1,228 587 343 145
General and administrative..... 1,038 3,412 1,952 1,580 3,421
Impairment of property, plant
and equipment................. -- -- -- -- 9,348
------- ------- ------- ------- --------
Total operating expenses..... 2,264 4,972 3,002 2,204 13,365
------- ------- ------- ------- --------
Loss from operations............. (2,464) (3,266) (3,276) (1,828) (16,993)
Interest expense, net............ 914 412 1,624 570 1,249
------- ------- ------- ------- --------
Net loss......................... $(3,378) $(3,678) $(4,900) $(2,398) $(18,242)
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... 5,000,000 $5,000 $ -- $ (4,324) $ 676
Net loss.................... -- -- -- (3,378) (3,378)
--------- ------ ------- -------- --------
Balance at December 31,
1994....................... 5,000,000 5,000 -- (7,702) (2,702)
Conversion of shareholder
debt, accounts payable and
accrued interest to
equity..................... -- -- 14,704 -- 14,704
Additional contributed
capital.................... -- -- 15,000 -- 15,000
Net loss.................... -- -- -- (3,678) (3,678)
--------- ------ ------- -------- --------
Balance at December 31,
1995....................... 5,000,000 5,000 29,704 (11,380) 23,324
Interest on loan from
related party contributed
to capital................. -- -- 191 -- 191
Net loss.................... -- -- -- (4,900) (4,900)
--------- ------ ------- -------- --------
Balance at December 31,
1996....................... 5,000,000 5,000 29,895 (16,280) 18,615
Interest on loan from
related party contributed
to capital (unaudited)..... -- -- 123 -- 123
Net loss (unaudited)........ -- -- -- (18,242) (18,242)
--------- ------ ------- -------- --------
Balance at June 30, 1997
(unaudited)................ 5,000,000 $5,000 $30,018 $(34,522) $ 496
========= ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
ALPHATEC USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(3,378) $ (3,678) $ (4,900) $ (2,398) $(18,242)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and
amortization.............. 1,892 3,739 6,806 3,060 3,949
Amortization of license and
loan fees................. 68 182 61 30 30
Loss (gain) on sale of
equipment................. (56) 34 186 -- --
Interest accrued on advance
from related party........ 387 -- 191 -- 123
Impairment of property,
plant and equipment....... -- -- -- -- 9,348
Changes in assets and
liabilities, net of
effects from acquisition
of Digital Testing
Services, Inc.
Accounts receivable....... 297 (3,172) (590) (493) 1,599
Receivable from related
party.................... (61) (885) 584 (105) 993
Inventories............... 1,244 (3,125) 1,628 654 2,609
Prepaid expenses and other
assets................... 157 (659) (2,454) 5 2,572
Accounts payable.......... (2,508) 8,005 (1,005) 128 1,103
Accrued expenses.......... 349 122 (2,068) 4,096 693
------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities.............. (1,609) 563 (1,561) 4,977 4,777
------- -------- -------- -------- --------
Cash flows from investing
activities:
Acquisition of property,
plant and equipment......... (3,729) (13,126) (11,249) (17,171) (3,982)
Proceeds from sale of
equipment................... 205 1,877 820 -- --
Acquisition of Digital
Testing Services, Inc. net
of cash acquired............ -- (5,509) -- -- --
------- -------- -------- -------- --------
Net cash used in
investing activities.... (3,524) (16,758) (10,429) (17,171) (3,982)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Borrowings from
shareholders................ 3,513 -- -- -- --
Net borrowings (repayments)
under revolving line of
credit...................... 292 5,090 104 (1,105) (1,887)
Proceeds from (payments on)
equipment term loan......... 573 (122) 5,669 6,084 702
Payment of capital lease
obligations................. (120) (543) (1,473) (380) (244)
Advance from related party... 523 -- 4,477 4,477 1,325
Proceeds from additional
contributed capital......... -- 15,000 -- -- --
------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities.............. 4,781 19,425 8,777 9,076 (104)
------- -------- -------- -------- --------
Net (decrease) increase in
cash......................... (352) 3,230 (3,213) (3,118) 691
Cash and cash equivalents at
beginning of period.......... 353 1 3,231 3,231 18
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 1 $ 3,231 $ 18 $ 113 $ 709
======= ======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest................ $ 486 $ 605 $ 1,433 $ 570 $ 1,249
Obligations incurred under
capitalized leases.......... 800 1,670 -- -- 3,869
Conversion of shareholder
debt and accounts payable to
equity...................... -- 14,704 191 -- 123
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ALPHATEC USA:
ALPHATEC USA
Alphatec USA, Inc. ("Alphatec USA"), formerly Indy Electronics, Inc., was
incorporated in California in March 1993. Alphatec USA performs semiconductor
assembly on a subcontract basis for semiconductor manufacturers. On May 12,
1995 Alphatec USA acquired Digital Testing Services, Inc. ("DTS"), which
provides integrated circuit test and engineering services (see Note 3).
Alphatec USA is a wholly-owned subsidiary of the Alphatec Electronics Co.
Ltd. ("Alphatec"), a company based in Thailand. Alphatec has several
subsidiaries and a number of related companies. These companies are related
through certain shared ownership, management and a common significant
shareholder. The common significant shareholder was the sole shareholder of
Alphatec USA prior to 1995. During 1995, Alphatec commenced the process of
acquiring Alphatec USA. The acquisition was accomplished in two steps. In the
first step, in March 1995, Alphatec USA's then sole shareholder transferred
the outstanding stock to Janall Investment Limited ("Janall") a Hong Kong
investment company. In the second step, Alphatec acquired the outstanding
stock of Alphatec USA from Janall in July 1996. The accompanying financial
statements of Alphatec USA do not reflect any impact of the above noted
changes in ownership, as such changes represented transfer of entities under
common control.
In conjunction with the above noted changes in ownership of Alphatec USA,
outstanding debt and interest totaling approximately $10 million payable to
Alphatec USA's sole shareholder in 1995 were converted to contributed capital.
Additionally, approximately $15 million of cash was contributed as capital by
Alphatec and approximately $4.7 million of Alphatec USA's accounts payable to
Alphatec were canceled as additional contribution of capital by Alphatec.
ACQUISITION OF ALPHATEC USA (UNAUDITED)
Effective September 11, 1997, ISE Labs, Inc. ("ISE") acquired the
semiconductor assembly operations of Alphatec USA and all of its equity in
DTS. (Note 11). Pursuant to Securities and Exchange Commission financial
statement requirements, an audited balance sheet of Alphatec USA has not been
presented as Alphatec USA's balances were included in the consolidated balance
sheet of ISE Labs, Inc. at October 31, 1997.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Alphatec USA
and its wholly owned subsidiary, DTS. All significant intercompany accounts
and transactions have been eliminated.
REVENUE RECOGNITION
Revenues from integrated circuit test and assembly foundry services are
recognized upon shipment of product back to customer.
CASH AND CASH EQUIVALENTS
Alphatec USA considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out basis.
F-20
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization is computed using the straight-line method based upon the
estimated useful lives of the assets, generally five years for equipment and
thirty years for buildings, or the lease term of the respective assets, as
applicable.
RESTRICTED CASH
During 1995, Alphatec USA entered into an equipment leasing agreement for
which an irrevocable standby letter of credit is required. Accordingly,
Alphatec USA has maintained a $420,000 certificate of deposit with a lending
company to collateralize the letter of credit. The deposit cannot be withdrawn
until the leasing obligations have been repaid.
LONG-LIVED ASSETS
Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
disposed of" ("SFAS 121"), the Company reviews long-lived assets, including
the identifiable intangible assets and goodwill for recoverability and will
reserve for impairment whenever events or changes in circumstances indicate
the carrying amount of the assets may not be fully recoverable. Recoverability
of these assets is determined by comparing the forecasted undiscounted net
cash flows of the operation to which the assets relate, to the carrying amount
including associated intangible assets of such operation. If the operation is
determined to be unable to recover the carrying amount of its assets, then
intangible assets are written down first, followed by the other long-lived
assets of the operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the nature of the
assets.
INCOME TAXES
Alphatec USA provides for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM RESULTS (UNAUDITED)
The consolidated statements of operations and of cash flows for the six
months ended June 30, 1996 and 1997 and the consolidated statements of
shareholders' deficit for the six months ended June 30, 1997 are unaudited. In
the opinion of management, these statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the fair
presentation of the results for the interim periods. The data disclosed in the
consolidated financial statements at such dates and for such periods are
unaudited.
F-21
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ACQUISITION OF DIGITAL TESTING SERVICES, INC.:
On May 12, 1995, Alphatec USA acquired Digital Testing Services, Inc.
("DTS"), which provides integrated circuit test and engineering services to
semiconductor manufacturers. The purchase price was approximately $9.8
million, including acquisition costs of approximately $100,000. The
acquisition was accounted for as a purchase. The purchase price was allocated
to the acquired assets and liabilities based upon an estimate of their fair
market values which included an independent appraisal of the equipment, as of
the acquisition date as follows (in thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 4,300
Accounts receivable................................................. 2,020
Equipment........................................................... 9,070
Other assets........................................................ 80
Accounts payable and accrued expenses............................... (4,041)
Capitalized lease obligations....................................... (1,620)
-------
$ 9,809
=======
</TABLE>
The results of operations of DTS are included with those of Alphatec USA for
periods subsequent to the date of the acquisition. Set forth below is the
unaudited pro forma combined summary of operations of Alphatec USA and DTS for
1994 and 1995 as though the acquisition had been made at the beginning of 1994
(in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
<S> <C> <C>
Revenues............................................... $ 50,200 $ 59,900
Gross profit........................................... 6,650 3,500
Income (loss) from operations.......................... 1,850 (1,700)
Net income (loss)...................................... 50 (2,180)
</TABLE>
The acquisition was financed with a $10 million capital contribution
received by Alphatec USA in March 1995 from Alphatec's sole shareholder. The
1994 pro forma combined results of operations shown above reflect imputed
interest charges of approximately $800,000 resulting from this additional
financing. No imputed interest charges were included in the 1995 pro forma
operating results as the debt was converted to equity (see Note 1).
In connection with the purchase, six key employees and former DTS
shareholders signed long-term employment contracts. These employment contracts
provide for profit sharing payments to these key employees of a certain
percentage of DTS' pretax income, as defined, for the years 1995 to 1999. The
percentage increases over that period from 20% to 40%. The 1994 and 1995 pro
forma combined results of operations shown above reflect payments charged to
compensation expense totaling $1,050,000 and $1,120,000, respectively, to
these former shareholders. In 1996, the related charge to compensation expense
was $1,853,000.
F-22
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS:
During 1994, 1995 and 1996, Alphatec USA entered into the following
transactions with its shareholder and the Alphatec Group (in thousands):
<TABLE>
<CAPTION>
ALPHATEC GROUP
--------------------
NOTES PAYABLE TO
SHAREHOLDER ADVANCE RECEIVABLES
<S> <C> <C> <C>
Balances due (to)/from related parties
at December 31, 1993................... $(5,618) $ -- $ 43
Borrowings from shareholder, including
interest of $387....................... (3,900) -- --
Advances to Alphatec USA ............... -- (523) --
Director's fees......................... (120) -- --
Administrative fees..................... -- -- (262)
Equipment purchases..................... -- -- (660)
Equipment sales......................... -- -- 351
Net payments............................ 120 -- 632
------- ------- -------
Balances due (to)/from related party at
December 31, 1994...................... (9,518) (523) 104
Borrowings from shareholder............. (5,186) -- --
Conversion of debt to equity............ 14,704 -- --
Director's fees......................... (120) -- --
Allocation of joint operational costs
incurred by the Company................ -- -- 589
Net advances paid by the Company........ -- -- 1,000
Net payments............................ 120 -- (104)
------- ------- -------
Balances due (to)/from related party at
December 31, 1995...................... -- (523) 1,589
Advance to/(from) related party......... -- (5,000) 1,000
Director's fees......................... (180) -- --
Allocation of joint operational costs
incurred by the Company................ -- -- 816
Net advances paid by the Company........ -- -- 1,600
Net payments............................ 180 523 (4,000)
------- ------- -------
Balances due (to)/from related party at
December 31, 1996...................... $ -- $(5,000) $ 1,005
======= ======= =======
</TABLE>
Alphatec USA has undertaken to act as an agent for Alphatec to assist with
the acquisition and implementation of MQUAD(C) manufacturing equipment on its
behalf and is to receive full reimbursement for such activities. Additionally,
during 1994, Alphatec USA entered into an agreement with Alphatec to develop
the Ball Grid Array ("BGA") package and the assembly processes necessary to
manufacture the package for both companies. Projected costs for development of
the new package have been divided equally between the companies. During 1996,
Alphatec USA recognized $523,000 as contract development revenue related to
the project.
Notes payable to the shareholder accrued interest at rates ranging from 10%
to 14% during 1994. All such interest was accrued as additional notes payable.
The debt and interest payable to the shareholder were converted to equity in
1995.
In June 1996, Alphatec USA obtained an interest free advance of $5 million
from the Alphatec Group. The advance is subordinated to the bank debt and no
repayment terms have been specified. Interest is imputed at 7% and recorded as
additional contributed capital.
During 1996, Alphatec USA and Alphatec jointly purchased a technology
license for the MQUAD(C) package assembly technology for $1 million, of which
$500,000 was paid for by Alphatec as its share of the cost of the license. The
cost of the license is being amortized on a straight-line basis over the
estimated economic life of the license which is seven years.
F-23
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--BORROWINGS:
In December 1995, Alphatec USA entered into a joint revolving line of credit
and two equipment term loans with two institutions. The revolving line of
credit was renewed in 1996 and matured in April 1997.
Under the terms of the $10 million revolving line of credit, with $5 million
to be paid severally by each institution, the outstanding balance is limited
to 80% of eligible accounts receivable plus 40% of eligible inventory. The
inventory advance is limited to $2 million. The line of credit requires
monthly interest payments which accrue at 1.25%, as amended, in excess of the
higher of the prime rate of either institution per annum. The interest rates
for the revolving line of credit at December 31, 1995 and 1996 were both 9.5%.
Under the terms of the first equipment term loan facility, the outstanding
balance is limited to an amount equal to 80% of the cost of new equipment, in
a total aggregate amount not to exceed $5 million. Under the terms of the
second equipment term loan facility, the outstanding balance is limited to an
amount equal to 70% of the "forced sale value", as defined, of specified
equipment, in a total aggregate amount not to exceed $5 million. The balances
of both term loans are being repaid monthly at a rate equal to 1/60 of the
original loan balances. The maturity dates are thirty-six months from the end
of the draw down period and thirty-six months from the closing date for the
first and second term loans, respectively. Balloon payments equivalent to any
outstanding balances are due at maturity.
Both equipment term loans require monthly interest payments which accrue at
1.75% in excess of the higher of the prime rate of either institution per
annum. The interest rates for the equipment term loans at December 31, 1996
and 1995 were both 9.5%.
On a consolidated basis, Alphatec USA is required to maintain certain
covenants, including a minimum tangible net worth, quick ratio and cash flow
coverage, as defined. Under the terms of the revolving credit facility and the
equipment term loan facilities, upon an event of default all amounts, at the
bank's discretion, become immediately due and payable. At December 31, 1995
and 1996, Alphatec USA was in default of certain covenants of the term loan.
1993 AND 1994 CREDIT FACILITIES
Under agreements with financial institutions dated October 1993 and June
1994, Alphatec USA borrowed funds under a revolving line of credit and an
equipment term loan at interest rates of prime plus 1.5% to 1.75%
(approximately 11% at December 31, 1994). Except for the first equipment term
loan, as discussed above, the agreements were terminated and the balances
repaid in June 1994 and March 1995, respectively.
F-24
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INCOME TAXES:
There was no provision for income taxes for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 because of the
losses incurred. Deferred tax assets at December 31, 1995 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
<S> <C> <C>
Net operating loss....................................... $ 2,060 $ 4,539
Reserves and accruals.................................... 742 769
------- -------
2,802 5,308
Valuation Allowance...................................... (2,802) (5,308)
------- -------
$ -- $ --
======= =======
</TABLE>
Based on factors which include a history of losses and the lack of carryback
capacity, it is more likely than not that Alphatec USA will not be able to
realized its deferred tax assets and thus a full valuation reserve has been
recorded.
At December 31, 1996, Alphatec USA had net operating loss carryforwards
available to reduce future taxable income of approximately $12 million for
federal income tax purposes. Alphatec USA's net operating loss carryforwards
expire in different years through 2011. The income tax benefit from
utilization of net operating loss carryforwards is limited due to cumulative
stock ownership changes of more than 50% over a three-year period.
NOTE 7--SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISKS:
Financial instruments which potentially subject Alphatec USA to
concentration of credit risk consist principally of bank deposits and trade
accounts receivable. Alphatec USA places its cash and cash equivalents in
checking and market rate accounts with major financial institutions and has
not recorded any losses related to these investments. Alphatec USA's assembly
and test foundry service revenue is received from semiconductor manufacturers
located primarily in the United States. Alphatec USA performs ongoing
evaluations of its customers' financial conditions and maintains allowances
for potential credit losses.
Two customers accounted for 43% and 11% of revenues for the year ended
December 31, 1994. Two customers accounted for 24% and 14% of revenues for the
year ended December 31, 1995. One customer accounted for 20% of revenues for
the year ended December 31, 1996. Revenues from export sales for the year
ended December 31, 1994, 1995 and 1996 were not significant.
F-25
<PAGE>
ALPHATEC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--COMMITMENTS:
Alphatec USA leases most of its manufacturing and office facilities under
noncancelable operating lease agreements that expire at various dates through
2001. These leases require Alphatec USA to pay taxes, insurance, and
maintenance expenses, and provide for renewal options at the then fair market
rental value of the property.
Future minimum lease payments for capital and noncancelable operating leases
were as follows at December 31, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
(IN THOUSANDS)
<S> <C> <C>
1997....................................................... $ 244 $ 5,081
1998....................................................... 224 4,455
1999....................................................... 24 4,240
2000....................................................... 4 3,449
2001....................................................... -- 1,862
----- -------
Total minimum lease payments............................... 496 $19,087
=======
Less: amount representing interest......................... (60)
-----
Present value of net minimum payments...................... 436
Less: current portion...................................... (201)
-----
Capitalized lease obligations, less current portion........ $ 235
=====
</TABLE>
Total operating lease expense was $111,000, $327,000 and $1,907,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
At December 31, 1996, Alphatec USA had purchase commitments aggregating
approximately $9 million, principally for the purchase of manufacturing
equipment.
NOTE 9--LITIGATION, CLAIMS AND ASSESSMENTS:
Alphatec USA is subject to legal proceedings and claims that arise in the
normal course of business. The amount of liability, if any, from such claims
cannot be determined with certainty; however, in the opinion of management,
the ultimate outcome of such claims will not have a material adverse effect on
Alphatec USA's results of operations or cash flows.
During 1995, Alphatec USA recorded a one-time pre-tax charge to general and
administration expense of $1,400,000 with respect to several claims. The
claims were settled during 1996 for a total of $312,000 and the difference was
credited against general and administrative expense in 1996.
NOTE 10--IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT: (UNAUDITED).
Due to a decrease in revenues and an increase in operating losses, Alphatec
USA significantly downsized its workforce and re-evaluated the value of
property, plant and equipment at June 30, 1997 relating to the semiconductor
assembly operations. This resulted in the establishment of a provision for
impairment totaling $9,348,000 which was recorded as an operating expense in
the six months ended June 30, 1997.
NOTE 11--SUBSEQUENT EVENT: (UNAUDITED)
Effective September 11, 1997, Alphatec USA, Inc. sold the semiconductor
assembly operations of Alphatec USA Inc., and all of its equity in Digital
Testing Services, Inc. to ISE Labs, Inc.
F-26
<PAGE>
ISE LABS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations gives
effect to the acquisition by ISE Labs, Inc. ("ISE" or "the Company") on
September 11, 1997 of substantially all of the assets of Alphatec USA, Inc.
("Alphatec") including all of the shares of capital stock of Digital Testing
Services, Inc. in a transaction accounted for as a purchase. The unaudited pro
forma combined statement of operations is based on the individual statements
of operations of ISE for the year ended October 31, 1997, appearing elsewhere
in this prospectus, and Alphatec for the period from November 1, 1996 through
September 10, 1997. Alphatec's operating results for the period from September
11, 1997 to October 31, 1997 are included in ISE's historical consolidated
statement of operations for the year ended October 31, 1997. Adjustments have
been made to such information to give effect to the September 11, 1997
acquisition of Alphatec, as if the acquisition had occurred on November 1,
1996.
The following unaudited pro forma combined statement of operations are not
necessarily indicative of the future results of operations of the Company or
the results of operations which would have resulted had the Company and
Alphatec been combined during the periods presented. In addition, the pro
forma results are not intended to be a projection of future results. The
unaudited pro forma combined statement of operations should be read in
conjunction with the consolidated financial statements of ISE and subsidiaries
and the financial statements of Alphatec, including the notes thereto,
appearing elsewhere in this Prospectus.
F-27
<PAGE>
ISE LABS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
------------------------------------------
ISE ALPHATEC PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues........................... $35,532 $ 39,070 $ -- $ 74,602
Cost of revenues................... 17,950 41,469 (270)(a) 59,149
------- -------- ------ --------
Gross profit (loss)................ 17,582 (2,399) 270 15,453
------- -------- ------ --------
Operating expenses:
Research and development......... 1,097 608 -- 1,705
Selling, general and
administrative.................. 7,229 6,540 544(b) 14,313
Impairment of plant and
machinery....................... -- 9,348 -- 9,348
------- -------- ------ --------
Total operating expenses........ 8,326 16,496 544 25,366
------- -------- ------ --------
Income (loss) from operations...... 9,256 (18,895) (274) (9,913)
Interest and other income
(expense), net.................... 804 -- -- 804
Interest expense................... (741) (2,193) (730)(c) (3,664)
------- -------- ------ --------
Income (loss) before income taxes.. 9,319 (21,088) (1,004) (12,773)
Provision for income taxes......... 3,579 -- (3,190)(d) 389
------- -------- ------ --------
Net income (loss).................. $ 5,740 $(21,088) $2,186 $(13,162)
======= ======== ====== ========
Pro forma net loss per share ...... $ (0.75)
========
Number of shares used in pro forma
per share computation............. 17,500
========
</TABLE>
See accompanying notes
F-28
<PAGE>
ISE LABS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATION
NOTE 1--BASIS OF PRESENTATION:
The unaudited pro forma combined statement of operations has been prepared
to reflect the acquisition of Alphatec by ISE, as if the acquisition had
occurred on November 1, 1996.
ISE acquired Alphatec effective September 11, 1997 and consequently, ISE's
results of operations for the year ended October 31, 1997 include Alphatec's
results of operations for the period from September 11, 1997 to October 31,
1997. Accordingly, in preparing the pro forma combined statement of
operations, the Company combined its results of operations for the year ended
October 31, 1997 with Alphatec's results of operations for the period from
November 1, 1996 to September 10, 1997.
NOTE 2--PRO FORMA ADJUSTMENTS:
The purchase price was approximately $31.2 million, including acquisition
costs. The purchase price was allocated, based on an independent appraisal of
the property, plant and equipment, to the fair value of the assets acquired
which included $28.6 million of tangible assets. The excess of the purchase
price over the fair value of the net tangible assets acquired was allocated to
goodwill and a covenant not to compete of approximately $1.6 million and $1.0
million, respectively.
The following adjustments were applied to the historical statement of
operations to arrive at the pro forma combined statement of operations:
(a) Reflects the adjustments to depreciation of property, plant and
equipment related to recording the Alphatec assets at fair market value.
(b) Reflects the additional amortization expense of $544,000 related to
intangible assets resulting from the acquisition of Alphatec over their
estimated useful lives.
(c) Reflects the additional interest expense relating to the incremental
debt assumed to finance the acquisition. The debt assumed bears interest at
prime rate plus applicable margin ranging from 0 to 0.75%. The effect on
net income (loss) before income taxes of a 1/8% variance in interest rates
would have been $12,000.
(d) Reflects the elimination of ISE's domestic income tax expense based
on the pro forma loss for the year.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 29
Management............................................................... 40
Certain Relationships and Related Transactions........................... 50
Principal and Selling Shareholders....................................... 51
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, RESTRICTED SECURITIES
WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,000,000 SHARES
ISE LABS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Appendix
Graphics
Inside Front Cover
ISE LABS, INC.
ISE Labs, Inc. ("ISE" or the "Company") is one of the leading independent
integrated circuit ("IC") testing and evaluation companies in the world.
Unlike many of its competitors, the Company offers a broad range of IC
testing, evaluation and other services throughout the entire semiconductor
manufacturing process. The major steps involved in the production of
semiconductors can be characterized as a circuit design development, wafer
fabrication, wafer sort, packaging and final test. Throughout the
semiconductor production process, ICs are subjected to a variety of analyses
and comprehensive tests. Such continuous analysis and testing is critical to
optimizing manufacturing process efficiencies and product yield.
Once a circuit design has been successfully validated through such tests and
analyses the prototype is released for production. The analysis and testing
that occurs during the semiconductor production process may be broadly
segmented into two stages: the Inventive Stage and the Production Stage. The
Inventive Stage of IC analysis and testing occurs during the initial
development of the IC and includes (i) software development; (ii) electrical
verification; (iii) reliability analysis; and (iv) failure analysis. The
Production Stage of IC analysis and testing occurs after a prototype IC has
been released for manufacture. During this stage, all or a subset of the
analysis and testing procedures performed on the prototype IC during the
Inventive Stage are repeated throughout the volume production of the IC. In
addition to these tests, semiconductor manufacturers may monitor production
quality and reliability on an ongoing basis.
In contrast to all of its major independent competitors, the Company's
headquarters is located in the Silicon Valley. In addition to its significant
United States presence, the Company has established substantial test capacity
in Hong Kong and has more recently commenced testing operations in Singapore.
The Company's proximity to a large number of the world's leading semiconductor
companies, together with its broad service offerings, enables the Company to
establish close working relationships with its customers' design engineers
early in the IC development process. By establishing such early stage
relationships with its customers, the Company believes it has a significant
competitive advantage in competing for high volume future testing business.
During the last twelve months, the Company has provided services to more
than 250 customers worldwide. The Company's customers include a number of the
world's leading vertically integrated and fabless semiconductor companies,
distributors and subcontractors, such as Atmel, C-Cube Microsystems, Cirrus
Logic, Hana Technologies, Hamilton Hallmark Technologies, Hewlett-Packard, LSI
Logic, Motorola, National Semiconductor, NeoMagic, Philips Electronics, S3,
Wyle Laboratories and Xilinx.
Service Domain
. Test Methodology / Test Program
. Modify Design
. Repair
. Analyze
. Inventive Stage
. IC Design
. Wafer Manufacturing
[Picture of round wafer]
. Wafer Sort
. Back End
. Package
. Final Test
. Production Stage
. Monitor
. Failure Analysis
. Environmental Tests
. High Reliability Screening
[Picture of IC]
[Flowchart depicting service domain, set on a backdrop picture of the Company's
testing operations]
<PAGE>
Inside Front Cover
[Picture of engineers working at the Company's testing facility]
Inventive Stage
. Design
. Prototype
. Test
. Characterization and Failure Analysis
. Test Program Development
. Burn-in
Production Stage
. Wafer Manufacture
. Wafer Sort (Test)
. Packaging
Monitoring
. Final (Electrical) Test
. Burn-in
. Process Reliability Monitor
. ESD
. Latch-up
. Assembly Reliability Monitor
. Hast
. 85/85
. Mechanical Shock
. Gross and Fine Leak
. Thermal Shock
[Flowchart depicting Inventive Stage, Production Stage and Monitoring]
[Picture of "FIB" tester]
FIB
[Picture of Packaging equipment]
Packaging
[Picture of engineers working at workstations]
Software Development
[Picture of Wafer Sort tested]
Wafer Sort
[Picture of Final Test equipment]
Final Test
[Picture of Burn-in tester]
Burn-in
[Picture of engineer standing in front of a HAST tester]
HAST
[Picture of engineer standing in front of an ESD tester]
ESD
[Picture of engineer working on a Failure Analysis work station]
BEAM
<PAGE>
PAGE 30
Inventive Stage
. Design
. Prototype
. Test
. Characterization and Failure Analysis
. Test Program Development
. Burn-in
Production Stage
. Wafer Manufacture
. Wafer Sort (Test)
. Packaging
Monitoring
. Final (Electrical) Test
. Burn-in
. Process Reliability Monitor
. ESD
. Latch-up
. Assembly Reliability Monitor
. Hast
. 85/85
. Mechanical Shock
. Gross and Fine Leak
. Thermal Shock
[Flowchart depicting Inventive Stage, Production Stage and Monitoring]
<PAGE>
Inside Back Cover
[Picture of World Map]
. Hong Kong
. Singapore
[Map of Silicon Valley]
. San Francisco
. Manteca
. Santa Clara
. Silicon Valley
. San Jose
ISE Locations:
ISE Labs, Inc.
2095 Ringwood Avenue
San Jose, CA 95131 USA
ISE Labs, Inc. / DTS
3600 Peterson Way
Santa Clara, CA 95054 USA
ISE Labs Assembly
400 Industrial Park Drive
Manteca, CA 95337
ISE Labs Hong Kong Ltd.
22/D, Southeast Ind. Bldg.
611-619 Castle Peak Road
Tsuen Wan, N7, Hong Kong
ISE Labs Singapore Pte. Ltd.
Blk. 1020 Tai Seng Avenue
#7-3508/12
Singapore 534416
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated costs
and expenses (all of which will be paid by the Registrant) in connection with
the issuance and distribution of the securities being registered pursuant to
this Registration Statement:
<TABLE>
<CAPTION>
AMOUNT TO BE
COMPANY PAID BY THE
------- ------------
<S> <C>
Securities and Exchange Commission Registration Fee........ $28,000
NASD Filing Fee............................................ $10,000
Nasdaq/NNM Listing Fee..................................... $95,000
Legal Fees and Expenses.................................... *
Blue Sky Qualification Fees and Expenses................... *
Accounting Fees and Expenses............................... *
Printing and Engraving Expenses............................ *
Transfer Agent's and Registrar's Fees and Expenses......... *
Nonaccountable Expense Allowance for Donaldson, Lufkin &
Jenrette Securities Corporation........................... *
Miscellaneous Fees......................................... *
-------
Total.................................................. $ *
=======
</TABLE>
- ---------------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The California General Corporation Law provides that directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors, including such conduct during a merger or tender
offer, in certain circumstances. See Item 17 of this Registration Statement
regarding the opinion of the Securities and Exchange Commission as to
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Act"). Such limitation does not affect liability for any breach
of a director's duty to the Company or its shareholders (i) with respect to
approval by the director of any transaction from which he derives an improper
personal benefit, (ii) with respect to acts or omissions involving an absence
of good faith, that he believes to be contrary to the best interests of the
Company, or its shareholders, that involve intentional misconduct or a knowing
and culpable violation of law, that constitute an unexcused pattern of
inattention that amounts to an abdication of his duty to the Company or its
shareholders, or that show a reckless disregard for his duty to the Company or
its shareholders in circumstances in which he was, or should have been aware,
in the ordinary course of performing his duties, or a risk of serious injury
to the Company or its shareholders or (iii) based on transactions between the
Company and its directors or another corporation with interrelated directors
or on improper distributions, loans, or guarantees under applicable sections
of the California Corporations Code. Such limitations of liability also do not
affect the availability of equitable remedies such as injunctive relief or
rescission, although in certain circumstances equitable relief may not be
available as a practical matter. The limitation may relieve the directors of
monetary liability to the Company for grossly negligent conduct, including
conduct in situations involving attempted takeovers of the Company. No claim
or litigation is currently pending against the Company's directors that would
be affected by the limitation of liability.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Act. Article IX of the Second Amended and Restated
Articles of Incorporation of the Registrant (Exhibit 3.1A) and Article VI,
Section 4 of the Company's Bylaws (Exhibit 3.2) provide for indemnification of
its directors and officers and other agents to the maximum extent permitted by
the California Corporations Code. The Underwriting Agreement (Exhibit 1.1)
provides for indemnification by the Underwriters of the Registrant, its
directors and executive officers and other persons for certain liabilities,
including liabilities arising under the Act. The Company also maintains
insurance for the benefit of its directors and officers that insures such
persons against certain
II-1
<PAGE>
liabilities, including liabilities under the securities laws. The Registrant
has entered into an indemnification agreement (Exhibit 10.7) with each of its
directors whereby the Company will reimburse its directors against certain
liabilities, including liabilities arising under the securities laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since November 1, 1994, the Company has issued options to purchase
securities without registration under the Securities Act of 1933, as amended
(the "Act") in the transactions and in reliance on the exemptions from
registration described below.
From October 20, 1997 through March 31, 1998, the Company issued options to
purchase an aggregate of 2,658,800 shares of Common Stock pursuant to grants
to certain employees, directors and service providers of the Company under the
1998 Stock Incentive Plan and other stock incentive plans of the Company.
These issuances were made in reliance on Rule 701 promulgated under the Act
due to the fact that they were offered and sold pursuant to a written
compensatory plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Business Sales Agreement, dated as of August 21, 1997, by and between
the Registrant and Alphatec USA, Inc. (including Digital Testing
Services, Inc.).
3.1 Form of Second Amended and Restated Articles of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Bylaws of Registrant.
4.1* Specimen Certificate of Common Stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Assignment and Assumption of Lease by and among RND Funding Company,
Inc., Alphatec Electronics Company Limited (Public) and Digital
Testing Services, Inc. dated as of September 12, 1997.
10.2 Lease Agreement between Kim Camp No. VII and Alphatec Electronics
Company Limited for 3600 Peterson Way, Santa Clara, California, dated
as of March 23, 1995.
10.3 Tenancy Agreement between Hing Seng Plastic Factory Limited and ISE
Labs (HK) Limited, dated as of April 25, 1996.
10.4 Loan and Security Agreement, by and among Comerica Bank-California, as
Lender, and the Registrant, ISE Technology Inc. and Digital Testing
Services, Inc., as Borrowers, dated October 2, 1997.
10.4A Manteca Note in the principal amount of $5,400,000, dated October 2,
1997.
10.4B Equipment Acquisition Note in the principal amount of $14,600,000,
dated October 2, 1997.
10.4C Revolving Promissory Note in the principal amount of $8,000,000, dated
October 2, 1997.
10.4D Equipment Refinance Note in the principal amount of $4,650,000, dated
October 2, 1997.
10.4E Amendment to Loan and Security Agreement, by and among Comerica Bank-
California, as Lenders, and the Registrant, ISE Technology Inc. and
Digital Testing Services, Inc., as Borrowers, dated April 1, 1998.
10.5 Employment and Noncompetition Agreement by and between the Registrant
and Dr. Sassan Raissi.
10.6 Employment and Noncompetition Agreement by and between the Registrant
and Ray G. Grammer.
10.7 Form of Indemnification Agreement entered into between the Registrant
and each of its officers and directors.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.8 Finance/Capital Lease Line of Credit Agreement by and among Comerica
Leasing Corporation, as Lessor, and the Registrant, and Digital
Testing Services Inc., as Co-Lessees, dated March 30, 1998.
10.9 1998 Stock Incentive Plan.
10.10 1998 Employee Stock Purchase Plan.
10.11 Promissory Note in the principal amount of $2,520,000 dated August 22,
1994.
11.1 Statement of Computation of Net Income Per Share.
21.1 List of Subsidiaries of the Registrant.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of
counsel filed as Exhibit 5.1 hereto).
23.2 Consent of Price Waterhouse, Independent Accountants relating to the
consolidated financial statements of ISE Labs, Inc.
23.3 Consent of Price Waterhouse, Independent Accountants relating to the
consolidated financial statements of Alphatec USA, Inc.
24.1 Power of Attorney (included on page II-4 of this Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
*To be filed by amendment.
(b) Financial Statement Schedules:
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown
in the consolidated financial statements or related notes.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING OF FORM S-1 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN SAN JOSE, CALIFORNIA ON THIS 8TH DAY OF APRIL, 1998.
ISE Labs, Inc.
By: /s/ Saeed A. Malik
--------------------------------
SAEED A. MALIK
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Saeed A. Malik and Ray
G. Grammer and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective amendments
and any related registration statement pursuant to Rule 462(b) under the
Securities Act of 1933), and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
/s/ Saeed A. Malik President and Chief April 8, 1998
- ------------------------------------- Executive Officer,
(SAEED A. MALIK) Director (Principal
Executive Officer)
/s/ Ray G. Grammer Chief Financial April 8, 1998
- ------------------------------------- Officer (Principal
(RAY G. GRAMMER) Financial and
Accounting Officer)
/s/ Laurence F. Jorstad Director April 8, 1998
- -------------------------------------
(LAURENCE F. JORSTAD)
/s/ Alex M. Barrios Director April 8, 1998
- -------------------------------------
(ALEX M. BARRIOS)
/s/ Muneer A. Malik Director April 8, 1998
- -------------------------------------
(MUNEER A. MALIK)
/s/ Terry N. Holdt Director April 8, 1998
- -------------------------------------
(TERRY N. HOLDT)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1 Business Sales Agreement, dated as of August 21, 1997, by and between
the Registrant and Alphatec USA, Inc. (including Digital Testing
Services, Inc.).
3.1 Form of Second Amended and Restated Articles of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Bylaws of Registrant.
4.1* Specimen Certificate of Common Stock.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Assignment and Assumption of Lease by and among RND Funding Company,
Inc., Alphatec Electronics Company Limited (Public) and Digital
Testing Services, Inc. dated as of September 12, 1997.
10.2 Lease Agreement between Kim Camp No. VII and Alphatec Electronics
Company Limited for 3600 Peterson Way, Santa Clara, California, dated
as of March 23, 1995.
10.3 Tenancy Agreement between Hing Seng Plastic Factory Limited and ISE
Labs (HK) Limited, dated as of April 25, 1996.
10.4 Loan and Security Agreement, by and among Comerica Bank-California, as
Lender, and the Registrant, ISE Technology Inc. and Digital Testing
Services, Inc., as Borrowers, dated October 2, 1997.
10.4A Manteca Note in the principal amount of $5,400,000, dated October 2,
1997.
10.4B Equipment Acquisition Note in the principal amount of $14,600,000,
dated October 2, 1997.
10.4C Revolving Promissory Note in the principal amount of $8,000,000, dated
October 2, 1997.
10.4D Equipment Refinance Note in the principal amount of $4,650,000, dated
October 2, 1997.
10.4E Amendment to Loan and Security Agreement, by and among Comerica Bank-
California, as Lender, and the Registrant, ISE Technology Inc. and
Digital Testing Services, Inc., as Borrowers, dated April 1, 1998.
10.5 Employment and Noncompetition Agreement by and between the Registrant
and Dr. Sassan Raissi.
10.6 Employment and Noncompetition Agreement by and between the Registrant
and Ray G. Grammer.
10.7 Form of Indemnification Agreement entered into between the Registrant
and each of its officers and directors.
10.8 Finance/Capital Lease Line of Credit Agreement by and among Comerica
Leasing Corporation, as Lessor, and the Registrant, and Digital
Testing Services Inc., as Co-Lessees, dated March 30, 1998.
10.9 1998 Stock Incentive Plan.
10.10 1998 Employee Stock Purchase Plan.
10.11 Promissory Note in the principal amount of $2,520,000 dated August 22,
1994.
11.1 Statement of Computation of Net Income Per Share.
21.1 List of Subsidiaries of the Registrant.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in the opinion of
counsel filed as Exhibit 5.1 hereto).
23.2 Consent of Price Waterhouse, Independent Accountants relating to the
consolidated financial statements of ISE Labs, Inc.
23.3 Consent of Price Waterhouse, Independent Accountants relating to the
consolidated financial statements of Alphatec USA, Inc.
24.1 Power of Attorney (included on page II-4 of this Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
*To be filed by amendment.
<PAGE>
EXHIBIT 1.1
WSGR DRAFT -- 4/8/98
--------------------
6,000,000 Shares
ISE LABS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
____________, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
ISE LABS, INC., a California corporation (the "COMPANY"), proposes to issue
and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and the shareholders of the Company named in Schedule II hereto
(the "SELLING SHAREHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of 6,000,000 shares of the common stock, par value
$0.001 per share of the Company (the "FIRM SHARES"), of which 5,000,000 shares
are to be issued and sold by the Company and 1,000,000 shares are to be sold by
the Selling Shareholders, each Selling Shareholder selling the amount set forth
opposite such Selling Shareholder's name in Schedule II hereto. The Company also
proposes to issue and sell to the several Underwriters not more than an
additional 900,000 shares of its common stock, par value $0.001 per share (the
"ADDITIONAL SHARES") if requested by the Underwriters as provided in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "SHARES". The shares of common stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK". The Company and the Selling Shareholders are
hereinafter sometimes referred to collectively as the "SELLERS."
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration
<PAGE>
statement at the time of effectiveness pursuant to Rule 430A under the Act, is
hereinafter referred to as the "REGISTRATION STATEMENT"; and the prospectus in
the form first used to confirm sales of Shares is hereinafter referred to as the
"PROSPECTUS". If the Company has filed or is required pursuant to the terms
hereof to file a registration statement pursuant to Rule 462(b) under the Act
registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION
STATEMENT"), then, unless otherwise specified, any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462(b)
Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE AND LOCK-UP AGREEMENTS. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
5,000,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not
jointly, to sell the number of Firm Shares set forth opposite such Selling
Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
[$________] (the "PURCHASE PRICE") the number of Firm Shares that bears the same
proportion to the total number of Firm Shares to be sold by such Seller as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedules I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 900,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company within 30 days after the date of this Agreement. You
shall give any such notice on behalf of the Underwriters and such notice shall
specify the aggregate number of Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof, which date shall be
a business day (i) no earlier than two business days after such notice has been
given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)) and (ii) no later than five business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (including,
without limitation, shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Commission) or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise), except to the
Underwriters pursuant to this Agreement, for a period of 180 days after the date
of the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"); provided however, that notwithstanding
the foregoing, during such period (a) the Company may grant stock options or
issue shares of Common Stock to service providers as permitted by the terms of
the Company's existing stock option plan or stock purchase plans; (b) the
Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof; (c) if
the Seller is an individual, he or she may transfer any of his or her shares
either during his or her lifetime or on death by gift, will or intestacy to his
-2-
<PAGE>
or her immediate family or to a trust the beneficiary of which is exclusively
such individual and/or members of his or her immediate family; (d) if the Seller
is a partnership, the partnership may transfer any of its shares to a partner of
such partnership as of the date such partner executed a lock-up agreement in
connection herewith, or a retired partner of such partnership who retires after
the date hereof, to the estate of any such partner or retired partner, and any
partner who is an individual may transfer any of his or her shares by gift, will
or intestacy to his or her immediate family or to a trust the beneficiary of
which is exclusively such partner and/or members of his or her immediate family;
and (e) if the Seller is a trust, the trust may transfer any of its shares to
any beneficiary of such trust as of the date such Seller executed a lock-up
agreement in connection herewith or to the estate of any such beneficiary, and
any beneficiary who is an individual may transfer any such shares by gift, will
or intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively the beneficiary and/or members of his or her immediate
family; provided, that, in any case, it shall be a condition to the transfer
that the transferee execute an agreement stating that the transferee is
receiving and holding the Seller's shares subject to the provisions hereof and
subject to a lock-up agreement in connection herewith, and there shall be no
further transfer of the Seller's shares except in accordance with the provisions
hereof and thereof. For the purposes of the foregoing, "immediate family" shall
mean spouse, lineal descendant, father, mother, brother or sister of the
transferor. Other than the filing of a registration statement on Form S-8 with
the Commission, the Company also agrees not to file any registration statement
with respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 30 days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. In addition, each Selling Shareholder agrees
that, for a period of 180 days after the date of the Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each Selling Shareholder, (ii) each of the directors and officers of the
Company who is not a Selling Shareholder and (iii) each shareholder listed on
Annex I hereto to the effect that such person will not, during the period
commencing on the effective date of the Prospectus and ending 180 days after the
effective date of the Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Corporation, and other than the filing of a
registration statement on Form S-8 with the Commission, (A) engage in any of the
transactions described in the first sentence of this paragraph or (B) make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. TERMS OF PUBLIC OFFERING. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on
__________ , 1998 (the "CLOSING DATE") at the offices of Brobeck, Phleger &
Harrison, LLP, 2200 Geng Road, Two Embarcadero Place, Palo Alto, California
94303, or such other place as you shall designate. The Closing Date and the
location of delivery of and payment for the Firm Shares may be varied by
agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at such place as you shall designate
at 9:00 A.M., New York City time, on the date specified in the applicable
exercise notice given by you pursuant to Section 2 (an "OPTION CLOSING DATE").
Any such Option Closing Date and the location of delivery of and payment for
such Additional Shares may be varied by agreement between you and the Company.
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The Company authorizes DLJ to register the Shares in the name of Cede &
Co., a nominee of the Depositary Trust Company ("DTC") or such other name as DLJ
shall determine prior to the Closing Date or an Option Closing Date, as the case
may be. On the Closing Date or the applicable Option Closing Date, as the case
may be, with any transfer tax thereon duly paid by the Sellers against payment
to the Sellers by the several Underwriters of the Purchase Price for the Shares
in same day funds, the Company will cause DTC to credit the Shares to the
account of Donaldson, Lufkin & Jenrette Securities Corporation at DTC for the
benefit of the several Underwriters. The Shares shall be made available to DLJ
for inspection not later than 9:30 a.m., New York City time, on the business day
immediately preceding the Closing Date.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop
order suspending the effectiveness of the Registration Statement, the Company
will use its best efforts to obtain the withdrawal or lifting of such order at
the earliest possible time.
(b) To furnish to you three (3) signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
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(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company and its
subsidiaries shall not be required in connection therewith to qualify as a
foreign corporation in any jurisdiction in which it is not now so qualified or
to take any action that would subject it to general consent to service of
process or taxation other than as to matters and transactions relating to the
Prospectus, the Registration Statement, any preliminary prospectus or the
offering or sale of the Shares, in any jurisdiction in which it is not now so
subject.
(g) To make generally available to its shareholders as soon as practicable
an earnings statement covering the twelve-month period ending April 30, 1999
that shall satisfy the provisions of Section 11(a) of the Act, and to advise you
in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request in writing.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Shareholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and reasonable fees
and disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel (but not counsel's fees) for the Underwriters
in connection with the review and clearance of the offering of the Shares by the
National
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Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, (ix) a nonaccountable expense
allowance in the amount of $750,000 payable to DLJ upon the Closing Date, the
payment of which will not require DLJ to provide any accounting therefor and (x)
all other costs and expenses incident to the performance of the obligations of
the Company and the Selling Shareholders hereunder for which provision is not
otherwise made in this Section. The provisions of this Section shall not
supersede or otherwise affect any agreement that the Company and the Selling
Shareholders may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to use its best efforts to maintain the listing of the
Shares on the Nasdaq National Market for a period of three years after the date
of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the
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<PAGE>
Registration Statement, the Prospectus or any amendments or supplements thereto
based upon information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any preliminary
prospectus or any amendments thereto based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21 of the Registration Statement. Each of the Company and its
subsidiaries has been duly incorporated, is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in the
Prospectus and to own, lease and operate its properties, and each is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(e) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(f) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement or option offers pursuant to outstanding employment offers.
(g) All the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Shareholders) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights except as otherwise disclosed in the Registration
Statement; and the Shares to be issued and sold by the Company have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(h) All of the outstanding shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, directly or indirectly through one
or more subsidiaries, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature except as otherwise disclosed in
the Registration Statement.
(i) The authorized, issued and outstanding capital stock of the Company
conforms as to legal matters to the description thereof contained in the
Prospectus.
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<PAGE>
(j) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound, except in each case where
failure to be so in compliance would not have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(k) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby and by the Prospectus will
not (i) require any material consent, approval, authorization or other order of,
or qualification with, any court or governmental body or agency (except such as
may be required under the securities or Blue Sky laws of the various states, the
Exchange Act or the rules and regulations promulgated by the National
Association of Securities Dealers, Inc.), (ii) materially conflict with or
constitute a material breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) materially violate
or materially conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their respective
property or (iv) result in the suspension, termination or revocation of any
material Authorization (as defined below) of the Company or any of its
subsidiaries or any other impairment of the rights of the holder of any such
material Authorization.
(l) To the Company's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is or could be a party or to which any of their respective property
is or could be subject that are required to be described in the Registration
Statement or the Prospectus and are not so described; nor are there any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(m) To the Company's knowledge, neither the Company nor any of its
subsidiaries has violated any federal, state or local law or regulation relating
to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS") or
any provisions of the Employee Retirement Income Security Act of 1974, as
amended, or the rules and regulations promulgated thereunder, except for such
violations which, singly or in the aggregate, would not have a material adverse
effect on the business, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole.
(n) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all material filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect in all material respects and each of the Company and its
subsidiaries is in compliance in all material respects with all the terms and
conditions thereof and with the rules and regulations of the authorities and
governing bodies having
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<PAGE>
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization, except where such failure to be valid and
in full force and effect or to be in compliance or the occurrence of any such
event would not, singly or in the aggregate, have a material adverse effect on
the business, financial condition or results of operations of the Company and
its subsidiaries, taken as a whole.
(o) There are no material costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
Environmental Laws or any Authorization, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(p) To the Company's knowledge, there is no (i) significant unfair labor
practice complaint, grievance or arbitration proceeding pending or threatened
against the Company or any of its subsidiaries before the National Labor
Relations Board or any state or local labor relations board, (ii) strike, labor
dispute, slowdown or stoppage pending or threatened against the Company or any
of its subsidiaries or (iii) union representation question existing with respect
to the employees of the Company and its subsidiaries, except for such actions
specified in clause (i) , (ii) or (iii) above, which, singly or in the
aggregate, would not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole. To the Company's knowledge, no collective bargaining organizing
activities are taking place with respect to the Company or any of its
subsidiaries.
(q) This Agreement has been duly authorized, executed and delivered by the
Company.
(r) Price Waterhouse LLP are independent public accountants with respect to
the Company and its subsidiaries as required by the Act.
(s) The execution and delivery of the Business Sales Agreement dated as of
August 21, 1997 (the "SALES AGREEMENT") between Alphatec USA, Inc. ("ALPHATEC")
and the Company, effecting the acquisition of certain of the assets of Alphatec,
including 100% of the stock of Digital Testing Services, Inc. ("DTS") and
selected assets of Alphatec in Manteca, California, was duly authorized by all
necessary corporate action on the part of the Company, and all governmental and
third party consents or approvals necessary to effect the transactions
contemplated by sale of the assets have been waived, indemnified against or
obtained, except where failure to so obtain such consents or approvals would not
have a material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole. The
Company had as of the date of the Sales Agreement all corporate power and
authority to execute and deliver the Sales Agreement and to consummate the sale
of the assets contemplated by the Sales Agreement, and the Sales Agreement at
the time of execution constituted a valid and binding obligation of the Company,
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally or by general equitable
principles.
(t) The audited financial statements of each of the Company and Alphatec
individually, and any financial statements presenting such entities on a
combined basis, included in the Registration Statement and the Prospectus (and
any amendment or supplement thereto), together with related schedules and notes,
present fairly the financial position, results of operations and changes in
financial position of the Company and Alphatec on the basis stated therein at
the respective dates or for the respective periods to which they apply; such
statements and related schedules and notes and the unaudited financial
information of the Company filed as part of the
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Registration Statement and the prospectus (and any amendment or supplement
thereto) have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company and Alphatec, as applicable.
(u) The Company and each of its subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) The Company is not and, after giving effect to the offering and sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(w) Any and all contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement have been satisfied or validly
waived.
(x) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change in the condition, financial
or otherwise, or the business or operations of the Company and its subsidiaries,
taken as a whole, (ii) there has not been any material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
liability or obligation, except liabilities and obligations incurred by the
Company in the ordinary course of business.
(y) The Company and its subsidiaries own or possess, or, to the Company's
knowledge, can acquire on reasonable terms, all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names ("INTELLECTUAL
PROPERTY") currently employed by them in connection with the business now
operated by them except where the failure to own or possess or otherwise be able
to acquire such Intellectual Property would not, singly or in the aggregate,
have a material adverse effect on the business, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole; and neither
the Company nor any of its subsidiaries has received any written notice of
infringement of or conflict with asserted rights of others with respect to any
of such Intellectual Property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
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(z) All material tax returns required to be filed by the Company and each
of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith or for which adequate reserves have been provided.
(aa) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; and
neither the Company nor any of its subsidiaries (i) has received written notice
from any insurer or agent of such insurer that substantial capital improvements
or other material expenditures will have to be made in order to continue such
insurance or (ii) has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers at a cost that would not have a material
adverse effect on the business, financial conditions or results of operations of
the Company and its subsidiaries, taken as a whole.
(bb) The Company has good and marketable title to all the physical
properties and assets reflected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus), subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except (i) those, if any, reflected in
such financial statements or elsewhere in the Registration Statement, or (ii)
those which are not material in amount and do not materially adversely affect
the use made and proposed to be made of such property by the Company. The
Company holds its leased properties under valid and binding leases, with such
exceptions as are not materially significant in relation to the business of the
Company and its subsidiaries, taken as a whole, and except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally or by
general equitable principles. Except as disclosed in the Registration
Statement, the Company owns or leases all such properties as are necessary to
its operations as now conducted.
(cc) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters in accordance herewith shall
be deemed to be a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder represents and warrants as to itself only to each
Underwriter that:
(a) such Selling Shareholder is the lawful owner of the Shares to be sold
by such Selling Shareholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever, other than pursuant to this Agreement and the Registration
Statement.
(b) To such Selling Shareholders knowledge, the Shares to be sold by such
Selling Shareholder have been duly authorized and are validly issued, fully paid
and non-assessable.
(c) Such Selling Shareholder has, and on the Closing Date will have, the
legal right, power and authority, and all authorization and approval required by
law, to enter into this Agreement, the Custody Agreement signed by such Selling
Shareholder and Boston Equiserve LLP, as Custodian, relating to the deposit of
the Shares to be sold by
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such Selling Shareholder (the "CUSTODY AGREEMENT") and the Power of Attorney of
such Selling Shareholder appointing certain individuals as such Selling
Shareholder's attorneys-in-fact (the "ATTORNEYS") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder in the manner provided herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder.
(e) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by general equitable principles.
(f) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding instrument of such Selling Shareholder, enforceable in accordance
with its terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by general equitable principles.
Pursuant to such Power of Attorney, such Selling Shareholder has, among other
things, authorized the Attorneys, or any one of them, to execute and deliver on
such Selling Shareholder's behalf this Agreement and any other document that
they, or any one of them, may deem necessary or desirable in connection with the
transactions contemplated hereby and thereby and to deliver the Shares to be
sold by such Selling Shareholder pursuant to this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such Selling
Shareholder pursuant to this Agreement, valid and marketable title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Shareholder by or on
behalf of such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any material
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states, the Exchange Act or the rules
and regulations promulgated by the National Association of Securities Dealers,
Inc.), (ii) materially conflict with any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any property of such Selling
Shareholder is bound or (iii) to such Selling Shareholder's knowledge, violate
or conflict with any applicable material law or any rule, regulation, judgment,
order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Shareholder or any property of such Selling
Shareholder.
(i) Such Selling Shareholder has reviewed the information contained in the
Registration Statement and, based on such review and such Selling Shareholder's
knowledge of the industry, the Company and its
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business (but without further investigation), nothing has come to such Selling
Shareholder's attention that would lead such Selling Shareholder to believe
that, at the time the Registration Statement became or becomes, as the case may
be, effective and at all times subsequent thereto up to and on the Closing Date
and on any later date on which Additional Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained or will contain any untrue stattement of a material fact or
omitted or will omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, and any amendments or supplements thereto effective on or prior to
the Closing Date or any Option Closing Date, contained or will contain any
untrue statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Shareholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling Shareholder and
delivered to the Underwriters or counsel for the Underwriters in accordance
herewith shall be deemed to be a representation and warranty by such Selling
Shareholder to the Underwriters as to the matters covered thereby.
(l) Such Selling Shareholder has reviewed the representations and
warranties of the Company contained in this Agreement. Based on the foregoing,
such Selling Shareholder has no reason to actually believe and does not actually
believe that such representations and warranties (other than those set forth in
Sections 6(b) and (c), as to which no representation or warranty is being made
by any Selling Shareholder) of the Company contained in Section 6 of this
Agreement are not true and correct in all material respects.
SECTION 8. INDEMNIFICATION. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto effective on or prior to the Closing Date or
any Option Closing Date), the Prospectus (or any amendment or supplement thereto
effective on or prior to the Closing Date or any Option Closing Date) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments (including, without limitation, any legal or
other expenses incurred in connection with investigating or defending any
matter, including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
directly or through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter who failed to deliver a Prospectus
(as then amended or
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supplemented, provided by the Company to the several Underwriters in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the Closing Date) to the person asserting any losses, claims, damages and
liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and the delivery of such Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Shareholder and each person, if any, who controls such Selling Shareholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter directly or through you expressly for
use in the Registration Statement (or any amendment thereto), the Prospectus (or
any amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as soon as possible
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 8(a) and 8(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 8(c), but
may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local
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counsel) for all Underwriters, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of any Underwriters,
such firm shall be designated in writing by Donaldson, Lufkin & Jenrette
Securities Corporation. In the case of any such separate firm for the Company
and control persons of the Company, such firm shall be designated in writing by
the Company. In the case of any such separate firm for the Selling Shareholders
and such control persons of any Selling Shareholders, such firm shall be
designated in writing by the Attorneys. The indemnifying party shall indemnify
and hold harmless the indemnified party from and against any and all losses,
claims, damages, liabilities and judgments by reason of any settlement of any
action effected with its written consent. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be, to the
extent the amount to be indemnified is less than or equal to the total net
proceeds from the offering, in the same proportion as the total net proceeds
from the offering (after deducting underwriting discounts and commissions and
the nonaccountable expense allowance (referred to in Section 5(i)(ix) hereof),
but before deducting expenses) received by the Sellers, and the total
underwriting discounts and commissions and the nonaccountable expense allowance
(referred to in Section 5(i)(ix) hereof) received by the Underwriters, bear to
the total price to the public of the Shares, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Sellers on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Shareholders on
the one hand or the Underwriters on the other hand and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
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<PAGE>
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) Notwithstanding anything in this Agreement to the contrary, no claim
for indemnification shall be made against any Selling Shareholder pursuant to
this Agreement until a claim shall first have been made against the Company by
an Underwriter and either (i) the Company shall have refused to pay any material
portion of the amount claimed or (ii) two (2) years shall have elapsed from the
date of such claim against the Company.
(g) Notwithstanding anything in this Agreement to the contrary, the
liability of each Selling Shareholder under the representations, warranties,
covenants and agreements contained herein and under the indemnity agreements
contained in the provisions of this Agreement shall be limited to an amount
equal to the net proceeds received by such Selling Shareholder upon the sale of
the Firm Shares by such Selling Shareholder to the Underwriters.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on the Closing Date
with the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., New York City time, on the
date of this Agreement; and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or threatened by
the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Saeed A. Malik and Ray Grammer, in their respective
capacities as the Chief Executive Officer and Chief Financial Officer of the
Company, confirming the matters set forth in Sections 6(x), 9(a) and 9(b) and
that the
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Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change in the financial condition, business,
or operations of the Company and its subsidiaries, taken as a whole, (ii) there
shall not have been any change in the capital stock or in the long-term debt of
the Company or any of its subsidiaries and (iii) neither the Company nor any of
its subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Shareholder
contained in this Agreement shall be true and correct in all material respects
on the Closing Date with the same force and effect as if made on and as of the
Closing Date and you shall have received on the Closing Date a certificate dated
the Closing Date from each Selling Shareholder to such effect and to the effect
that such Selling Shareholder has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by such Selling Shareholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Brobeck,
Phleger & Harrison, LLP, counsel for the Company and the Selling Shareholders,
to the effect that:
(i) each of the Company and DTS has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of
California and has the corporate power and authority to carry on its business as
described in the Prospectus and to own, lease and operate its properties;
(ii) to such counsel's knowledge, each of the Company and DTS is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole;
(iii) all the outstanding shares of capital stock of the Company
outstanding prior to the issuance of the Shares (including the Shares to be sold
by the Selling Shareholders) have been duly authorized and validly issued and
are fully paid, non-assessable and, to such counsel's knowledge, not subject to
any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares and, to such counsel's
knowledge, will not be subject to any preemptive or similar rights;
(v) all of the outstanding shares of capital stock of DTS have been
duly authorized and validly issued and are fully paid and non-assessable, and
are owned by the Company, directly or indirectly, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature, except as
set forth in the Registration Statement;
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(vi) this Agreement has been duly authorized, executed and delivered
by the Company and by or on behalf of each Selling Shareholder;
(vii) the authorized, issued and outstanding capital stock of the
Company is as set forth under the heading "Actual" under the caption
"Capitalization" in the Prospectus;
(viii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no proceedings
for that purpose are, to such counsel's knowledge after due inquiry, pending
before or threatened in writing by the Commission;
(ix) the statements under the captions "Risk Factors-Shares Eligible
for Future Sale," "Management-Compensation Plans," "Shares Eligible for Future
Sale," "Description of Capital Stock" and "Underwriting" in the Prospectus,
insofar as such statements constitute a summary of the legal matters, documents
or proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings;
(x) the execution, delivery and performance of this Agreement by the
Company do not (A) require any material consent, approval, authorization or
other order of, or qualification with, any court or governmental body or agency
applicable to the Company, (B) conflict with or constitute a breach of any of
the material terms or provisions of, or a default under, any material provision
of the charter or by-laws of the Company or any material provision of any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company is a party or by which the Company or its property is bound as set forth
on the list of Exhibits set forth in the Registration Statement or (C) violate
or conflict with any material provision of applicable California or federal
securities law or any rule, regulation (except such as will have been obtained
under the Securities Act and the Exchange Act and such as may be required under
the securities or Blue Sky laws of the various states, as for which such counsel
need not express any opinion), judgment, order or decree known to such counsel
of any court or any governmental body or agency having jurisdiction over the
Company;
(xi) such counsel has no knowledge of any legal or governmental
proceedings pending or threatened to which the Company is a party that is
required to be described in the Registration Statement or the Prospectus and are
not so described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are
not so described or filed as required;
(xii) to such counsel's knowledge, any and all contracts, agreements
or understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act with
respect to any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the Registration
Statement have been satisfied or validly waived;
(xiii) to such counsel's knowledge, based on a Certificate provided
by such Selling Shareholder and relied upon by such counsel, each Selling
Shareholder has the right, power and authority, and the authorization and
approval required by law, to enter into this Agreement, the Custody Agreement
and the Power of Attorney of such Selling Shareholder and to sell, assign,
transfer and deliver the Shares to be sold by such Selling Shareholder in the
manner provided herein and therein;
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(xiv) to such counsel's knowledge, based on a Certificate provided by
such Selling Shareholder and relied upon by such counsel, the Custody Agreement
of each Selling Shareholder has been duly authorized, executed and delivered by
such Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms;
(xv) to such counsel's knowledge, based on a Certificate provided by
such Selling Shareholder and relied upon by such counsel, the Power of Attorney
of each Selling Shareholder has been duly authorized, executed and delivered by
such Selling Shareholder and is a valid and binding instrument of such Selling
Shareholder, enforceable in accordance with its terms and, pursuant to such
Power of Attorney, such Selling Shareholder has, among other things, authorized
the Attorneys, or either one of them, to execute and deliver on such Selling
Shareholder's behalf this Agreement and any other document they, or any one of
them, may deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold by such
Selling Shareholder pursuant to this Agreement;
(xvi) to such counsel's knowledge, based on a Certificate provided by
such Selling Shareholder and relied upon by such counsel, upon delivery of and
payment for the Shares to be sold by each Selling Shareholder pursuant to this
Agreement, each of the Underwriters will receive valid and marketable title to
the Shares purchased by it from such Selling Shareholder, free of any adverse
claim, assuming the Underwriters purchase such Shares for value, in good faith
and without notice of any adverse claim, as such terms are defined in the
Uniform Commercial Code in effect in the State of New York.
(xvii) the execution, delivery and performance of this Agreement, the
Custody Agreement and Power of Attorney of each Selling Shareholder by such
Selling Shareholder and the consummation of the transactions contemplated hereby
and thereby will not (A) to such counsel's knowledge require any material
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency, (B) to such counsel's knowledge, conflict
with or constitute a breach of any material provision of, or a default under,
any material provision of any indenture, loan agreement, mortgage, lease or
other agreement or instrument to which such Selling Shareholder is a party or by
which any property of such Selling Shareholder is bound or (C) violate or
conflict with any applicable material law or, to such counsel's knowledge, any
rule, regulation (except such as may be required under the securities or Blue
Sky laws of the various states, as for which such counsel need not express any
opinion), judgment, order or decree of any court or any governmental body or
agency having jurisdiction over such Selling Shareholder.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Additional Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto filed on or prior to the Closing Date (other
than the financial statements including supporting schedules and other financial
and statistical information derived therefrom, as to which such counsel need
express no comment) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the
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Additional Shares are to be purchased, as the case may be, the Registration
Statement, the Prospectus and any amendment or supplement thereto filed on or
prior to the Closing Date (except as aforesaid) contained any untrue statement
of a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (collectively, a "NEGATIVE ASSURANCES REPRESENTATION").
The opinion of Brobeck, Phleger & Harrison, LLP described in Section 9(f)
above shall be rendered to you at the request of the Company and the Selling
Shareholders and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, as to the matters referred to in Sections
9(f)(iv), 9(f)(vi) (but only with respect to the Company), 9(f)(ix) (but only
with respect to the statements under the caption "Description of Capital Stock"
and "Underwriting"), and including a Negative Assurances Representation
substantially similar to that set forth in this Section 9.
In giving such opinions with respect to the matters covered by Section
9(f)(xix), counsel for the Company and the Selling Shareholders and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you and to Price Waterhouse LLP, independent
accountants, from Price Waterhouse LLP, independent accountants, containing the
information and statements of the type ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(i) The Company shall have delivered to you the agreements specified in
Section 2 hereof, which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been approved and duly listed for quotation on
the Nasdaq National Market.
(k) The Company and the Selling Shareholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the material
agreements herein contained and required to be performed or complied with by the
Company or the Selling Shareholders, as the case may be, on or prior to the
Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United
-20-
<PAGE>
States or elsewhere that, in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (ii) the suspension or material
limitation of trading in securities or other instruments on the New York Stock
Exchange, the American Stock Exchange, the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq
National Market or limitation on prices for securities or other instruments on
any such exchange or the Nasdaq National Market, (iii) the suspension of trading
of any securities of the Company on any exchange or in the over-the-counter
market, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects,
or will materially and adversely affect, the business, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole, (v)
the declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided, that, in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Shareholders for purchase of such Firm Shares are
not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Shareholders, except to the extent provided in Section 8 hereof.
In any such case which does not result in termination of this Agreement, either
you or the Sellers shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. If, on an Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such non-
defaulting Underwriters would have been obligated to purchase on such date in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
SECTION 11. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each Selling
Shareholder agrees with you and the Company to pay or to cause to be paid all
transfer taxes payable in connection with the transfer of the Shares to be sold
by such Selling Shareholder to the Underwriters.
-21-
<PAGE>
SECTION 12. MISCELLANEOUS. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company or the
Selling Shareholders, to ISE Labs, Inc., 2095 Ringwood Avenue, San Jose,
California 95131, Attn: Saeed Malik, with a copy to: Brobeck, Phleger &
Harrison, LLP, 2200 Geng Road, Two Embarcadero Place, Palo Alto, California
94303, Attn: Warren T. Lazarow, Esq.; and (ii) if to any Underwriter or to you,
to you, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Syndicate Department, with a copy
to Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill
Road, Palo Alto, California 94304, Attn: Jeffrey A. Herbst, Esq., or in any case
to such other address as the person to be notified may have requested in
writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling such Selling
Shareholder and (ii) acceptance of the Shares and payment for them hereunder.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company shall reimburse the several
Underwriters for all reasonable out-of-pocket expenses (including reasonable
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters', any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors
and assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
-22-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
ISE LABS, INC.
By:____________________________________
Title:_________________________________
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II HERETO, ACTING SEVERALLY
By:____________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN INCORPORATED
Acting severally on behalf of themselves
and the several other Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:__________________________________
-23-
<PAGE>
SCHEDULE I
----------
Underwriters Number of Firm Shares
to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
BT Alex. Brown Incorporated
---------
Total 6,000,000
-24-
<PAGE>
SCHEDULE II
-----------
Selling Shareholders
--------------------
<TABLE>
<CAPTION>
Name Number of Firm
Shares Being Sold
<S> <C>
Saeed A. Malik....................... 271,600
Laurence F. Jorstad.................. 271,600
Alex M. Barrios...................... 271,600
Zafar Malik.......................... 90,100
Patrick Yu........................... 90,100
Dharam Ahuja......................... 5,000
---------
Total................................ 1,000,000
</TABLE>
-25-
<PAGE>
Annex I
Saeed A. Malik
Laurence F. Jorstad
Alex M. Barrios
Zafar Malik
Patrick Yu
Dharam Ahuja
-26-
<PAGE>
Exhibit 2.1
BUSINESS SALES AGREEMENT
------------------------
August 21, 1997
This BUSINESS SALE AGREEMENT (hereafter, this "Agreement") is made as of
the 21st day of August, 1997, by and between Alphatec USA, Inc., a California
corporation (including, unless otherwise specifically noted or unless the
context otherwise requires, Digital Testing Services, Inc., collectively
"SELLER"); and ISE Labs, Inc., a California corporation ("BUYER").
W I T N E S S E T H:
WHEREAS, SELLER conducts the Contract Assembly Business (as such term is
defined below) at the Facility (as such term is defined below), and the
Integrated Circuit Test Business (as such term is defined below) at the Leased
Premises (as such term is defined below) through its wholly owned subsidiary
Digital Testing Services, Inc. ("DTS"); and
WHEREAS, BUYER desires to acquire the Contract Assembly Business and the
Integrated Circuit Test Business from SELLER, upon the terms specifically
provided herein and in the exhibits attached hereto.
NOW, THEREFORE, in consideration of the representations, warranties,
agreements and covenants hereinafter set forth and other good and valuable
consideration, the receipt of which is hereby acknowledged and agreed, the
parties agree as follows:
ARTICLE 1
DEFINITIONS
-----------
1.1 Definitions. For purposes of this Agreement, the following terms shall
-----------
have the following meanings:
1.1.1 "Business" shall mean the "Integrated Circuit Test Business" and the
"Contract Assembly Business."
1.1.2 "Integrated Circuit Test Business" shall mean the business of
providing testing services performed by DTS.
<PAGE>
1.1.3 "Facility" shall mean Alphatec USA, Inc.'s facility in Manteca,
California including the Land (as such term is defined in Section
2.2.3 hereof).
1.1.4 "Contract Assembly Business" shall mean the business of contract
assembly of electronic devices into electronic packages.
1.1.5 "Leased Premises" shall mean the building located at 3600 Peterson
Way, Santa Clara, CA 95054.
1.1.6 "Closing Date" shall be September 15, 1997 or when all conditions to
Closing specified in Article 6 are satisfied or waived.
1.1.7 "Inventory" shall mean the piece parts and materials, spare parts,
office supplies, and other items used in the Contract Assembly
Business and listed, and items of a character similar to those
listed, on Schedule 1.1.7 and owned by SELLER on the Closing Date.
ARTICLE 2
PURCHASE AND SALE
-----------------
2.1 Business Purchases. On the Closing Date, BUYER shall purchase from SELLER,
------------------
and SELLER shall sell, transfer, assign and convey to BUYER:
2.1.1 the Contract Assembly Business, such purchase and sale to include
the transfer to BUYER of the Purchased Assets (as such term is
defined in Section 2.2 hereof) and the assumption by BUYER of the
Assumed Liabilities (as such term is defined in Section 2.4 hereof),
and
2.1.2 all of the outstanding securities of DTS.
2.2 Purchased Assets. The purchase of the Assembly Business shall include the
----------------
transfer to BUYER of the following assets:
2.2.1 Inventory: all the Inventory located at the Facility;
---------
2.2.2 Equipment: the machinery and equipment of the Contract Assembly
---------
Business as of the Closing Date and listed on Schedule 2.2.2 (the
"Assembly Equipment");
2.2.3 Land: the real property owned by SELLER more particularly described
----
in Schedule 2.2.3 hereof (the "Land"), together with all buildings
and other real property improvements situated on the Land;
2
<PAGE>
2.2.4 Know-How: the trade secrets, tradenames, know-how and other
--------
intellectual property and proprietary information of SELLER related
to the Contract Assembly Business;
2.2.5 any and all cash and bank accounts of SELLER and its subsidiary and
affiliated companies;
2.2.6 accounts and notes receivable (other than intercompany receivables)
(for purposes of this Subsection 2.2.6, accounts and notes
receivable shall mean those receivables applicable to services
performed and/or product shipped by SELLER including DTS at any
time prior to 12:01 a.m. on the Closing Date, and are referred to
herein as the "Receivables");
2.2.7 except for the suppliers contracts referred to in Section 2.3.3,
all claims and rights under all agreements, contracts, licenses,
leases, franchises, instruments, documents, purchase and sale
orders and other executory commitments, and all permits, consents,
and certificates of any regulatory, administrative or other
governmental agency or body;
2.2.8 all rights under express or implied warranties from suppliers of
SELLER;
2.2.9 all leasehold interests of SELLER listed on Schedule 2.2.9 hereto;
2.2.10 all other assets of the Business not specifically referred to in
this Section 2.2, other than the Excluded Assets; and
2.2.11 all THREE HUNDRED FIFTY THOUSAND shares of the issued and
outstanding shares of Common Stock of DTS.
(collectively the "Purchased Assets"; provided, however, that the Purchased
Assets shall not include the Excluded Assets as such term is defined in Section
2.3 hereof). BUYER shall take delivery and possession of the Purchased Assets
upon the Closing Date.
2.3 Excluded Assets. Notwithstanding any other provision of this Agreement,
---------------
SELLER shall not transfer to Buyer any of the following:
2.3.1 any and all intercompany accounts receivables and payables of
SELLER and its subsidiary and affiliated companies;
2.3.2 all insurance policies of SELLER pertaining to the Purchased Assets
and all rights of SELLER of every nature and description under or
arising out of such insurance policies;
3
<PAGE>
2.3.3 all losses, carryovers and rights to receive refunds from suppliers
or with respect to any and all taxes of SELLER including DTS of
every nature and description, including interest payable with
respect thereto;
2.3.4 the books and records of account and all supporting vouchers,
invoices and other records, and records and materials relating to
any or all taxes of SELLER including DTS (provided that, following
the Closing, SELLER shall grant BUYER access thereto during business
hours on reasonable notice).
If an asset of the Contract Assembly Business is not specifically listed as
an Excluded Asset under Section 2.3 of this Agreement, it shall be deemed a
Purchased Asset and shall be conveyed to Buyer pursuant to this Agreement.
2.4 Obligations.
-----------
2.4.1 Assumed Liabilities.
-------------------
2.4.1.1 Definition. The Buyer covenants and agrees that it shall
----------
only assume those liabilities of Alphatec USA, Inc. (excluding DTS)
that are specifically listed on Schedule 2.4.1.1 (the "Assumed
Liabilities"). Alphatec USA, Inc. (excluding DTS) covenants to and
agrees with BUYER that all other liabilities and obligations of
Alphatec USA, Inc. (excluding DTS) shall remain the sole obligation
of Alphatec USA, Inc. and BUYER shall not be responsible for any
other liabilities and obligations of Alphatec USA, Inc. (excluding
DTS) or any of its parents or other affiliates.
2.4.1.2 Unfilled Orders. Any orders for assembly or testing by
---------------
SELLER received or communicated in the ordinary course of business
that had not been completed or shipped prior to 12:01 a.m. of the
Closing Date, as listed on Schedule 2.4.1.2, shall be transferred to
BUYER at the Closing and BUYER shall be responsible for filling such
orders and shall be entitled to the revenues generated therefrom
(including advance payments).
2.4.1.3 Assignment and Assumption Agreement. On the Closing Date,
-----------------------------------
SELLER and BUYER shall execute an assignment and assumption
agreement, substantially in the form of Exhibit 2.4.1.3 attached
hereto (the "Assignment and Assumption Agreement"), as evidence to
third parties of SELLER's assignment and transfer to BUYER of all of
SELLER's right, title and interest to the Purchased Assets, and
BUYER's assumption and agreement to thereafter fully and timely
perform and discharge in accordance with their terms, the Assumed
Liabilities.
2.4.2 Liabilities and Obligations. For the purposes of this Section 2.4,
---------------------------
the term "liabilities and obligations" means all liabilities,
obligations, indebtedness,
4
<PAGE>
losses, damages, deficiencies, or responsibilities, fixed or unfixed,
now existing or hereafter arising, known or unknown, secured or
unsecured, accrued, absolute, contingent or otherwise, whether caused
by any action or failure to act, whether arising out of contract or
tort (including negligence) or from any other cause.
2.5 Bill of Sale. On the Closing Date, SELLER shall execute a bill of sale,
------------
substantially in the form of Exhibit 2.5 hereto, conveying the Purchased
Assets to BUYER ("Bill of Sale").
2.6 Land. On the Closing Date, SELLER shall execute a deed, substantially in
----
the form of Exhibit 2.6 attached hereto, conveying the Land to BUYER (the
"Deed").
2.7 Stock. On the Closing Date, SELLER shall deliver a stock certificate for
-----
350,000 shares of DTS Common Stock, duly endorsed to BUYER, representing
all of the issued and outstanding shares of DTS.
2.8 Personnel; Employee Meetings. From and after the date hereof,
----------------------------
representatives of BUYER shall be entitled to hold an initial meeting with
the employees of Seller upon reasonable notice to SELLER to explain and
answer questions, policies and benefits of employment under BUYER.
Thereafter, until the Closing, SELLER shall cooperate with BUYER in
communicating to the employees any additional information concerning
employment under BUYER that the employees may seek, or which BUYER may
desire to provide, and during normal working hours shall allow such
additional meetings by representatives of BUYER with employees as BUYER may
request. SELLER shall be entitled to have one or more representatives
attend all such meetings.
ARTICLE 3
PURCHASE PRICE
--------------
3.1 Price. Subject to the terms of this Agreement, as consideration for the
-----
Purchased Assets, BUYER shall pay SELLER THIRTY MILLION DOLLARS
($30,000,000) (the "Purchase Price").
3.2 Allocation. The Purchase Price shall be allocated as mutually agreed upon
----------
by BUYER and SELLER as set forth in Exhibit 3.2 attached hereto. Following
the date hereof, the parties may modify Exhibit 3.2 by mutual written
agreement. BUYER and SELLER agree to prepare their respective federal,
state, local and foreign tax returns in a manner consistent with such
allocation and Section 9.12.
5
<PAGE>
3.3 Method of Payment. The Purchase Price shall be paid in immediately
-----------------
available funds on the Closing Date.
3.4 Taxes. BUYER shall pay all sales, use, transfer, registration, stamp, or
-----
other similar taxes or duties (collectively "Transfer Taxes") arising out
of or incurred in connection with the transfers of Purchased Assets
pursuant to this Agreement. Notwithstanding the foregoing, BUYER shall
have no liability to SELLER with respect to any income taxes or any other
taxes measured by the affairs of SELLER or SELLER's affiliates.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Of SELLER. SELLER (which includes DTS) hereby represents and warrants to
---------
BUYER as follows and agrees with BUYER that the following representations
and warranties shall be true and correct on the Closing Date:
4.1.1 SELLER Organization. SELLER has been duly incorporated, and is
-------------------
validly existing as a corporation in good standing under the laws of
the State of California and has the corporate power to carry on its
business as now conducted and has full power and authority under
such laws to execute, deliver and perform this Agreement. Alphatec
USA, Inc. owns all of the shares of capital stock of DTS, free and
clear of all liens. The SELLER does not have any subsidiaries, other
than DTS. SELLER is not required to be qualified in any other
jurisdiction and all of the assets of the Business are located in
California.
4.1.2 Corporate Authority. SELLER has full power and authority to enter
-------------------
into this Agreement and the related agreements, to perform its
obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby, including, without
limitation, the execution and delivery of this Agreement, general
conveyances, bills of sale, assignments, and other documents and
instruments evidencing the conveyance of the Purchased Assets or
delivered in accordance with this Agreement and agreements related
hereto. No other proceedings on the part of SELLER or any affiliate
are necessary to authorize this Agreement and the related agreements
or to consummate the transactions contemplated hereby and thereby,
except as may be required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR"). All corporate actions
have been taken by SELLER and each affiliated party that are
necessary for the due authorization, execution and delivery of this
Agreement and the performance of the obligations of SELLER
hereunder. This Agreement constitutes the legal, valid, and binding
obligation of SELLER, enforceable against SELLER in accordance with
its terms, subject
6
<PAGE>
to any equitable principles limiting the right to obtain specific
performance of certain obligations of SELLER hereunder. Except as
provided in Schedule 4.1.2 hereto, the execution and delivery of
this Agreement and such other agreements and instruments and the
consummation of the transactions contemplated hereby and thereby do
not and will not violate any law, regulation, rule, injunction or
court order, or the provisions of SELLER's Articles of Incorporation
or By-Laws, or of any note, indenture, mortgage, lease, license
agreement or other agreement or instrument to which SELLER or any
affiliated party is party or by which SELLER or any affiliated party
is bound or of which SELLER or any affiliated party is maker, or
result in the creation of any lien, charge or encumbrance upon the
Purchased Assets or any asset of DTS to be sold hereunder.
4.1.3 Land. Alphatec USA, Inc. is the owner of the Land in fee simple,
----
except for (i) easements that are a matter of public record, (ii)
liens for taxes not yet due and payable and listed on Schedule
4.1.3, and (iii) any items listed on Schedule 4.1.3 attached hereto.
4.1.4 Consents. Except as provided in Schedule 4.1.4, attached hereto, no
--------
consent, approval, waiver, license, authorization or declaration of,
or filing or registration with, any person, firm, corporation or
other entity, including, without limitation, any lender, mortgagee,
governmental authority, bureau or agency is required in connection
with the execution, delivery and performance by SELLER of this
Agreement or the consummation of the transactions contemplated
hereby, except for HSR.
4.1.5 Litigation. Other than complaints and threats of litigation
----------
received from time to time from customers of SELLER, each of which
is listed on Schedule 4.1.5, and as otherwise specifically provided
in Schedule 4.1.5 hereto, to the best of the knowledge of the
officers of SELLER, SELLER is not in violation of, or in default
with respect to, any order, judgment or decree affecting the
Business or the Purchased Assets that would materially impair the
ability of BUYER to conduct the Business following the Closing Date,
nor is it required to take remedial action in order to avoid such
violation or default. There is no claim, investigation, litigation,
action, suit, or proceeding, administrative or judicial, pending or
threatened against SELLER or any officer or director of SELLER, or
involving the Purchased Assets or assets of DTS, at law or in
equity, before any federal, state, local, or foreign court, or
regulatory agency, or other governmental authority, including,
without limitation, any unfair labor practice or grievance
proceedings or otherwise. SELLER has not received any complaints
from any of its customers or suppliers within the last six months,
which complaints could reasonably be expected individually or in the
aggregate, to have a potential adverse effect on the Business,
Purchased Assets, prospects, operations, employee relations, rights
or condition of the SELLER.
7
<PAGE>
4.1.6 Leases. Schedule 4.1.6 contains a complete and correct list of all
------
material leases under which SELLER is a party used in connection
with the Business. For purposes of this Section 4.1.6 a "material"
lease is a lease which provides for the payment of annual rent of
$50,000 or more. SELLER has made, or will make, available to BUYER a
complete and correct copy of each lease set forth in Schedule 4.1.6
and each such lease is in full force and effect. All rents and
additional rents due to date on each such lease have been paid
except as disclosed in Schedule 4.1.6 and, in the case of the lease
of real property, the lessee has had quiet enjoyment of the premises
since the commencement of the original term of such lease.
4.1.7 Employee Benefit Plans. Schedule 4.1.7 contains a true and complete
----------------------
list of each plan contract, program and arrangement evidencing an
employee benefit plan maintained, contributed to, or required to be
contributed to, by SELLER (and any other entity that is under common
control or affiliated with SELLER (an "ERISA Affiliate") within the
meaning of Section 4001 of the Employee Retirement Income Security
Act of 1984, as amended ("ERISA") and the rules and regulations
promulgated thereunder and/or Sections 414(b), (c), (m) or (l) of
the Internal Revenue Code of 1986, as amended the ("Code"), and the
rules and regulations promulgated thereunder) for the benefit of any
employee, director or agent employed, or retained with respect to
the Contract Assembly Business in the United States ("Plan
Beneficiaries"), whether or not any of the foregoing is funded,
whether or not required by law, whether formal or informal, whether
or not subject to ERISA, and whether or not legally binding
(collectively, the "Benefit Plans"). SELLER has no formal plan or
commitment, whether legally binding or not, to create any additional
plan with respect to the Business or modify or change any existing
Benefit Plan that would affect any Plan Beneficiary, except as
required by applicable law, including the Tax Reform Act of 1986, as
amended ("TRA"). SELLER has delivered to BUYER (i) true and complete
copies of all documents embodying or relating to the Benefit Plans,
all amendments to the Benefit Plans, and any trust or other funding
arrangement, and (ii) a copy of the most recent summary plan
description relating to each such Benefit Plan.
4.1.8 Absence of Certain Changes and Events. Since December 31, 1996,
-------------------------------------
there has not been any material adverse change in the financial
condition, results of operation, assets, liabilities, business, or
prospects of SELLER or any occurrence, circumstance, or combination
thereof which reasonably could be expected to result in any such
material adverse change;
4.1.9 Undisclosed Liabilities. There are no debts, liabilities or
-----------------------
obligations with respect to SELLER or to which the Purchased Assets
or assets of DTS are subject, liquidated, unliquidated, accrued,
absolute, contingent, or otherwise,
8
<PAGE>
that are not specifically identified in Schedule 2.4.1.1 or have
been retained by SELLER.
4.1.10 Inventory; Accounts Receivable. All Inventory of Alphatec USA,
------------------------------
Inc. and all items to be delivered to Alphatec USA, Inc. or have
been retained by SELLER for Inventory after the Closing that are
subject to purchase commitments outstanding at the Closing, consist
of items that are or upon delivery will be good and merchantable
and of a quality and quantity presently usable and saleable in the
ordinary course of business. All of the Receivables are good and
fully collectible in the ordinary course of business and there are
no claims, setoffs or counterclaims in existence with respect
thereto.
4.1.11 Properties. SELLER has good, valid and marketable title to all
----------
property and Purchased Assets and assets of DTS, tangible and
intangible, purported to be owned by it, including the property and
Purchased Assets and assets of DTS reflected on the SELLER
Financial Statements (as defined in Section 4.1.27 herein). All
such property and Purchased Assets and assets of DTS purported to
be owned by SELLER are free and clear of all mortgages, liens,
charges, security interests or other encumbrances of any nature
whatsoever. All property and Purchased Assets and assets of DTS,
including machinery and equipment, owned, leased or otherwise used
by the SELLER are in good operating condition and repair,
reasonable wear and tear excepted, and are suitable and adequate
for use in the ordinary course of business and conform in all
material respects to all applicable laws. All leases are binding,
valid and enforceable in accordance with their terms subject to the
effect, if any, of (i) applicable bankruptcy and other similar laws
affecting the rights of creditors generally, and (ii) rules of law
governing specific performance, injunctive relief and other
equitable remedies, and there are no current defaults or events
which have occurred with which the giving of notice or lapse of
time or both would constitute a material default under any lease.
After the Closing, BUYER will be entitled to the continued use and
possession of the leased property by it, for the terms specified in
such leases and for the purposes for which such property is used.
There is no pending or threatened condemnation or similar
proceeding affecting any of the real property owned or leased by
SELLER.
4.1.12 Taxes.
-----
4.1.12.1 All Taxes (as hereinafter defined) due or payable by
SELLER, and all interest and penalties thereon, whether
disputed or not, other than Taxes which are not yet due
and payable, have been paid in full. All Tax returns,
statements, reports, forms and other documents required
to be filed in connection therewith have been duly and
timely filed (and no extension of any filing date
applicable thereto has been requested or granted) and
were
9
<PAGE>
correct and complete in all respects. All deposits required
by law to be made by SELLER with respect to employees' with
holding taxes have been duly made. SELLER is not delinquent
in the payment of any Tax, assessment or governmental charge
or deposit, and SELLER does not have any Tax deficiency or
claim currently pending, outstanding or asserted against it,
and there is no basis for any such Tax deficiency or claim.
There is no audit currently pending regarding any Taxes and
SELLER has not extended the period in which any Tax could be
assessed or collected.
4.1.12.2 No Tax is required to be withheld pursuant to Section 1445
of the Internal Revenue Code as a result of the transfers
contemplated by this Agreement, and SELLER is not a person
other than a United States person within the meaning of the
Code. There are no liens for Taxes upon the Purchased
Assets and assets of DTS except liens for current immaterial
amounts of Taxes not yet due. There is no contract,
agreement, plan or arrangement, including but not limited to
the provisions of this Agreement, covering any employee or
independent contractor or former employee or independent
contractor of SELLER that, individually or collectively,
could give rise to the payment by SELLER of any amount that
would not be deductible pursuant to Section 280G or Section
162 of the Code. None of the assets (including the
Purchased Assets) of SELLER (i) is property that is required
to be treated as owned by any other person pursuant to the
so-called "safe harbor lease" provisions of former Section
168(f)(8) of the Code, (ii) directly or indirectly secures
any debt the interest on which is tax exempt under Section
103(a) of the Code or (iii) is "tax exempt use property"
within the meaning of Section 168(h) of the Code. The
transactions contemplated herein are not subject to the tax
withholding provisions of Code Section 3406, or of
Subchapter A of Chapter 3 of the Code or of any other
provision of law in any jurisdiction.
4.1.12.3 No governmental entity (a "Taxing Authority") responsible
for the imposition of any Tax (domestic or foreign) has
asserted jurisdiction to impose any Taxes upon SELLER.
4.1.12.4 There is no contract, agreement, plan or arrangement,
including but not limited to the provisions of this
Agreement, covering any employee or independent contractor
or former employee or independent contractor of SELLER that,
individually or collectively, could give rise to the payment
by SELLER of any
10
<PAGE>
amount that would not be deductible pursuant to Section 280G
or Section 162 of the Code. None of the assets (including
the Purchased Assets) of SELLER (i) is property this is
required to be treated as owned by any other person pursuant
to the so-called "safe harbor lease" provisions of former
Section 168(f)(8) of the Code, (ii) directly or indirectly
secures any debt the interest on which is tax exempt under
Section 103(a) of the Code or (iii) is "tax exempt use
property" within the meaning of Section 168(h) of the Code.
The transactions contemplated herein are not subject to the
tax withholding provisions of Code Section 3406, or of
Subchapter A of Chapter 3 of the Code or of any other
provision of law in any jurisdiction. The SELLER is not and
has never been a member of a group permitted or required to
file consolidated Tax returns and is not party to any
agreement relating to the payment or sharing of liability
for Taxes. SELLER has not filed a consent under Section
341(f) of the Code.
4.1.12.5 For purposes of this Agreement, "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other
tax, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or any
penalty, addition to tax or additional amount imposed by any
Taxing Authority responsible for the imposition of any such
tax (domestic or foreign), (ii) any liability for the
payment of any amounts of the type described in (i) as a
result of being a member of an affiliated, consolidated,
combined or unitary group for any Taxable period and (iii)
any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or
implied obligation to indemnify any other person.
4.1.13 Compliance with Laws. SELLER has complied and is in compliance with
--------------------
all applicable foreign, federal, state, and local laws, statutes,
licensing requirements, rules, and regulations, and judicial or
administrative decisions applicable to the Business where the failure
to so comply could have a material adverse effect on the results of
operations or financial condition of SELLER, the Business or the
Purchased Assets. SELLER has been granted all licenses, permits
(temporary and otherwise), authorizations, and approvals from foreign,
federal, state, and local government regulatory bodies necessary to
carry on the
11
<PAGE>
Business as currently conducted, all of which are currently valid
and in full force and effect. All such licenses, permits,
authorizations, and approvals shall be transferred to BUYER
effective as of the Closing, and shall be valid and in full force
and effect to the same extent as if SELLER were continuing
operation of the Business. To the best of SELLER's knowledge,
there is no order issued, investigation, or proceeding pending or
threatened, or notice served with respect to any violation of any
law, ordinance, order, writ, decree, rule, or regulation issued by
any federal, state, local, or foreign court or governmental agency
or instrumentality applicable to the Business.
4.1.14 [Intentionally Omitted].
4.1.15 Contracts and Commitments.
-------------------------
4.1.15.1 Set forth on Schedule 4.1.15.1 is a list of all
outstanding contracts, whether or not in writing, to
which SELLER is a party or to which any of the Purchased
Assets or DTS assets are subject that may: (i) involve
obligations (contingent or otherwise) of, or payments
to, SELLER in excess of $25,000; (ii) involve agreements
(written or unwritten) with suppliers and customers of
SELLER; (iii) involve the license of any proprietary
rights to or from SELLER; (iv) contain provisions
restricting and/or affecting the development,
manufacture, or distribution of the SELLER's products or
services; (v) relate to any aspect of the Business of
SELLER in which any other person who was or is an
officer, director, or employee of SELLER (or any person,
firm, partnership, trust, or corporation affiliated with
any such persons or any family members of such persons)
have a material interest; or (vi) involve agreements
(written or unwritten) on which the Business is
materially dependent.
4.1.15.2 SELLER has performed all of its obligations under the
terms of each such contract, and is not in default
thereunder. No event or omission has occurred which but
for the giving of notice or lapse of time or both would
constitute a default by any party thereto under any such
contract, where such default by any party could have an
adverse impact on the results of operations or financial
condition or prospects of SELLER, the Business or the
Purchased Assets. Each such contract is valid and
binding on all parties thereto and in full force and
effect. SELLER has received no notice of default,
cancellation, or termination in connection with any such
contract.
12
<PAGE>
4.1.16 Assets. The Purchased Assets include all intellectual property,
------
inventory and all other property in which SELLER has any right,
title and interest. The Purchased Assets include all the assets
necessary to operate the Business in the same manner as the
Business was operated by SELLER prior to the Closing. The Purchased
Assets are suitable for the purpose or purposes for which they are
being used, are in good operating condition and in reasonable
repair, and free from any known defects, except such minor defects
as do not interfere with the continued use thereof. Each tangible
Purchased Asset has been serviced and maintained in accordance with
customary industry practices. Subject to normal wear and tear, such
plants, facilities, machinery, and equip ment are capable of and
are producing sound and merchantable products.
4.1.17 [Intentionally Omitted].
4.1.18 No Conflict or Default. Neither the execution and delivery of this
----------------------
Agreement or the related agreements, nor compliance with the terms
and provisions hereof and thereof, including without limitation,
the consummation of the transactions contemplated hereby and
thereby, will violate any statute, regulation, or ordinance of any
governmental authority, or conflict with or result in the breach of
any term, condition, or provision of the Articles of Incorporation
or Bylaws of SELLER, as presently in effect, or of any agreement,
deed, contract, mortgage, indenture, writ, order, decree, legal
obligation, or instrument to which SELLER is a party or by which it
or any of the Purchased Assets or assets of DTS are or may be
bound, or constitute a default (or an event which, with the lapse
of time or the giving of notice, or both, would constitute a
default) thereunder.
4.1.19 Labor Relations.
---------------
4.1.19.1 With respect to the Business, SELLER has complied with
Title VII of the Civil Rights Act of 1964, as amended,
the Fair Labor Standards Act, as amended, the
Occupational Safety and Health Act of 1970, as amended,
all applicable federal, state, and local laws, rules, and
regulations relating to employment, and all applicable
laws, rules and regulations governing payment of minimum
wages and overtime rates, and the withholding and payment
of taxes from compensation of employees.
4.1.19.2 There are no labor controversies pending or threatened
between SELLER and any of its employees.
4.1.19.3 SELLER has never entered into a collective bargaining
agreement or other labor union contract relating to the
Business and applicable to the employees.
13
<PAGE>
4.1.19.4 There are no written employment or separation agreements,
or oral employment or separation agreements other than
those establishing an "at-will" employment relationship
between SELLER and any of the employees, except as set
forth in Schedule 4.1.19.4.
4.1.20 Environmental Matters. SELLER: (i) has obtained all applicable
---------------------
permits, licenses and other authorizations which are required under
foreign, federal, state or local laws relating to pollution or
protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land or otherwise
relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes by SELLER
(or its agents); (ii) is in compliance with all terms and
conditions of such required permits, licenses and authorization,
and also is in compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgement, notice or demand
letter issued, entered, promulgated or approved thereunder; (iii)
is not aware of nor has received notice of any event, condition,
circumstance, activity, practice, incident, action or plan which is
reasonably likely to interfere with or prevent continued compliance
or which would give rise to any common law or statutory liability,
or otherwise form the basis of any claim, action, suit or
proceeding, based on or resulting from SELLER's (or any of its
agents') manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling, or the emission,
discharge, or release into the environment, of any pollutant,
contaminant, or hazardous or toxic material waste; (iv) has taken
all actions necessary under applicable requirements of Federal,
state or local laws, rules or regulations to register any products
or materials required to be registered by SELLER (or any of its
agents) thereunder; and (v) is not aware of any contaminated soil
or groundwater at any of the properties owned or operated, leased
or previously owned or leased by SELLER. SELLER has disclosed to
BUYER in writing (i) all permits relating to pollution or
protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land or otherwise
relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes by SELLER
(or its agents) its holds as of the date hereof, and (ii) all
documents relating to tests previously conducted or to be conducted
in the future for potential contamination at any of SELLER's
facilities, whether owned or leased, including soil and water
tests.
14
<PAGE>
4.1.21 Miscellaneous.
-------------
4.1.21.1 SELLER is (and following the Closing shall remain) solvent,
generally able to pay its debts as they become due and in a
position where SELLER has reasonably sufficient working
capital compared to SELLER's business plans, needs, and
expectations. In making this representation, SELLER
acknowledges that it is using such terms and financial
standards in every sense in which such terms and standards are
used in the Bankruptcy Code (Title 11 of the United States
Code) and in the Uniform Fraudulent Transfer Act and Uniform
Fraudulent Conveyance Act, as in effect in each applicable
jurisdiction.
4.1.21.2 The consideration received by SELLER at the Closing is
reasonably equivalent to the value of the Purchased Assets and
the obligations of SELLER to BUYER in this Transaction. BUYER
has received no notice, knowledge or reason for inquiry from
SELLER (or, to the best of SELLER's knowledge and belief,
anyone else) of any information, fact, condition, event or
matter to contrary to such representations or otherwise
inconsistent with BUYER's good faith belief that BUYER is
paying in the ordinary and normal course of business a fair
and reasonable price for such Purchased Assets and
obligations.
Without limiting the generality of the foregoing, SELLER acknowledges that the
risk factors affecting the pricing of the Purchased Assets were independent of
SELLER's financial condition and circumstances, and BUYER did not unduly or
unfairly take advantage of SELLER's desire to sell the Purchased Assets. In all
respects, BUYER has conducted itself in good faith and consistent with
commercially reasonable standards for buyers in regularly conducted and
commercially reasonable sales.
4.1.22 Proprietary Rights.
------------------
4.1.22.1 SELLER owns all right, title and interest in and to or
is exclusively licensed or is otherwise entitled to
exercise, without restriction, all rights to all
patents, trademarks, trade names, service marks,
copyrights, mask works, trade secrets and other
intellectual property rights, and any applications or
registrations therefor, and all inventions, mask work
layouts, net lists, source code, object code,
schematics, technical drawings, technology, know-how,
processes, formulas, algorithms, computer software
programs, documentation, and all other tangible and
intangible information or material in any form, used
or currently proposed to be used in the Business or
which form part of the Purchased
15
<PAGE>
Assets, without any conflict with or infringement of
the rights of others and free and clear of any liens,
encumbrances or security interests (collectively, the
"Intellectual Property Rights") and has the right to
use, sell, license, assign, transfer, convey or
dispose thereof or the products, processes and
materials covered thereby.
4.1.22.2 No person has asserted or threatened to assert any
claims with respect to the Intellectual Property
Rights (i) contesting the right of SELLER to use,
exercise, sell, license, transfer or dispose of any of
the Intellectual Property Rights or any products,
processes or materials covered thereby or (ii)
challenging the ownership, validity or enforceability
of any of the Intellectual Property Rights.
4.1.23 Certain Payments. In connection with the Business, SELLER has
----------------
not and no person directly or indirectly on behalf of it has
made or received any payment that was not legal to make or
receive.
4.1.24 Books and Records. The books and records of SELLER to which
-----------------
BUYER and its accountants and attorneys have been given access
are the true books and records of SELLER and truly and fairly
reflect the underlying facts and transactions in all material
respects.
4.1.25 Complete Disclosure. The copies of all instruments, agreements,
-------------------
other documents and written information delivered by SELLER to
BUYER or its accountants or counsel are and will be complete and
correct in all material respects as of the date of delivery
thereof. No representations or warranties made by SELLER in this
Agreement, nor any document, written information, statement,
financial statement, certificate or exhibit prepared and
furnished or to be prepared and furnished by them or its
representatives to BUYER pursuant hereto or the related
agreements in connection with the transactions contemplated
hereby or thereby, contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material
fact necessary to make the statements or facts contained herein
or therein not misleading.
4.1.26 Customers and Suppliers. DTS is not aware nor has any reason to
------------------------
believe that any of DTS' ten largest customers during the twelve
months ended July 31, 1997 (determined on the basis of both
revenues and bookings during such period) has terminated, or
intends to materially reduce or terminate, the amount of its
business with DTS, and DTS has no reason to believe that such
termination or alteration would occur as a result of the
consummation of the transactions contemplated by this Agreement
or the related agreements.
16
<PAGE>
4.1.27 Financial Statements. SELLER has furnished to BUYER a complete
--------------------
and accurate copy of its audited consolidated balance sheet as
of December 31, 1994, December 31, 1995 and December 31, 1996
and its audited consolidated statement of operations, cash flow
and shareholders' equity for each of its fiscal years ended
December 31, 1994, 1995, and 1996 (collectively, the "SELLER
Audited Financial Statements"). The SELLER Audited Financial
Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied and
fairly present the consolidated financial position of SELLER as
and at the dates thereof and SELLER's consolidated results of
operations and cash flows for the periods then ended. The notes
to the SELLER Audited Financial Statements as at and for each
such period set forth in reasonable detail SELLER's accounting
policies, principles and methods. SELLER has furnished to BUYER
a complete and accurate copy of Alphatec USA, Inc.'s (including
DTS) and DTS's on a stand alone basis, their respective
unaudited balance sheet as of June 30, 1997 and their respective
unaudited statement of operations, cash flow and shareholders'
equity for the six months ended June 30, 1997 and has furnished
to BUYER a balance sheet and statement of operations for
Alphatec USA, Inc. (excluding DTS) as of July 31, 1997
(collectively, the "SELLER Unaudited Financial Statements" and
collectively with the SELLER Audited Financial Statements, the
"SELLER Financial Statements"). The Company's revenue
recognition policies comply with GAAP and no current or former
customer has the right to return any products to the Company or
has any right of set off or counterclaim against the Company.
The SELLER Financial Statements have been prepared in accordance
with GAAP consistently applied, except for the absence of
footnotes, and fairly present the financial position of SELLER
and each such entity individually and collectively as and at the
dates thereof and SELLER's and each such entity's consolidated
results of operations and cash flows for the periods then ended.
4.2 Of BUYER. BUYER hereby represents and warrants to SELLER as follows and
--------
agrees with SELLER that the following representations and warranties shall
be true and correct on the Closing Date:
4.2.1 BUYER Organization. At the Closing date BUYER will be duly
------------------
incorporated and will be validly existing as a corporation in good
standing under the laws of the State of California, will have the
corporate power to carry on its business as now conducted and will
have full power and authority under such laws to execute, deliver
and perform this Agreement.
4.2.2 Corporate Authority. On or prior to the Closing Date, all corporate
-------------------
actions will have been taken by BUYER that are necessary to the due
authorization or ratification of the execution and delivery of this
Agreement and the performance of the BUYER hereunder. This Agreement
constitutes the legal,
17
<PAGE>
valid and binding obligation of BUYER, enforceable against BUYER in
accordance with its terms, subject, as to the enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally from time to time in effect, and subject
to any equitable principles limiting the right to obtain specific
performance of certain obligations of BUYER hereunder. Except as
required by BUYER's lenders, the entering into of this Agreement and
the consummation of the transactions contemplated hereby do not and
will not violate any law, regulation, rule, injunction or court
order, or the provisions of BUYER'S Articles of Incorporation or By-
Laws, or of any note, indenture, mortgage, lease license agreement
or other agreement or instrument to which BUYER is a party or by
which any of them is bound or of which any of them is maker.
4.2.3 Consents. Except for any filing that may be required under HSR or
--------
as required by BUYER'S lenders, no consent, approval, waiver,
license, authorization or declaration of, or filing or registration
with, any person, firm, corporation or other entity, including,
without limitation, any lender, mortgagee, governmental authority,
bureau or agency is required in connection with the execution,
delivery and performance by BUYER of this Agreement or the
consummation of the transaction contemplated hereby or thereby,
except under the HSR Act.
ARTICLE 5
CLOSING/PREPARATION FOR CLOSING
-------------------------------
5.1 Closing Date. Subject to Article 6 hereof, the closing of the transactions
------------
contemplated by this Agreement (the "Closing") shall be held at the offices
of SELLER at the LEASED PREMISES at 11:00 a.m. on the Closing Date, or at
such other time as may be mutually agreed to by the parties, unless the
date for the Closing is extended by mutual agreement of the parties (the
"Closing Date").
5.2 From the date of this Agreement until the Closing Date:
5.2.1 BUYER'S Access to Premises and Information. In order that BUYER may
------------------------------------------
have full opportunity to make such investigation as it shall desire
concerning the Business and the Purchased Assets, SELLER shall make
available management personnel familiar with the conduct of the
Business and the Purchased Assets and BUYER and its counsel,
accountants and other representatives shall be afforded access
during normal business hours to the properties, books, accounts,
records, contracts and other documents of SELLER relating the
Business and the Purchased Assets and the Assumed Obligations,
wherever located and shall be permitted to make abstracts from and
copies of
18
<PAGE>
such books and records and documents. Prior to the Closing and if,
for any reason the transactions contemplated by this Agreement are
not consummated, thereafter until September 30, 2002, BUYER agrees
that it will not disclose to any third person (other than its
advisers or investors or lenders in respect of this transaction) or
use for its own benefit any nonpublic confidential information
relating to the Business that SELLER may have acquired during the
course of its investigation and examination of the Business, whether
acquired prior to or after the execution of this Agreement;
provided, however, that nothing herein shall prohibit disclosure of
-------- -------
information (i) generally known to the public, or which becomes
generally known to the public other than through a violation of this
Agreement, (ii) in the possession of BUYER, or (iii) coming into the
possession of BUYER will promptly return or destroy and cause its
representatives to return or destroy any property, books, records or
papers of SELLER and all abstracts and copies thereof which any of
them may have in its possession. Because the breach or attempted or
threatened breach of the obligations under this Section 5.2.1 will
result in immediate and irreparable injury to SELLER for which
SELLER will not have an adequate remedy at law, SELLER shall be
entitled, in addition to all other remedies, to a decree of specific
performance of this covenant and to a temporary and permanent
injunction enjoining such breach, without posting bond or furnishing
similar security.
5.2.2 Conduct of Business in Ordinary Course. SELLER shall cause the
--------------------------------------
Business to be operated in the ordinary course, consistent with past
practice, except as may be consented to in writing by BUYER.
5.2.3 Consents. SELLER shall use its best efforts to obtain all consents
--------
of and authorizations by third parties and to make all filings with
and give all notices to third parties that may be necessary or
required in order to consummate the sale of the Purchased Assets,
and shall take such additional actions as BUYER may request to
cooperate so that the transactions contemplated by this Agreement
may be expeditiously consummated.
5.2.4 Other Discussions. From the date hereof until the Closing, SELLER
-----------------
shall not, nor shall any of its representatives or affiliates on its
behalf, discuss, communicate or negotiate with any other party,
concerning the possible disposition of the Business or the Purchased
Assets or the assets of DTS or of SELLER. If SELLER or any such
representatives receives any inquiries from another party relating
to any proposed disposition of the Business or the Purchased Assets
following the date hereof, SELLER shall promptly (a) advise such
party that SELLER is not entitled to enter into any such discussions
or negotiations and (b) notify BUYER in writing of such inquiry.
SELLER understands that BUYER is relying on this covenant in
entering into this
19
<PAGE>
Agreement and that BUYER is expending significant funds in order to
purchase the Purchased Assets.
5.2.5 Bulk Transfer Laws. SELLER shall comply with the California Uniform
------------------
Commercial Code - Bulk Transfers and any other applicable state bulk
transfer laws (collectively, the "Bulk Sales Provisions"), if
required, prior to the Closing and shall provide BUYER with written
documentation of such compliance. If SELLER cannot timely comply
with such bulk sales laws requirements BUYER hereby agrees to waive
compliance with such laws and SELLER agrees to indemnify and hold
BUYER's Indemnitees (as defined) harmless which they may suffer or
incur by virtue of such non-compliance. Such indemnification shall
survive the Closing and shall not be subject to the limitations on
the amount of indemnification or duration provided in Article 8
hereof.
5.2.6 Purchase or Retirement of Bank Debt. Prior to Closing, the BUYER
-----------------------------------
shall have the right, in its sole discretion, to purchase or retire
up to all of the debt of SELLER owed to Silicon Valley Bank,
Comerica/California and Comerica/International. Any and all amounts
so purchased or retired by BUYER reduce the Purchase Price on a
dollar-for-dollar basis. SELLER agrees to cooperate and enter into
any agreements necessary to give effect to the foregoing covenant.
5.2.7 Exhibits and Schedules to Agreement. BUYER and SELLER shall each
-----------------------------------
deliver to the other their respective Exhibits and Schedules
contemplated by this Agreement within eight days after executing
this Agreement. SELLER's Exhibits and Schedules must be in a form
reasonably satisfactory to BUYER, or BUYER shall have the right to
terminate this Agreement without liability or obligation.
ARTICLE 6
CONDITIONS TO CLOSING
---------------------
6.1 BUYER. The obligations of BUYER to close shall be subject to the
-----
satisfaction, or the waiver in writing by BUYER, on or prior to the Closing
Date, of all of the following conditions:
6.1.1 Deed. BUYER shall have received the Deed, executed by SELLER.
----
6.1.2 Bill of Sale. BUYER shall have received the Bill of Sale, executed
------------
by SELLER.
20
<PAGE>
6.1.3 Assignment and Assumption. BUYER shall have received the Assignment
-------------------------
and Assumption Agreement, executed by SELLER.
6.1.4 Representations and Warranties. The representations and warranties
------------------------------
of SELLER contained in this Agreement shall be correct in all
respects on and as of the Closing Date with the same force and
effect as though such representations and warranties were made at
the Closing; and each and all of the covenants to be performed by
SELLER on or before the Closing Date pursuant to the terms hereof
shall have been duly performed.
6.1.5 No Liens. The Purchase Assets, the assets of DTS and the Business
--------
shall be delivered to BUYER free and clear of all material liens,
encumbrances, claims and the like.
6.1.6 Performance of Agreement. All covenants, conditions, and other
------------------------
obligations under this Agreement and the related agreements which
are to be performed or complied with by the SELLER, including Board
of Directors and stockholder approval, shall have been fully
performed and complied with at or prior to the Closing.
6.1.7 No Material Adverse Change. There shall have been no material
--------------------------
adverse change in the financial condition, business, or properties
of SELLER which materially and adversely affects the conduct of the
Business as presently being conducted or the financial condition,
business, or properties of SELLER since June 30, 1997.
6.1.8 Absence of Governmental or Other Objection. There shall be no
------------------------------------------
pending or threatened lawsuit challenging the transaction by any
body or agency of the federal, state, or local government or by any
third party, and the consummation of the transaction shall not have
been enjoined by a court of competent jurisdiction as of the Closing
and any applicable waiting period under any applicable federal law
shall have expired.
6.1.9 Evidence of Title. BUYER shall have received evidence, at or prior
-----------------
to the Closing, satisfactory to it of SELLER's title to all of the
Purchased Assets and right to fully convey all Purchased Assets free
and clear of any lien, encumbrances or restrictions on transfer.
6.1.10 HSR Act. Any waiting period (and any extension thereof) applicable
-------
to the consummation of the sale of Purchased Assets under HSR shall
have expired or been earlier terminated.
21
<PAGE>
6.1.11 FIRPTA. BUYER shall have received a properly executed Foreign
------
Investment and Real Property Tax Act of 1980 ("FIRPTA")
Notification Letter, in form and substance satisfactory to BUYER.
6.1.12 Assets. On the date of Closing, SELLER shall have at least
------
$5,000,000 of fully and readily collectible accounts receivable and
cash and cash equivalents on hand and shall provide to BUYER a
Closing Date balance sheet indicating such amount.
6.1.13 Evidence of Debt Extinguishment. BUYER shall have received
-------------------------------
satisfactory written evidence that all intercompany accounts
between SELLER and parent and SELLER and Alphatec Electronics
Corporation have been properly eliminated and that any net
intercompany receivables owing to Alphatec and DTS by their
corporate parent or affiliate shall be properly recorded.
6.1.14 BUYER Board Approval. The Board of Directors of BUYER shall have
--------------------
approved the transactions contemplated by this Agreement.
6.1.15 Environmental Reports. BUYER shall have received environmental
---------------------
reports prepared by a firm reasonably acceptable to BUYER, such
reports to be in form and substance acceptable to BUYER. The costs
and expenses of such reports and the associated investigation and
testing shall be borne by SELLER.
6.1.16 Employment Agreements. Each of Sassan Raissi, Mike Sarvian, Tom
---------------------
Knecht and Del Gilliam shall have executed and delivered new
employment and non-competition agreements with DTS (each an
"Employment Agreement"). The terms of each Employment Agreement
shall provide, among other things, that (i) such agreement
supersedes and replaces all prior agreements between such employee
and DTS with respect to employment and compensation matters and
(ii) such employee releases and discharges DTS and ISE with respect
to any claims with respect to compensation, including, without
limitation, salary, bonuses, profit sharing and vacation accruals.
6.2 SELLER. The obligations of SELLER to be performed at the Closing shall be
------
subject to the satisfaction, or the waiver in writing by SELLER, on or
prior to the Closing Date of all of the following conditions:
6.2.1 Payment. SELLER shall have received payment of the Purchase Price
-------
specified in Section 3.1.
6.2.2 Assignment and Assumption. SELLER shall have received the
-------------------------
Assignment and Assumption Agreement, executed by BUYER.
22
<PAGE>
6.2.3 Representations and Warranties. The representations and warranties
------------------------------
of BUYER contained in this Agreement shall be correct in all
material respects on and as of the Closing Date with the same force
and effect as though such representations and warranties were made
at the Closing Date, and each and all of the covenants to be
performed by BUYER on or before the Closing Date pursuant to the
terms hereof shall have been duly performed.
ARTICLE 7
COVENANTS
7.1 Additional Documentation. At any time and from time to time after the
------------------------
Closing Date, at BUYER's reasonable request and without further monetary
consideration, SELLER will execute and deliver such other instruments of
conveyance and transfer as BUYER reasonably may require more effectively to
convey to, transfer to, and vest in BUYER, or to put BUYER in possession
of, any or all of the assets and properties intended to be transferred,
conveyed or assigned to BUYER pursuant to the provisions of this Agreement.
7.2 Assumption of Obligations. To the extent that any of the commitments,
-------------------------
leases, purchase orders and contracts of the Business are not assignable
without the consent of another party and are "Assumed Liabilities," SELLER
and BUYER each agree to use reasonable efforts to obtain such consent to
the assignment hereof to BUYER. If such consent shall not be obtained for
any such commitments, leases, purchase orders or contracts, SELLER and
BUYER shall make suitable arrangements, without cost to SELLER, whereby
BUYER may nevertheless enjoy the benefits and rights of SELLER, and perform
the obligations of SELLER, thereunder.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 SELLER'S Indemnification.
------------------------
8.1.1 SELLER agrees to indemnify and hold harmless BUYER, its affiliates
and its officers, directors, employees and agents, successors and
assigns (each a BUYER's Indemnitee" and collectively the "BUYER's
Indemnitees") from any and all damages (including punitive damages),
loses, expenses (including, without limitation, court costs,
arbitration fees and attorneys' fees and expenses of investigation
and all payments made pursuant to any agreement or legal requirement
to indemnify, hold harmless or exonerate any person), claims
(including amounts paid in settlement), demands, suits, causes of
action,
23
<PAGE>
proceedings, judgments, fines, penalties and other liabilities or
obligations of any nature (including costs relating to the
enforcement of this Article 8, contingent or non-contingent,
liquidated or unliquidated, direct or indirect) (collectively,
"Losses"), incurred or sustained by or asserted against any of the
BUYER's Indemnitees with respect to or arising out of: (i) the
failure or breach of any of the SELLER's representations and
warranties made in Section 4.1 hereof to be true and correct in all
respects as of the Closing Date; (ii) the SELLER's failure or refusal
or inability to pay for all liabilities and obligations of SELLER,
other than the Assumed Liabilities that BUYER has agreed to assume
pursuant to Section 2.4 of this Agreement; and (iii) the breach of or
failure by SELLER to observe or perform any obligation, covenant or
agreement of SELLER under this Agreement; provided, however, that no
-------- -------
BUYER's Indemnitee shall be entitled to indemnification for Losses
under the provisions of this Section 8.1 unless and until the
aggregate amount of all Losses of the BUYER's Indemnitees as a group
under Section 8.1 shall have exceeded $100,000 in the aggregate, in
which event the BUYER's Indemnitees in the aggregate shall be
entitled to such indemnification only for all Losses in excess of
such amount. The indemnification obligations of SELLER for a breach
of its representations and warranties under this Section 8.1 shall
survive the Closing for a period of three (3) years after the
Closing.
8.1.2 Notwithstanding any investigation conducted at any time with regard
thereto by or on behalf of any party to this Agreement, all
representations, warranties, obligations, covenants, and agreements
of SELLER shall survive the execution, delivery, and performance of
this Agreement, unless otherwise specifically set forth in this
Agreement to the contrary. No investigation made by or on behalf of
BUYER with respect to SELLER shall be deemed to affect BUYER's
reliance on the representations, warranties, covenants and agreements
made by SELLER contained in this Agreement and shall not be a waiver
of BUYER's rights to indemnity as herein provided for the breach or
inaccuracy of or failure to perform or comply with any of SELLER's
representations, warranties, covenants or agreements under this
Agreement. All representations and warranties of each party set forth
in this Agreement shall be deemed to have been made again by such
party at and as of the Closing. Nothing in this Agreement shall be
construed as limiting in any way the remedies that may be available
to a party in the event of fraud relating to the representations,
warranties, agreements or covenants made by any other party in this
Agreement. SELLER shall have liabilities and obligations for Losses
with respect to claims submitted or notice of claims provided during
the time period of survivability of the specific representation,
warranty, covenant or agreement as set forth herein. Notwithstanding
the expiration date of the representations, warranties, covenants and
agreements set forth herein, if BUYER shall notify SELLER with
respect to the submission of a claim during the time period of
survivability of such representation, warranty, covenant or
agreement,
24
<PAGE>
SELLER's liability or obligation for Losses shall continue in full
force and effect until settled to the other party's satisfaction with
respect to those claims timely made.
8.2 BUYER's Indemnification. BUYER agrees to indemnify and hold harmless
-----------------------
SELLER, its affiliates and its officers, directors, employees and agents,
successors and assigns (each a SELLER's "Indemnitee" and collectively,
"SELLER's Indemnitees") from all Losses incurred or sustained by or
asserted against any of SELLER's Indemnitees with respect to or arising out
of: (i) the failure of the BUYER's representations to be true and correct
in all material respects as of the Closing Date, provided, however, that
-------- -------
SELLER's Indemnitees shall be entitled to indemnification for Losses under
this Section 8.2: (i) only if and when, and to the extent that, such Losses
exceed $100,000 in the aggregate, in which event the BUYER's indemnitees in
the aggregate shall be entitled to such indemnification only for all Losses
in excess of such amount; (ii) the Assumed Liabilities; and (iii) the
breach of or failure to observe or perform any obligation of BUYER required
under this Agreement and the agreements contemplated hereby. The
indemnification obligations of BUYER pursuant to this Section 8.2 shall
survive the Closing as follows: With respect to clause (i), for three
years thereafter, and with respect to clauses (ii) and (iii), until such
time as the applicable statute of limitation has expired.
8.3 Notice and Defense. Any party or parties seeking indemnification under
------------------
this Article 8 (collectively, the "Indemnitee") shall, on each occasion
that indemnification is sought, give prompt written notice within the
prescribed survival period for such indemnification, of any claim, suit or
demand that the Indemnitee believes will or may give rise to
indemnification hereunder to BUYER, on behalf of all BUYER's Indemnitees,
on the one hand, or to SELLER, on behalf of all SELLER's Indemnitees, on
the other hand (the person to whom such notice of claim is given being
referred to herein as the "Indemnitor"). Except as hereinafter provided,
the Indemnitor shall be obligated to defend and to direct the defense
against such claim, suit or demand, in its name or in the name of the
Indemnitee at the Indemnitor's expense and with counsel of the Indemnitor's
own choosing and, so long as the Indemnitor is conducting such defense, the
Indemnitee shall not without the Indemnitor's written consent settle or
compromise or by affirmative action extend the statue of limitations with
respect to, and the Indemnitor shall have the right to settle or
compromise, any such claim, suit or demand; provided, however, that the
-------- -------
Indemnitor shall not, without the Indemnitee's written consent, settle or
compromise any claim or consent to any entry of judgment that does not
include as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnitee of a release from all liability in respect of
such claim, in form and substance reasonably satisfactory to the
Indemnitee. The Indemnitee shall, at the Indemnitor's expense, cooperate
in the defense of any such claim, suit or demand. If the Indemnitor,
within a reasonable time after notice of a claim, fails to defend the
Indemnitee, the Indemnitee shall be entitled to undertake the defense of,
and to compromise or settle such claim at the expense of and for the
account and risk of the
25
<PAGE>
Indemnitor, utilizing counsel of the Indemnitee's own choosing. No right
or remedy conferred in this Article 8 is intended to be exclusive of any
right or remedy available, now or hereafter, at law or in equity or
otherwise, to the parties hereto.
ARTICLE 9
MISCELLANEOUS
-------------
9.1 Cost. All costs and expenses, including attorneys' fees, incident to this
----
Agreement and the transactions contemplated herein shall be paid by the
party who incurred the same, whether or not the transactions contemplated
herein or therein are consummated. The parties hereto respectively
represent and warrant that they have not dealt in any manner with a broker,
agent or finder as regards the transaction set forth in this Agreement,
except the BUYER has retained two agents.
9.2 No Third-Party Benefit. The agreements contained herein are solely for the
----------------------
benefit of the parties hereto. No party, including employees, other than
such corporations and natural person and their respective permitted
assigns, shall be entitled to reply on this Agreement for any purpose.
9.3 Headings. The titles of the Articles and sections of this Agreement are
--------
for convenience of reference only and are not to be considered in
construing this Agreement.
9.4 Entire Agreement. This Agreement and any documents specifically referred
----------------
to herein constitute the entire understanding between the parties with
respect to the subject matter hereof, superseding all negotiations, prior
discussions and preliminary agreements.
9.5 Modification/Waiver. SELLER and BUYER may by subsequent written agreement,
-------------------
with each party acting at its sole and absolute discretion: (i) extend the
time for the performance of any of the obligations or other acts of the
parties here; (ii) waive any inaccuracies in the representations contained
in this Agreement; (iii) waive compliance with or modify any of the
covenants contained in this Agreement; (iv) waive or modify performance of
any of the obligations of any of the parties hereto; and (v) otherwise
amend this Agreement. Any agreement on the part of the party for any such
extension, modification, waiver or amendment shall be validly and
sufficiently authorized for the purpose of this Agreement if authorized by
proper officers of such party.
9.6 Representations/Warranties. There are no representations, warranties or
--------------------------
obligations of any kind made in connection with the transactions
contemplated hereby other than those expressed in this Agreement. It is
expressly understood and agreed that BUYER
26
<PAGE>
and SELLER, and their respective affiliates, officers and/or agents, have
not made any warranty or agreement, express or implied, except as are
herein expressly incorporated, as to the tax consequences of this
transaction or the tax consequences of any transaction pursuant to or
arising out of this Agreement.
9.7 Assignment. No party hereto may assign its rights or delegate its
----------
responsibilities under this Agreement without the prior written consent of
the other party hereto. The terms of this Agreement shall, however, be
binding and legally enforceable against all successors and assigns, by law
or otherwise, including upon dissolution or merger.
9.8 Remedies of BUYER. SELLER agree that the Purchased Assets are unique and
-----------------
not otherwise readily available to BUYER. Accordingly, SELLER acknowledges
that, in addition to all other remedies to which BUYER is entitled, BUYER
shall have the right to enforce the terms of this Agreement by a decree of
specific performance.
9.9 Notices. All notices, requests, demands and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given when
delivered in person to the respective address listed below, or when faxed
to the respective address listed below, or two (2) business days after
mailed by certified mail, postage prepaid, return receipt requested to the
address listed below:
If to BUYER:
ISE LABS, INC.
2095 Ringwood Avenue
San Jose, CA 95131
with a copy to BUYER's counsel:
Warren Lazarow, Esq.
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Palo Alto, CA 94403
If to SELLER:
ALPHATEC USA, INC.
3600 Peterson Way
Santa Clara, CA 95054
Fax: (408) 567-1111
Attention: President
9.10 Attorneys' Fees. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Agreement or to protect the rights
obtained hereunder the prevailing
27
<PAGE>
party shall be entitled to its reasonable attorneys' fees, costs, and
disbursements in addition to any other relief to which it may be entitled.
9.11 Cooperation and Records Retention. SELLER and BUYER shall (i) each provide
---------------------------------
the other with such assistance as may reasonably be requested by them in
connection with the preparation of any Tax return, statement, report, form
or other document (hereinafter collectively a "Tax Return"), or in
connection with any audit or other examination by any taxing authority or
any judicial or administrative proceedings relating to liability for
Taxes, (ii) each retain and provide the other, with any records or other
information which may be relevant to any such Tax Return, audit or
examination, proceeding or determination, and (iii) each provide the other
with any final determination of any such audit or examination, proceeding
or determination that affects any amount required to be shown on any Tax
Return of the other for any period. Without limiting the generality of the
foregoing, SELLER and BUYER shall retain, until the applicable statute of
limitations (including any extensions) have expired, copies of all Tax
Returns, supporting work schedules and other records or information which
may be relevant to such Tax Returns for all tax periods or portions
thereof ending before or including the Closing and shall not destroy or
otherwise dispose of any such records without first providing the other
party with a reasonable opportunity to review and copy the same. BUYER
shall keep the original copies of the records at its facilities in
California and elsewhere, if applicable, and, at SELLER's expense, shall
provide copies of the Records to SELLER upon SELLER's request. SELLER
shall provide BUYER with access to all of SELLER's books and records if
BUYER requests them from time to time.
9.12 Section 338(h)(10) Election.
---------------------------
9.12.1 SELLER shall, at the request of BUYER, join with BUYER in making a
timely election under Section 338(h)(10) of the Code and any
corresponding elections under state and local tax laws
(collectively, the "Election") with respect to the acquisition of
the DTS shares. BUYER and SELLER shall cooperate with each other
to take all actions necessary and appropriate (including filing
such forms, returns, elections, schedules and other documents as
may be required) to effect and preserve a timely Election in
accordance with Section 338(h)(10) of the Code or any successor
provisions (and all corresponding state and local tax laws). BUYER
and SELLER shall report the acquisition of the DTS shares pursuant
to this Agreement consistent with the Election.
9.12.2 In connection with the Election, within 90 days after Closing,
BUYER shall provide to SELLER a schedule which sets forth the
proposed allocation of the Purchase Price (and any deemed
assumption of liabilities for Tax purposes) among the assets of
DTS (the "Allocation Schedule"). Such allocations shall be made in
accordance with Section 338(h)(10) of the Code and any applicable
Treasury Regulations. The parties shall report the deemed sale of
assets of
28
<PAGE>
DTS pursuant to the Election in a manner consistent with the
Allocation Schedule.
9.13 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California. The parties hereto
consent and agree that the state and federal courts located within the
State of California shall have exclusive jurisdiction over any dispute
arising hereunder.
9.14 Equipment at Closing. SELLER shall furnish an equipment list to BUYER by
--------------------
September 1, 1997. In the event that the equipment supplied at Closing is
less than that set forth on the final equipment list at Closing, then
BUYER shall be repaid the amount of the net book value of the equipment
not supplied.
9.15 Purchase Price Escrow. At BUYER's option, the purchase price may be held
---------------------
in escrow with instructions to the escrow agent to discharge in order, the
following indebtedness, liability or obligations of Alphatec USA or DTS:
(i) to the extent not purchased or retired by BUYER pursuant to Section
5.2.6, all debts of SELLER owed to Silicon Valley Bank,
Comercia/California and Comerica/International, (ii) all accounts
payable--trade (excluding any accounts payable to affiliates) of DTS as of
the Closing Date for the transaction, (iii) all accounts payable--trade
(excluding any accounts payable to affiliates), short term capital lease,
short term equipment loan, long term capital lease and long term equipment
loan (excluding long term loan from affiliated entities), of Alphatec USA
as of the Closing Date for the transaction, as reflected on the audited
non-consolidated balance sheet of Alphatec USA as of such date, and (iv)
all amounts due and owing to DTS employees under their profit sharing
agreements as of the Closing Date for the proposed transaction.
9.16 Employee Benefits. Prior to Closing, SELLER shall pay all accrued
-----------------
salaries and bonuses (including profit sharing) and accrued vacation
amounts owed to all service providers of SELLER (including DTS).
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their respective names
to be hereunto subscribed as of the date and year first above written.
ISE LABS, INC.
By: /s/ Saeed Malik
-----------------------------
Name: Saeed Malik
-----------------------------
Title: President
-----------------------------
ALPHATEC USA, INC.
for itself and on behalf of
Digital Testing Services, Inc.
By: /s/ William H. Dana
-----------------------------
Name: William H. Dana
-----------------------------
Title: Vice President
-----------------------------
By: /s/ R G Grammer
-----------------------------
Name: R G Grammer
-----------------------------
Title: President
-----------------------------
<PAGE>
Exhibit 2.1
The Registrant agrees to furnish supplementally a copy of any omitted
Exhibits, Attachment and Schedules to the Commission upon request.
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ISE LABS, INC.
Saeed A. Malik and Warren T. Lazarow certify that:
1. They are the president and the secretary, respectively, of ISE LABS,
INC., a California corporation.
2. The articles of incorporation of this corporation are amended and
restated to read as follows:
ARTICLE I.
The name of the corporation is ISE LABS, INC.
ARTICLE II.
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporations
Law of California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the California
Corporation Code.
ARTICLE III.
A. Classes of Stock. This corporation is authorized to issue two
----------------
classes of capital stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the corporation is
authorized to issue is Fifty-Three Million (53,000,000) shares. Fifty Million
(50,000,000) shares shall be Common Stock, par value $.001 per share, and Three
Million (3,000,000) shares shall be Preferred Stock, par value $.001 per share.
B. Rights, Preferences and Restrictions of Preferred Stock. The
-------------------------------------------------------
Preferred Stock authorized by these Restated Articles of Incorporation may be
issued from time to time in one or more series, without further shareholder
approval. The Board of Directors is hereby authorized to fix or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
such series of Preferred Stock, and the number of shares constituting any such
series and the designation thereof, or of any of them. Subject to compliance
with applicable protective voting rights which have been or may be granted to
the Preferred Stock or series thereof in Certificates of Determination or this
corporation's Articles of
<PAGE>
Incorporation ("Protective Provisions"), but notwithstanding any other rights of
the Preferred Stock or any series thereof, the rights, privileges, preferences
and restrictions of any such additional series may be subordinated to, pari
----
passu with (including, without limitation, inclusion in provisions with respect
- -----
to liquidation and acquisition preferences, redemption and/or approval of
matters by vote or written consent), or senior to any of those of any present or
future class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series, prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE IV.
Effective when this corporation becomes a listed corporation within
the meaning of Section 301.5 of the Corporations Code, shareholders of this
corporation shall not be entitled to cumulate their votes at any election of
directors of this corporation.
ARTICLE V.
This Article V shall become effective only when this corporation
becomes a listed corporation within the meaning of Section 301.5 of the
Corporations Code.
The Board of Directors shall be and is divided into two classes, Class
I and Class II. Such classes shall be as nearly equal in number of directors as
possible. Each director shall serve for a term ending on the second annual
meeting following the annual meeting at which such director was elected;
provided, however, that (i) the directors first elected to Class I after this
provision becomes effective shall serve for a term ending on the annual meeting
next following the end of the calendar year after this provision becomes
effective and (ii) the directors first elected to Class II shall serve for a
term ending on the second annual meeting next following the end of the calendar
year in which this provision becomes effective. The foregoing notwithstanding,
each director shall serve until his successor shall have been duly elected and
qualified, unless he or she shall resign, become disqualified, disabled or shall
otherwise be removed.
At each annual election, directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed.
Notwithstanding the provision that the classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term, or his prior death, resignation or removal.
If any newly created
<PAGE>
directorship may, consistently with the provision that the classes shall be as
nearly equal in number of directors as possible, be allocated to any class, the
Board shall allocate it to that ofthe available class whose term of office is
due to expire at the earliest date following such allocation.
ARTICLE VI.
The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders."
* * *
3. The foregoing second amendment and restatement of the articles of
incorporation has been duly approved by the board of directors.
4. The foregoing second amendment and restatement of the articles of
incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 of the Corporations Code. The total number of
outstanding shares of the corporation is 17,500,000 shares of Common Stock. No
shares of Preferred Stock have been issued and are outstanding. The number of
shares voting in favor of the amendment equaled or exceeded the vote required.
The percentage vote required was at least 80% to establish the provisions of
Article V and at least 70% for all other provisions of this corporation's Second
Amended and Restated Articles of Incorporation.
<PAGE>
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
DATE: May______, 1998.
_______________________________
Saeed A. Malik, President
_______________________________
Warren T. Lazarow, Secretary
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
ISE LABS, INC.
ARTICLE I - OFFICES
-------------------
Section 1. The principal executive offices of ISE LABS, INC. (the
"Corporation") shall be at such place inside or outside the State of California
as the Board of Directors may determine from time to time.
Section 2. The Corporation may also have offices at such other places
as the Board of Directors may from time to time designate, or as the business of
the Corporation may require.
ARTICLE II - SHAREHOLDERS' MEETINGS
-----------------------------------
Section 1. Annual Meetings. The annual meeting of the shareholders
---------------
of the Corporation for the election of directors to succeed those whose terms
expire and for the transaction of such other business as may properly come
before the meeting shall be held at such place and at such time as may be fixed
from time to time by the Board of Directors and stated in the notice of the
meeting. If the annual meeting of the shareholders be not held as herein
prescribed, the election of directors may be held at any meeting thereafter
called pursuant to these Bylaws.
<PAGE>
Section 2. Special Meetings. Special meetings of the shareholders,
----------------
for any purpose whatsoever, unless otherwise prescribed by statute, may be
called at any time by the Chairman of the Board, the President, or by the Board
of Directors, or by one or more shareholders holding not less than ten percent
(10%) of the voting power of the Corporation.
Section 3. Place. All meetings of the shareholders shall be at any
-----
place within or without the State of California designated either by the Board
of Directors or by written consent of the holders of a majority of the shares
entitled to vote thereat, given either before or after the meeting. In the
absence of any such designation, shareholders' meetings shall be held at the
principal executive office of the Corporation.
Section 4. Notice. Notice of meetings of the shareholders of the
------
Corporation shall be given in writing to each shareholder entitled to vote,
either personally or by first-class mail (unless the Corporation has 500 or more
shareholders determined as provided by the California Corporations Code on the
record date for the meeting, in which case notice may be sent by third-class
mail) or other means of written communication, charges prepaid, addressed to the
shareholder at his address appearing on the books of the Corporation or given by
the shareholder to the Corporation for the purpose of notice. Notice of any
such meeting of shareholders shall be sent to each shareholder entitled thereto
not fewer than ten (10) (or, if sent by third-class mail, 30) nor more than 60
days before the meeting. Said notice shall state the place, date and hour of
the meeting and (1) in the case of special meetings, the general nature of the
business to be transacted, and no other business may be transacted, or (2) in
the case of annual meetings, those matters that the Board of Directors, at the
time of the mailing of the notice, intends to present for action by the
shareholders, but subject to Section 601(f) of the California Corporations Code
any proper matter may be presented at the meeting for shareholder
<PAGE>
action, and (3) in the case of any meeting at which directors are to be elected,
the names of the nominees intended at the time of the mailing of the notice to
be presented by management for election.
Section 5. Adjourned Meetings. Any shareholders' meeting may be
------------------
adjourned from time to time by the vote of the holders of a majority of the
voting shares present at the meeting either in person or by proxy. Notice of
any adjourned meeting need not be given unless a meeting is adjourned for forty-
five (45) days or more from the date set for the original meeting.
Section 6. Quorum. The presence in person or by proxy of the persons
------
entitled to vote a majority of the shares entitled to vote at any meeting
constitutes a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares, the holders
of which are either present in person or represented by proxy thereat, but no
other business may be transacted, except as provided above.
Section 7. Consent to Shareholder Action. Any action that may be
-----------------------------
taken at any meeting of shareholders may be taken without a meeting and without
prior notice, if a consent in writing, setting forth the action so taken, shall
be signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted;
provided, however, that (1) unless the consents of all shareholders entitled to
- -------- -------
vote have been
<PAGE>
solicited in writing, notice of any shareholder approval without a meeting by
less than unanimous written consent shall be given as required by the California
Corporations Code, and (2) directors may not be elected by written consent
except by unanimous written consent of all shares entitled to vote for the
election of directors.
Any written consent may be revoked by a writing received by the
Secretary of the Corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.
Section 8. Waiver of Notice. The transactions of any meeting of
----------------
shareholders, however called and noticed, and whenever held, shall be as valid
as though had at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting, or an approval of the minutes thereof. All such waivers, consents, or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Section 9. Voting. The voting at all meetings of shareholders need
------
not be by ballot, but any qualified shareholder before the voting begins may
demand a stock vote whereupon such stock vote shall be taken by ballot, each of
which shall state the name of the shareholder voting and the number of shares
voted by such shareholder, and if such ballot be cast by a proxy, it shall also
state the name of such proxy.
At any meeting of the shareholders, every shareholder having the right
to vote shall be entitled to vote in person, or by proxy appointed in a writing
subscribed by such shareholder and bearing a date not more than eleven (11)
months prior to said meeting, unless the writing states that it is irrevocable
and satisfies Section 705(e) of the California Corporations
<PAGE>
Code, in which event it is irrevocable for the period specified in said writing
and said Section 705(e).
Section 10. Record Dates. In the event the Board of Directors fixes
------------
a day for the determination of shareholders of record entitled to vote as
provided in Section 1 of Article V of these Bylaws, then, subject to the
provisions of the General Corporation Law of the State of California, only
persons in whose name shares entitled to vote stand on the stock records of the
Corporation at the close of business on such day shall be entitled to vote.
If no record date is fixed:
The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;
The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is given; and
The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days.
Section 11. Cumulative Voting for Election of Directors. Provided
-------------------------------------------
the
<PAGE>
candidate's name has been placed in nomination prior to the voting and one
or more shareholders has given notice at the meeting prior to the voting of the
shareholder's intent to cumulate the shareholder's votes, every shareholder
entitled to vote at any election for directors shall have the right to cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
shareholder's shares are normally entitled, or distribute the shareholder's
votes on the same principle among as many candidates as the shareholder shall
think fit. The candidates receiving the highest number of votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected.
This Section 11 of Article II shall not be effective when the
Corporation becomes a listed corporation within the meaning of Section 301.5 of
the California Corporations Code, and thereafter shareholders shall no longer be
entitled to cumulate their votes for candidates in an election of directors.
ARTICLE III - BOARD OF DIRECTORS
--------------------------------
Section 1. Powers. Subject to any limitations in the Second Amended
------
and Restated Articles of Incorporation or these Amended and Restated Bylaws and
to any provision of the California Corporations Code requiring shareholder
authorization or approval for a particular action, the business and affairs of
the Corporation shall be managed and all corporate powers shall be exercised by,
or under the direction of, the Board of Directors. The Board of Directors may
delegate the management of the day-to-day operation of the business of the
Corporation to a management company or other person provided that the business
and affairs of the Corporation shall be managed and all corporate powers shall
be exercised, under the ultimate direction of the Board of Directors.
<PAGE>
Section 2. Number, Tenure and Qualifications. The number of
---------------------------------
directors that shall constitute the whole Board of Directors shall be not fewer
than four (4) nor more than seven (7), the exact number of directors to be fixed
from time to time within such limit by a duly adopted resolution of the Board of
Directors or shareholders. The exact number of directors presently authorized
shall be five (5) until changed within the limits specified above by a duly
adopted resolution of the Board of Directors or shareholders. Directors need
not be shareholders.
Prior to the date on which the Corporation becomes a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code, the Directors shall hold office until the next annual meeting of
shareholders and until their respective successors are elected. If any such
annual meeting is not held, or the directors are not elected thereat, the
directors may be elected at any special meeting of shareholders held for that
purpose. When the Corporation becomes a listed corporation within the meaning of
Section 301.5 of the California Corporations Code, each Director shall hold
office for the period corresponding to that director's class as set forth in the
Corporation's Second Amended and Restated Articles of Incorporation.
Section 3. Regular Meetings. A regular annual meeting of the Board
----------------
of Directors shall be held without other notice than this Bylaw immediately
after, and at the same place as, the annual meeting of shareholders. The Board
of Directors may provide for other regular meetings from time to time by
resolution.
Section 4. Special Meetings. Special meetings of the Board of
----------------
Directors may be called at any time by the Chairman of the Board, or the
President or any Vice President, or the Secretary or any two (2) directors.
Written notice of the time and place of all special meetings of the Board of
Directors shall be delivered personally or by telephone or facsimile to each
director at least forty-eight (48) hours before the meeting, or sent to each
director by first-class mail,
<PAGE>
postage prepaid, at least four (4) days before the meeting. Such notice need not
specify the purpose of the meeting. Notice of any meeting of the Board of
Directors need not be given to any director who signs a waiver of notice,
whether before or after the meeting, or who attends the meeting without
protesting prior thereto or at its commencement, the lack of notice to such
director.
Section 5. Place of Meetings. Meetings of the Board of Directors may
-----------------
be held at any place within or without the State of California, which has been
designated in the notice, or if not stated in the notice or there is no notice,
the principal executive office of the Corporation or as designated by the
resolution duly adopted by the Board of Directors.
Section 6. Participation by Telephone. Members of the Board of
--------------------------
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.
Section 7. Quorum. A majority of the Board of Directors shall
------
constitute a quorum at all meetings. In the absence of a quorum a majority of
the directors present may adjourn any meeting to another time and place. If a
meeting is adjourned for more than twenty-four (24) hours, notice of any
adjournment to another time or place shall be given prior to the time of the
reconvened meeting to the directors who were not present at the time of
adjournment.
Section 8. Action at Meeting. Every act or decision done or made by
-----------------
a majority of the directors present at a meeting duly held at which a quorum is
present is the act of the Board of Directors. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.
Section 9. Waiver of Notice. The transactions of any meeting of the
----------------
Board of
<PAGE>
Directors, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 10. Action Without Meeting. Any action required or permitted
----------------------
to be taken by the Board of Directors may be taken without a meeting, if all
members of the Board of Directors individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors. Such action by
written consent shall have the same force and effect as a unanimous vote of such
directors.
Section 11. Removal. The Board of Directors may declare vacant the
-------
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony.
<PAGE>
The entire Board of Directors or any individual director may be
removed from office without cause by a vote of shareholders holding a majority
of the outstanding shares entitled to vote at an election of directors;
provided, however, that unless the entire Board of Directors is removed, no
- -------- -------
individual director may be removed when the votes cast against removal, or not
consenting in writing to such removal, would be sufficient to elect such
director if voted cumulatively (without regard to whether shares may otherwise
be voted cumulatively) at an election at which the same total number of votes
cast were cast (or, if such action is taken by written consent, all shares
entitled to vote were voted) and either the number of directors elected at the
most recent annual meeting of shareholders, or if greater, the number of
directors for whom removal is being sought, were then being elected.
In the event an office of a director is so declared vacant or in case
the Board of Directors or any one or more directors be so removed, new directors
may be elected at the same meeting.
Section 12. Resignations. Any director may resign effective upon
------------
giving written notice to the Chairman of the Board, the President, the Secretary
or the Board of Directors of the Corporation, unless the notice specifies a
later time for the effectiveness of such resignation. If the resignation is
effective at a future time, a successor may be elected to take office when the
resignation becomes effective.
Section 13. Vacancies. Except for a vacancy created by the removal
---------
of a director, all vacancies in the Board of Directors, whether caused by
resignation, death or otherwise, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and each
director so elected shall hold office until his successor is elected at an
annual, regular or special meeting of the shareholders. Vacancies created by
the removal of a
<PAGE>
director may be filled only by approval of the shareholders. The shareholders
may elect a director at any time to fill any vacancy not filled by the
directors. Any such election by written consent requires the consent of a
majority of the outstanding shares entitled to vote.
Section 14. Compensation. By resolution of the Board of Directors,
------------
an annual fee, a fixed sum and expenses of attendance, if any, may be allowed
for attendance at each regular or special meeting of such Board of Directors;
provided that nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 15. Committees. The Board of Directors may, by resolution
----------
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Corporation, except with
respect to (a) the approval of any action requiring shareholders' approval or
approval of the outstanding shares, (b) the filling of vacancies on the Board of
Directors or any committee, (c) the fixing of compensation of directors for
serving on the Board of Directors or a committee, (d) the adoption, amendment or
repeal of Bylaws, (e) the amendment or repeal of any resolution of the Board of
Directors that by its express terms is not so amendable or repealable, (f) a
distribution to shareholders, except at a rate
<PAGE>
or in a periodic amount or within a price range determined by the Board of
Directors, and (g) the appointment of other committees of the Board of Directors
or the members thereof.
ARTICLE IV - OFFICERS
---------------------
Section 1. Number and Term. The officers of the Corporation shall be
---------------
a Chairman of the Board, a President, one or more Vice Presidents, a Secretary
and a Chief Financial Officer, all of which shall be chosen by the Board of
Directors. In addition, the Board of Directors may appoint such other officers
as may be deemed expedient for the proper conduct of the business of the
Corporation, each of whom shall have such authority and perform such duties as
the Board of Directors may from time to time determine. The officers to be
appointed by the Board of Directors shall be chosen annually at the regular
meeting of the Board of Directors held after the annual meeting of shareholders
and shall serve at the pleasure of the Board of Directors. If officers are not
chosen at such meeting of the Board of Directors, they shall be chosen as soon
thereafter as shall be convenient. Each officer shall hold office until his
successor shall have been duly chosen or until his removal or resignation.
Section 2. Inability to Act. In the case of absence or inability to
----------------
act of any officer of the Corporation and of any person herein authorized to act
in his place, the Board of Directors may from time to time delegate the powers
or duties of such officer to any other officer, or any director or other person
whom it may select.
Section 3. Removal and Resignation. Any officer chosen by the Board
-----------------------
of Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of all the members of the Board of Directors.
<PAGE>
Any officer chosen by the Board of Directors may resign at any time by
giving written notice of said resignation to the Corporation. Unless a
different time is specified therein, such resignation shall be effective upon
its receipt by the Chairman of the Board, the President, the Secretary or the
Board of Directors.
Section 4. Vacancies. A vacancy in any office because of any cause
---------
may be filled by the Board of Directors for the unexpired portion of the term.
Section 5. Chairman of the Board. The Chairman of the Board shall
---------------------
preside at all meetings of the Board of Directors.
Section 6. President. The President shall be the general manager and
---------
chief executive officer of the Corporation, subject to the control of the Board
of Directors, and as such shall preside at all meetings of shareholders, shall
have general supervision of the affairs of the Corporation, shall sign or
countersign or authorize another officer to sign all certificates, contracts,
and other instruments of the Corporation as authorized by the Board of
Directors, shall make reports to the Board of Directors and shareholders, and
shall perform all such other duties as are incident to such office or are
properly required by the Board of Directors.
Section 7. Vice President. In the absence of the President, or in
--------------
the event of such officer's death, disability or refusal to act, the Vice
President, or in the event there be more than one Vice President, the Vice
Presidents in the order designated at the time of their selection, or in the
absence of any such designation, then in the order of their selection, shall
perform the duties of President, and when so acting, shall have all the powers
and be subject to all restrictions upon the President. Each Vice President
shall have such powers and discharge such duties as may be assigned from time to
time by the President or by the Board of Directors.
Section 8. Secretary. The Secretary shall see that notices for all
---------
meetings are
<PAGE>
given in accordance with the provisions of these Bylaws and as required by law,
shall keep minutes of all meetings, shall have charge of the seal and the
corporate books, and shall make such reports and perform such other duties as
are incident to such office, or as are properly required by the President or by
the Board of Directors.
The Assistant Secretary or the Assistant Secretaries, in the order of
their seniority, shall, in the absence or disability of the Secretary, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers and discharge such duties as may be assigned from time to time by the
President or by the Board of Directors.
Section 9. Chief Financial Officer. The Chief Financial Officer may
-----------------------
also be designated by the alternate title of "Treasurer." The Chief Financial
Officer shall have custody of all moneys and securities of the Corporation and
shall keep regular books of account. Such officer shall disburse the funds of
the Corporation in payment of the just demands against the Corporation, or as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors from time to time as
may be required of such officer, an account of all transactions as Chief
Financial Officer and of the financial condition of the Corporation. Such
officer shall perform all duties incident to such office or that are properly
required by the President or by the Board of Directors.
The Assistant Treasurer or the Assistant Treasurers, in the order of
their seniority, shall, in the absence or disability of the Chief Financial
Officer, or in the event of such officer's refusal to act, perform the duties
and exercise the powers of the Chief Financial Officer, and shall have such
powers and discharge such duties as may be assigned from time to time by the
President or by the Board of Directors.
Section 10. Salaries. The salaries of the officers shall be fixed
--------
from time to time
<PAGE>
by the Board of Directors and no officer shall be prevented from receiving such
salary by reason of the fact that such officer is also a director of the
Corporation.
Section 11. Officers Holding More than One Office. Any two or more
-------------------------------------
offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.
Section 12. Approval of Loans to Officers. The Corporation may, upon
-----------------------------
the approval of the Board of Directors alone, make loans of money or property
to, or guarantee the obligations of, any officer of the Corporation or its
parent or subsidiary, whether or not a director, or adopt an employee benefit
plan or plans authorizing such loans or guaranties provided that (i) the Board
of Directors determines that such a loan or guaranty or plan may reasonably be
expected to benefit the Corporation, (ii) the Corporation has outstanding shares
held of record by 100 or more persons (determined as provided in Section 605 of
the California Corporations Code) on the date of approval by the Board of
Directors, and (iii) the approval of the Board of Directors is by a vote
sufficient without counting the vote of any interested director or directors.
<PAGE>
ARTICLE V - MISCELLANEOUS
-------------------------
Section 1. Record Date and Closing of Stock Books. The Board of
--------------------------------------
Directors may fix a time in the future as a record date for the determination of
the shareholders entitled to notice of and to vote at any meeting of
shareholders or entitled to receive payment of any dividend or distribution, or
any allotment of rights, or to exercise rights in respect to any other lawful
action. The record date so fixed shall not be more than sixty (60) nor less
than ten (10) days prior to the date of the meeting or event for the purposes of
which it is fixed. When a record date is so fixed, only shareholders of record
at the close of business on that date are entitled to notice of and to vote at
the meeting or to receive the dividend, distribution, or allotment of rights, or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after the record date.
The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of a period of not more than
sixty (60) days prior to the date of a shareholders' meeting, the date when the
right to any dividend, distribution, or allotment of rights vests, or the
effective date of any change, conversion or exchange of shares.
Section 2. Certificates. Certificates of stock shall be issued in
------------
numerical order and each shareholder shall be entitled to a certificate signed
in the name of the Corporation by the Chairman of the Board or the President or
a Vice President, and the Chief Financial Officer, the Secretary or an Assistant
Secretary, certifying to the number of shares owned by such shareholder. Any or
all of the signatures on the certificate may be facsimile. Prior to the due
presentment for registration of transfer in the stock transfer book of the
Corporation, the registered owner shall be treated as the person exclusively
entitled to vote, to receive notifications and otherwise to exercise all the
rights and powers of an owner, except as expressly
<PAGE>
provided otherwise hereunder by the laws of the State of California.
Section 3. Representation of Shares in Other Corporations. Shares of
----------------------------------------------
other corporations standing in the name of this Corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
Corporation by the Chairman of the Board, the President or any Vice President
and the Chief Financial Officer or the Secretary or an Assistant Secretary.
Section 4. Fiscal Year. The fiscal year of Corporation shall end on
-----------
the 31st day of October.
Section 5. Annual Reports. The Annual Report to shareholders,
--------------
described in the California Corporations Code, is expressly waived and dispensed
with.
Section 6. Amendments. Bylaws may be adopted, amended, or repealed
----------
by the vote or the written consent of shareholders entitled to exercise a
majority of the voting power of the Corporation. Subject to the right of
shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended,
or repealed by the Board of Directors, except that a Bylaw amendment thereof
changing the authorized number of directors may be adopted by the Board of
Directors only if these Bylaws permit an indefinite number of directors and the
Bylaw or amendment thereof adopted by the Board of Directors changes the
authorized number of directors within the limits specified in these Bylaws.
Section 7. Indemnification of Corporate Agents.
------------------------------------
(a) The Corporation shall indemnify each of its agents against
expenses, judgments, fines, settlements and other amounts, actually and
reasonably incurred by such person by reason of such person's having been made
or having threatened to be made a party to a proceeding to the fullest extent
permissible under the provisions of Section 317 of the
<PAGE>
California Corporations Code. The terms "agent", "proceeding" and "expenses"
made in this Section 7 shall have the same meaning as such terms in said Section
317.
(b) Expenses reasonably incurred by an agent of the Corporation in
defending a civil or criminal action, suit or proceeding by reason of the fact
that he or she is or was an agent of the Corporation (or was serving at the
Corporation's request as a director or officer of another corporation) shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such agent to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized by relevant sections
of the General Corporation Law of California.
(c) Notwithstanding the foregoing, the Corporation shall not be
required to advance such expenses to an agent who is party to an action, suit or
proceeding brought by the Corporation and approved by a majority of the Board
which alleges willful misappropriation of corporate assets by such agent,
wrongful disclosure of confidential information, or any other willful and
deliberate breach in bad faith of such agent's duty to the Corporation or its
shareholders.
<PAGE>
Exhibit 10.1
ASSIGNMENT AND ASSUMPTION OF LEASE
This Assignment and Assumption of Lease is made as of September 12, 1997,
among R N D Funding Company, Inc., A Delaware Corporation, c/o Lincoln
Property Company N.C., Inc. ("Landlord"), Alphatec Electronics Company
Limited (Public), A Thailand Public Corporation ("Assignor"), and Digital
Testing Services, Inc., A California Corporation ("Assignee"), who agree
as follows:
1. Recitals. This Assignment and Assumption of Lease is made with
--------
reference to the following facts and objectives:
A. Kim Camp No. VII ("Kim Camp") and Assignor, as Lessee, entered
into a written Lease Agreement dated March 23, 1995 (the "Lease"),
in which Kim Camp leased to Assignor and Assignor leased from Kim
Camp approximately 70,538 square feet of space at 3600 Peterson
Way, Santa Clara, California ("Premises"), per Exhibit "A"
attached.
B. Kim Camp has assigned the Lease to Landlord.
C. Assignor wishes to assign all its right, title and interest in the
Lease to Assignee and Assignee wishes to accept said assignment.
D. Landlord agrees to consent to the proposed assignment on the
conditions set forth herein.
2. Effective Date of Assignment. The assignment contemplated herein
----------------------------
shall take effect on September 12, 1997, and Assignor shall give possession
of the Premises to Assignee on that date.
3. Assignment and Assumption. Assignor assigns and transfers to Assignee
-------------------------
all its right, title and interest in the Lease and to the Premises, and
Assignee accepts the assignment and assumes and agrees to perform, from the
date the assignment becomes effective, as a direct obligation to Lessor, all
duties and obligations of Assignor under the Lease.
4. Landlord's Consent. Landlord consents to the assignment without
------------------
waiver of restrictions, if any, concerning further assignment.
5. Assignor's Liability. Assignor shall remain liable for the
--------------------
performance of the provisions of the Lease.
6. Security Deposit. The parties agree that Assignor shall deposit the
----------------
sum of ($54,314.26), to be be applied subject to the provisions of the
Lease. Assignor releases all claims to that sum, and the sum shall be held
by Lessor for the benefit of Assignee, subject to the provisions of the
Lease.
7. Indemnity. Assignor and Assignee, jointly and severally, agree to
---------
indemnify and hold Lessor harmless and defend Lessor, with counsel
satisfactory to Lessor, from any and all asserted, threatened or actual
liabilities, losses, damages, suits, actions, and claims, of any nature
whatsoever, incurred by Lessor as a result of, or arising from, or which is
related to the matters set forth in this Agreement, including, without
limitation, the assignment by Assignor of all of its right, title and
interest in and to the Lease to Assignee and the assumption by Assignee of
all duties and obligations of Assignor under the Lease.
8. Attorneys' Fees. If any party commences an action against any of the
---------------
other parties arising out of or in connection with this Assignment and
Assumption of Lease, the prevailing party or parties shall be entitled to
recover from the losing party or parties reasonable attorneys' fees and
costs of suit.
<PAGE>
9. General Provisions.
------------------
A. Entire Agreement: No Modifications. This Agreement incorporates
-----------------------------------
the entire understanding between the parties to the Agreement with respect
to the subject matter of it. Any prior correspondence, memoranda,
understandings, offers, negotiations and agreements, oral or written, are
replaced in total by this Agreement. This Agreement may not be modified or
amended except in writing, signed by the parties hereto.
B. Time. Time is of the essence in the performance of the parties'
----
respective obligations set forth in this Agreement.
C. Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the parties to this Agreement and their respective
successors and assigns.
D. Construction. This Agreement shall be governed by and construed
------------
under the laws of the State of California. The parties acknowledge that each
party and its counsel, if any, have reviewed and revised this Agreement and
that no rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall be employed in the interpretation
of this Agreement or any amendments or exhibits to it or any document
executed and delivered by either party in connection with this Agreement.
All captions in this Agreement are for reference only and shall not be used
in the interpretation of this Agreement or any related document. Whenever
required by the context of this Agreement, the singular shall include the
plural, the masculine shall include the feminine, and vice versa. If any
provision of this Agreement shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of
this Agreement and all such provisions shall remain in full force and
effect.
ASSIGNOR:
. Alphatec Electronics Company Limited (Public)
. a Thailand Public Corporation
By: Date: 9/19/97
------------------------------- ----------------
R.B. Mollerstuen
Its: Acting C.E.O.
-------------------------------
ASSIGNEE:
. Digital Testing Services, Inc.
. a California Corporation
By: /s/ [ILLEGIBLE SIGNATURE] Date: Sept. 24, 1997
------------------------------ ----------------
Its: V.P.
-------------------------------
LANDLORD:
. RND Funding Company, Inc.
. a Delaware Corporation
By: Lincoln Property Company Management Services, Inc.,
As Manager and Agent for Landlord
By: /s/ [ILLEGIBLE SIGNATURE]
----------------------------------
Its: Vice President
<PAGE>
B. Time. Time is of the essence in the performance of the parties'
----
respective obligations set forth in this agreement.
C. Successor and Assigns. This Agreement shall inure to the benefit of
---------------------
and be binding upon the parties to this Agreement and their respective
successors and assigns.
D. Construction. This Agreement shall be governed by and construed
------------
under the laws of the State of California. The parties acknowledge that each
party and its counsel, if any, have reviewed and revised this Agreement
and that no rule of construction to the effect that any ambiguities are to
be resolved against the drafting party shall be employed in the
interpretation of this Agreement or any amendments or exhibits to it or any
document executed and delivered by either party in connection with this
Agreement. All captions in this Agreement are for reference only and shall
not be used in the interpretation of this Agreement or any related document.
Whenever required by the context of this Agreement, the singular shall
include the plural, the masculine shall include the feminine, and vice
versa. If any provision of this Agreement shall be determined to be illegal
or unenforceable, such determination shall not affect any other provision of
this Agreement and all such provisions shall remain in full force and
effect.
ASSIGNOR:
. Alphatec Electronics Company Limited (Public)
.
By: Date: 9/19/97
------------------------------ ---------------
Its: Acting CEO
------------------------------
ASSIGNEE:
. Digital Testing Services, Inc.
By: Date:
------------------------------ ---------------
Its:
------------------------------
[Word Processing will place appropriate Lessor reference from signature
block here.]
<PAGE>
LEASE AGREEMENT
BETWEEN
KIM CAMP NO. VII
AS LANDLORD
AND
ALPHATEC ELECTRONICS COMPANY LIMITED (PUBLIC)
A THAILAND PUBLIC CORPORATION
AS
TENANT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Premises......................................... 1
2. Tenant Improvements; Condition of Premises....... 1
2.1 Construction of Tenant Improvements....... 1
2.2 Contractor; Construction.................. 1
2.3 Improvement Costs......................... 3
2.4 Delivery of Premises; As-is Condition..... 4
3. Term............................................. 5
3.1 Initial Lease Term........................ 5
3.2 Extended Terms............................ 6
4. Rent............................................. 7
4.1 Base Rent................................. 7
4.2 Rent for Extended Term.................... 8
5. [Intentionally Omitted].......................... 10
6. Operating Expenses and Taxes..................... 10
6.1 Payment by Tenant......................... 10
6.2 Definitions............................... 12
7. Utilities........................................ 14
8. Late Charges..................................... 15
9. Use of Premises; Compliance with Laws............ 15
9.1 General................................... 15
9.2 Hazardous Materials....................... 17
9.3 Signage................................... 20
9.4 Reasonableness of Restrictions............ 20
10. Alterations; Condition on Termination............ 21
11. Repairs and Maintenance.......................... 22
11.1 Tenant's Obligations...................... 22
11.2 Landlord's Obligations.................... 23
12. Insurance........................................ 24
12.1 Tenant's Insurance........................ 24
12.2 Landlord's Insurance...................... 25
12.3 Waiver of Subrogation..................... 25
13. Limitation of Liability and Indemnity............ 26
14. Assignment and Subletting........................ 28
14.1 In General................................ 28
14.2 Transfers of Interests in Tenant.......... 29
14.3 Permitted Transfers....................... 29
14.4 Excess Rents.............................. 29
15. Ad Valorem Taxes................................. 30
16. Lender Requirements.............................. 30
16.1 Subordination............................. 30
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
16.2 Attornment................................ 31
16.3 Approval by Lender........................ 31
17. Right of Entry................................... 31
18. Estoppel Certificate............................. 32
19. Tenant's Default................................. 33
20. Remedies for Tenant's Default.................... 34
20.1 Termination............................... 34
20.2 Continuance of Lease...................... 36
20.3 Reletting Premises........................ 36
20.4 Right to Cure Tenant's Default............ 37
21. Surrender of Premises............................ 37
22. Landlord's Default............................... 38
23. Parking.......................................... 38
24. Sale of Premises................................. 38
25. Waiver........................................... 38
26. Casualty Damage.................................. 39
27. Condemnation..................................... 41
28. General Provisions............................... 42
28.1 Time...................................... 42
28.2 Successors and Assigns.................... 42
28.3 Recordation............................... 42
28.4 Landlord's Personal Liability............. 42
28.5 Separability.............................. 42
28.6 Choice of Law............................. 42
28.7 Attorneys' Fees........................... 42
28.8 Interest.................................. 43
28.9 Notices................................... 43
28.10 Authorization............................. 43
28.11 Prior Agreements.......................... 44
28.12 Quiet Enjoyment........................... 44
28.13 Brokers................................... 44
</TABLE>
ii
<PAGE>
LEASE AGREEMENT
---------------
DATE: March 23, 1995
LANDLORD: KIM CAMP NO. VII, a California
general partnership
50 West San Fernando Street, Suite 320
San Jose, CA 95113
TENANT: ALPHATEC ELECTRONICS COMPANY LIMITED (PUBLIC)
a Thailand public corporation
1245 Oakmead Parkway, Suite 200
Sunnyvale, CA 94086
After Commencement Date:
3600 Peterson Way
Santa Clara, CA
1. Premises. Landlord hereby leases to Tenant, upon the terms and
--------
conditions contained in this lease ("Lease"), those certain premises (the
"Premises") consisting of the ("Land") and the "Building" located at 3600
Peterson Way, Santa Clara, California, which Premises are shown on the map
attached hereto as Exhibit "A." The Building contains approximately 70,538
square feet.
2. Tenant Improvements; Condition of Premises.
------------------------------------------
2.1 Development of Plans and Specifications. On or before April 11,
---------------------------------------
1995, Landlord shall cause to be prepared and submitted to Tenant working
drawings and related specifications (the "Plans and Specifications") for the
interior improvements (the "Tenant Improvements") depicted in the floor plan
attached hereto as Exhibit "B". Provided that Landlord has submitted the Plans
and Specifications to Tenant by the date set forth in the preceding sentence,
Tenant shall review and approve the Plans and Specifications no later than 5:00
p.m. April 14, 1995.
2.2 Contractor; Construction. Upon review and approval of the Plans
------------------------
and Specifications by Tenant, Landlord shall submit the same for bidding
purposes to Devcon Construction ("Devcon") and
1
<PAGE>
one other contractor selected by Tenant ("Tenant's Contractor"), which
submission shall be with instructions that such contractors must provide full
written bids for the construction of the Tenant Improvements to Landlord no
later than 5:00 p.m., April 18, 1995. Landlord shall select, for the
construction of the Tenant Improvements, the contractor which has submitted the
lowest responsive bid; provided, however, Landlord shall only be required to
select Tenant's Contractor to the extent such contractor has the requisite level
of back-ground and experience, is able to provide full performance and payment
bonding for the Tenant Improvements (whether or not bonds are actually
obtained), and otherwise has the financial capability to carry out the subject
construction; provided further, however, in the event Tenant's Contractor has
submitted the lowest responsive bid (and meets the requirements set forth
above), Landlord may nevertheless select Devcon if either Devcon agrees to lower
its bid to that submitted by Tenant's Contractor or Landlord otherwise agrees to
increase the Improvement Allowance (as defined in Section 2.3 below) to include
the excess of Devcon's bid over the bid of Tenant's Contractor.
The contractor selected, as provided above, shall be retained by
Landlord and the actual construction for the Tenant Improvements shall be
carried out under the direction and supervision of Landlord. Landlord shall use
its reasonable efforts to cause the Tenant Improvements to be Substantially
Completed by July 1, 1995. "Substantially Completed" shall mean (a) the Tenant
Improvements have been completed in accordance with the Plans and Specifications
approved by Landlord, except for minor deviations and Tenant's punchlist items
and (b) a certificate of occupancy has been issued for the Premises by the
appropriate governmental authority.
2
<PAGE>
Tenant shall have the right to have its employees and/or contractors enter
the Premises prior to the Substantial Completion of the Tenant Improvements for
the purposes of installing Tenant's data and telecommunications cabling and
related fixtures and equipment, provided that prior to such entry Tenant shall
submit to Landlord evidence of the liability insurance required pursuant Section
12.1 below. Any entry by Tenant pursuant to the preceding sentence shall be
subject to the provisions of Section 13.1 below.
During the course of construction of the Tenant Improvements, Landlord shall
obtain the prior consent of Tenant to any changes to, or deviations from, the
Plans and Specifications (as approved by both Landlord and Tenant), which
changes or deviations would, in the aggregate, result in an overall increase in
the total amount of the Improvements Costs.
2.3 Improvement Costs. All of the costs, expenses, and applicable fees
-----------------
to be incurred in connection with the design and construction of the Tenant
Improvements ("Improvement Costs") shall be advanced by Landlord. Landlord shall
advance funds for the Improvements Costs up to One Million Four Hundred Ten
Thousand Seven Hundred Sixty Dollars ($1,410,760) as the "Improvement
Allowance". Any Improvements Costs incurred by Landlord in excess of the
Improvement Allowance (but only to the extent such excess does not exceed Three
Hundred Fifty-two Thousand Six Hundred Ninety Dollars ($352,690) (the
"Additional Allowance") shall be amortized over the initial Lease Term (together
with interest thereon at the rate of eleven percent (11%) per annum) and shall
be payable by Tenant, as Additional Rent under this Lease, in equal monthly
installments over the initial Lease Term with each payment of monthly Base Rent
payable by Tenant under this Lease. Any Improvement Costs incurred by Landlord
in connection with the
3
<PAGE>
Tenant Improvements in excess of the Improvement Allowance and the Additional
Allowance shall be paid for by Tenant, which payment shall be due and payable
within ten (10) days following written demand therefor by Landlord.
2.4 Delivery of Premises: "As Is" Condition. Landlord shall not be in
---------------------------------------
default hereunder and shall not be liable to Tenant for any damage or loss
incurred by Tenant by reason of Landlord's failure, for whatever reason, to
cause the Premises to be delivered (or the Tenant Improvements Substantially
Completed) by any particular date, nor shall this Lease be void nor voidable on
account thereof; provided, however, in the event the Tenant Improvements have
not been Substantially Completed on or before January 31, 1996 ("Outside
Completion Date") and such delay is not a result of a Tenant Delay (as defined
in Section 3.1 below), Tenant shall have the right, as its sole and exclusive
remedy, to terminate this Lease by providing Landlord with written notice
thereof on or before the date which is ten (10) days following the Outside
Completion Date:
Tenant shall accept the Premises on the Commencement Date (as defined
below) in its "As Is" condition, subject to the following:
(a) The Tenant Improvements shall have been constructed in
accordance with the Plans and Specifications approved by Landlord;
(b) The Premises shall be in compliance with all applicable
governmental ordinances, rules, codes, or regulations which relate to the
Building (collectively, "General Building Regulations"); and,
(c) The Building shall comply with the Americans with Disabilities
Act ("ADA").
4
<PAGE>
All costs and expenses incurred in placing the base Building shell in
compliance with any General Building Regulations and/or the ADA shall be borne
by Landlord and shall not be deducted from the Improvement Allowance or, if
applicable, included within Additional Allowance. All other costs and expenses
relating to compliance with General Building Regulations and/or the ADA
(including, without limitation, any such compliance which is required in
connection with the Tenant Improvements) may be deducted from the Improvement
Allowance and, if applicable, included within Additional Allowance.
3. Term.
----
3.1 Initial Lease Term; Early Occupancy. The term of this Lease (the
-----------------------------------
"Lease Term") shall commence on the Commencement Date (defined below) and shall
end on the date that is five (5) years thereafter, which Lease Term is subject
to extension as provided in Section 3.2 below. The Commencement Date shall be
the date which is sixty (60) days following the earlier of the date (a) upon
which the Tenant Improvements are Substantially Completed, or (b) upon which the
Tenant Improvements would have been Substantially Completed, but for the
occurrence of any Tenant Delays; provided, however, in no event shall the
Commencement Date be earlier than September 1, 1995. "Tenant Delay(s)" shall
mean delays in the design and/or construction of the Tenant Improvements caused
by (i) Tenant's failure to review and approve the Plans and Specifications
within the times set forth in Section 2.1 above, (ii) errors or defects in the
floor plan of the Tenant Improvements (to the extent prepared by Tenant or
Tenant's consultants), (iii) requests by Tenant for change orders or other
modifications to the Tenant Improvements, and/or (iv) any other act or omission
on the part of Tenant, or its agents, employees, contractor's, or
5
<PAGE>
consultants. The events described in (ii) through (iv) above shall only
constitute Tenant Delays to the extent such events result in an actual delay in
the overall substantial completion of the Tenant Improvements.
Tenant may take occupancy of the Premises at such time as the Tenant
Improvements are Substantially Completed. The date of such occupancy is
hereinafter referred to as the "Occupancy Date". Tenant's entry and occupancy of
the Premises on the Occupancy Date shall be subject to all the terms, covenants,
conditions and provisions of this Lease, including, but not limited to, the
maintenance of insurance as provided in Section 12.1, but excepting therefrom
the payment by Tenant of monthly Base Rent, as described in Section 4.1 below.
As of the Commencement Date, all terms, covenants, conditions and
provisions of the Lease shall apply. At such time as the Commencement Date is
ascertainable, Landlord shall provide to Tenant written notice thereof.
3.2 Extended Term. The Landlord hereby grants to Tenant one option to
-------------
extend the Lease Term (the "Option") upon the following terms and conditions:
(a) The option shall give Tenant the right to extend the Lease Term
for one (1) additional five (5) year period (the "Extended Term");
(b) Tenant shall give Landlord written notice of its exercise of the
Option no later than six (6) months before the date the Lease Term would end but
for said exercise;
(c) Tenant shall not have the right to exercise the Option if at the
time of exercise Tenant is in material default under this Lease. The period of
exercise for the Option shall not be extended for any period for which Tenant is
6
<PAGE>
unable to exercise the Option by reason of Tenant's material default;
(d) All terms and conditions of this Lease shall apply during
the Extended Term except that Base Rent shall be determined as provided in
Section 4.2 below; and,
(e) Once Tenant delivers notice of its exercise of the
Option, Tenant may not withdraw such exercise, and such notice of exercise shall
operate to automatically extend the Lease Term; provided, however, if Tenant is
in material default on the date an Extended Term is to begin, this Lease, at
Landlord's election shall not be extended pursuant to the provisions of this
Section 3.2, but shall terminate on the last day of the Lease Term.
The term "Lease Term" shall mean and refer to the initial term of the Lease,
as described in Section 3.1 above, together with the Extended Term which has
been put into effect by reason of an exercise of the Option by Tenant pursuant
to this Section 3.2.
4. Rent.
----
4.1 Base Rent; Additional Rent.
--------------------------
4.1.1 Base Rent. Tenant agrees to pay Landlord, without
---------
prior notice, demand, or right of deduction and/or offset monthly "Base Rent" in
the amounts set forth in Exhibit "C" attached hereto, which Base Rent shall be
due and payable at Landlord's address shown above on the first day of each
calendar month throughout the Lease Term. Base Rent for any period during the
Lease Term which is for less than one (1) month shall be prorated based on a
thirty (30) day month.
4.1.2 Actual Rent. In addition to Base Rent, Tenant shall
-----------
pay, as "Additional Rent," Tenant's Percentage Share of Operating Expenses and
Taxes, utility costs as referred to in Section 7 below, that portion of any
Improvement Costs described
7
<PAGE>
in the last sentence of Section 2.3, late charges and interest as provided for
in this Lease, and all other items to be paid hereunder to Landlord. The term
"Rent(s)" whenever used herein refers to Base Rent and Additional Rent.
4.1.3 Rent Deposit. Upon execution of this Lease, Tenant
------------
shall pay to Landlord the sum of Fifty Thousand Seven Hundred Eighty-seven
Dollars and Thirty-six Cents ($50,787.36) as a prepayment towards Base Rent for
the first month of the Lease Term.
4.2 Rent for Extended Term. Base Rent for the Extended Term shall
----------------------
be an amount equal to ninety-five percent (95%) of the fair market rental value
of the Premises in relation to market conditions at the time of the extension;
provided, however, in no event shall the Base Rent for the Extended Term be less
than Fifty-two Thousand Nine Hundred Three Dollars and Fifty Cents(i.e.
$52,903.50). The fair market rental value of the Premises shall be determined by
and as follows:
4.2.1 Mutual Agreement. After timely receipt by Landlord of
----------------
Tenant's notice of exercise of the Option, Landlord and Tenant shall have a
period of thirty (30) days in which to agree on Base Rent for the Extended Term;
provided, however, if Tenant's notice of exercise of the Option is given prior
to the 48th month of the Lease Term, then the thirty (30) day period referenced
herein shall commence to run on the first day of the 53rd month of the Lease
Term and if Tenant's notice of exercise of the Option is given after the 48th
month of the Lease Term, then the thirty (30) day period referenced herein shall
commence to run as of the date of such notice. If Landlord and Tenant agree on
Base Rent during the thirty (30) day, they shall immediately execute an
amendment to this Lease stating Base Rent for the Extended Term. If Landlord
8
<PAGE>
and Tenant are unable to so agree on Base Rent, then Base Rent for the Extended
Term shall be calculated by utilizing the fair market rental value of the
Premises determined as provided in Section 4.2.2 below.
4.2.2 Appraisal. Within ten (10) days after the expiration
---------
of the thirty (30) day period described in Section 4.2.1 above, each party, at
its cost and by giving notice to the other party, shall appoint M.A.I. real
estate appraiser, with at least five (5) years full-time commercial appraisal
experience in Santa Clara County, to appraise and set the fair market rental
value of the Premises. If a party does not appoint an appraiser within five (5)
days after the other party has given notice of the name of its appraiser, the
single appraiser appointed shall be the sole appraiser and shall set the fair
market rental value of the Premises. The cost of such sole appraiser shall be
borne equally by the parties. The two appraisers appointed by the parties shall
meet promptly and attempt to set the fair-market rental value of the Premises.
If they are unable to agree within twenty (20) days after the last appraiser has
been appointed, then the two appraisers shall attempt to select a third
appraiser meeting the qualifications stated in this Section 4.2.2 within ten
(10) days after the last day the two appraisers are given to set the fair market
rental value of the Premises. If they are unable to agree on the third
appraiser, either of the parties to this Lease, by giving ten (10) days notice
to the other party, may apply to the presiding judge of the Superior Court of
Santa Clara County for the selection of a third appraiser who meets the
qualifications stated above. Each of the parties shall bear one-half (1/2) of
the cost of appointing the third appraiser and of paying the third appraiser's
fee. The third appraiser, however selected, shall be instructed to
9
<PAGE>
select which of the two appraisals submitted by the parties' respective
appraisers more closely represents the fair market rental value for the
Premises, which selection shall be the fair market rental value of the Premises.
In establishing the fair market rental value, the appraiser or appraisers shall
consider (on a triple net basis) the reasonable market rental value for the
Premises (which shall include considerations of (a) rental rates for comparable
space with comparable tenant improvements, (b) cost of living increases or other
rental adjustments, (c) the relative strength of the tenants, and (d) the size
of the space without regard to the existence of this Lease.
5. [Intentionally Omitted].
6. Operating Expenses and Taxes.
----------------------------
6.1 Payment by Tenant. Pursuant to this Section 6, Tenant shall pay to
-----------------
Landlord Tenant's Percentage Share of Operating Expenses and Taxes.
(a) Operating Expenses. Landlord shall determine or estimate the
------------------
amount of Tenant's Percentage Share of Operating Expenses for the calendar year
in which the Occupancy Date occurs. Beginning on the Commencement Date, one-
twelfth (1/12) of the amount estimated by Landlord to be Tenant's Percentage
Share of Operating Expenses shall be due and payable by Tenant to Landlord, as
Additional Rent, on the first day of each calendar month remaining in the
calendar year. Thereafter, Landlord may estimate such increases to Tenant's
Percentage Share of Operating Expenses as of the beginning of each calendar year
and may require Tenant to pay one-twelfth (1/12) of such estimated amount as
Additional Rent hereunder as of the first day of each calendar month.
10
<PAGE>
In the event that during the course of any calendar year Operating Expenses
have increased by more than five percent (5%) over the amount of Operating
Expenses estimated by Landlord at the commencement of that calendar year,
Landlord may recalculate the amount of the monthly estimated payments to be paid
by Tenant in order to take into account any such increases and, following notice
from Landlord of any such increase, Tenant shall pay the full amount of the
recalculated payments on a monthly basis for the remainder of the subject
calendar year. In making the aforesaid recalculation, Landlord may include
amounts necessary to reimburse Landlord for any increased Operating Expenses
applicable to that portion of the subject calendar year which was prior to the
date of Landlord's notice.
Not later than ninety (90) days following any calendar year (including the
year following the year in which this Lease terminates), Landlord shall furnish
Tenant with a true and correct accounting of the actual Operating Expenses
incurred by Landlord in the preceding calendar year, and within thirty (30) days
of Landlord's delivery of such accounting, Tenant shall pay to Landlord the
amount of any underpayment by Tenant of Tenant's Percentage Share of Operating
Expenses. Notwithstanding the foregoing, failure by Landlord to give such
accounting shall not constitute a waiver by Landlord of its right to collect
Tenant's Percentage Share of Operating Expenses or any underpayment by Tenant
thereof. Landlord shall credit the amount of any overpayment by Tenant toward
the next estimated installment(s) of Tenant's Percentage Share of Operating
Expenses or, where the term of the Lease has expired or been terminated (other
than due to a default by Tenant), shall refund the amount of overpayment to
Tenant within
11
<PAGE>
thirty (30) days without obligation upon Tenant to demand such refund from
Landlord.
(b) Taxes. Tenant shall pay to Tenant's Percentage Share of
-----
Taxes within ten (10) days following the written demand by Landlord therefor,
which demand shall be accompanied by a copy of the tax bill reflecting the Taxes
for which Landlord is seeking payment and shall be made by Landlord no earlier
than thirty (30) days prior to the due date of such Taxes. If any Taxes cover
any period of time either prior to the Occupancy Date or after the expiration of
the Lease Term, Tenant's Percentage Share of Taxes shall be prorated to cover
only the period of time following the Occupancy Date or prior to the expiration
of the Lease Term, as applicable.
6.2 Definitions. "Tenant's Percentage Share" shall be one hundred
-----------
percent (100%).
"Operating Expenses" are defined as all reasonable costs and expenses paid
or incurred by Landlord in connection with the ownership, maintenance, repair,
management, and operation of the Premises, the Building, and the Land, which
reasonable costs and expenses shall include, without limit, the following:
(a) Landlord's reasonable costs and expenses in carrying out
repairs and maintenance pursuant to Section 11.2(b), (c), and (d) below;
(b) Landlord's cost of fire, extended coverage (including
rental loss insurance) and other insurance for the Building and the Land;
(c) Landlord's reasonable cost of modifications to the
Building occasioned by any rules, laws or regulations effective subsequent to
the Occupancy Date;
12
<PAGE>
(d) Landlord's reasonable cost of the fire sprinkler
monitoring system;
(e) a management fee of Twenty Thousand ($20,000) per year
for each year during the initial five years of the Lease Term (and, if
applicable, a management fee in a reasonable and customary amount for each year
during the Extended Term; and,
(f) the amortized portion of any capital expenditures
incurred by Landlord with respect to the Building, including, without
limitation, expenditures for modifications to Building occasioned by any rules,
laws or regulations made effective subsequent to the Occupancy Date; provided,
however, capital expenditures made with respect to the structure of the Building
shall not be included within Operating Expenses.
In any calendar year Operating Expenses shall include no more than Two
Thousand Dollars ($2,000) for costs and expenses related to routine maintenance
and repair of the roof of the Building; provided, however, if any roof related
expense constitutes a capital expenditure, then Tenant shall pay a portion
thereof as provided in (f) above.
"Amortized portion" of any capital expenditure to be paid by Tenant shall
mean Tenant's Percentage Share of the following: the amount of the expenditure
amortized (on a monthly basis) over the useful life of the item to which the
expenditure is applicable. Tenant's Percentage Share of such amortized amount
shall be payable in each month after such expenditure is incurred until the
earlier of (i) the expiration of the Lease Term, or (ii) the end of the useful
life of the item to which the expenditure is applicable.
"Taxes" are defined as all real property taxes applicable to the Land,
the Building, and the Premises. The term "real
13
<PAGE>
property taxes" shall include any form of assessment (general, special, ordinary
or extraordinary), commercial rental tax, improvement bond or bonds, license
fee, license tax, rental tax, levy, penalty imposed by any authority having the
direct or indirect power of tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
district thereof, as against any legal or equitable interest of Landlord in the
Land, the Building, and/or the Premises, as against Landlord's right to rent or
to other income therefrom, or as against Landlord's business of leasing the
Premises or the occupancy of Tenant, or any other tax, fee, or excise, however
described including any value added tax, or any tax imposed in substitution,
partially or totally, of any tax previously included within the definition of
real property taxes, or any additional tax, the nature of which was previously
included within the definition of real property tax. The term "real property
taxes" shall not include any income of franchise taxes imposed on Landlord. In
addition, in the event of any increase in real property taxes resulting from a
reassessments of the Land and/or the Building due to any sale, transfer,
refinancing, or other change in ownership of the Building or the Land during the
initial Lease Term, then fifty percent (50%) of the increase in real property
taxes resulting therefrom shall not be included as part of "real property taxes"
for purposes of determining Tenant's Percentage Share of Taxes.
7. Utilities. Tenant shall be solely responsible for paying the cost of
---------
all water, gas, heat, electricity, telephone, garbage and other utilities used
on the Premises. Tenant shall pay directly to the utility provider the cost of
all such utilities.
14
<PAGE>
8. Late Charges. Tenant acknowledges that late payment by Tenant to
------------
Landlord of Base Rent, Tenant's Percentage Share of Operating Expenses and Taxes
or other sums due hereunder will cause Landlord to incur costs not contemplated
by this Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges and late charges that may be imposed on Landlord by the terms
of any encumbrances or notes secured by any encumbrance covering the Premises.
Therefore, if any installment of Base Rent or other sum due from Tenant is not
received by Landlord when due, then, within ten (10) days following the date
said Base Rent or other sum is due, Tenant shall pay to Landlord, without
additional invoice or demand, an additional sum equal to ten percent (10%) of
such overdue amount as a late charge. The parties agree that this late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of late payment by Tenant. The accrual and/or acceptance of any late
charge shall not constitute a waiver of Tenant's default with respect to the
overdue amount, nor prevent Landlord from exercising any of Landlord's other
rights and remedies.
9. Use of Premises; Compliance with Laws.
-------------------------------------
9.1 General. The Premises are to be used for testing, research and
-------
development, related semiconductor testing and such other uses which are
incidental thereto (collectively, "Tenant's Operations"). Any other use of the
Premises shall only be made upon the prior written consent of Landlord, which
consent shall not be unreasonably withheld. Tenant shall not do anything or
permit anything to be done in or about the Premises nor keep or bring anything
or permit anything to be kept or brought therein which will in any way increase
the existing rate of or affect any policy
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of fire or other insurance upon the Building or any of its contents, or cause a
cancellation of any insurance policy. Tenant shall not use or allow the Premises
to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises. Tenant shall not damage or deface or
otherwise commit or suffer to be committed any waste in or upon the Premises.
Tenant shall honor the terms of all recorded covenants, conditions and
restrictions relating to the Land. Tenant shall honor the terms of any
reasonable rules and regulations established by Landlord during the Lease Term
which relate to the Premises and/or the Building.
In connection with Tenant's use of the Premises, Tenant shall, at its
sole cost and expense, do the following:
(a) Apply for, obtain and maintain throughout the Lease Term any and
all permits, licenses and other governmental approvals which are required in
connection with Tenant's Operations;
(b) Comply with any and all laws, rules, regulations or ordinances
(collectively, "Law") of and governmental authority which govern Tenant's
Operations;
(c) Adopt such measures as are, from time to time, necessary or
required in order to prevent injury, or damage to persons or properties, in or
around the Premises as a result of any activities related to Tenant's
Operations; and,
(d) Subject to Article 10 below, carry out any and all alterations
and improvements to the Premises which may be necessary in order to comply with
the Laws, except that Tenant shall not be responsible for (nor shall Operating
Expenses include) any alterations or improvements to the Premises which may be
necessary in order to comply with any Laws which (i) are effective prior to
16
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the Occupancy Date, and (ii) do not relate to specifically to Tenant's
Operations or any other specific use of the Premises by Tenant; provided,
however, subject to Landlord's obligations as set forth in Section 2.4 above,
with respect to the ADA, Tenant shall carry out those alterations and
improvements to the Premises which may be necessary in order to comply with the
provisions of Titles I and IV of the ADA and Titles II and III of the ADA as
Titles II and III of the ADA relate to any construction, alterations,
renovations and/or repairs made to the Premises by or at the direction of
Tenant. Any work to the Premises by Tenant to comply with the ADA shall be
carried out in accordance with, and subject to, Section 10 below.
9.2 Hazardous Materials.
-------------------
9.2.1 Prohibition. Tenant and Tenant's agents, contractors,
-----------
subcontractors, and employees shall not use, store, release or dispose of
(collectively "Release(s)"), or allow a Release of, any Hazardous Materials
(defined below) in or about the Premises, except that Tenant may, subject to the
terms of this Lease, use and store in the Premises any Permitted Materials
(defined below). Tenant shall, at its sole cost and expense, comply with any
and all laws, rules, regulations or ordinances of any governmental authority
which govern the use, handling or storage of any Hazardous Materials in or about
the Premises. All provisions of this Lease relating to Tenant's obligations with
respect to Hazardous Materials, including, without limitation, the obligations
set forth in this Section 9.2, in Section 11.1 (regarding maintenance of the
Premises) and Section 13 (regarding Tenant's indemnity of Landlord with respect
to Hazardous Materials), shall survive the termination or earlier expiration of
this Lease.
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9.2.3 Definitions. As used in this Lease, the term "Hazardous
-----------
Materials" includes, without limitation, any material or substance which is (i)
defined as a "hazardous waste," "extremely hazardous waste" or "restricted
hazardous waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to
Section 25140, of the California Health and Safety Code, Division 20, Chapter
6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under
Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8
(Carpenter-Presley-Tanner Hazardous Substance Account Act), (iii) defined as a
"hazardous material," "hazardous substance," or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release Response Plans and Inventory), (iv) defined as a
"hazardous substance" under Section 25281 of the California Health and Safety
Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances),
(v) petroleum and any petroleum by-products, (vi) asbestos, (vii) urea
formaldehyde foam insulation, (viii) listed under Article 9 or defined as
hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the
California Administrative Code, Division 4, Chapter 20, (ix) designated as a
"hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act (33 U.S.C. (S)1317), (x) defined as a "hazardous waste" pursuant to
Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C.
(S)6901 et seq. (42 U.S.C. (S)6903), (xi) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq. (42 U.S.C."(S) 9601),
or (xii) determined to be, or defined as, under any federal, state or local
18
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governmental authority as hazardous, toxic, or dangerous to persons, animals or
the environment.
As used in this Lease, the term "Permitted Materials" shall mean and
refer to those Hazardous Substances which are (a) customarily used by Tenant in
the conduct of Tenant's Operations, (b) designated by Tenant to Landlord in
writing prior to use, and (c) reasonably approved, in advance of its use, by
Landlord. As to any Hazardous Materials which are "Permitted Materials," Tenant
shall comply with any reasonable requirements imposed by Landlord to confirm
that Tenant's use of such materials are, or will be, in compliance with all
applicable rules, laws and regulations, and will not otherwise not pose a threat
of contamination or unlawful release in or about the Premises.
9.2.4 Landlord's Representation. Landlord hereby represents to
-------------------------
Tenant that Landlord has no actual knowledge of the existence of any Hazardous
Materials on or within the Land, Building and/or Premises. Tenant acknowledges
that Landlord has not conducted any investigation, examination or study of the
Land, Building or Premises in connection with the representation made herein.
The term "actual knowledge" shall mean and refer to the knowledge of Kimball W.
Small, David K. Small and Steven P. Belomy.
9.2.5 Landlord's Indemnity. Landlord hereby agrees to indemnify,
--------------------
defend and hold Tenant harmless from and against any and all claims,
liabilities, damages, costs or expenses arising in connection with the presence
or Release of Hazardous Materials on or within the Land, the Building and/or the
Premises, except to the extent that the presence of the Hazardous Materials in
question (a) arose after the Occupancy Date, (b) was due to the actions of
Tenant, its agents, invitees, contractors, subcontractors and/or employees or
any failure by Tenant to take
19
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any actions that Tenant is required to take either pursuant to the terms of this
Lease or by any law, rule, regulation or ordinance, or (c) the Tenant's use or
occupancy of the Premises; provided, however, in no event shall Landlord have
any obligation to indemnify, defend or hold Tenant harmless from and against any
of such claims, liabilities, damages, costs or expenses that (i) are covered by
any insurance that is either actually maintained or required to be maintained by
Tenant pursuant to the terms of this Lease (whether it be in the form of
worker's compensation, business interruption, general liability, casualty or
otherwise), or (ii) relate to loss of profits, loss of income or other business
or consequential damages suffered or incurred by Tenant.
9.3 Signage. Tenant shall be entitled to place its name and logo
-------
("Tenant's Sign") on the two monument signs on the exterior of the Premises
and/or on the exterior of the Building, subject to the following:
(a) The design of Tenant's Sign shall be subject to Landlord's
prior reasonable approval;
(b) Tenant's Sign shall comply with all appropriate sign
ordinances of the City of Santa Clara; and
(c) All costs and expenses in connection with Tenant's Sign
shall be borne by Tenant.
9.4 Reasonableness of Restrictions. Landlord and Tenant hereby
------------------------------
acknowledge and agree that the use restrictions set forth in this Section 9
shall be deemed reasonable in all respects and under all circumstances. Landlord
and Tenant further acknowledge and agree that, notwithstanding any other
provision of this Lease to the contrary, (a) in the event Tenant requests
Landlord's consent to a proposed assignment or subletting pursuant to Section 14
hereof, Landlord shall be deemed reasonable in withholding its consent to
20
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such assignment or subletting if the proposed assignee or subtenant intends to
use the Premises for any purpose other than as set forth in Section 9.1 above,
and (b) in the event of a default by Tenant, the enforcement of the use
restrictions set forth herein shall be deemed reasonable for the purpose of
computing the rental loss that could have been reasonably avoided by Landlord
pursuant to California Civil Coded Section 1951.2.
10. Alterations; Condition on Termination. Tenant shall not install any
------------------------------------
signs, fixtures or improvements ("Alterations") to the Premises, the cost of
which is Ten Thousand Dollars ($10,000) or more, without the prior written
consent of Landlord. At such time as Landlord is granting its consent to any
proposed Alterations, Landlord shall indicate whether such Alterations will be
required to be removed upon a termination of this Lease. Tenant shall obtain all
governmental permits, licenses and other consents, and shall comply with all
governmental rules, laws, regulations and requirements, which are applicable to
any Alterations and/or additions constructed on the Premises by Tenant, all at
Tenant's sole cost and expense. Tenant shall keep the Premises, the Building and
the Land free from any liens arising out of any work performed, materials
furnished or obligations incurred by or on behalf of Tenant. During the Lease
Term, all Alterations placed or constructed on the Premises by Tenant shall be
deemed the property of Tenant. During the Lease Term, Tenant may remove any
such Alterations without the prior consent of Landlord, provided that Tenant
shall pay all costs and expenses relating to damage caused by such removal. Upon
the termination of this Lease, Tenant shall cause all its equipment and trade
fixtures to be removed from the Premises and shall repair any damage to the
Premises resulting therefrom at its sole cost and expense. With respect to any
21
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Alterations (including any Alterations not requiring the prior written consent
of Landlord) not removed by Tenant prior to the termination of this Lease and
provided that Landlord has not indicated otherwise, Landlord expressly reserves
the right to require Tenant to remove any or all of such Alterations upon the
termination of this Lease, and Tenant shall promptly remove any Alterations that
Landlord so requires to be removed and repair any damage to the Premises
resulting from such removal, all at Tenant's sole cost and expense. All
Alterations not required, pursuant to this Section 10, to be removed shall
become the property of Landlord upon the termination of this Lease.
Upon termination of this Lease, Tenant shall (a) repair any damage caused
by the installation or removal of any Alterations placed or constructed on the
Premises by Tenant, (b) assure that the Premises, the Building and/or the Land
are free and clear of all Hazardous Materials used or stored by Tenant, or
Tenant's agents, employees, contractors, subcontractors, licensees, customers or
invitees, during the Lease Term, and (c) assure that the Premises are in good
condition and in good working order (except as to any casualty damage and where,
pursuant thereto, this Lease has been terminated pursuant to Section 27 below),
reasonable and normal wear and tear excepted.
11. Repairs and Maintenance.
-----------------------
11.1 Tenant's Obligations. Tenant shall, at Tenant's sole cost and
--------------------
expense, do the following:
(a) maintain the interior portions of the Premises in good,
clean and safe condition and repair;
(b) maintain all phone, network, and other communications
cabling on, about or within the Premises;
22
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(c) maintain those exterior portions of the Premises which are not
otherwise the responsibility of Landlord as set forth in Section 11.2 below in
good, clean and safe condition and repair;
(d) repair any damage to the Premises, the Building or Land caused
by any act or omission of Tenant or its employees, agents, invitees, licensees
or contractors; and
(e) conduct all maintenance, clean-ups and repair required in
connection with Tenant's or Tenant's agents, employees, contractors,
subcontractors, licensees, customers or invitees use and/or storage of Hazardous
Materials on or about the Premises, the Building and/or the Land.
Tenant shall have no right to install any device on the roof of the
Premises or the Building, or make any penetrations of the roof, without the
express prior written consent of Landlord, which consent shall not be
unreasonably withheld; provided, however, Tenant shall be directly liable to
Landlord for any and all damages, costs, expenses, and other charges (including,
without limitation, additional maintenance expenses) incurred by Landlord as a
result of any such installations or penetrations, which damages, costs,
expenses, and other charges shall be due and payable by Tenant to Landlord, as
Additional Rent, within ten (10) days following demand.
11.2 Landlords Obligations. Landlord shall do the following:
(a) repair and maintain in good condition the structural
portions of the Building and the Premises (including, without limit, Building
foundations, structural walls, and the roof structure);
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<PAGE>
(b) repair and maintain in good condition the roof membrane and
other roof components;
(c) repair and maintain in good condition all heating and HVAC
systems servicing the Premises and the Building; and,
(d) maintain in good condition all landscaping, parking areas
and exterior grounds, and any underground plumbing and electrical systems or
connections.
All costs advanced by Landlord in connection with the performance of
Landlord's obligations in this Section 11.2 shall be subject to repayment by
Tenant to Landlord as part of Tenant's Percentage Share of Operating Expenses,
except those costs advanced by Landlord in connection with the work described in
11.2(a).
12. Insurance.
---------
12.1 Tenant's Insurance. Tenant shall at all times during the Lease
------------------
Term, and at its sole cost and expense, maintain general commercial liability
insurance (together with a broad form comprehensive general liability
endorsement) against liability for bodily injury and property damage. The
aforesaid liability insurance shall also contain an endorsement naming Landlord,
and Landlord's partners, employees, agents and assignees, as "additional
insureds," which endorsement shall cover the aforesaid additional insureds for
all acts and omissions of said parties in or about the Premises. The aforesaid
insurance shall be in an amount of not less than Two Million Dollars
($2,000,000) per occurrence and not less than Five Million Dollars ($5,000,000)
in the aggregate. In no event shall the limits of said policy be considered as
limiting the liability of Tenant under this Lease.
24
<PAGE>
Tenant shall also at all times maintain standard "all risk" casualty
insurance on the Tenant Improvements; and upon all of Tenant's equipment,
furnishings and fixtures,
The aforesaid insurance shall be with companies licensed to do business with
the Insurance Commissioner of the State of California. A certificate of such
insurance shall be delivered to Landlord prior to the Occupancy Date and,
thereafter, on each anniversary date of the Commencement Date. The certificate
for Tenant's liability insurance shall certify that the policy names Landlord
and the other aforesaid persons and entities as "additional insureds" and that
the policy shall not be canceled or altered without thirty (30} days prior
written notice to Landlord.
12.2 Landlord's Insurance. During the Lease Term, Landlord shall
--------------------
maintain standard "all risk" casualty insurance on the Building and the
Premises, which coverage shall be in an amount not less than the full
replacement cost of the Building, exclusive of architectural and engineering
fees, excavations, footings, and foundations, and the Tenant Improvements. The
policy to be maintained by Landlord, as set forth herein, shall provide that
such policy shall not be canceled or altered without thirty (30) days prior
written notice to Tenant.
12.3 Waiver of Subrogation. Notwithstanding any other provision of
---------------------
this Lease, Landlord and Tenant each hereby waive any right of recovery against
the other and the authorized representatives of the other for any loss or damage
that is of the type required to be covered by any policy of insurance required
under Section 12.1 or 12.2 above. Each party shall cause each insurance policy
obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by any policy. If any insurance
25
<PAGE>
policy cannot be obtained with a waiver of subrogation, or is obtainable only by
the payment of an additional premium charge above that charged by insurance
companies issuing policies without waivers of subrogation, the party undertaking
to obtain the insurance shall notify the other party of this fact. The other
party shall have a period of thirty (30) days after receiving such notice either
to replace the insurance with a company that is reasonably satisfactory to the
other party and that will carry the insurance with a waiver of subrogation, or
to agree to pay the additional premium if such policy is obtainable at
additional cost. If the insurance cannot be obtained or the party in whose favor
a waiver of subrogation is desired refuses to pay the additional premium charge,
the other party is relieved of the obligation to obtain a waiver of subrogation
rights with respect to the particular insurance involved.
13. Limitation of Liability and Indemnity.
-------------------------------------
13.1 By Tenant. Tenant agrees to save, defend and hold Landlord
---------
harmless and indemnify Landlord, and Landlord's partners, employees, agents, and
contractors, against all liabilities, charges and expenses (including reasonable
attorneys' fees, costs of court and expenses necessary in the prosecution or
defense of any litigation) by reason of injury to person or property, from
whatever cause, while in or on the Premises, or in any way connected with the
Premises, with the improvements or with the personal property therein, including
any liability for injury to person or property of Tenant, its agents or
employees or third party persons; provided, however, Landlord shall be liable
only for property damage and bodily injury resulting from the negligent acts or
omissions of Landlord, or any of its partners, employees, agents or contractors.
26
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Tenant's obligations under this Section 13.1 shall include the obligation
to indemnify, hold harmless, and defend Landlord, and its partners, agents and
employees, from and against any and all claims, losses, liabilities, costs and
expenses arising out of or in connection with (a) any injury or damage resulting
from Tenant's use of the Premises in connection with Tenant's Operations, and
(b) any Release of any Hazardous Materials in or about the Premises, the
Building and/or the Land, to the extent the Release is caused or permitted by
Tenant, or any of its agents, employees, contractors, subcontractors and/or
invitees. Tenant's indemnity obligations under this Section 13.1 shall survive
termination of this Lease.
Landlord, and Landlord's partners, employees, agents, and contractors,
shall not be liable to Tenant for any damage to Tenant or Tenant's property, nor
for any injury to or loss of Tenant's business nor for any damage or injury to
any person from any cause; provided, however, Landlord shall be liable for, and
shall indemnify, defend and hold Tenant harmless from and against any claims
arising in connection with, property damage and bodily injury resulting from the
willful misconduct or negligent acts or omissions of Landlord, or any of its
partners, employees, agents, or contractors, but only to the extent any such
property damage and bodily injury is not covered by either the insurance
required to be maintained by Tenant under this Lease or by any other insurance
actually maintained by Tenant.
13.2 By Landlord. Landlord agrees to save, defend and hold Tenant
-----------
harmless and indemnify Tenant and Tenant's partners, employees, agents, and
contractors, against all liabilities, charges and expenses (including reasonable
attorneys' fees, costs of court and expenses necessary in the prosecution or
defense of
27
<PAGE>
any litigation) arising by reason of injury to person or property, from the
negligent acts or omissions of Landlord, or any of its partners, employees,
agents or contractors, but only to the extent any such liabilities, charges, and
other items are not covered by either the insurance required to be maintained by
Tenant under this Lease or by any other insurance actually maintained by Tenant;
provided, however, Landlord shall in no event be liable to Tenant for any damage
to or loss of Tenant's business nor for any other form of consequential damages.
14. Assignment and Subletting.
-------------------------
14.1 In General. Tenant shall not, either voluntarily or by operation
----------
of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease
or any interest therein, and shall not sublet the Premises or any part thereof,
or any right or privilege appurtenant thereto, without the prior written consent
of Landlord, which consent shall not be unreasonably withheld. Tenant shall give
Landlord at least thirty (30) days written notice of its desire to assign or
sublet all or some of the Premises. Any such assignment, sublease or the like
which is approved by Landlord must be pursuant to a written agreement in a form
acceptable to Landlord. Each permitted assignee, transferee, or sublessee shall
assume and be deemed to have assumed this Lease (or the appropriate part hereof)
and shall be and remain jointly and severally liable with Tenant for the payment
of Rents and for the due performance of and compliance with all the terms,
covenants, conditions and agreements to be performed or complied with by Tenant
herein (including, but not limited to, the provisions of this Section 14).
14.2 Transfers of Interests in Tenant. Except as provided in Section 14.3
--------------------------------
below, any dissolution, consolidation or other reorganization of the corporation
which comprises Tenant, any sale,
28
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transfer, or distribution (or cumulative sales, transfers, or distributions) of
substantially all of the assets of Tenant, or any sale or other transfer of a
majority of the shareholder interests in Tenant shall be deemed an assignment of
this Lease requiring the prior written consent of Landlord pursuant to Section
14.1 above.
14.3 Permitted Transfers. Notwithstanding Sections 14.1 and 14.2
-------------------
above, Tenant may assign this Lease to a limited partnership, corporation or
other entity with which it may merge or consolidate, or to a purchaser of two-
thirds (i.e. 66.66%) or more of Tenant's assets, or to any parent, subsidiary,
or other limited partnership, corporation or other entity to which Tenant is
affiliated, or to any entity resulting from a reorganization of Tenant, provided
that each of the following shall be complied with:
(a) the assignee shall execute an instrument reasonably
satisfactory to Landlord assuming all of Tenant's obligations under this Lease;
(b) Tenant shall give Landlord prior written notice of the
subject transfer; and
(c) Tenant shall provide to Landlord sufficient evidence (as
reasonably determined by Landlord) that the net worth of the assignee is equal
to or greater than the net worth of Tenant as of the Commencement Date or as of
the date of transfer, whichever is higher. Any permitted assignment pursuant to
this Section 14.3, or any other assignment otherwise permitted pursuant to this
Lease, shall not release Tenant from any liability under this Lease.
14.4 Excess Rents. Any Excess Rents (defined below) payable pursuant
------------
to any assignment or subletting shall be paid to Landlord and Tenant shall have
no right thereto or interest therein. Landlord shall have the right to impose
terms and
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<PAGE>
conditions on its consent to any assignment or subletting to assure the
accounting and payment to Landlord of Excess Rents. "Excess Rents" shall mean
any and all rents, payments, charges and other considerations to be received by
Tenant upon an assignment or subletting of all or any portion of the Premises
which are in excess of the Rents payable by Tenant to Landlord under this Lease
after the recovery by Tenant of reasonable amounts for brokerage commissions,
legal expenses, and tenant improvement costs, to the extent such items have been
incurred by Tenant in connection with the subject assignment or sublease.
15. Ad Valorem Taxes. Tenant shall pay before delinquent all taxes
----------------
assessed against the personal property of Tenant and all taxes attributable to
any leasehold improvements installed by Tenant.
16. Lender Requirements.
-------------------
16.1 Subordination. This Lease is subordinate to any and all
-------------
mortgages and/or deeds of trust ("Encumbrances") now of record against the Land
and/or the Building. Tenant shall, upon the request of Landlord, execute any
instrument reasonably necessary or desirable to (a) acknowledge the
subordination of this Lease to any existing mortgages or deeds of trust, or (b)
subordinate this Lease and all of Tenant's rights hereunder to any and all
Encumbrances hereafter recorded against the Land and/or the Building; provided,
however, Tenant may require as a condition to any subordination in (b) above
that the holder of any future Encumbrances agree to not disturb (a "non-
disturbance agreement") Tenant's possession of the Premises in the event such
holder acquires the Premises pursuant to foreclosure or otherwise. Landlord
shall, within thirty (30) days following the date hereof, submit a written
request to all present holders of any Encumbrances
30
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that such parties provide a non-disturbance agreement to and for the benefit of
Tenant. Tenant hereby acknowledges that there is no assurance that such present
holders will honor such request and that, if the request is denied, this Lease
will continue unaffected.
16.2 Attornment. In the event any proceedings are brought for
----------
foreclosure or in the event of the exercise of the power of sale under any
mortgage or deed of trust made by Landlord covering the Premises, Tenant shall,
at the option of such purchaser, attorn to the purchaser upon any such
foreclosure or sale and shall recognize such purchaser as the Landlord under
this Lease, provided such purchaser agrees in writing to assume all obligations
of Landlord under this Lease accruing following such sale or purchase and
provides a copy of such agreement to Tenant.
16.3 Approval by Lender. Tenant acknowledges that any future holder
------------------
of an Encumbrance may retain the right to approve the terms and provisions of
this Lease. Tenant agrees that, in the event such holder shall require any
modification of this Lease in order to protect its security interest in the
Premises, including, without limitation, modification of the provisions relating
to damage to or condemnation of the Premises, Tenant shall execute the
appropriate amendments to this Lease, provided, however, no modification of this
Lease shall (a) change the size, location or dimension of the Premises, (b)
increase the Rents payable by Tenant hereunder, (c) result in unreimbursable
expenses to Tenant, or (d) reduce Tenant's rights or protections set forth
herein. If Tenant fails to execute any such amendment, Landlord may, at
Landlord's discretion, terminate this Lease.
17. Right to Entry. Tenant grants Landlord or its agents the right to
--------------
enter the Premises at all reasonable times during normal
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business hours for purposes of inspection, exhibition, repair or alteration;
provided, however, Landlord shall give Tenant at least one (1) business day
prior notice (except in the event of emergency) of Landlord's intent to enter
the Premises. Landlord shall have the right to use any and all means Landlord
deems necessary to enter the Premises in an emergency. Landlord shall also have
the right to place "for rent" signs of a reasonable size on the outside of the
Premises at a reasonable location during the last six (6) months of the Lease
Term, provided that such signs shall include the words "Do Not Disturb Tenant".
Tenant hereby waives any claim for damages or for any injury or inconvenience to
or interference with Tenant's business, or any other loss occasioned thereby;
provided, however, Landlord shall be liable for property damage and bodily
injury resulting from the negligent acts or omissions of Landlord or Landlord's
authorized representatives (except where Landlord is released from liability for
negligence in Section 12.3 above).
18. Estoppel Certificate. Each party shall execute and deliver to the
--------------------
other party, upon not less than fifteen (15) days prior written notice, a
statement in writing certifying (a) that this Lease is unmodified and is in full
force and effect (or, if modified, stating the nature of such modification), (b)
the date to which Rent and other charges are paid in advance, if any, (c) that
there are not, to such party's knowledge, any uncured defaults on the part of
the other party or specifying such defaults as they are claimed, and (d) such
other information as a prospective purchaser, encumbrancer, assignee or
subletter of the Premises may reasonably require. Any such statement may be
conclusively relied upon by any prospective purchaser, encumbrancer, assignee or
subletter of the Premises, as applicable. A party's failure to deliver such
32
<PAGE>
statement within such time shall be conclusive upon such party that (i) this
Lease is in full force and effect without modification except as may be
represented by the other party, (ii) there are no uncured defaults in the other
party's performance, and (iii) not more than one month's Rent has been paid in
advance.
19. Tenant's Default. The occurrence of any one or more of the following
----------------
events shall constitute a default and breach of this Lease by Tenant:
(a) The failure by Tenant to make any payment of Rent or any other
payment required hereunder within five (5) days from the date the same is due
and payable;
(b) The failure of Tenant to observe, perform or comply with any of
the conditions or provisions of this Lease for a period, unless a longer period
is otherwise provided herein, of thirty (30) days after written notice, or if
such default cannot be cured within that time, then such additional time as may
be reasonably necessary if within such thirty (30) days Tenant has commenced and
is diligently pursuing such activities as are necessary to cure the default; and
(c) Tenant becomes the subject of any bankruptcy, reorganization or
insolvency proceeding, whether voluntary or involuntary, and, in the case of an
involuntary bankruptcy proceeding, Tenant fails to cause the same to be
dismissed within sixty (60) days following that date of the filing of such bank-
ruptcy.
Any notice from Landlord to Tenant described in this Section 19 shall, in
the sole discretion of Landlord, constitute a three (3) day notice pursuant to
California Code of Civil Procedure section 1161 or any successor statute. With
respect to any "default" by Tenant referenced in this Lease, the term "default"
as
33
<PAGE>
used in such context shall mean any of the events described in subsections (a),
(b) and/or (c) of this Section 19.
20. Remedies for Tenant's Default. Upon any default by Tenant, Landlord
---------------------------
shall have the following remedies, in addition to all other rights and remedies
provided by law, to which Landlord may resort cumulatively, or in the
alternative:
20.1 Termination. Upon any default by Tenant, Landlord shall have the
-----------
right (but not the obligation) to terminate this Lease and Tenant's right to
possession of the Premises. If Landlord has given Tenant any written notice
pursuant to Section 19 above, then Landlord shall not be required to give Tenant
any additional notice terminating this Lease. Upon termination of this Lease,
Landlord shall have the right to recover from Tenant:
(a) The worth at the time of award of the unpaid Rents which had
been earned at the time of termination;
(b) The worth at the time of award of the amount by which the
Rents which would have been earned after termination until the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;
(c) The worth at the time of award (computed by discounting at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent) of the amount by which the Rents for the balance of the
Lease Term after the time of award exceed the amount of such rental loss that
Tenant proves could be reasonably avoided; and
(d) Any other amounts necessary to compensate Landlord for all
detriment proximately caused by the default by Tenant or which in the ordinary
course of events would likely result, including without limitation the
following:
34
<PAGE>
(i) Expenses in retaking possession of the Premises;
(ii) Expenses for cleaning, repairing or restoring the
Premises, except for normal wear and tear;
(iii) Any unamortized real estate brokerage commission paid
in connection with this Lease;
(iv) Expenses for removing, transporting, and storing any
of Tenant's property left at the Premises (although Landlord shall have no
obligation to remove, transport, or store any such property);
(v) Expenses of reletting the Premises, including without
limitation, brokerage commissions and attorneys' fees; and
(vi) Attorneys' fees and court costs.
The "worth at the time of award" of the amounts referred to in
subparagraphs (a) and (b) of this Section 20.1 is computed by allowing interest
at an annual rate equal to the greater of: ten percent (10%); or five percent
(5%) plus the rate established by the Federal Reserve Bank of San Francisco, as
of the twenty-fifth (25th) day of the month immediately preceding the default by
Tenant, on advances to member banks under Sections 13 and 13(a) of the Federal
Reserve Act, as now in effect or hereafter from time to time amended, not to
exceed the maximum rate allowable by law.
The computation of the rental loss that could be or could have been avoided
by Landlord pursuant to California Civil Code Section 1951.2 shall take into
account the use restrictions set forth in Section 9 above except to the extent
Tenant proves under all circumstances that the enforcement of the such
restrictions would be unreasonable.
35
<PAGE>
20.2 Continuance of Lease. Upon a default by Tenant and unless and
--------------------
until Landlord elects to terminate this Lease pursuant to Section 20.1 above,
this Lease shall continue in effect after the default by Tenant, and Landlord
may enforce all rights and remedies under this Lease, including, without
limitation, the right to recover payment of Rents as they become due. Neither
efforts by Landlord to mitigate damages caused by a default by Tenant nor the
acceptance of any Rents shall constitute a waiver by Landlord of any of
Landlord's rights or remedies, including the rights and remedies specified in
this Section 20. It is intended that the remedy set forth in this Section 20.2
is to provide Landlord the rights set forth in California Civil Code Section
1951.4. The use restrictions set forth in Section 9 above shall apply to
Landlord's rights under this Section 20.2 except to the extent Tenant proves
under all circumstances that the enforcement of such restrictions would be
unreasonable.
20.3 Reletting Premises. Upon a default by Tenant, Landlord may, at
------------------
Landlord's election, re-enter the Premises and, without terminating this Lease,
and at any time and from time to time, relet the Premises or any part or parts
thereof for the account and in the name of Tenant or otherwise. Landlord may, at
Landlord's election, eject Tenant or any of Tenant's subtenants, assignees or
other person claiming any right in or through this Lease. Tenant shall
nevertheless pay to Landlord on the due dates specified in this Lease all sums
required to be paid by Tenant under this Lease, plus Landlord's expenses, less
the proceeds of any sublease or reletting. Notwithstanding any prior reletting
without termination, Landlord may later elect to terminate this Lease because of
a default by Tenant.
36
<PAGE>
20.4 Right to Cure Tenant's Default. In the event Tenant fails to
------------------------------
cure a default described under Section 19(b) within a period of thirty (30) days
after written notice (unless a longer period of time is otherwise provided
herein), Landlord may, in addition to all other rights and remedies under this
Lease, to which Landlord may resort cumulatively or in the alternative, cure
such default and demand reimbursement by Tenant of the cost actually incurred by
Landlord in curing such default by Tenant, with interest thereon from the date
such cost is incurred by Landlord until payment. All amounts due and payable to
Landlord under this Section 20.4 shall constitute Rent under this Lease. The
cure by Landlord of any default shall in no way be deemed a waiver or release of
Tenant from any obligation under this Lease.
21. Surrender of Premises. Upon termination of the Lease or expiration of
---------------------
the term hereof, if Tenant retains possession of the Premises without Landlord's
written consent first had and obtained, then Tenant's possession shall be deemed
a tenancy at sufferance, and Landlord may bring an action for possession or
detainer at any time thereafter. If Tenant holds possession of the Premises
after the term of this Lease with Landlord's consent, Tenant shall become a
tenant from month to month upon the terms and conditions as provided in this
Lease except that Base Rent shall equal one hundred twenty-five percent (125%)
of the Base Rent due during the last year of the Lease Term, payable in advance
on or before the first day of each month. All options, if any, granted under the
terms of this Lease shall be deemed terminated and be of no effect during said
month to month tenancy. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the
37
<PAGE>
other party at least thirty (30) days prior to the effective date of
termination.
22. Landlord's Default. Upon any default by Landlord under this Lease,
------------------
Tenant shall provide Landlord with written notice of such default and a
reasonable time period in which to cure such default.
23. Parking. Tenant shall have the right during the Lease Term to use, on
-------
an exclusive basis, one hundred percent (100%) of the parking spaces located
within the parking facilities situated within the Common Areas.
24. Sale of Premises. In the event of any sale of the Premises by
----------------
Landlord, Landlord shall be, without any further act or acknowledgment on the
part of Landlord or Tenant, entirely released from all liability under any and
all of its covenants and obligations contained in or derived from this Lease or
arising out of any act, occurrence or omission occurring after the consummation
of such sale. The purchaser at such sale or any subsequent sale of the Premises
shall be deemed, without any further agreement between the parties or their
successors in interest or between the parties and any such purchaser, to have
assumed and agreed to carry out any and all of the covenants and obligations of
Landlord under this Lease.
25. Waiver. No delay or omission in the exercise of any right or remedy of
------
either party on any default by the other party shall impair such a right or
remedy or be construed as a waiver. The subsequent acceptance of Rents by
Landlord or payments by Tenant after breach by the payee of any covenant or term
of this Lease shall not be deemed a waiver of such breach, other than a waiver
of timely payment for the particular payment involved, and shall not prevent the
aggrieved party from maintaining any action
38
<PAGE>
based on such breach (including an unlawful detainer action, if applicable). No
payment by a party or receipt by the other party of a lesser amount than the
Rent and other sums due hereunder shall be deemed to be other than on account of
the earliest Rent or other sums due, nor shall any endorsement or statement on
any check or accompanying any check or payment be deemed an accord and
satisfaction. A party may accept such check or payment without prejudice to its
right to recover the balance of such Rent or other sum or pursue any other
remedy provided in this Lease. The waiver by a party of any breach of any term
of this Lease shall not be deemed a waiver of such term or of any subsequent
breach thereof.
26. Casualty Damage. If the Premises or any part thereof shall be damaged
---------------
by fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building or the Premises shall be damaged by fire or other
casualty (a) such that more than thirty percent (30%) reconstruction of the
Building or the Premises is required, as determined by Landlord, or (b)
regardless of the extent of damage, such damage is either uninsured or the
insurance proceeds are unavailable or insufficient for Landlord to restore the
Building or the Premises, Landlord may elect to either terminate this Lease or
restore the Building or the Premises. In all other cases, Landlord shall
promptly commence reconstruction repair subject to this Section 26. If Landlord
elects to terminate the Lease, the estate created hereby shall terminate forty-
five (45) days following the date of damage, and Base Rent due hereunder shall
be abated as of the date of such damage. If Landlord elects to repair and
restore the Building or the Premises, then Landlord shall proceed with
reasonable diligence to restore the Building or the Premises (except Landlord
shall not be responsible for delays outside of its control) to substantially
39
<PAGE>
the same condition existing immediately prior to the casualty. If Landlord is
required to make any repairs or restorations pursuant to this Section 26,
Landlord shall not be required to spend for such repairs or restoration an
amount in excess of the insurance proceeds actually received by Landlord as a
result of the casualty. If Landlord elects to repair or restore the Building or
the Premises, then Tenant, within thirty (30) days after the date the damage
occurred, may request in writing from Landlord an estimate of the time required
to repair or restore the Building or the Premises. Landlord shall notify Tenant
of Landlord's reasonable estimate of the time for restoration or repair. If
Landlord estimates that the Premises or the Building cannot be restored within
one hundred and eighty (180) days from the date that the damage occurred, then
Tenant shall have five (5) business days from receipt of Landlord's estimate in
which to terminate this Lease, which termination shall be effective as of the
date the damage occurred. Landlord shall not be liable for any inconvenience or
annoyance to Tenant, injury to the business of Tenant, loss of use of any part
of the Premises by Tenant or loss of Tenant's personal property resulting in any
way from such damage or the restoration thereof, except that, during any
restoration, Landlord shall allow Tenant a fair diminution of Base Rent during
the time and to the extent the Premises are unfit for occupancy. In no event
shall Landlord be required to rebuild, repair or replace any part of the Tenant
Improvements or Tenant's furniture, furnishings or fixtures and equipment except
to the extent that Landlord actually receives insurance proceeds with respect to
the damage of such property (Tenant acknowledges that Landlord is under no
obligation to maintain insurance covering such property and that neither
Landlord nor any of its representatives have made any representations or
40
<PAGE>
warranties to Tenant that Landlord intends to maintain any insurance covering
such property). Tenant hereby waives the provisions of Sections 1932(2.),
1933(4.), 1941 and 1942 of the California Civil Code.
Landlord or Tenant shall have the right to terminate this Lease if (a) the
damage to the Premises occurs during the last year of the term of this Lease,
and (b) it is estimated by Landlord that the necessary repairs will take more
than ninety (90) days from the date of the damage.
27. Condemnation. If twenty-five percent (25%) or more of the Land
------------
or fifteen percent (15%) or more of the Premises is taken for any public or
quasi-public purpose of any lawful governmental power or authority, by exercise
of the right of appropriation, reverse condemnation, condemnation or eminent
domain, or sold to prevent such taking, Tenant or Landlord may, at its sole
option, terminate this Lease as of the effective date of such taking. Tenant
shall not assert any claim against Landlord or the taking authority for any
compensation because of such taking, and Landlord shall be entitled to receive
the entire amount of any award without deduction for any estate of interest of
Tenant; provided, Tenant shall be entitled to any portion of an award separately
designated as compensation to Tenant for moving expenses and/or loss of
goodwill. If less than twenty-five percent (25%) of the Land and/or less than
fifteen percent (15%) of the Premises is taken, Landlord shall, if necessary,
promptly proceed to restore the Premises to substantially its same condition
prior to such partial taking, allowing for the reasonable effects of such
taking, and a proportionate allowance shall be made to Tenant for the Rent
corresponding to the time during which, and to the part of the Premises of
which, Tenant is deprived on account of such taking and
41
<PAGE>
restoration. Notwithstanding the foregoing, Landlord shall not be required to
expend funds in connection with the restoration of the Premises in excess of
compensation actually received by Landlord from the condemning authority.
28. General Provisions.
------------------
28.1 Time. Time is of the essence in this Lease and with respect to
----
each and all of its provisions in which performance is a factor.
28.2 Successors and Assigns. The covenants and conditions herein
----------------------
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors and assigns of the parties hereto.
28.3 Recordation. Tenant shall not record this Lease or a short form
-----------
memorandum hereof without the prior written consent of Landlord.
28.4 Landlord's Personal Liability. The liability of Landlord to
-----------------------------
Tenant for any default by Landlord under the terms of this Lease shall be
limited to the interest of Landlord in the Building, and Tenant agrees to look
solely to Landlord's interest in the Building for the recovery of any judgment,
it being intended that Landlord (nor any of its partners) shall not be
personally liable for any judgment or deficiency.
28.5 Separability. Any provisions of this Lease which shall prove to
------------
be invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision shall remain in full force and
effect.
28.6 Choice of Law. This Lease shall be governed by the laws of the
-------------
State of California.
28.7 Attorneys' Fees. In the event any legal action is brought to
---------------
enforce or interpret the provisions of this Lease, the
42
<PAGE>
prevailing party therein shall be entitled to recover all costs and expenses
including reasonable attorneys' fees.
28.8 Interest. Any installment of Base Rent or any other sum due from
--------
Tenant under this Lease which is received by Landlord after thirty (30) days
from when the same is due shall bear interest from said thirtieth (30th) day
until paid at an annual rate equal to the greater of; (a) ten percent (10%); or
(b) five percent (5%) plus the rate established by the Federal Reserve Bank of
San Francisco as of the twenty-fifth (25th) day of the month immediately
preceding the due date on advances to member banks under Sections 13 and 13 (a)
of the Federal Reserve Act, as now in effect or hereafter from time to time
amended, not to exceed the maximum rate allowable by law. The accrual and/or
acceptance of any interest shall not constitute a waiver of Tenant's default
with respect to any overdue amount, nor prevent Landlord from exercising any of
Landlord's other rights or remedies.
28.9 Notices. All notices and demands required to be sent to Landlord
-------
or Tenant under the terms of this Lease shall be personally delivered or sent by
certified or registered mail to the addresses indicated above or to such other
addresses as the parties may from time to time designate by notice. The parties
agree that any notice required pursuant to California Civil Code Section 1946 or
California Code of Civil Procedures Sections 1161 and 1161a may be served in
this manner, and if so served, shall constitute proper service of process under
said statutory provisions.
28.10 Authorization. The person signing this Lease on behalf of
-------------
Tenant hereby represents and warrants to Landlord the following:
(a) That the Tenant, by duly passed resolution of the board of
directors of the corporation which comprises
43
<PAGE>
Tenant, is authorized to enter into this Lease and to incur and perform all the
obligations of Tenant hereunder;
(b) That the person signing this Lease on behalf of Tenant has
been authorized by the corporation which comprises Tenant to execute this Lease
on behalf of such corporation and deliver the same to Landlord.
In the event of any breach of the representations and warranties set forth
above, then, in addition to any and all other rights and remedies which Landlord
may have against the person signing this Lease and the corporation which
comprises Tenant, the person(s) signing this Lease on behalf of Landlord shall
be personally liable for each and every obligation of Tenant set forth in this
Lease.
28.11 Prior Agreements. This Lease contains all of the agreements of
----------------
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreements or understandings pertaining to any such matters
shall be effective for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors-in-interest.
28.12 Quiet Enjoyment. If Tenant timely pays the Rents and other
---------------
amounts provided in this Lease, and observes and performs all the covenants,
terms, and conditions of this Lease, Tenant shall peaceably and quietly hold and
enjoy the Premises for the Lease Term without interruption by Landlord or any
person or persons claiming by, through or under Landlord, subject, nevertheless,
to the terms and conditions of this Lease.
28.13 Brokers. The parties hereto acknowledge that Landlord is
-------
represented by CPS and that Tenant is represented by
44
<PAGE>
Colliers Parrish International. Each party represents and warrants to the other
that no other brokers, finders, or agents have been employed or otherwise
retained by that party. Landlord shall be obligated to pay the commission of
both CPS and Colliers Parrish International pursuant to a separate agreement.
IN WITNESS WHEREOF, this Lease is executed on the date and year first above
written.
LANDLORD
KIM CAMP NO. VII, a California
general partnership
By: Kimball Small Partners, L.P.,
a California limited partnership
By: Kimball Small Corporation,
a California corporation,
its general partner
By: /s/ Kimball W. Small
--------------------------
Kimball W Small
Its president
TENANT:
ALPHATEC ELECTRONICS
COMPANY LIMITED (PUBLIC)
a Thailand public corporation
By /s/ Charn Uswachoke
----------------------------
Charn Uswachoke
Its Chief Executive Officer
45
<PAGE>
EXHIBIT "A"
BUILDING FLOOR PLAN WITH CROSS-HATCHED PREMISES
[BUILDING FLOOR PLAN APPEARS HERE]
46
<PAGE>
EXHIBIT "C"
BASE RENT SCHEDULE
Months Base
- ------ ----
Rent
- ----
Months 1-20 $50,787.36
Months 21-40 $54,314.26
Months 41-60 $57,841.16
47
<PAGE>
Exhibit 10.3
Dated 25th day of April 1996
HING SENG PLASTIC FACTORY LIMITED
and
ISE LABS (HK) LIMITED
--------------------------------
TENANCY AGREEMENT
of
Unit C, 22nd Floor, Southeast
Industrial Building, Nos.611-619
Castle Peak Road, Tsuen Wan,
New Territories.
--------------------------------
--------------------------------
Registered in the Land Registry
by Memorial No. 6622208
on 25 May 1996
P. Land Registrar
--------------------------------
[SIGNATURE APPEARS HERE]
<PAGE>
AN AGREEMENT made this 25th day of April
One thousand nine hundred and ninety-six
PARTIES
- -------
BETWEEN the parties described in Part 1 of the Schedule.
WHEREBY IT IS AGREED as follows :-
LETTING
- -------
1. The Landlord lets and the Tenant takes ALL THOSE the premises described in
Part 2 of the Schedule (hereinafter referred to as "the said premises")
which premises form part of the development described in Part 2 of the
schedule (hereinafter referred to as "the said development") which
development is erected on the land described in Part 2 of the Schedule
(hereinafter referred to as "the said land") Together with the Landlord's
fixtures and fittings (including those described in Part 4 of the Schedule)
in the said premises (hereinafter referred to as "the said fixtures") and
together with the use in common with the Landlord and all others having the
like right of the common areas and of the equipment serving the said
premises or intended for the common use of the owners or occupiers of the
said building or the said land for the term (hereinafter referred to as "the
said term") and at the rent (hereinafter referred to as "the said rent")
described in Part 3 of the Schedule.
TENANT'S AGREEMENTS
- -------------------
2. The Tenant to the intent that the obligation shall continue throughout the
said term hereby agrees with the Landlord as follows:-
[HONG KONG STAMP DUTY PAID APPEARS HERE]
[DUPLICATE OR COUNTERPART STAMP APPEARS HERE]
<PAGE>
(a) Rent management charge and rates
--------------------------------
(i) To pay the said rent as provided in Part 3 of the Schedule.
(ii) To pay the monthly management charge payable in respect of the
said premises by the Landlord in its capacity as owner of the
said premises under the Deed of Mutual Covenant but excluding
any part or element of such charge with represents payment of or
a contribution to payment of costs expenses or other outgoings
of a capital or non-recurring nature or which represents a
contribution to a sinking fund or a contingency fund.
(iii) To pay the rates and all other outgoings and impositions of an
annual or recurring and non-capital nature assessed in respect
of the said premises by the government of Hong Kong.
(b) Utilities
---------
To pay and discharge all charges for telephone services, gas,
electricity and water consumed by the Tenant in the said premises.
(c) Repair
------
To keep all the interior of the said premises including the floor
coverings and the finishes to interior walls, ceilings, windows and
doors in the said premises and, if and to the extent the same are
damaged by the act or neglect of the Tenant, the said fixtures in
good, clean and tenantable repair and condition (fair wear and tear,
any damage or destruction of the sort referred to in sub-clause 4(i),
any damage, defect or want of repair which subsists at the
commencement of the said term or which is of a latent, inherent or
structural nature all excepted) and to deliver
2
<PAGE>
up the same to the Landlord at the ending of the said term in such
repair and condition.
(d) Installations
-------------
Not without the previous written consent of the Landlord to erect or
install any wall, partitioning or other such erection in the said
premises.
(e) Injury to premises
------------------
Not to cut or deface any door, window, structural wall, beam or
structural member of the said premises nor any of the plumbing or
sanitary apparatus or installations installed therein Provided that
without breach of this Sub-Clause or any other provision of this
Agreement the Tenant may after consultation with the Landlord carry
out such works to the said premises and the fixtures and fittings
therein as the Tenant reasonably considers necessary for the purpose
of fitting-out the said premises to the standard required by the
Tenant.
(f) Drains
------
To pay the Landlord on demand all reasonable costs properly incurred
by the Landlord in cleansing or clearing any of the drains or water
pipes in the said premises choked or stopped up owing to the improper
use of the same by the Tenant.
(g) Protection of interior
----------------------
To take reasonable precautions to protect the interior of the said
premises against damage by storm, typhoon or other adverse weather
condition.
3
<PAGE>
(h) Nuisance
--------
Not to do in the said premises any act which constitutes a nuisance to
the Landlord or to the owners of other premises in the said
development or in buildings in the neighborhood of the said
development.
(i) Crown Lease and insurance
-------------------------
Not to do in the said premises any act which is not expressly or by
implication permitted or contemplated by this Agreement and which
constitutes a breach of any of the negative or restrictive terms and
conditions of the Crown grant under which the said land is held from
the Crown nor to do in the said premises any act which is not
expressly or by implication permitted or contemplated by this
Agreement whereby any insurance effected by the Landlord on the said
premises against loss or damage by fire for the time being in force is
rendered void or voidable or whereby the premium thereon is increased
Provided that the Tenant shall have no liability under this Sub-Clause
unless prior to the commission of any breach by the Tenant of the
provisions of this Sub-Clause the Landlord has supplied the Tenant a
copy of the fire policy or policies in force at the time of the
breach.
(j) Combustible or hazardous goods
------------------------------
Not to keep or store or permit or suffer to be kept or stored in the
said premises any arms ammunition gunpowder saltpetre kerosene or
other explosive or combustible or hazardous goods in contravention of
the Dangerous Goods Ordinance Cap.295.
4
<PAGE>
(k) Use
---
(i) To use the Premises as provided in Part 4 of the Schedule
hereto; and in the event of the permitted user as stated in Part
4 of the Schedule being non-domestic, at the Tenant's expense to
obtain all licenses or permits necessary for carrying on the
Tenant's business on the Premises and which under any Ordinance
the Tenant as lessee has the obligation to obtain.
(ii) Not to use the said premises or any part thereof or permit or
suffer the same to be used for any illegal or immoral purpose
nor to carry on or permit or suffer to be carried on therein or
on any part thereof any offensive, noisome, noxious, noisy or
dangerous trade, business manufacture or occupation whatsoever.
(iii) Not to permit any person other than staff of the Tenant who
occasionally have to do overtime work in relation to the
Tenant's business to remain in the said premises overnight
without the written permission of the Landlord such permission
only to be given to enable the Tenant to post watchmen to look
after the contents of the said premises which shall not be used
as sleeping quarters or as domestic premises within the meaning
of any Landlord and Tenant (Consolidation) Ordinance or any
amendments thereto or substitution therefor for the time being
in force.
(l) Signs
-----
Not to affix or display or permit or suffer to be affixed or displayed
on the exterior of the said premises any signboard, sign, poster,
picture or other such thing whether illuminated or not;
5
<PAGE>
(m) Common areas
------------
Not to encumber or obstruct or permit to be encumbered or obstructed
with any of the Tenant's boxes, packaging or other things any of the
common areas and not to leave any of the Tenant's rubbish in the
common areas except those parts of the common areas designated for
such purpose.
(n) Ordinances and Deed of Mutual Covenant
--------------------------------------
Not to do in the said premises any act which is not expressly or by
implication permitted or contemplated by this Agreement and which
constitutes a breach of any ordinance relating to the use of the said
premises by the Tenant nor to do in the said premises any act which is
not expressly or by implication permitted or contemplated by this
Agreement which constitutes a breach of the restrictive or negative
covenants which affect the said premises in the Deed of Mutual
Covenant.
(o) Alienation
----------
Not to assign, sub-let, underlet, mortgage or charge the said
premises.
(p) Entry
-----
To permit the Landlord and all persons bearing the written authority
of the Landlord at all reasonable times and upon prior appointment
having been made with the Tenant to enter and view the state of the
said premises and, during the last three months immediately preceding
the expiration of the said term to show the said premises to
prospective tenants or purchasers of the said premises provided that
in exercising its rights under this Sub-Clause the Landlord shall
cause and shall ensure that all persons entering the said premises
pursuant to this Sub-Clause cause the least possible inconvenience to
the occupier of the said premises
6
<PAGE>
and shall forthwith make good any damage, injury or loss caused by or
as a consequence of entry on to the said premises, to the Tenant, the
occupier of the said premises, the said premises or any thing in or
affixed to the said premiums.
(q) Yield up
--------
At the ending of the said term quietly to yield up the said premises
in a condition consistent with performance by the Tenant of its
obligations under Sub-Clause [2(e)] -
LANDLORD'S AGREEMENTS
- ---------------------
3. The Landlord hereby agrees with the Tenant as follows:-
(a) Payments
--------
To promptly pay the Crown Rent, Property Tax and all expenses of a
capital or non-recurring nature attributable to or payable in respect
of the said premises.
(b) Quiet enjoyment
---------------
That the Tenant paying the rent hereby reserved and observing and
performing its obligations under this Agreement shall peaceably hold
and enjoy the said premises the said fixtures and the rights granted
in Clause 1 without any interruption by the Landlord or any person
claiming under or in trust for the Landlord or by virtue or title
paramount.
(c) Deed of Mutual Covenant
-----------------------
To exercise and enforce its rights under the Deed of Mutual Covenant
against each and every other person who is bound by such Deed of
Mutual Covenant.
7
<PAGE>
(d) Repair
------
To the extent that the same is not the obligation of the Tenant under
Sub-Clause [2(e)] to keep the said premises and the said fixtures and
the equipment serving the said premises in good, clean and tenantable
repair and condition.
(e) Building
--------
To use its reasonable endeavours keep or procure that there is kept
in good, clean and tenantable repair and condition the equipment, the
said development and the common areas.
FURTHER PROVISIONS
- ------------------
4. IT IS HEREBY FURTHER AGREED that the parties will be obliged and bound by,
and will have rights and powers in accordance with the following
provisions:-
(a) Re-entry
--------
If the said rent or any part thereof shall be unpaid for 15 days after
service of a written notice calling upon the Tenant to make payment of
the same or if the Tenant shall fail to observe and perform any of its
obligations under this Agreement or if the Tenant shall become
bankrupt or shall go into insolvent liquidation or make any
composition with its creditors or shall suffer any successful
prosecution in respect of the non-payment of any money due from it to
the Hong Kong Government in respect of the said premises then and in
any such case it shall be lawful for the Landlord at any time
thereafter to re-enter on the said premises or any part thereof in the
name of the whole whereupon this Agreement shall determine but without
prejudice to any right or claim of either party in respect of any
antecedent breach of this Agreement or to the right
8
<PAGE>
of the Tenant to the return of the said deposit in accordance with
clause 6.
(b) Notice sufficient
-----------------
A notice served by the Landlord on the Tenant in manner hereinafter
mentioned to the effect that the Landlord thereby exercises the power
of re-entry herein contained shall be a full and sufficient exercise
of such power without actual physical re-entry on the part of the
Landlord.
(c) No waiver
---------
Acceptance of the said rent by the Landlord shall not be deemed to
operate as a waiver by the Landlord of any right to proceed against
the Tenant in respect of any consistent breach of the Tenant's
obligations under this Agreement.
(d) Indemnity
---------
The Tenant shall indemnify the Landlord from and against all
proceedings taken against the Landlord by any person in respect of any
damage or injury caused to such person by the overflow from the said
premises of water the origin of which is in the said premises or the
escape from the said premises of fumes, smoke, fire or other substance
or thing the origin of which is in the said premises owing in any case
to the negligence of the Tenant.
(e) Premises
--------
The Landlord warrants to the Tenant that the said premises are
authorised for use and occupation as provided for under this
Agreement.
9
<PAGE>
(f) Acts of servants
----------------
For the purpose of this Agreement any act, default, negligence or
omission of any visitor, servant or agent of the Tenant or of the
Landlord shall be deemed to be the act, default, negligence or
omission of the Tenant or (as the case may be) the Landlord.
(g) Distraint
---------
For the purposes of Part III of the Landlord and Tenant
(Consolidation) Ordinance, (Chapter 7) and of this Agreement, the said
rent shall be and be deemed to be in arrear if not paid in advance at
the times provided for payment thereof.
(h) Notices
-------
Any notice required to be served under this Agreement shall be in
writing and shall, if to be served on the Tenant, be sufficiently
served if addressed to the Tenant and sent by prepaid registered post
to or delivered at the Tenant's registered office in Hong Kong and, if
to be served on the Landlord shall be sufficiently served if addressed
to the Landlord and sent by prepaid registered post to or delivered at
the Landlord's registered office in Hong Kong.
(i) Rent cesser
-----------
If at any time or times the said premises or any part thereof are
inaccessible, or if at any time or times the said premises or any part
thereof are destroyed or damaged owing to fire water storm wind
typhoon defective construction white ants earthquake subsidence of the
ground or any other cause whatsoever so as to render the said premises
or any part thereof unfit for habitation or use, or if at any time or
times any order is made or served under
10
<PAGE>
the Buildings Ordinance in respect of the said premises or any part
thereof, or if at any time or times the said premises or any part
thereof are for any reason unfit, unsuitable or unsafe for habitation
or use (which events are hereinafter referred to as "the calamity")
then the rent hereby reserved and all other sums payable by the Tenant
under this Agreement shall immediately be suspended and cease to be
payable until (as the circumstances may require) the said premises and
every part thereof (or is) are rendered accessible, or are reinstated
so as to be fit for habitation and use, or are fit, suitable and safe
for habitation and use or are free of any such order Provided that
should the said premises and every part thereof not (as the
circumstances may require) have been rendered accessible, reinstated
so as to be fit for habitation and use, become fit suitable and safe
for habitation and use or free of any such order in the meantime
either the Landlord or the Tenant may at any time after one month from
the calamity give to the other of them notice in writing to determine
this Agreement and thereupon the same and everything herein contained
shall determine as from the date of the calamity but without prejudice
to the rights and remedies of either party against the other in
respect of any antecedent claim or breach of this Agreement or of the
Tenant in respect of its right to the return of its deposit in
accordance with Clause 6 hereof.
(j) Stamp Duty and costs
--------------------
Each party shall bear its own legal costs and disbursements and other
expenses of or incidental to the preparation and completion of this
Agreement but the stamp duty on this Agreement and its duplicate shall
be borne by the parties hereto in equal shares.
KEY MONEY
- ---------
5. The Tenant declares that for the grant of the said term no key
11
<PAGE>
money or premium or other such consideration other than the consideration
referred to in this Agreement has been paid or will be payable by the
Tenant to the Landlord or to any person.
TENANT'S DEPOSIT
- ----------------
6. (a) The Tenant shall on the signing of this Agreement deposit with
the Landlord the sum specified in Part 3 of the Schedule (in this
Agreement referred to as "the said deposit"). The said deposit shall
be held by the Landlord free of interest to the Tenant with power for
the Landlord to deduct from the said deposit the amount of any
monetary loss the Landlord suffers because of any breach by the Tenant
of its obligations under this Agreement but subject to this the said
deposit shall be returned to the Tenant within fourteen days after the
ending of the said term and the delivery of vacant possession of the
said premises.
(b) In the event of any transfer of the Landlord's interest in the said
premises, the Landlord shall at its own cost obtain upon such transfer
from the person to whom such transfer is made a legally binding
undertaking in favour of the Tenant to observe and perform the
obligations of the Landlord under this Agreement including the
obligations of the Landlord under this Clause 6 and upon such
undertaking being obtained and supplied to the Tenant the Landlord
shall transfer the said deposit to the person giving the undertaking.
(c) The Landlord hereby acknowledges receipt from the Tenant of the said
deposit.
DELIVERY OF VACANT POSSESSION/REINSTATEMENT BY THE TENANT
- ---------------------------------------------------------
7. It is hereby expressly agreed that at the expiration of the said term or at
any time when the Tenant shall deliver up vacant possession of the said
premises to the Landlord the Tenant shall at the same time if so required
by the Landlord forthwith remove
12
<PAGE>
all fixtures, additions, fittings and improvements affixed, installed or
made by the Tenant at or to the said premises and make good any damage
caused to the said premises by such removal.
OPTION TO RENEW
- ---------------
8. (a) Option
------
If the Tenant shall be desirous of renewing the tenancy created by this
Agreement for a further term of two (2) years from the expiration of
the said term and shall not less than three months before the
expiration of the said term give to the Landlord notice in writing of
such desire then the Landlord will let the said premises to the Tenant
for a further term of two (2) years from the day immediately following
the expiry of the said term at the New Rent and subject to this and
save and except for this provision for renewal on the same terms and
conditions as this Agreement.
(b) Rent
----
For the purposes of this Clause, the New Rent means the calendar
monthly rent at which the Premises might reasonably be expected to be
let in the open market on the day immediately following the expiry of
the said term ("the New Term Date") by a willing landlord to a willing
tenant without a premium but with vacant possession and subject to the
provisions of this Agreement (other than the amount of the said rent
and the provisions of this Clause) for a term of two (2) years
commencing on the New Term Date with there being disregarded any
goodwill attached to the Premises by reason of the carrying on there of
business by the Tenant and the fact that the Tenant has been in
occupation of the said premises.
13
<PAGE>
(c) Referral of disputes
--------------------
The Landlord and the Tenant shall endeavour to agree the New Rent but
if it has not been agreed by the day one month before the New Term
Date the question of the New Rent may at any time thereafter be
referred by the Landlord or the Tenant to the determination of a
referee acting as an expert.
(d) Referee
-------
(i) The referee (who is to have substantial recent experience of
the letting of property such as the said premises and in their
vicinity) may be agreed on by the Landlord and the Tenant or if
not agreed on by them within two weeks from the nomination in
writing of a referee by one part to the other is to be appointed
on the application of either party by the President for the time
being of the Royal Institution of Chartered Surveyors (Hong Kong
Branch).
(ii) If the referee relinquishes his appointment or dies or if it
becomes apparent that he will be unable or unwilling to complete
his duties the Landlord and the Tenant may agree upon or either
of them may apply to the President for a substitute in his place
which procedure may be repeated as many times as necessary.
(iii) If the President is unable or unwilling to make an appointment
at the time of application the appointment may be made by the
Vice-President or next senior officer of the Institution then
able and willing to make it or if no such officer is available
by such officer of such professional body as the Landlord
designates.
(iv) The referee shall afford the Landlord and the Tenant the
opportunity to make representations subject to such
14
<PAGE>
reasonable time and other limits as he may prescribe and he
shall have regard to any such representations but not be bound
by them.
(v) The fees and expenses of the referee including the cost of his
appointment shall be borne as the referee may direct.
(e) Shortfall
---------
If the New Rent has not been agreed or determined by the New Term Date
the Tenant shall continue to pay the said rent in accordance with this
Agreement and following the New Rent being agreed or determined:-
(i) if there shall be any shortfall between the said rent paid as
aforesaid and the New Rent for the period from the New Term
Date and the date on which the New Rent is agreed or determined
then the Tenant shall pay to the Landlord the amount of such
shortfall; or
(ii) if there shall be any excess between the said rent paid as
aforesaid and the New Rent for the period from the New Term Date
and the date on which the New Rent is agreed or determined then
the Landlord shall pay to the Tenant the amount of such excess.
INTERPRETATION DEFINITIONS
- --------------------------
9. In this Agreement unless otherwise specified:-
(a) any reference to a Clause, Sub-Clause or Schedule is a reference to a
clause, sub-clause or schedule of or to this Agreement;
(b) headings have been inserted for ease of reference only and shall not
affect construction or interpretation;
15
<PAGE>
(c) words importing the singular include the plural and vice versa and
words of one gender include all the other genders;
(d) "the ending of the said term" means the coming to an end of the said
term in any way including expiration, termination, surrender and
forfeiture;
(e) "the Landlord" means the person named in this Agreement as the
Landlord and the person for the time being entitled to the reversion
immediately expectant on the ending of the said term;
(f) "the common areas" means those parts of the said development and the
said land intended for the common use of the owners or occupiers of
the said development or the said land;
(g) "the Deed of Mutual Covenant" means the Deed of Mutual Covenant
registered in the Land Registry by Memorial No.3037693 and includes
such Deed as amended, modified or extended and includes any instrument
including any sub-deed of mutual covenant or management agreement
(including the Sub-Deed of Mutual Covenant registered in the Land
Registry by Memorial No.5461236) made under or pursuant to it;
(h) "the equipment" means the plant, machinery, apparatus, lifts, systems,
services, facilities, conduits and conductive media of or benefiting
the said development or the said land;
(i) a reference to a specific ordinance includes such ordinance as
amended, modified, consolidated, extended or re-enacted and includes
any subsidiary legislation, regulations, orders and instruments for
the time being made under or pursuant it or deriving validity from it;
(j) where a party consists of two or more persons the obligations of such
persons shall be joint and several.
16
<PAGE>
AS WITNESS the hands of the parties hereto the day and year first above
written.
17
<PAGE>
THE SCHEDULE
------------
Part 1
------
(PARTIES)
Landlord : Hing Seng Plastic Factory Limited whose registered office is
situate at Unit E, 8th Floor, Southeast Industrial Building, Castle
Peak Road, Tsuen Wan, New Territories ("the Landlord").
TENANT : ISE LABS (HK) Limited of Unit C, 22nd Floor, Southeast Industrial
Building, Castle Peak Road, Tsuen Wan, New Territories ("the
Tenant").
Part 2
------
(PREMISES, BUILDING, LAND)
THE SAID PREMISES: Unit C, 22nd Floor, Southeast Industrial Building,
Nos.611-619 Castle Peak Road, Tsuen Wan, New Territories.
THE SAID DEVELOPMENT: Southeast Industrial Building, Nos.611-619 Castle
Peak Road, Tsuen Wan, New Territories.
THE SAID LAND: Section A of Tsun Wan Inland Lot No.17 and the Extension
thereto; Section A of Tsun Wan Marine Lot No.7.
Part 3
------
(TERM, RENT, DEPOSIT)
THE SAID TERM : For the term of three (3) years commencing on 1st May 1996
and expiring on 30th April 1999.
THE SAID RENT : HK$23,984.00 per month payable monthly (and so in proportion
for any period less than a month) in advance on the 1st day
of each month during the said term.
18
<PAGE>
THE SAID DEPOSIT: HK$47,968.00
Part 4
------
(PERMITTED USE)
The Tenant shall have the right to use the said premises for non-domestic
purposes.
SIGNED by NG LUI YUEN, its )
Director, ) [SEAL OF HING SENG PLASTIC FACTORY
------------------------ LIMITED APPEARS HERE]
for and on behalf of the Landlord )
in the presence of:- )
Name: LEUNG KIN WING
Clerk to Messrs. Wat & Co., Solicitors, Hong Kong.
Address: 16th Floor, Fung House, 19 & 20 Connaught Road Central,
Hong Kong.
Signature: I hereby verify the signature of
Leung Kin Wing:-
JOHN NG HOI SANG
Solicitor, Hong Kong
SIGNED by: Larry Sannes ) /s/ Larry Sannes
)
for and on behalf of the )
Tenant in the presence of:- )
Name: Philip Ng
Address: 1-7F. Southeast Industrial Bldg. 611-619 Castle Peak Road, Tsuen Wan.
Signature: /s/ Philip Ng
19
<PAGE>
EXHIBIT 10.4
ISE LABS, INC.
DIGITAL TESTING SERVICES, INC.
ISE TECHNOLOGY, INC.
LOAN AND SECURITY AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. DEFINITIONS AND CONSTRUCTION.................................... 1
1.1 Definitions.................................................. 1
1.2 Accounting Terms............................................. 7
2. LOAN AND TERMS OF PAYMENT....................................... 7
2.1 Revolving Advances........................................... 7
2.2 Payments and Calculations.................................... 9
2.3 Crediting Payments........................................... 9
2.4 Fees......................................................... 10
2.5 Additional Costs............................................. 10
2.6 Term......................................................... 10
2.7 ISE as Agent................................................. 10
3. CONDITIONS OF ADVANCES.......................................... 11
3.1 Conditions Precedent to Initial Advance...................... 11
3.2 Conditions Precedent to all Advances......................... 12
4. CREATION OF SECURITY INTEREST................................... 12
4.1 Grant of Security Interest................................... 12
4.2 Delivery of Additional Documentation Required................ 12
4.3 Right to Inspect............................................. 12
4.4 Stock Pledge................................................. 12
4.5 Pledge of Purchased Loans.................................... 13
5. REPRESENTATIONS AND WARRANTIES.................................. 14
5.1 Due Organization and Qualification........................... 14
5.2 Due Authorization; No Conflict............................... 14
5.3 No Prior Encumbrances........................................ 14
5.4 Bona Fide Eligible Accounts.................................. 14
5.5 Merchantable Inventory....................................... 14
5.6 DTS Shares................................................... 14
5.7 Name; Location of Chief Executive Office..................... 15
5.8 Litigation................................................... 15
5.9 No Material Adverse Change in Financial Statements........... 15
5.10 Solvency..................................................... 15
5.11 Regulatory Compliance........................................ 15
5.12 Environmental Condition...................................... 15
5.13 Taxes........................................................ 15
5.14 Subsidiaries................................................. 16
5.15 Government Consents.......................................... 16
5.16 Sanwa Loans.................................................. 16
5.17 Business Sales Agreement..................................... 16
5.18 Full Disclosure.............................................. 16
6. AFFIRMATIVE COVENANTS........................................... 16
6.1 Good Standing................................................ 16
6.2 Government Compliance........................................ 16
6.3 Financial Statements, Reports, Certificates.................. 16
6.4 Inventory; Returns........................................... 17
6.5 Taxes........................................................ 17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>.......................................................... <C>
6.6 Insurance.................................................... 17
6.7 Principal Depository......................................... 18
6.8 Quick Ratio.................................................. 18
6.9 Debt Service Coverage........................................ 18
6.10 Debt-Tangible Net Worth Ratio................................ 18
6.11 Tangible Net Worth........................................... 18
6.12 Unrestricted Cash............................................ 18
6.13 Domestic Assets.............................................. 18
6.14 Registration of Intellectual Property Rights................. 19
6.15 San Jose Refinance........................................... 19
6.16 Further Assurances........................................... 19
7. NEGATIVE COVENANTS.............................................. 19
7.1 Dispositions................................................. 19
7.2 Change in Business........................................... 19
7.3 Mergers or Acquisitions...................................... 19
7.4 Indebtedness................................................. 19
7.5 Encumbrances................................................. 20
7.6 Distributions................................................ 20
7.7 Investments.................................................. 20
7.8 Transactions with Affiliates................................. 20
7.9 Subordinated Debt............................................ 20
7.10 Inventory.................................................... 20
7.11 Compliance................................................... 20
7.12 Capital Expenditures......................................... 20
8. EVENTS OF DEFAULT............................................... 20
8.1 Payment Default.............................................. 20
8.2 Covenant Default............................................. 21
8.3 Material Adverse Change...................................... 21
8.4 Attachment................................................... 21
8.5 Insolvency................................................... 21
8.6 Other Agreements............................................. 21
8.7 Subordinated Debt............................................ 22
8.8 Judgments.................................................... 22
8.9 Misrepresentations........................................... 22
9. BANK'S RIGHTS AND REMEDIES...................................... 22
9.1 Rights and Remedies.......................................... 22
9.2 Power of Attorney............................................ 23
9.3 Accounts Collection.......................................... 23
9.4 Bank Expenses................................................ 24
9.5 Remedies Cumulative.......................................... 24
10. WAIVERS; INDEMNIFICATION........................................ 24
10.1 Demand; Protest.............................................. 24
10.2 Bank's Liability for Collateral.............................. 24
10.3 Indemnification.............................................. 24
10.4 Subrogation and Similar Rights............................... 24
10.5 Waivers of Notice............................................ 25
10.6 Subrogation Defenses......................................... 25
10.7 Right to Settle, Release..................................... 25
10.8 Primary Obligation........................................... 25
10.9 Subordination................................................ 26
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.10 Enforcement of Rights........................................ 26
11. NOTICES......................................................... 26
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...................... 27
13. GENERAL PROVISIONS.............................................. 27
13.1 Successors and Assigns....................................... 27
13.2 Time of Essence.............................................. 27
13.3 Severability of Provisions................................... 27
13.4 Amendments in Writing, Integration........................... 27
13.5 Counterparts................................................. 27
13.6 Survival..................................................... 27
13.7 Confidentiality.............................................. 27
</TABLE>
iii
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of October 2, 1997, by
and among COMERICA BANK-CALIFORNIA ("Bank"), ISE LABS, INC. ("ISE"), a
California corporation, ISE TECHNOLOGY, INC. ("ISE TECH"), a California
corporation, and DIGITAL TESTING SERVICES, INC. ("DTS"), a California
corporation (ISE, ISE TECH and DTS are referred to individually, as a
"Borrower," and, collectively, as the "Borrowers").
RECITALS
--------
ISE desires to purchase certain assets of Alphatec USA, Inc., including all
of the outstanding stock of DTS. Prior to the date hereof, ISE borrowed certain
funds from Sanwa Bank California to finance certain acquisitions of assets,
including equipment and loans made to Alphatec USA, Inc. Borrowers have asked
Bank for credit facilities to refinance certain of those loans, to provide
working capital to Borrowers, and to provide funds to complete the purchase of
certain assets of Alphatec USA, Inc. This Agreement sets forth the terms on
which Bank will advance credit to Borrowers, and Borrowers will repay the
amounts owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 Definitions. As used in this Agreement, the following terms
-----------
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to a
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by such Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by such Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means one or more of a Revolving Advance,
the Equipment Acquisition Advance, the Manteca Term Advance, or the Equipment
Refinance Advance.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Alphatec" means Alphatec USA, Inc.
"Applicable Margin" has the meaning specified on Attachment 1
------------
hereto.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of a Borrower's books and records
including: ledgers; records concerning such Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1 hereof.
1
<PAGE>
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Business Sales Agreement" means that certain Business Sales
Agreement, dated as of August 21, 1997, between Borrower and Alphatec USA, Inc.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property of each Borrower described on
Exhibit A attached hereto.
- ---------
"Committed Line" means Eight Million Dollars ($8,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of a Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding
Advances made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of such Borrower or
any Subsidiary to a date more than one year from the date of determination.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of a Borrower's business that comply in all material respects
with all of Borrowers' material representations and warranties to Bank set forth
in Section 5.4; provided, that standards of eligibility may be fixed and revised
--------
from time to time by Bank in Bank's reasonable judgment and upon advance
notification thereof to Borrowers in accordance with the provisions hereof.
Unless otherwise agreed to by Bank, Eligible Accounts shall not include the
following:
(a) Accounts that the account debtor has failed to pay
within ninety (90) days of invoice date; provided that Accounts owing to ISE
that are aged up to one hundred twenty (120) days of invoice date shall be
permitted through December 31, 1997;
(b) Accounts with respect to an account debtor, twenty-
five percent (25%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
2
<PAGE>
(c) Accounts with respect to which the account debtor is
an officer, employee, or agent of a Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is
an Affiliate of Borrower;
(f) Accounts with respect to which the account debtor is
the United States or any department, agency, or instrumentality of the United
States unless Borrower has complied with the Federal Assignment of Claims Act to
Bank's reasonable satisfaction with respect to such Accounts;
(g) Accounts with respect to which a Borrower is liable
to the account debtor for goods sold or services rendered by the account debtor
to such Borrower, but only to the extent of any amounts owing to the account
debtor against amounts owed to such Borrower;
(h) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total then-outstanding obligations
to a Borrower exceed twenty percent (20%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, except that the concentration
limit shall be thirty percent (30%) of Accounts owing to a Borrower by each of
C-Cube Microsystems, Qualcomm, Xilinx, ESS Technologies, LSI Logic, S3 and
Cirrus Logic; and
(i) Accounts with respect to which the account debtor
(i) disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or (ii) is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business, and
(j) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which a Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations, whether on- or off-
balance sheet, and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in which a
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of such
3
<PAGE>
Borrower, including such inventory as is temporarily out of its custody or
possession or in transit and including any returns upon any accounts or other
proceeds, including insurance proceeds, resulting from the sale or disposition
of any of the foregoing and any documents of title representing any of the
above, and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by a Borrower, and any other agreement entered into between a
Borrower or the Borrowers and Bank in connection with this Agreement, all as
amended or extended from time to time.
"Manteca Facility" means the facility in Manteca, California,
including the Land, as those terms are defined in the Business Sales Agreement.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of a Borrower and
its Subsidiaries taken as a whole or (ii) the ability of a Borrower to repay the
Obligations or otherwise perform its material obligations under the Loan
Documents.
"Maturity Date" means September 30, 2002.
"Negotiable Collateral" means all of a Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by a Borrower or Borrowers pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding.
"Periodic Payments" means all installments or similar recurring
payments that a Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between a Borrower or the Borrowers and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of a Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) After the date hereof, the incurrence of capital
leases in an amount not to exceed Five Million Dollars ($5,000,000) in any
fiscal year prior to the receipt of proceeds from the Manteca Sale and Ten
Million Dollars ($10,000,000) in any fiscal year after receipt of proceeds from
the Manteca Sale;
4
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(d) Subordinated Debt;
(e) Indebtedness to trade creditors incurred in the
ordinary course of business; and
(f) Refinancings of any of the foregoing, provided the
principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed
in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed
in the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings;
(c) Liens (i) upon or in any equipment acquired, leased
or held by a Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
--------
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension, renewal
--------
or replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Purchased Loans" means those assets purchased by ISE Labs, Inc.
under (i) the Loan Purchase Agreement by and between Comerica Bank as Seller and
ISE Labs, Inc. as Purchaser, dated as of September 9, 1997, and (ii) the Loan
Purchase Agreement by and among Silicon Valley Bank and Comerica Bank-California
as Sellers and ISE Labs, Inc. as Purchaser, dated as of September 11, 1997,
including, but not limited to those agreements referenced on the Estoppel
Certificate executed in connection with this Agreement.
5
<PAGE>
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of a Borrower
determined in accordance with GAAP.
"Responsible Officer" means any of the Chief Executive Officer,
the Chief Financial Officer, if any, or the Controller of a Borrower.
"Revolving Advance" means a cash advance under Section 2.1.
"Revolving Maturity Date" means September 30, 1998.
"Revolving Facility" means the facility under which Borrowers may
request Bank to issue cash advances pursuant to Section 2.1 hereof.
"Sanwa Equipment Loans" means the loans evidenced by the
agreements that are described on the Schedule as the "Sanwa Equipment Loan
Agreements".
"Sanwa Line of Credit" means the loan evidenced by the agreement
that is described on the Schedule as the "Sanwa Line of Credit".
"Schedule" means the schedule of exceptions attached hereto.
"Shares" means the shares of stock of DTS and ISE Tech.
"Subordinated Debt" means any debt incurred by the Borrowers that
is subordinated to the debt owing by any such Borrower to Bank on terms
reasonably acceptable to Bank (and identified as being such by such Borrower and
Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by a Borrower, either directly or through
an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of a Borrower and its
Subsidiaries taken as a whole, minus, without duplication, (i) the sum of any
-----
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
---
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of a
Borrower, including in any event all Indebtedness.
1.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Revolving Advances.
------------------
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Revolving Advances to Borrowers in an aggregate
amount not to exceed the lesser of the Committed Line or the Borrowing Base. For
purposes of this Agreement, "Borrowing Base" shall mean an
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<PAGE>
amount equal to eighty percent (80%) of Eligible Accounts owing to ISE plus (ii)
seventy-five percent (75%) of the Eligible Accounts owing to Alphatec USA, Inc.
and DTS that ISE purchased under the Business Sales Agreement minus any reserves
plus (iii) eighty percent (80%) of the Eligible Accounts owing to DTS arising
from invoices dated from and after the Closing Date plus (iv) from the Closing
Date through December 15, 1997, Two Million Five Hundred Thousand Dollars
($2,500,000). Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time
prior to the Revolving Maturity Date.
(b) The Revolving Advances shall bear interest at a
floating rate equal to the Prime Rate. Interest shall be payable on the last
Business Day of each month.
(c) Whenever Borrowers desire a Revolving Advance, ISE
will notify Bank by facsimile transmission or telephone no later than noon
California time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit C hereto. Bank is authorized to make Revolving
---------
Advances under this Agreement, based upon instructions received from a
Responsible Officer, or without instructions if in Bank's reasonable discretion
such Revolving Advances are necessary to meet Obligations which have become due
and remain unpaid, subject to any applicable grace period. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer, and Borrowers shall indemnify and hold
Bank harmless for any damages or loss suffered by Bank as a result of such
reliance. Bank will credit the amount of Revolving Advances made under this
Section 2.1 to any Borrower's deposit account specified by Borrowers.
(d) If at any time the aggregate outstanding Revolving
Advances exceed the lesser of the Committed Line or the Borrowing Base,
Borrowers, shall within five (5) days notice thereof, immediately pay the amount
of such excess to Bank.
(e) Upon the repayment of that portion of the
outstanding Revolving Advances necessary to eliminate clause (iv) of the
Borrowing Base, such clause (iv) thereafter will not be a component of the
Borrowing Base, and Bank will release the debenture granted by ISE Labs, Inc.-
Hong Kong securing its guaranty.
(f) The Revolving Facility shall terminate on the
Revolving Maturity Date, at which time all outstanding Revolving Advances shall
be immediately due and payable. The Revolving Facility shall be evidenced by
this Agreement and a promissory note in substantially the form of Exhibit B-1.
-----------
2.1.1 Equipment Acquisition Facility.
------------------------------
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to make one Advance (the "Equipment Acquisition Advance")
to Borrowers on the Closing Date in an amount equal to Fourteen Million Six
Hundred Thousand Dollars ($14,600,000). The Equipment Acquisition Advance will
be evidenced by this Agreement and a promissory note in substantially the form
of Exhibit B-2.
-----------
(b) The Equipment Acquisition Advance shall bear
interest at a floating rate equal to the Prime Rate plus the Applicable Margin.
Subject to the provisions of Sections 2.1.1 (c) and (d), Borrowers shall repay
the Equipment Acquisition Advance in monthly installments of $243,333.33, plus
accrued interest, each installment to be due on the last Business Day of each
month. The entire outstanding principal amount of the Equipment Acquisition
Advance, plus accrued and unpaid interest, shall be due on the Maturity Date.
(c) Within 45 days of the last day of each fiscal
quarter, beginning the fiscal quarter ending on March 31, 1998, and continuing
until the earlier of (i) the date that Borrowers have made aggregate payments
under this Section 2.1.1(c) of $6,000,000 or (ii) June 30, 1999, Borrowers shall
make mandatory prepayments on account of the Equipment Acquisition Advance. Each
such payment shall be equal to
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<PAGE>
twenty-five percent (25%) of Borrowers' consolidated net income after taxes plus
depreciation and amortization for the preceding fiscal quarter. If the aggregate
payments made under this Section 2.1.1(c) by June 30, 1999 are less than
$6,000,000, then Borrowers shall pay to Bank on June 30, 1999 the amount of such
deficiency. Payments made under this Section 2.1.1(c) shall be applied to the
outstanding principal installments in the reverse order of maturity.
(d) Upon receipt by a Borrower of proceeds in excess of
Ten Million Dollars ($10,000,000) from the sale or issuance of its equity
securities, such Borrower shall pay Bank the difference, if any, between Six
Million Dollars ($6,000,000) minus the aggregate payments made through such date
under Section 2.1.1(c). Such payment shall be applied to the outstanding
principal installments in the reverse order of maturity. Upon such payment,
Borrowers shall have no further obligations under Section 2.1.1(c).
(e) Borrowers shall make a mandatory prepayment of the
net after tax proceeds of the disposition of any Inventory outside the ordinary
course of business located at the Manteca Facility or collection of Accounts
arising out of such disposition outside the ordinary course of business, subject
to the fourth sentence of this paragraph. Borrowers will provide Bank with a
report within fifteen (15) days after the last day of each month of such assets
sold. Such payments shall be applied to the outstanding principal installments
in the reverse order of maturity. If the sale of the Manteca Facility together
with the Contract Assembly Business yields proceeds greater than Nine Million
Dollars ($9,000,000) after payment of related expenses, ISE shall make a
mandatory prepayment upon receipt of such proceeds on account of the Equipment
Acquisition Advance in an amount equal to Sixty Percent (60%) of the net after
tax proceeds received from such sale after payment of related expenses.
2.1.2 Manteca Facility. On the date hereof, Borrowers may
----------------
request one Advance (the "Manteca Term Advance") in a principal amount not to
exceed Five Million Four Hundred Thousand Dollars ($5,400,000). Interest shall
accrue from the date of the Manteca Term Advance at a floating rate equal to the
Prime Rate plus the Applicable Margin, and shall be payable monthly on the last
Business Day of each month. In addition to monthly interest payments, Borrowers
will pay Bank the entire principal amount of the Manteca Term Advance and all
accrued but unpaid interest on the earlier of March 31, 1998 or the date of the
sale of the Manteca Facility. Borrowers may prepay all or any part of the
Manteca Term Advance without premium or penalty. Bank may, in its sole, but
reasonable discretion, permit Borrowers to extend the repayment date of the
principal amount of the Manteca Term Advance for six (6) months after the
original Maturity Date, in which case Borrowers shall pay Bank an extension fee
of Twenty Seven Thousand Dollars ($27,000). Borrower shall use the proceeds of
the Manteca Term Advance to repay all amounts owing to Sanwa Bank California
under that certain Line of Credit Agreement dated as of August 22, 1994, a copy
of which is attached hereto. The Manteca Term Advance will be evidenced by this
Agreement and a promissory note in substantially the form of Exhibit B-3.
-----------
2.1.3 Equipment Refinance Facility. On the Closing Date,
----------------------------
Borrowers may request one Advance (the "Equipment Refinance Advance" in a
principal amount not to exceed Four Million Six Hundred Fifty Thousand Dollars
($4,650,000). Borrowers shall use the proceeds of the Equipment Refinance
Advance to repay all amounts outstanding under the Sanwa Equipment Loans.
Interest shall accrue on the Equipment Refinance Advance at a floating rate
equal to the Prime Rate. Borrowers shall repay the Equipment Refinance Advance
in installments of $116,250 per month, plus accrued interest, beginning on
October 31, 1997 and continuing on the last Business Day of each month through
January 31, 2001, on which date the entire outstanding principal amount of the
Equipment Refinance Advance and all accrued but unpaid interest shall be due and
payable. The Equipment Refinance Advance will be evidenced by this Agreement and
a promissory note in substantially the form of Exhibit B-4.
-----------
2.2 Payments and Calculations.
-------------------------
(a) Payments. Bank shall, at its option, charge such
--------
interest, all Bank Expenses, and all Periodic Payments against any of a
Borrower's deposit accounts or against the Revolving
8
<PAGE>
Facility, in which case those amounts shall thereafter accrue interest at the
rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder. Any Advance
may be prepaid at any time without penalty or premium.
(b) Computation. In the event the Prime Rate is changed
-----------
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.3 Crediting Payments. Bank shall credit a wire transfer of funds,
------------------
check or other item of payment to such deposit account or Obligation as a
Borrower specifies. However, during the continuance of an Event of Default, the
receipt by Bank of any wire transfer of funds, check, or other item of payment
shall be immediately applied to conditionally reduce Obligations, but shall not
be considered a payment on account unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 12:00 noon
California time shall be deemed to have been received by Bank as of the opening
of business on the immediately following Business Day. Whenever any payment to
Bank under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.4 Fees. Borrowers shall pay to Bank the following:
----
(a) Facility Fee. A Facility Fee equal to One Hundred
------------
Six Thousand Five Hundred Dollars ($106,500), which fee shall be fully earned
and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's
----------------------------------------
customary fees and reasonable out-of-pocket expenses for Bank's audits of a
Borrower's Accounts, and for each appraisal of Collateral and financial analysis
and examination of any Borrower performed from time to time by Bank or its
agents in its reasonable discretion;
(c) Bank Expenses. Upon the date hereof, all Bank
-------------
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.5 Additional Costs. In case any change in any law, regulation,
----------------
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by a Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect
to its performance under this Agreement,
9
<PAGE>
and the result of any of the foregoing is to materially increase the cost to
Bank, reduce the income receivable by Bank or impose any expense upon Bank with
respect to any Advances, Bank shall notify ISE thereof. Borrowers agree to pay
to Bank the amount of such material increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and setting
forth Bank's calculation thereof, all in reasonable detail, which statement
shall be deemed true and correct absent manifest error.
2.6 Term. This Agreement shall become effective on the Closing Date
----
and shall continue in full force and effect for a term ending on the Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.
2.7 ISE as Agent. Each Borrower appoints ISE as its agent with all
------------
necessary power and authority to give and receive notices, certificates or
demands for and on behalf of both Borrowers, to act as disbursing agent for
receipt of any Advances on behalf of the Borrowers, and to apply to Bank on
behalf of Borrowers for Advances, any waivers and any consents. This
authorization cannot be revoked, and Bank need not inquire as to ISE's authority
to act for or on behalf of a Borrower.
3. CONDITIONS OF ADVANCES
----------------------
3.1 Conditions Precedent to Initial Advance. The obligation of Bank
---------------------------------------
to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of an officer of each Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) an Intellectual Property Security Agreement for each
Borrower;
(d) a guaranty and debenture of ISE Labs, Inc. - Hong
Kong;
(e) the share certificates evidencing the Shares;
(f) an audit of each Borrower's Collateral;
(g) an appraisal of ISE's fixed assets;
(h) an opinion of ISE and ISE Tech's counsel;
(i) a copy of the Business Sales Agreement, and evidence
of consummation of the transactions contemplated by the Business Sales
Agreement;
(j) financing statements (Forms UCC-1);
(k) insurance certificates;
(l) a solvency certificate;
(m) a Non-Encumbrance Agreement;
(n) a listing of Equipment owned by DTS;
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(o) a pro forma balance sheet of Borrowers reviewed by
Borrowers' independent accountants;
(p) ISE's audited financial statements for 1995 and
1996;
(q) aged listings of the accounts receivable and
accounts payable of each Borrower;
(r) consolidated income statement and balance sheet for
ISE for the fiscal year to June 30 and a monthly, consolidated income statement
and balance sheet for the months of July and August, 1997;
(s) payment of the fees and Bank Expenses then due
specified in Section 2.4 hereof; and
(t) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank to
------------------------------------
make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form
as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making of
each Advance shall be deemed to be a representation and warranty by Borrower on
the date of such Advance as to the accuracy of the facts referred to in this
Section 3.2(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Each Borrower grants and pledges to
--------------------------
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by each Borrower of
each of its covenants and duties under the Loan Documents. Such security
interest constitutes a valid, first priority security interest in the presently
existing Collateral, and will constitute a valid, first priority security
interest in Collateral acquired after the date hereof, subject to Permitted
Liens, and provided that Bank takes the actions necessary to create a valid
first priority security interest in the Collateral.
4.2 Delivery of Additional Documentation Required. Each Borrower
---------------------------------------------
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
----------------
or agents) shall have the right, upon reasonable prior notice, from time to time
during a Borrower's usual business hours, to inspect such Borrower's Books and
to make copies thereof and to check, test, and appraise the Collateral in order
to verify such Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
4.4 Stock Pledge.
------------
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(a) ISE hereby pledges, assigns and delivers to Bank and
grants to Bank a security interest in the Shares, together with all proceeds and
substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing
(all hereinafter called the "Pledged Collateral"), as security for the prompt
performance of all of the Obligations.
(b) The term "Pledged Collateral" shall also include any
securities, instruments or distributions of any kind issuable, issued or
received by ISE upon conversion of, in respect of, or in exchange for any other
Pledged Collateral, including, but not limited to, those arising from a stock
dividend, stock split, reclassification, reorganization, merger, consolidation,
sale of assets or other exchange of securities or any dividends or other
distributions of any kind upon or with respect to the Pledged Collateral.
(c) The certificate or certificates for the securities
included in the Pledged Collateral, accompanied by an instrument of assignment
duly executed in blank by ISE, have been delivered by ISE to Bank. DTS shall
cause its books to reflect the pledge of the Shares. During the continuance of
an Event of Default hereunder, Bank may effect the transfer of any securities
included in the Pledged Collateral into the name of Bank and cause new
certificates representing such securities to be issued in the name of Bank. ISE
will execute and deliver such documents, and take or cause to be taken such
actions, as Bank may reasonably request to perfect or continue the perfection of
Bank's security interest in the Pledged Collateral.
(d) Unless an Event of Default (as defined below) shall
have occurred and be continuing, ISE shall be entitled to exercise any voting
rights with respect to the Pledged Collateral and to give consents, waivers and
ratifications in respect thereof, provided that no vote shall be cast or
--------
consent, waiver or ratification given or action taken which would be
inconsistent with any of the terms of this Agreement or which would constitute
or create any violation of any of such terms. All such rights of ISE to vote and
give consents, waiver and ratifications shall cease in case such an Event of
Default hereunder shall occur and be continuing.
(e) ISE recognizes that, after the occurrence and
continuance of an Event of Default, Bank, in connection with the exercise of its
remedies hereunder, may be unable to effect a public sale of all or a part of
the Pledged Collateral by reason of certain prohibitions contained in the
Securities Act of 1933, as amended ("Act"), so that Bank may be compelled to
resort to one or more private sales to a restricted group of purchasers who will
be obliged to agree, among other things, to acquire the Pledged Collateral for
their own account, for investment and without a view to the distribution or
resale thereof. ISE understands that private sales so made may be at prices and
on other terms less favorable to the seller than if the Pledged Collateral were
sold at public sales, and agrees that Bank has no obligation to delay the sale
of any of the Pledged Collateral for the period of time necessary (even if Bank
would agree), to register such securities for sale under the Act. ISE agrees
that private sales made under the foregoing circumstances and otherwise
permitted hereunder shall be deemed to have been made in a commercially
reasonable manner.
4.5 Pledge of Purchased Loans.
-------------------------
(a) ISE Tech hereby pledges, assigns and delivers to
Bank and grants to Bank a security interest in the Purchased Loans, together
with all other cash and noncash proceeds of the foregoing including, but not
limited to, interest or other distributions of any kind upon or with respect
thereto and all collateral therefor.
(b) ISE Tech shall deliver to Bank on the Closing Date
the following original documents (except where copies are otherwise expressly
permitted):
(i) The original of each promissory note executed in
connection with the Purchased Loans, endorsed in blank;
12
<PAGE>
(ii) The originals or copies of all security agreements,
together with copies of all related financing statements executed in connection
with the Purchased Loans;
(iii) Assignments of Financing Statements on Form UCC-2
evidencing the pledge to Bank of all of ISE Tech's right, title and interest in
and to any security interests in personal property created in connection with
the Purchased Loans;
(iv) The original executed guaranty signed in connection
with the Purchased Loans;
(v) An estoppel certificate in substantially the form
attached hereto; and
(vi) Such other documents and instruments as Bank may
reasonably request to effect the pledge provided for in this Section 4.5.
(c) ISE Tech is the owner of all of the Purchased Loans.
ISE Tech has not assigned, transferred or hypothecated to any third party (nor
released) any portion of its interest in any of the Purchased Loans or the
security therefor. To the best of ISE Tech's knowledge, there are no agreements
or arrangements by Alphatec or DTS with one or more of their respective
creditors that would reasonably be expected to have a material adverse effect on
the value of the Purchased Loans or any security thereto. Upon Bank's reasonable
request, ISE Tech shall cause all payments received on account of the Purchased
Loans to be paid directly to Bank. No interest shall accrue on the Purchased
Loans and Borrower will not make payments to the Lender with respect thereto.
Upon Bank's reasonable request, ISE Tech shall cause the borrowers obligated
under the Purchased Loans to comply with all obligations under the Purchased
Loans. ISE Tech irrevocably appoints Bank its attorney-in-fact to enforce any
remedies available with respect to the Purchased Loans and to settle all claims
and disputes arising in connection therewith for amounts and upon terms that
Bank, in its sole discretion, deems appropriate. ISE Tech shall not amend any of
the documents evidencing or entered into in connection with the Purchased Loans,
or waive, compromise or settle any claim or right in connection therewith,
without Bank's prior written consent, which will not be unreasonably withheld.
As long as an event of default has not occurred and is continuing, Bank will
take commercially reasonable steps to cooperate with Borrowers with respect to
any claims by third parties with respect to the Purchased Loans.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Except as set forth in the Schedule, Borrowers represent and warrant
as follows:
5.1 Due Organization and Qualification. Each Borrower and each
----------------------------------
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where any such
failure would not reasonably be expected to have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of the Loan Documents are within each Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in such Borrower's Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
such Borrower is a party or by which such Borrower is bound. Such Borrower is
not in default under any material agreement to which it is a party or by which
it is bound, which default could reasonably expected to have a Material Adverse
Effect.
5.3 No Prior Encumbrances. Each Borrower has good and indefeasible
---------------------
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. To Borrowers' knowledge, the
---------------------------
Eligible Accounts arising before the Closing Date are bona fide existing
obligations and the property giving rise to such Eligible Accounts
13
<PAGE>
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor. The
Eligible Accounts arising after the Closing Date are bona fide existing
obligations and the property giving rise to such Eligible Accounts has been
delivered to the account debtor or to the account debtor's agent for immediate
shipment to and unconditional acceptance by the account debtor. No Borrower has
received notice of actual or imminent Insolvency Proceeding of any account
debtor that is included in any Borrowing Base Certificate as an Eligible
Account.
5.5 Merchantable Inventory. To Borrower's knowledge, all Inventory
----------------------
acquired before the Closing Date is in all material respects of good and
marketable quality, free from all material defects. All Inventory acquired
after the Closing Date is in all material respects of good and marketable
quality, free from all material defects.
5.6 Shares. There are no subscriptions, warrants or other options
------
exercisable with respect to the Shares. The Shares represent one hundred
percent (100%) of the issued and outstanding stock of DTS and ISE Tech,
respectively, there are no agreements that require DTS or ISE Tech to issue any
additional shares, and there are no outstanding options to purchase such
additional shares. The Shares have been duly authorized and validly issued, and
are fully paid and non-assessable.
5.7 Name; Location of Chief Executive Office. Except as disclosed in
----------------------------------------
the Schedule, no Borrower has done business under any name other than that
specified on the signature page hereof. The chief executive office of each
Borrower is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no
----------
actions or proceedings pending by or against any Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on such Borrower's interest or Bank's security interest in the
Collateral. No Borrower has knowledge of any such pending or threatened actions
or proceedings.
5.9 No Material Adverse Change in Financial Statements. All
--------------------------------------------------
consolidated financial statements related to Borrowers that have been delivered
by a Borrower to Bank fairly present in all material respects Borrowers'
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrowers since the date of the most recent of such financial statements
submitted to Bank.
5.10 Solvency. Each Borrower is solvent and able to pay its debts
--------
(including trade debts) as they mature.
5.11 Regulatory Compliance. Each Borrower and each Subsidiary has met
---------------------
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from a Borrower's
failure to comply with ERISA that is reasonably likely to result in such
Borrower's incurring any liability that could reasonably be expected to have a
Material Adverse Effect. No Borrower is an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940. No Borrower is engaged principally, or as one of the
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System). Each Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Neither Borrower has violated any statutes, laws, ordinances or rules applicable
to it, violation of which could reasonably be expected to have a Material
Adverse Effect.
5.12 Environmental Condition. None of any Borrower's or any
-----------------------
Subsidiary's properties or assets has ever been used by such Borrower or any
Subsidiary or, to the best of any Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of such Borrower's knowledge, none of such
Borrower's properties or assets has ever been designated or identified
14
<PAGE>
in any manner pursuant to any environmental protection statute as a hazardous
waste or hazardous substance disposal site, or a candidate for closure pursuant
to any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by such Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by such Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.13 Taxes. Each Borrower and each Subsidiary has filed or caused to
-----
be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. No Borrower owns any stock, partnership interest
------------
or other equity securities of any Person, except for Permitted Investments.
5.15 Government Consents. Each Borrower and each Subsidiary has
-------------------
obtained all material consents, approvals and authorizations of, made all
material declarations or filings with, and given all notices to, all
governmental authorities that are necessary for the continued operation of such
Borrower's business as currently conducted, except that where the failure to
obtain is not reasonably likely to cause a Material Adverse Effect.
5.16 Sanwa Loans. Attached hereto are copies of the agreements
-----------
evidencing the Sanwa Equipment Loans and the Sanwa Line of Credit. Such
agreements are in full force and effect. The principal amount outstanding under
each such agreement is specified in the Schedule.
5.17 Business Sales Agreement. Attached hereto is a true and correct
------------------------
copy of the Business Sales Agreement. The transactions contemplated by the
Business Sales Agreement have been completed or will be completed shortly
thereafter, ISE has marketable title to the Purchased Assets as therein defined
(except for Permitted Liens), no material consents or authorizations are
necessary to complete such transactions, and any waiting period under any
applicable law as a condition to such completion has expired.
5.18 Full Disclosure. No material representation or warranty made by
---------------
a Borrower in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
contained in such representation or warranty not misleading as of the date of
this Agreement.
6. AFFIRMATIVE COVENANTS
---------------------
Borrowers covenant and agree that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, each Borrower shall do all of the following:
6.1 Good Standing. Such Borrower shall maintain its and each of its
-------------
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse
Effect. Such Borrower shall maintain, and shall cause each of its Subsidiaries
to maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could reasonably be expected to have a Material Adverse Effect.
6.2 Government Compliance. Such Borrower shall meet, and shall cause
---------------------
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Such Borrower shall comply, and
shall cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could
15
<PAGE>
reasonably be expected to have a Material Adverse Effect or a material adverse
effect on the Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrowers shall
-------------------------------------------
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month and each fiscal quarter, a company prepared
consolidated and consolidating balance sheet and income statement covering
Borrowers' consolidated operations during each such period, certified by a
Responsible Officer; (b) as soon as available, but in any event within one
hundred twenty (120) days after the end of Borrowers' fiscal year, audited
consolidated and consolidating financial statements of Borrowers prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or made available generally
by a Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against a Borrower or any Subsidiary that could
individually result in damages or costs to a Borrower or any Subsidiary of Seven
Hundred Fifty Thousand Dollars ($750,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within fifteen (15) days after the last day of each month, Borrowers shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit D hereto, together with aged listings of
---------
accounts receivable and accounts payable.
Borrowers shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit E hereto.
---------
Bank shall have a right from time to time hereafter to audit each
Borrower's Accounts at such Borrower's expense, provided that such audits will
be conducted upon prior written notice to such Borrower and during such
Borrower's usual business hours and no more often than every three (3) months
unless an Event of Default has occurred and is continuing.
If the Manteca Facility is not the subject of an agreement to sell on terms
reasonably acceptable to Bank by February 15, 1998, Bank shall have a right, on
or after such date, to obtain an appraisal and environmental report on the
Manteca Facility at Borrower's expense.
6.4 Inventory; Returns. Such Borrower shall keep all Inventory in
------------------
good and marketable condition, free from all material defects, except to the
extent such Inventory was acquired in a condition not good and marketable or not
free from material defects. Returns and allowances, if any, as between such
Borrower and its account debtors shall be on the same basis and in accordance
with the usual customary practices of such Borrower or predecessor, as they
exist at the time of the execution and delivery of this Agreement, or as
otherwise approved by Bank. Each Borrower shall promptly notify Bank of all
returns and recoveries and of all disputes and claims, where the return,
recovery, dispute or claim involves more than Two Hundred Thousand Dollars
($200,000).
6.5 Taxes. Each Borrower shall make, and shall cause each Subsidiary
-----
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and each Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that such Borrower or a Subsidiary has made such
payments or deposits; provided that such Borrower or a Subsidiary need not make
any payment if the amount or validity of such payment is contested in good faith
by appropriate proceedings and is reserved against (to the extent required by
GAAP) by Borrower or such Subsidiary.
16
<PAGE>
6.6 Insurance.
---------
(a) Each Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Each Borrower shall also
maintain insurance relating to such Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar to
such Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, each Borrower shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Each Borrower shall maintain its principal
--------------------
depository and operating accounts with Bank.
6.8 Quick Ratio. Borrowers on a consolidated basis shall maintain,
-----------
as of the last day of each calendar month, a ratio of Quick Assets to Current
Liabilities of at least 0.55 to 1.00. After the earlier of the date that clause
(iv) of Section 2.1(a) is removed from the Borrowing Base or (ii) December 31,
1997, Borrowers on a consolidated basis shall maintain as of the last day of
each calendar month, a ratio of Quick Assets to Current Liabilities of at least
0.70 to 1.00. For the purpose of this Section 6.8, twenty percent (20%) of the
outstanding principal amount of the Manteca Term Advance shall be deemed to be a
Current Liability.
6.9 Debt Service Coverage. Beginning with the fiscal quarter ending
---------------------
December 31, 1997, Borrowers on a consolidated basis shall maintain, as of the
last day of each fiscal quarter on an annualized basis, Debt Service Coverage of
not less than 2.00 to 1.00. "Debt Service Coverage" shall mean the sum of
Borrowers' net profits, depreciation, amortization and interest for the
preceding fiscal quarter, divided by the current portion of long term debt plus
capital expenditures for such fiscal quarter. For the purpose of this Section
6.9, twenty percent (20%) of the outstanding principal amount of the Manteca
Term Advance shall be included in the current portion of long term debt. For
the fiscal quarter ending on December 31, 1997, or the fiscal quarter in which
the $1,600,000 payment is made to Sassan Raissi, the writeoffs associated with
this amount shall not be included in the calculation of Debt Service Coverage.
6.10 Debt-Tangible Net Worth Ratio. Borrowers on a consolidated basis
-----------------------------
shall maintain, as of the last day of each calendar month, a ratio of Total
Liabilities to Tangible Net Worth of not more than: 4.25 to 1.00 from the date
hereof through May 31, 1998; a ratio of not more than 2.50 to 1.00 as of June
30, 1998 through September 30, 1999; and a ratio of not more than 2.00 to 1.00
as of October 31, 1999 and thereafter.
6.11 Tangible Net Worth. Borrowers on a consolidated basis shall
------------------
maintain, as of the last day of each calendar month, a Tangible Net Worth of not
less than Ten Million Dollars ($10,000,000) plus fifty percent (50%) of
Borrowers' quarterly net profits after tax plus eighty percent (80%) of the
proceeds received by Borrowers from the sale or issuance after the Closing Date
of the equity securities of ISE; provided that the Tangible Net Worth may be
--------
reduced one time upon the completion of the sale of the Manteca Facility to
reflect a reduction of not more than Nine Million Dollars ($9,000,000) in ISE's
fixed assets and a reduction of Five Million Four Hundred Thousand Dollars
($5,400,000) of amounts that Borrowers owe to Bank, provided that
notwithstanding such sale and reduction, Borrowers shall in all cases maintain a
Tangible Net Worth of not less than Eight Million Dollars ($8,000,000).
17
<PAGE>
6.12 Unrestricted Cash. Upon the Closing Date, Borrowers on a
-----------------
consolidated basis shall maintain a balance of unrestricted cash and cash
equivalents of Two Million Dollars ($2,000,000).
6.13 Domestic Assets. Borrowers shall maintain not less than seventy
---------------
percent (70%) of their consolidated assets (i) in corporations incorporated
under the laws of a state of the United States and (ii) in the United States.
6.14 Registration of Intellectual Property Rights. Each Borrower
--------------------------------------------
shall register or apply to register (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by such Borrower in connection with this Agreement within
thirty (30) days of the date of this Agreement. Such Borrower shall register or
cause to be registered with the United States Patent and Trademark Office or the
United States Copyright Office, as applicable, those additional intellectual
property rights developed or acquired by Borrower from time to time in
connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C. Such Borrower
shall execute and deliver such additional instruments and documents from time to
time as Bank shall reasonably request to perfect Bank's security interest in
such additional intellectual property rights. This section shall not require
registration of any intellectual property prior to the occurrence of an uncured
Event of Default that such Borrower reasonably determines is not necessary or
appropriate in the management of its business.
6.15 San Jose Refinance. Upon the refinancing of ISE's real estate
------------------
located in San Jose, California, (to which Bank hereby consents) Borrower shall
repay that portion of the outstanding Revolving Advances necessary to eliminate
clause (iv) of the Borrowing Base. Upon such repayment, clause (iv) thereafter
will not be a component of the Borrowing Base or any financial or other
covenant.
6.16 Further Assurances. At any time and from time to time each
------------------
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrowers covenant and agree that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, a Borrower
will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
------------
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of such Borrower
or its Subsidiaries; (iii) Transfers of idle, worn-out or obsolete Equipment;
(iv) transfers of Equipment among Borrowers or to Subsidiaries, provided Bank
retains in all cases a first priority security interest in such Equipment, or
(v) disposition of the Manteca Facility for a purchase price that does not
result in paying off the Manteca Term Advance.
7.2 Change in Business. Engage in any business, or permit any of its
------------------
Subsidiaries to engage in any business, other than the businesses currently
engaged in by such Borrower and any business substantially similar or related
thereto (or incidental thereto), or suffer a material change in such Borrower's
ownership (other than as a result of the exercise of employee stock options).
Such Borrower will not, without thirty (30) days prior written notification to
Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
-----------------------
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person (not an
Affiliate).
18
<PAGE>
7.4 Indebtedness. Create, incur, assume or be or remain liable with
------------
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
------------
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
-------------
or payment on account of or in redemption, retirement or purchase of any capital
stock, provided that Borrower may repurchase its shares from former employees,
directors and agents in accordance with any repurchase agreements so long as an
Event of Default has not occurred or would exist after giving effect of such
repurchase.
7.7 Investments. Directly or indirectly acquire or own, or make any
-----------
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Except as set forth in the
----------------------------
Schedule, directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of such Borrower except for transactions that are
in the ordinary course of such Borrower's business, upon fair and reasonable
terms that are no less favorable to such Borrower than would be obtained in an
arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
-----------------
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
---------
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as may be necessary in the ordinary
course of a Borrower's business, such Borrower shall keep the Inventory only at
the location set forth in Section 10 hereof and such other locations of which
such Borrower gives Bank prior written notice and as to which such Borrower
signs and files a financing statement where needed to perfect Bank's security
interest.
7.11 Compliance. Become an "investment company" controlled by an
----------
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose; or
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act; or violate any law or regulation,
which violation could reasonably be expected to have a Material Adverse Effect
or a material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral, or permit any of its Subsidiaries to do any of the foregoing.
7.12 Capital Expenditures. Pay or become committed to pay more than
--------------------
Five Million Dollars ($5,000,000) in any fiscal year prior to the sale of the
Manteca Facility, and Ten Million Dollars ($10,000,000) in any fiscal year after
the sale of the Manteca Facility, for any capitalized Equipment.
8. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Borrowers under this Agreement:
8.1 Payment Default. If a Borrower fails to pay the principal of, or
---------------
any interest on, any Advances when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by a
Borrower of an invoice for such other Obligations;
19
<PAGE>
8.2 Covenant Default. If a Borrower fails to perform any material
----------------
obligation under Article 6 or violates any of the covenants contained in Article
7 of this Agreement, or fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between a Borrower or the Borrowers and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within twenty (20) days after a Borrower
receives written notice thereof or any officer of such Borrower actually becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the twenty (20) day period or cannot after diligent attempts by a
Borrower be cured within such twenty (20) day period, and such default is likely
to be cured within a reasonable time, then such Borrower shall have an
additional reasonable period (which shall not in any case exceed thirty (30)
days) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Advances will be required to be made during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
-----------------------
change in a Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral from the condition that existed on the Closing Date;
8.4 Attachment. If any material portion of a Borrower's assets is
----------
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if a Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of a
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of a Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within thirty (30) days after a Borrower receives written notice thereof,
provided that none of the foregoing shall constitute an Event of Default where
such action or event is stayed or an adequate bond has been posted pending a
good faith contest by a Borrower (provided that no Advances will be required to
be made during such cure period);
8.5 Insolvency. If a Borrower becomes insolvent, or if an Insolvency
----------
Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is
commenced against a Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is an uncured default in any
----------------
agreement to which a Borrower is a party with a third party or parties resulting
in a right by such third party or parties, (unless waived), to accelerate the
maturity of any Indebtedness in an amount in excess of Three Hundred Thousand
Dollars ($300,000) or that could reasonably be expected to have a Material
Adverse Effect;
8.7 Subordinated Debt. If a Borrower makes any payment on account of
-----------------
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
---------
in an amount, individually or in the aggregate, of at least Two Hundred Fifty
Thousand Dollars ($250,000) shall be rendered against a Borrower, and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
------------------
material misstatement exists now or hereafter in any material warranty or
material representation set forth herein or in any certificate delivered to Bank
by any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document, as of the date of such warranty
or representation.
20
<PAGE>
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. If any Event of Default occurs and is
-------------------
continuing, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrowers:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of a Borrower under this Agreement or under any other agreement
between any Borrower or the Borrowers and Bank;
(c) Cause all Obligations to bear interest, during the
continuance of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.
(d) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon a Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Each Borrower agrees to
assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Each Borrower authorizes Bank to enter
the premises where the Collateral is located, to take and maintain possession of
the Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of a Borrower's owned premises, such
Borrower hereby grants Bank a license to enter into possession of such premises
and to occupy the same, without charge, in order to exercise any of Bank's
rights or remedies provided herein, at law, in equity, or otherwise;
(f) Without notice to a Borrower set off and apply to
the Obligations any and all (i) balances and deposits of such Borrower held by
Bank, or (ii) indebtedness at any time owing to or for the credit or the account
of such Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, a
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including a Borrower's premises) as
Bank determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Bank deems appropriate;
(i) Exercise all the powers of a Bank under the
Purchased Loans as though Bank were the absolute owner of such Purchased Loans,
including without limitation the right to file any claims in respect of the
Purchased Loans in any Insolvency Proceeding in which Alphatec or DTS is the
debtor,
21
<PAGE>
and to accept or reject any plan of reorganization and to otherwise note
Borrower's claims in respect of the Purchased Loans in any manner that Bank
deems appropriate;
(j) Bank may credit bid and purchase at any public sale;
and
(k) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrowers.
9.2 Power of Attorney. Effective only upon the occurrence and
-----------------
continuance of an Event of Default, each Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as such Borrower's
true and lawful attorney to: (a) send requests for verification of Accounts or
notify account debtors of Bank's security interest in the Accounts; (b) endorse
a Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign a Borrower's name on any invoice or bill
of lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance and Accounts for amounts and upon
terms which Bank determines to be reasonable; and (e) dispose of the Collateral
in accordance with the Code; provided Bank may exercise such power of attorney
to sign the name of a Borrower on any of the documents described in Section 4.2
relating to the perfection of Bank's security interest in the Collateral,
regardless of whether an Event of Default has occurred. The appointment of Bank
as a Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide Advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
-------------------
Agreement, Bank may notify any Person owing funds to a Borrower of Bank's
security interest in such funds and verify the amount of such Account. Each
Borrower shall collect all amounts owing to such Borrower for Bank, receive in
trust all payments as Bank's trustee, and immediately deliver such payments to
Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If a Borrower fails to pay any amounts or furnish
-------------
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank reasonably deems necessary to protect Bank from
the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank reasonably deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable rate
hereinabove provided, and shall be secured by the Collateral. Any payments made
by Bank shall not constitute an agreement by Bank to make similar payments in
the future or a waiver by Bank of any Event of Default under this Agreement.
9.5 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
10. WAIVERS; INDEMNIFICATION
------------------------
10.1 Demand; Protest. Each Borrower waives demand, protest, notice of
---------------
protest, notice of dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which such Borrower may in any way be liable.
22
<PAGE>
10.2 Bank's Liability for Collateral. So long as Bank complies with
-------------------------------
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrowers.
10.3 Indemnification. Each Borrower shall defend, indemnify and hold
---------------
harmless until all Obligations have been paid in full, Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities claimed or asserted by any other party in connection with the
transactions contemplated by this Agreement; and (b) all losses or reasonable
Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or
in any way arising out of, following, or consequential to transactions between
Bank and either Borrower under this Agreement; including without limitation in
each case with respect to (a) and (b) reasonable attorneys fees and expenses,
but excluding in the case of (a) and (b) all obligations, demands, claims,
liabilities, Bank Expenses and losses caused by Bank's gross negligence or
willful misconduct.
10.4 Subrogation and Similar Rights. Notwithstanding any other
------------------------------
provision of this Agreement or any other Loan Document, until all Obligations
have been paid in full, each Borrower irrevocably waives all rights that it may
have at law or in equity (including, without limitation, any law subrogating the
Borrower to the rights of Bank under the Loan Documents) to seek contribution,
indemnification, or any other form of reimbursement from any other Borrower, or
any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by such Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise and all rights
that it might have to benefit from, or to participate in, any security for the
Obligations as a result of any payment made by such Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise. Any agreement
providing for indemnification, reimbursement or any other arrangement prohibited
under this Section 10.4 shall be null and void. If any payment is made to a
Borrower in contravention of this Section 10.4, such Borrower shall hold such
payment in trust for Bank and such payment shall be promptly delivered to Bank
for application to the Obligations, whether matured or unmatured.
10.5 Waivers of Notice. Except as otherwise expressly provided
-----------------
herein, each Borrower waives notice of acceptance hereof; notice of the
existence, creation or acquisition of any of the Obligations; notice of an Event
of Default; notice of the amount of the Obligations outstanding at any time;
notice of intent to accelerate; notice of any adverse change in the financial
condition of any other Borrower or of any other fact that might increase the
Borrower's risk; presentment for payment; demand; protest and notice thereof as
to any instrument; default; and all other notices and demands to which the
Borrower would otherwise be entitled. Each Borrower waives any defense arising
from any defense of any other Borrower, or by reason of the cessation from any
cause whatsoever of the liability of any other Borrower. Bank's failure at any
time to require strict performance by any Borrower of any provision of the Loan
Documents shall not waive, alter or diminish any right of Bank thereafter to
demand strict compliance and performance therewith. Nothing contained herein
shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage
or other security instrument, or exercising any rights available thereunder, and
the exercise of any such rights shall not constitute a legal or equitable
discharge of any Borrower. Each Borrower also waives any defense arising from
any act or omission of Bank that changes the scope of the Borrower's risks
hereunder, other than any act or omission resulting from Bank's gross negligence
or willful misconduct. Each Borrower hereby waives any right to assert against
Bank any defense (legal or equitable), setoff, counterclaim, or claims that such
Borrower individually may now or hereafter have against another Borrower or any
other Person liable to Bank with respect to the Obligations in any manner or
whatsoever.
10.6 Subrogation Defenses. Each Borrower hereby waives any defense
--------------------
based on impairment or destruction of its subrogation or other rights against
any other Borrower and waives all benefits which might otherwise be available to
it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848,
2849, 2850, 2899, and 3433 and California Code of Civil Procedure Sections 580a,
580b, 580d and 726, as
23
<PAGE>
those statutory provisions are now in effect and hereafter amended, and under
any other similar statutes now and hereafter in effect.
10.7 Right to Settle, Release.
------------------------
(a) The liability of Borrowers hereunder shall not be
diminished by (i) any agreement, understanding or representation that any of the
Obligations is or was to be guaranteed by another Person or secured by other
property, or (ii) any release or unenforceability, whether partial or total, of
rights, if any, that Bank may now or hereafter have against any other Person,
including another Borrower, or property with respect to any of the Obligations.
(b) Without notice to any Borrower and without affecting
the liability of any Borrower hereunder, Bank may (i) compromise, settle, renew,
extend the time for payment, change the manner or terms of payment, discharge
the performance of, decline to enforce, or release all or any of the Obligations
with respect to a Borrower, (ii) grant other indulgences to a Borrower in
respect of the Obligations, (iii) modify in any manner any documents relating to
the Obligations with respect to a Borrower, (iv) release, surrender or exchange
any deposits or other property securing the Obligations, whether pledged by a
Borrower or any other Person, or (v) compromise, settle, renew, or extend the
time for payment, discharge the performance of, decline to enforce, or release
all or any obligations of any guarantor, endorser or other Person who is now or
may hereafter be liable with respect to any of the Obligations.
10.8 Primary Obligation. This Agreement is a primary and original
------------------
obligation of each Borrower and shall remain in effect notwithstanding future
changes in conditions, including any change of law or any invalidity or
irregularity in the creation or acquisition of any Obligations or in the
execution or delivery of any agreement between Bank and any Borrower. Each
Borrower shall be liable for existing and future Obligations as fully as if all
of the Loan were advanced to the Borrower. Bank may rely on any certificate or
representation made by any Borrower as made on behalf of, and binding on, all
Borrowers, including without limitation Borrowing Certificates, Borrowing Base
Certificates and Compliance Certificates.
10.9 Subordination. All indebtedness of a Borrower now or hereafter
-------------
arising held by another Borrower is subordinated to the Obligations and the
Borrower holding the indebtedness shall take all actions reasonably requested by
Bank to effect, to enforce and to give notice of such subordination.
10.10 Enforcement of Rights. Borrowers are jointly and severally
---------------------
liable for the Obligations and Bank may proceed against one or more of the
Borrowers to enforce the Obligations without waiving its right to proceed
against any of the other Borrowers.
11. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to a Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to ISE: ISE Labs, Inc.
2095 Ringwood Avenue
San Jose, CA 95131
Attn: President, Saeed Malik
FAX: (408) 954-1676
If to ISE TECH: ISE Technology, Inc.
2095 Ringwood Avenue
24
<PAGE>
San Jose, CA 95131
Attn: Saeed Malik
FAX: (408) 954-1676
If to DTS: Digital Testing Service, Inc.
3600 Peterson Way
Santa Clara, CA 95054
Attn: Sassan Raissi
FAX: (408) 954-1676
with a copy to: Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Warren T. Lazarow, Esq.
FAX: (650) 496-2885
If to Bank: Comerica Bank-California
55 Almaden Boulevard, Second Floor
San Jose, CA 95113
Attn: Mary Beth Suhr
FAX: (408) 271-4021
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. EACH BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
13. GENERAL PROVISIONS
------------------
13.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by a Borrower without Bank's prior written consent, which
consent may be granted or withheld in Bank's sole discretion. Bank shall have
the right without the consent of or notice to a Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
13.2 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
25
<PAGE>
13.3 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
13.4 Amendments in Writing, Integration. This Agreement cannot be
----------------------------------
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are superseded by this
Agreement and the Loan Documents.
13.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
13.6 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrowers to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 10.3 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13.7 Confidentiality. In handling any confidential information Bank
---------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received
26
<PAGE>
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrowers, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrowers and
have delivered a copy to Borrowers, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may determine in connection with the enforcement of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain or in the knowledge or possession of Bank
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ISE LABS, INC.
By: /s/ Saeed Malik
-----------------------------------
Title: President
---------------------------------
DIGITAL TESTING SERVICES, INC.
By: /s/ Sassan Raissi
-----------------------------------
Title: President
---------------------------------
ISE TECHNOLOGY, INC.
By: /s/ Saeed Malik
-----------------------------------
Title: President
---------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Mary Beth Suhr
-----------------------------------
Title: Vice President
---------------------------------
27
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of a Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles, and any interest in any
of the foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing, wherever
located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of a Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to a Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by a Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by a Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
28
<PAGE>
EXHIBIT C
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:_______________________
FAX#: (408) 271-4021 TIME:_______________________
FROM:_______________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:_______________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:_______________________________________________________
PHONE NUMBER:_______________________________________________________________
FROM ACCOUNT # ____________________ TO ACCOUNT # _______________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_________________________________________
PRINCIPAL PAYMENT (ONLY) $_________________________________________
INTEREST PAYMENT (ONLY) $_________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_________________________________________
OTHER INSTRUCTIONS:_________________________________________________________
____________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
____________________________________________ _____________________________
Authorized Requester Phone #
____________________________________________ _____________________________
Received By (Bank) Phone #
_______________________________________________
Authorized Signature (Bank)
29
<PAGE>
EXHIBIT D
BORROWING BASE CERTIFICATE
________________________________________________________________________________
Borrowers: ISE Labs, Inc.
ISE Technology, Inc.
Digital Testing Services, Inc.
Commitment Amount: $8,000,000
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of_______ $_______________
2. Additions (please explain on reverse) $_______________
3. TOTAL ACCOUNTS RECEIVABLE $_______________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due (120 days for DTS through 12-31-97) $______________
5. Balance of 50% over 90 day accounts $______________
6. Concentration Limits $______________
7. Governmental Accounts $______________
8. Contra Accounts $______________
9. Promotion or Demo Accounts $______________
10. Intercompany/Employee Accounts $______________
11. Other (please explain on reverse) $______________
12. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______________
13. Eligible Accounts (#3 minus #12) $_____________
14. LOAN VALUE OF ACCOUNTS (75% of #13) $_______________
ALPHATEC ACCOUNTS
15. Eligible Accounts Book Value as of $_______________
16. LOAN VALUE OF ALPHATEC ELIGIBLE ACCOUNTS (75% of #16) $_______________
OVERADVANCE
17. Until December 17, 1997, $2,500,000 $_______________
BALANCES
18. Maximum Loan Amount $_______________
19. Total Funds Available [Lesser of #18 or (#14 plus #16 plus #17)] $_______________
20. Present balance owing on Line of Credit $_______________
21. Outstanding under Sublimits ( ) $_______________
22. RESERVE POSITION (#19 minus #20 and #21)
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Comerica Bank-California.
COMMENTS:
ISE, for itself and as
Agent for ISE Technology, Inc. and Digital Testing Services, Inc.
________________________________________________________
By:_____________________________________________________
Authorized Signer
BANK USE ONLY
Rec'd By: ___________________
Auth. Signer
Date: ________________________
Verified: ____________________
Auth. Signer
Date: ________________________
30
<PAGE>
EXHIBIT E
COMPLIANCE CERTIFICATE
TO: COMERICA BANK-CALIFORNIA
FROM: ISE LABS, INC.
ISE TECHNOLOGY, INC.
DIGITAL TESTING SERVICES, INC.
The undersigned authorized officer of ISE Labs, Inc. on behalf of itself,
ISE Technology, Inc. and Digital Testing Services, Inc. hereby certifies that in
accordance with the terms and conditions of the Loan and Security Agreement
between Borrowers and Bank (the "Agreement"), (i) Borrowers are in compliance in
all material respects for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrowers stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ---------------------------------------------------- ------------------------ --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Quarterly financial statements Quarterly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
Form 10K Annually within 5 days Yes No
Form 10Q Quarterly within 5 days Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ---------------------------------------------------- ------------------------ ------------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio 0.55:1.00/1/ _____:1.0 Yes No
Minimum Tangible Net Worth $10,000,000/2/ $________ Yes No
Maximum Debt/Tangible Net Worth 4.25:1.00/3/ _____:1.0 Yes No
Minimum Debt Service Ratio (Quarterly) 2.0:1.0 _____:1.0 Yes No
</TABLE>
/1/ 0.7:1.0 after repayment of over-formula or December 31, 1997.
/2/ Plus 50% of quarterly NPAT plus 80% of new equity. May be reduced upon
sale of Manteca Facility--see Agreement.
/3/ Reduces to 2.50:1.00 by June 30, 1998 and 2.0:1.0 by October 31, 1999
and thereafter.
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
_____________________________________
Signature(s)
_____________________________________
Title(s)
_____________________________________
Date
BANK USE ONLY
Received by:__________________________
authorized signer
Date:_________________________________
Verified:_____________________________
authorized signer
Date:_________________________________
Compliance Status: Yes No
31
<PAGE>
ATTACHMENT 1
------------
PRICING GRID
<TABLE>
<CAPTION>
INDEBTEDNESS/EBITDA PRICING PERIOD LEVEL APPLICABLE MARGIN
RATIO (1)
<S> <C> <C>
(more than)1.75 1 0.75%
(less than)1.75, 2 0.50%
(more than)0.75
(less than)0.75, 3 0.25%
(more than)0.50
(less than)0.50 4 0.00%
</TABLE>
1. The Applicable Margin for each Advance (excluding the Revolving Advance)
will be set for each pricing period and will vary depending upon whether
such period is a Level 1 Period, Level 2 Period, Level 3 Period, or Level 4
Period.
2. The first Pricing Period, which commences on the date of the Loan Agreement
and ends on the March 31, 1998, will be a Level 2 Period.
3. The second Pricing Period, which commences on April 1, 1998 and ends on May
15, 1998, will be a Level 1, 2, 3 or 4 Pricing Period depending upon
Borrower's annualized Indebtedness/EBITDA ratio for the most recent quarter
period ending prior to the first day of such Pricing Period.
4. Pricing Period shall mean (a) the Pricing Period commencing on the date of
the Loan Agreement and ending on March 31, 1998, (b) the 45 day period
commencing April 1, 1998 and ending May 15, 1998, (c) the three month
period commencing June 1, 1998 and ending August 31, 1998 and (d) each
consecutive three month period thereafter beginning on the day following
the last day of the immediately preceding three month period and ending on
the last day of that time period.
32
<PAGE>
SCHEDULE OF EXCEPTIONS
Permitted Indebtedness
- ----------------------
Permitted Investments
- ---------------------
Permitted Liens
- ---------------
Prior Names (Section 5.7)
- -----------
Litigation (Section 5.8)
- ----------
Sanwa Equipment Loan Agreements
- -------------------------------
Sanwa Line of Credit
- --------------------
33
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrowers: ISE Labs, Inc.
ISE Technology, Inc.
Digital Testing Services, Inc.
================================================================================
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit and a Variable
Rate Term .
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of the revolving loan is Short Term
Working Capital and of the term loans is the acquisition of property and the
refinancing of debt.
DISBURSEMENT INSTRUCTIONS. Borrowers understand that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Equipment Manteca Refinance
Line Facility Facility Facility
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Amount paid to Borrowers directly: $______ $______ $______ $______
Undisbursed Funds $______ $______ $______ $______
Principal $______ $______ $______ $______
</TABLE>
CHARGES PAID IN CASH. Borrowers have paid or will pay in cash as agreed the
following charges:
$106,500 Loan Fee
$ 2,250 Accounts Receivables Audit
$ 8,500 Collateral Appraisals ($10,000 already received on $18,500 bill)
$ 300 UCC Search Fees
$ 200 UCC Filing Fees
$_______ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $________
AUTOMATIC PAYMENTS. Cash Borrower hereby authorizes Bank automatically to
deduct from such Borrower's account numbered 8501-092236 the amount of any loan
payment. If the funds in the account are insufficient to cover any payment,
Bank shall not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, EACH BORROWER REPRESENTS
AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT IN
ALL MATERIAL RESPECTS AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN SUCH
BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN SUCH BORROWER'S MOST RECENT
FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF
____________________, 19____.
BORROWER:
ISE Labs, Inc. for itself and as
Agent for ISE Technology, Inc. and Digital Testing Services, Inc.
____________________________________________________________
Authorized Officer
================================================================================
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTORS: ISE Labs, Inc. BANK: Comerica Bank-California
ISE Technology, Inc.
Digital Testing Services, Inc.
================================================================================
INSURANCE REQUIREMENTS. ISE Labs, Inc., ISE Technology, Inc. and Digital
Testing Services, Inc. ("Grantors") understand that insurance coverage is
required in connection with the extending of a loan or the providing of other
financial accommodations to Grantors by Bank. These requirements are set forth
in the Loan Documents. The following minimum insurance coverages must be
provided on the following described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without a
minimum of twenty (20) days prior written notice to
Bank.
INSURANCE COMPANY. Grantors may obtain insurance from any insurance
company Grantors may choose that is reasonably acceptable to Bank. Grantors
understand that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantors agree to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of September 30, 1997, or earlier. Grantors acknowledge and
agree that if Grantors fail to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantors' expense as
provided in the Loan and Security Agreement. The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the security document. GRANTORS ACKNOWLEDGE THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, GRANTORS' EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION,
THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. Subject to the confidentiality provisions of the Loan and
Security Agreement, for purposes of insurance coverage on the Collateral,
Grantors authorize Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTORS ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
____________________________, 19___.
GRANTOR:
ISE Labs, Inc., for itself and as
Agent for ISE Technology, Inc. and Digital Testing Services, Inc.
x______________________________________________________
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:___________________ PHONE:___________________
AGENT'S NAME:____________________________________________________
INSURANCE COMPANY:_______________________________________________
POLICY NUMBER:___________________________________________________
EFFECTIVE DATES:_________________________________________________
COMMENTS:________________________________________________________
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
________________________________________________________________________________
BORROWER: ISE LABS, INC.
________________________________________________________________________________
I, the undersigned officer of ISE Labs, Inc. (the "Corporation"), HEREBY
CERTIFY that the Corporation is organized and existing under and by virtue of
the laws of the State of California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or
by other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Comerica Bank-California
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one
or more promissory note or notes of the Corporation, on Bank's forms, at such
rates of interest and on such terms as may be agreed upon, evidencing the sums
of money so borrowed or any indebtedness of the Corporation to Bank, and also to
execute and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the notes, or
any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE>
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on ______________________,
19____ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X______________________________________
________________________________________________________________________________
2
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
________________________________________________________________________________
BORROWER: ISE TECHNOLOGY, INC.
________________________________________________________________________________
I, the undersigned officer of ISE Technology, Inc.. (the "Corporation"),
HEREBY CERTIFY that the Corporation is organized and existing under and by
virtue of the laws of the State of California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or
by other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Comerica Bank-California
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one
or more promissory note or notes of the Corporation, on Bank's forms, at such
rates of interest and on such terms as may be agreed upon, evidencing the sums
of money so borrowed or any indebtedness of the Corporation to Bank, and also to
execute and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the notes, or
any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE>
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on ______________________,
19____ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X______________________________________
________________________________________________________________________________
2
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
________________________________________________________________________________
BORROWER: DIGITAL TESTING SERVICES, INC.
________________________________________________________________________________
I, the undersigned officer of Digital Testing Services, Inc. (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or
by other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
______________________ ______________________ ________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Comerica Bank-California
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of October 2, 1997 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the Loan Agreement and one
or more promissory note or notes of the Corporation, on Bank's forms, at such
rates of interest and on such terms as may be agreed upon, evidencing the sums
of money so borrowed or any indebtedness of the Corporation to Bank, and also to
execute and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the notes, or
any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
1
<PAGE>
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on ______________________,
19____ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X______________________________________
________________________________________________________________________________
2
<PAGE>
SOLVENCY CERTIFICATE
--------------------
The undersigned hereby certifies that the undersigned is the Chief
Executive Officer of ISE Labs, Inc. ("Borrower"). This Certificate is being
delivered pursuant to the Loan and Security Agreement dated as of the date
hereof (the "Loan Agreement") and executed by and among Borrower, ISE
Technology, Inc. and Digital Testing Services, Inc. as Co-borrowers
("Borrowers"), and Comerica Bank-California (the "Bank"). All capitalized terms
used which are not otherwise defined herein shall have the meanings attributed
to such terms in the Loan Agreement.
The undersigned has reviewed the Loan Agreement and the contents of this
Certificate and, in connection with the execution and delivery hereof, has made
such investigation and inquiries as he deems necessary and prudent.
The undersigned further certifies that the financial information,
assumptions and valuation techniques that underlie and form the basis for the
representations made in this Certificate were reasonable when made and were made
in good faith and continue to be reasonable as of the date hereof.
The undersigned hereby further certifies that to his knowledge in his
capacity as an officer of the Borrower:
1. Attached hereto as Exhibit A are pro forma balance sheets of Borrowers
---------
that give effect to the consummation of the acquisition contemplated by the
Business Sales Agreement dated as of August 21, 1997 and the funding of the
Advances, and the consummation of all other transactions contemplated by the
Loan Agreement (all of the foregoing being collectively referred to as the
"Transactions"), and the payment of all fees and expenses in connection
therewith.
2. On the date hereof, after giving effect to the transactions
contemplated by the Loan Agreement and the payment of fees and expenses in
connection therewith, the undersigned in good faith after due inquiry believes
that:
(a) The fair market going concern value of all of the assets of
Borrowers is greater than the total amount of liabilities, including contingent,
subordinated, absolute, fixed, matured or unmatured and liquidated or
unliquidated liabilities of Borrowers.
(b) The present fair market going concern value of the assets of
Borrowers is sufficient to pay the probable liability of Borrowers on their
existing debts as such debts become absolute and matured.
(c) Borrowers are able to pay their debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business.
(d) Borrowers are not engaged, or about to engage, in business or
transactions for which they have unreasonably small capital.
3. Borrowers do not intend to or believe that they will incur debts or
liabilities that will be beyond their ability to pay as they mature.
4. In consummating the Transactions, Borrowers do not intend to hinder,
delay or defraud either present or future creditors or any other person to which
they are or will become indebted on or after the date hereof.
1
<PAGE>
5. In reaching the conclusions set forth in this Certificate, the
undersigned has considered, among other things:
(a) the cash and other current assets of Borrowers reflected in the
Pro Forma Balance Sheets;
(b) all contingent liabilities of Borrowers including, without
limitation, claims arising out of pending or threatened litigation against
Borrowers, and in so doing, the undersigned has computed the amount of such
liabilities as the amount which, in light of all the facts and circumstances
existing on the date hereof, represents the amount that reasonably can be
expected to become an actual or matured liability; and
(c) such other financial, statistical and other data as the person
signing this Certificate has deemed necessary for the purposes of this
Certificate.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the
____ day of October, 1997.
2
<PAGE>
EXHIBIT 10.4A
MANTECA NOTE
$5,400,000 San Jose, California
Date: October 2, 1997
ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC.
(collectively, "Borrower"), for value received, hereby promises to pay to the
order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States
of America, pursuant to that certain Loan and Security Agreement dated as of
October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i)
the principal amount of $5,400,000 or, if lesser, (ii) the principal amount of
the Manteca Term Advance.
This Note is one of the Notes referred to in the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.
Borrower further promises to pay interest on the Manteca Term Advance
hereunder in like funds on the principal amount hereof from time to time
outstanding from the date hereof until paid in full, at a rate or rates per
annum and payable on the dates determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the
Loan Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of the Manteca Term Advance hereunder upon the occurrence of certain
stated events and also provides for optional and mandatory prepayments of
principal hereof prior to any stated maturity upon the terms and conditions
therein specified.
The Manteca Term Advance made by Bank to Borrower pursuant to the Loan
Agreement shall be recorded by Bank on the books and records of Bank. The
failure of Bank to record the Manteca Term Advance or any prepayment or payment
made on account of the principal balance hereof shall not limit or otherwise
affect the obligation of Borrower under this Note and under the Loan Agreement
to pay the principal, interest and other amounts due and payable under the
Manteca Term Advance.
Any principal or interest payments on this Note not paid when due,
whether at stated maturity, by acceleration or otherwise, shall bear interest at
the Default Rate.
Upon the occurrence of a default hereunder or an Event of Default under
the Loan Agreement, all unpaid principal, accrued interest and other amounts
owing hereunder shall, at the option of Bank, be immediately collectible by on
behalf of Bank pursuant to the Loan Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorney's fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflicts of laws
principles that would cause the application of the laws of any other
jurisdiction.
<PAGE>
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
DIGITAL TESTING SERVICES, INC. ISE ELABS, INC.
By: /s/ Sassan Raissi By: /s/ Saeed Malik
--------------------------- ---------------------------
Title: President Title: President
------------------------ ------------------------
ISE TECHNOLOGY, INC.
By: /s/ Saeed Malik
---------------------------
Title: President
------------------------
<PAGE>
EXHIBIT 10.4B
EQUIPMENT ACQUISITION NOTE
$14,600,000 San Jose, California
Date: October 2, 1997
ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC.
(collectively, "Borrower"), for value received, hereby promises to pay to the
order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States
of America, pursuant to that certain Loan and Security Agreement dated as of
October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i)
the principal amount of $14,600,000 or, if lesser, (ii) the principal amount of
the Equipment Acquisition Advance.
This Note is one of the Notes referred to in the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.
Borrower further promises to pay interest on the Equipment Acquisition
Advance hereunder in like funds on the principal amount hereof from time to time
outstanding from the date hereof until paid in full, at a rate or rates per
annum and payable on the dates determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the
Loan Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of the Equipment Acquisition Advance hereunder upon the occurrence of
certain stated events and also provides for optional and mandatory prepayments
of principal hereof prior to any stated maturity upon the terms and conditions
therein specified.
The Equipment Acquisition Advance made by Bank to Borrower pursuant to
the Loan Agreement shall be recorded by Bank on the books and records of Bank.
The failure of Bank to record the Equipment Acquisition Advance or any
prepayment or payment made on account of the principal balance hereof shall not
limit or otherwise affect the obligation of Borrower under this Note and under
the Loan Agreement to pay the principal, interest and other amounts due and
payable under the Equipment Acquisition Advance.
Any principal or interest payments on this Note not paid when due,
whether at stated maturity, by acceleration or otherwise, shall bear interest at
the Default Rate.
Upon the occurrence of a default hereunder or an Event of Default under
the Loan Agreement, all unpaid principal, accrued interest and other amounts
owing hereunder shall, at the option of Bank, be immediately collectible by on
behalf of Bank pursuant to the Loan Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorney's fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflicts of laws
principles that would cause the application of the laws of any other
jurisdiction.
<PAGE>
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
DIGITAL TESTING SERVICES, INC. ISE ELABS, INC.
By: /s/ Sassan Raissi By: /s/ Saeed Malik
--------------------------- ---------------------------
Title: President Title: President
------------------------ ------------------------
ISE TECHNOLOGY, INC.
By: /s/ Saeed Malik
---------------------------
Title: President
------------------------
<PAGE>
EXHIBIT 10.4C
REVOLVING PROMISSORY NOTE
$8,000,000 San Jose, California
Date: October 2, 1997
ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC.
(collectively, "Borrower"), for value received, hereby promises to pay to the
order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States
of America, pursuant to that certain Loan and Security Agreement dated as of
October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i)
the principal amount of $8,000,000 or, if lesser, (ii) the principal amount of
all Revolving Advances outstanding as of the maturity date hereof.
This Note is one of the Notes referred to in the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.
Borrower further promises to pay interest on each Revolving Advance
hereunder in like funds on the principal amount hereof until paid in full, at a
rate or rates per annum and payable on the dates determined pursuant to the Loan
Agreement.
Payment on this Note shall be applied in the manner set forth in the
Loan Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of the Revolving Advances hereunder upon the occurrence of certain
stated events and also provides for optional and mandatory prepayments of
principal hereof prior to any stated maturity upon the terms and conditions
therein specified.
All Revolving Advances made by Bank to Borrower pursuant to the Loan
Agreement shall be recorded by Bank on the books and records of Bank. The
failure of Bank to record any Revolving Advance or any prepayment or payment
made on account of the principal balance hereof shall not limit or otherwise
affect the obligation of Borrower under this Note and under the Loan Agreement
to pay the principal, interest and other amounts due and payable under the
Revolving Advances.
Any principal or interest payments on this Note not paid when due,
whether at stated maturity, by acceleration or otherwise, shall bear interest at
the Default Rate.
Upon the occurrence and continuance of a default hereunder or an Event
of Default under the Loan Agreement, all unpaid principal, accrued interest
and other amounts owing hereunder shall, at the option of Bank, be immediately
collectible by on behalf of Bank pursuant to the Loan Agreement and applicable
law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorney's fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflicts of laws
principles that would cause the application of the laws of any other
jurisdiction.
<PAGE>
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
DIGITAL TESTING SERVICES, INC. ISE ELABS, INC.
By: /s/ Sassan Raissi By: /s/ Saeed Malik
--------------------------- ---------------------------
Title: President Title: President
------------------------ ------------------------
ISE TECHNOLOGY, INC.
By: /s/ Saeed Malik
---------------------------
Title: President
------------------------
<PAGE>
EXHIBIT 10.4D
EQUIPMENT REFINANCE NOTE
$4,650,000 San Jose, California
Date: October 2, 1997
ISE LABS, INC., ISE TECHNOLOGY, INC. and DIGITAL TESTING SERVICES, INC.
(collectively, "Borrower"), for value received, hereby promises to pay to the
order of COMERICA BANK-CALIFORNIA ("Bank"), in lawful money of the United States
of America, pursuant to that certain Loan and Security Agreement dated as of
October 2, 1997, by and between Borrower and Bank (the "Loan Agreement"), (i)
the principal amount of $4,650,000 or, if lesser, (ii) the principal amount of
the Equipment Refinance Advance.
This Note is one of the Notes referred to in the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.
Borrower further promises to pay interest on the Equipment Refinance
Advance hereunder in like funds on the principal amount hereof from time to time
outstanding from the date hereof until paid in full, at a rate or rates per
annum and payable on the dates determined pursuant to the Loan Agreement.
Payment on this Note shall be applied in the manner set forth in the
Loan Agreement. The Loan Agreement contains provisions for acceleration of the
maturity of the Equipment Refinance Advance hereunder upon the occurrence of
certain stated events and also provides for optional and mandatory prepayments
of principal hereof prior to any stated maturity upon the terms and conditions
therein specified.
The Equipment Refinance Advance made by Bank to Borrower pursuant to the
Loan Agreement shall be recorded by Bank on the books and records of Bank. The
failure of Bank to record the Equipment Refinance Advance or any prepayment or
payment made on account of the principal balance hereof shall not limit or
otherwise affect the obligation of Borrower under this Note and under the Loan
Agreement to pay the principal, interest and other amounts due and payable under
the Equipment Refinance Advance.
Any principal or interest payments on this Note not paid when due,
whether at stated maturity, by acceleration or otherwise, shall bear interest at
the Default Rate.
Upon the occurrence of a default hereunder or an Event of Default under
the Loan Agreement, all unpaid principal, accrued interest and other amounts
owing hereunder shall, at the option of Bank, be immediately collectible by on
behalf of Bank pursuant to the Loan Agreement and applicable law.
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including reasonable attorney's fees, costs and
expenses. The right to plead any and all statutes of limitations as a defense to
any demand hereunder is hereby waived to the full extent permitted by law.
The amount of this Note is secured by the Collateral identified and
described as security therefor in the Loan Agreement.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of California, excluding conflicts of laws
principles that would cause the application of the laws of any other
jurisdiction.
<PAGE>
The provisions of this Note shall inure to the benefit of and be binding
upon any successor to Borrower and shall extend to any holder hereof.
DIGITAL TESTING SERVICES, INC. ISE ELABS, INC.
By: /s/ Sassan Raissi By: /s/ Saeed Malik
--------------------------- ---------------------------
Title: President Title: President
------------------------ ------------------------
ISE TECHNOLOGY, INC.
By: /s/ Saeed Malik
---------------------------
Title: President
------------------------
<PAGE>
EXHIBIT 10.4E
AMENDMENT
---------
TO
--
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment to Loan and Security Agreement is entered into as of April
1, 1998, by and between Comerica Bank-California ("Bank") and ISE Labs, Inc, ISE
Technology, Inc. and Digital Testing Services, Inc. (collectively, the
"Borrowers").
RECITALS
--------
Borrowers and Comerica are parties to that certain Loan and Security
Agreement dated as of October 2, 1997, as amended from time to time (the
"Agreement"). Borrowers and Bank desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The reference in Section 2.1.2 of the Agreement to "March 31, 1998" is
amended to read "September 30, 1998".
2. Notwithstanding any other provisions of the Agreement, each of the
Advances shall bear interest at a floating rate equal to the Prime Rate from and
after February 9, 1998.
3. Section 6.10 is amended to read as follows:
6.10 Debt-Tangible Net Worth Ratio. Borrowers on a consolidated
basis shall maintain, as of the last day of each calendar month, a ratio of
Total Liabilities of not more than 3.00 to 1.00 through May 31, 1998; a ratio of
not more than 2.50 to 1.00 as of June 30, 1998 through September 30, 1999; and a
ratio of not more than 2.00 to 1.00 as of October 31, 1999 and thereafter.
4. The reference in Section 6.11 to Ten Million Dollars ($10,000,000) is
amended to read "Eighteen Million Dollars ($18,000,000)". The words "provided
that notwithstanding such sale and reduction, Borrowers shall in all cases
maintain a Tangible Net Worth of not less than Eight Millin Dollars
($8,000,000)" are deleted from Section 6.11.
5. Section 6.14 is deleted from the Agreement.
6. Section 7.12 is amended to read as follows:
7.12 Capital Expenditures. Pay or become committed to pay more than
Nine Million Dollars ($9,000,000) in any fiscal year prior to the earlier of (i)
Borrower's receipt of not less than Twelve Million Dollars ($12,000,000) from
the sale or issuance of its equity securities or (ii) the sale of the Manteca
Facility, and Twelve Million Dollars ($12,000,000) in any fiscal year
thereafter, for any capitalized Equipment.
7. In consideration of this Amendment, Borrower shall pay Bank Twenty-
seven Thousand Dollars ($27,000) plus reasonable appraisal, environmental, title
and other out of pocket expenses incurred in connection with the Manteca
Facility, which fee is payable on April 1, 1999; provided Bank shall waive such
fee if an Event of Default has not occurred and Borrower has maintained in a
demand deposit account with Bank, from the date hereof through April 1, 1999,
net free collected balances of at least Four Million Dollars ($4,000,000).
1
<PAGE>
8. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
9. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
ISE LABS, INC.
By: /s/ Saeed Malik
-----------------------------
Title: President
---------------------------
ISE TECHNOLOGY, INC.
By:/s/ Saeed Malik
-------------------------------
Title:____________________________
DIGITAL TESTING SERVICES, INC.
By: /s/ Saeed Malik
-------------------------------
Title:____________________________
COMERICA BANK-CALIFORNIA
By: /s/ Mary Beth Suhr
-------------------------------
Title: Vice President
----------------------------
2
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
This Agreement is entered into by and between ISE Labs, Inc. and its
successors and assigns ("ISE"), on the one hand, and Sassan Raissi ("Employee")
on the other hand. The effective date of the Agreement is the date of
acquisition of Digital Test Services ("DTS") by ISE.
WHEREAS, ISE desires to employ, retain and make secure for the
companies the experience and services of Employee, being one of the key
employees of ISE:
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Employment
----------
1.1 Period. ISE shall employ Employee as President of DTS in Santa
------
Clara, California and Employee shall perform services for and continue in the
employment of ISE for the period commencing on the date hereof through September
30, 2000 ("The Employment Period") subject however, to prior termination by
either party as set forth in Article III herein.
1.2 Base Salary and Employee Benefits. During Employee's employment
---------------------------------
hereunder, ISE will pay to Employee a base salary of not less than $175,000 per
year, subject to regular base salary review in accordance with ISE's
compensation policy. ISE shall also provide to Employee such employee benefits
provided to all ISE's other employees.
1.2.1 Sign-On Bonus. Employee will be paid the sum of $2,000,000
-------------
(two millions) within 5 days of the effective date of this Agreement.
1.2.2 Other Compensation. Employee will be paid the sum of
------------------
$1,500,000 (one million and five hundred thousand dollars) based on the
achievement of milestones mutually agreed to by Employee and ISE and the
successful integration of DTS and ISE as mutually agreed to by Employee and ISE.
1.2.3 Stock Options. Based on approximately 17.5 million shares
-------------
(post-split) held by the owners of ISE prior to the DTS acquisition, and the
creation of an Employee Stock Option Plan (ESOP) with 3.5 million shares,
Employee will be granted Non-Statutory Stock Options for 750,000 (post-split)
shares under the ESOP plan. The Stock Options granted Employee shall have a
strike price equal to fair market value on the date of the grant. Normal ESOP
vesting is 25% after one year and a 6.25% vesting every quarter thereafter.
Employee's Stock Options will vest on an expedited schedule as follows: 50% of
the options shall vest on the first anniversary after signing of this Agreement
and 12.5% of the options vesting every quarter thereafter. The Employee will be
fully vested on the second anniversary of this Agreement. In addition, if ISE
is acquired by another company, all of Employee's stock options will vest
immediately.
<PAGE>
ARTICLE II
Non-Competition
---------------
2.1 Non-Competition. Employee agrees that for a period of three
---------------
years from the effective date of this agreement, the Employee will not (a)
engage in competition with ISE in the performance of any services that directly
relates to testing of semiconductor devices as conducted by ISE prior to the
effective Date of this Agreement, or (b) induce any employee of ISE or DTS, who
at the time of such inducement is an employee of ISE or DTS, to terminate his or
her employment, except as otherwise may be required in the performance of
Employee's duties to ISE or DTS.
Notwithstanding the foregoing, Employees may own, directly or
indirectly, solely as an investment, up to one percent (1%) of any class of
"publicly traded securities" of any person or entity which owns a business that
directly competes with ISE. For the purposes of this Section 2.1, the term
"publicly traded securities" shall mean securities that are traded on a national
securities exchange or listed on the National Association of Securities Dealers
Automated Quotation System.
Notwithstanding the foregoing, Employee will not be prohibited from
competing with ISE, if ISE, or any entity deriving title to its good will or
shares, ceases to carry out the business of testing semiconductor devices.
2.2 Savings Clause. If any restriction set forth in Section 2.1
--------------
above is held to be unreasonable, then both parties agree, and hereby submit, to
the reduction and limitation of such prohibition as shall be deemed reasonable.
ARTICLE III
Termination of Employment
-------------------------
3.1 Death. In the event of Employee's death during the term of his
-----
employment hereunder, ISE shall pay to Employee's estate within ten (10) days of
notice of Employee's death the sign-on bonus and other compensation as set forth
in Sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have
already been paid to Employee) and any unpaid salary and benefits due to
Employee through the date of Employee's death.
3.2 Termination of Employment by ISE With Cause. Employee's
-------------------------------------------
employment hereunder may be terminated by ISE for Cause by giving Employee
written notice of such termination. For the purposes of this Agreement, "Cause"
shall be limited to: (a) Employee's willful failure to perform his or her
assigned job duties (other than as a result of sickness, accident or similar
cause beyond Employee's control) after receipt by Employee of not less than two
written warnings setting forth the specific performance deficiencies and a
reasonable period of time, not less than thirty (30) days, to cure such
performance deficiencies; (b) Employee's engaging in willful misconduct that is
demonstrably and materially injurious to the interests of ISE; (c) Employee's
misappropriation of ISE's material property or proprietary information; or (d)
Employee's conviction of a felony that is materially injurious to the business
reputation of ISE.
2.
<PAGE>
Employee may be terminated for the reasons set forth in (a), (b), (c)
or (d) of this section. In the event that Employee is terminated for cause, ISE
shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in
sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have
already been paid to Employee); and any unpaid salary earned through the date of
termination with Cause and such payment shall be made by ISE to Employee on the
date Employee is terminated with Cause.
3.3 Termination of Employment by ISE Without Cause. Employee's
----------------------------------------------
employment hereunder may be terminated by ISE without Cause upon ninety (90)
days written notice to Employee. In such event ISE shall pay to Employee the
Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2
under the terms therein (unless such amounts have already been paid to
Employee); and any unpaid salary earned through the date of termination without
Cause and such payment shall be made by ISE to Employee on the date Employee is
terminated without Cause. ISE shall also pay to Employee a severance amount
solely equal to three months base salary.
3.4 Termination of Employment for Certain Reasons. Employee may
---------------------------------------------
terminate his employment with ISE hereunder for Certain Reasons. "Certain
Reasons" shall mean: (a) a reduction in cash compensation, or a material
reduction in employee benefits, each of which does not generally affect ISE's
employees; (b) a material demotion of job duties or; (c) relocation in excess of
one year of Employee's regular workplace from Santa Clara and Alameda Counties,
California, provided however, that in each event, Employee has provided ISE
written notice of Employee's intention to terminate for Certain Reasons, stating
the Certain Reasons and ISE has not cured the Certain Reasons within fifteen
(15) days after receipt of Employee's written notice. In the event of
Employee's termination for Certain Reasons, ISE shall pay Employee the Sign-On
Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the
terms therein (unless such amounts have already been paid to Employee); and any
unpaid salary earned through the date of termination for Certain Reasons and
such payment shall be made by ISE to Employee on the date Employee terminates
employment for Certain Reasons. ISE shall also pay to Employee a severance
amount on the date of termination for Certain Reasons. The severance amount
will be equal solely to three months base salary.
3.5 Termination of Employment by Employee Without Certain Reasons.
-------------------------------------------------------------
Employee may terminate his employment with ISE hereunder for any reason, without
cause, with a three months written notice. In such event, ISE shall pay to
Employee any unpaid salary earned through the date of termination without
Certain Reasons and such payment shall be made by ISE to Employee on the date
Employee terminates employment without Certain Reasons.
ARTICLE IV
Miscellaneous
-------------
4.1 Successors, Assigns, Merger. This Agreement shall be binding
---------------------------
upon and shall inure to the benefit of ISE and its successors and assigns. This
Agreement shall be
3.
<PAGE>
binding upon Employee and shall inure to his benefit and to the benefit of his
heirs, executors, administrators and legal representatives, but shall not be
assignable by Employee.
4.2 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between ISE and/or DTS and/or Alphatec USA, Inc. and Employee relating
to his employment with any of such parties and the additional matters herein
provided for. This Agreement supersedes and replaces any prior verbal or
written agreements between such three parties, including the Employment
Agreement (the "Prior Agreement") entered into by Employee in connection with
the sale of DTS to Alphatec USA, Inc. By executing this Agreement, Employee
agrees that he is not entitled to any compensation under said Prior Agreement
and will not have and will not assert any rights or benefits thereunder. ISE is
aware of payments to be made to Employee by Alphatec USA, Inc. under the Prior
Agreement on or about the effective date of this agreement. Such payments are
the responsibility of Alphatec USA, Inc. and ISE will not make up for any or all
payments not made by Alphatec USA, Inc. This Agreement may be amended or
altered only in writing signed by ISE and Employee.
4.3 Applicable Law Severability. This Agreement shall be construed
---------------------------
and interpreted in accordance with the laws of the State of California. Each
provision of this Agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable it and the other provisions hereof
shall continue to be enforceable to the full extent allowable, as if such
offending provision had not been a part of this Agreement.
4.4 No Setoff. No amounts payable and due to Employee by ISE
---------
herein shall be made without set-off or counterclaim.
4.5 Expense. In the event of any action (at law, equity or in
-------
arbitration) between or among any of the parties to this Agreement alleging a
breach of this Agreement or seeking enforcement of this Agreement, the
prevailing party shall be entitled to recover his reasonable attorneys' fees and
costs of such action from the non-prevailing party.
4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
Dated: October 1, 1997.
ISE, INC.
By: /s/ Saeed Malik
-------------------------------
Saeed Malik
Its: President
EMPLOYEE
/s/ Sassan Raissi
--------------------------------------
5.
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
This Agreement is entered into by and between ISE Labs, Inc. and its
successors and assigns ("ISE"), on the one hand, and Ray Grammer ("Employee") on
the other hand. The effective date of the Agreement is the date of acquisition
of Digital Test Services ("DTS") by ISE.
WHEREAS, ISE desires to employ, retain and make secure for the
companies the experience and services of Employee, being one of the key
employees of ISE:
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Employment
----------
1.1 Period. ISE shall employ Employee as Vice-President of DTS in
------
Santa Clara, California and Employee shall perform services for and continue in
the employment of ISE for the period commencing on the date hereof through
September 30, 2000 ("The Employment Period") subject however, to prior
termination by either party as set forth in Article III herein.
1.2 Base Salary and Employee Benefits. During Employee's employment
---------------------------------
hereunder, ISE will pay to Employee a base salary of not less than $175,000 per
year, subject to regular base salary review in accordance with ISE's
compensation policy. ISE shall also provide to Employee such employee benefits
provided to all ISE's other employees.
1.2.1 Sign-On Bonus. Employee will be paid the sum of $175,000 (one
-------------
hundred seventy five thousand) within 10 days of the effective date of this
Agreement.
1.2.2 Other Compensation. Employee will be paid the sum of $100,000
------------------
(one hundred thousand) dollars based on the achievement of milestones mutually
agreed to by Employee and ISE and the successful integration of DTS and ISE as
mutually agreed to by Employee and ISE.
1.2.3 Stock Options. Based on approximately 17.5 million shares
-------------
(post-split) held by the owners of ISE prior to the DTS acquisition, and the
creation of an Employee Stock Option Plan (ESOP) with 3.5 million shares,
Employee will be granted Non-Statutory Stock Options for 100,000 (post-split)
shares under the ESOP plan. The Stock Options granted Employee shall have a
strike price equal to fair market value on the date of the grant. ESOP vesting
is 25% after one year and a 6.25% vesting every quarter thereafter.
<PAGE>
ARTICLE II
Non-Competition
---------------
2.1 Non-Competition. Employee agrees that for a period of three
---------------
years from the effective date of this agreement, the Employee will not
(a) engage in competition with ISE in the performance of any services that
directly relates to testing of semiconductor devices as conducted by ISE prior
to the effective date of this Agreement, or (b) induce any employee of ISE or
DTS, who at the time of such inducement is an employee of ISE or DTS, to
terminate his or her employment, except as otherwise may be required in the
performance of Employee's duties to ISE or DTS.
Notwithstanding the foregoing, Employees may own, directly or
indirectly, solely as an investment, up to one percent (1%) of any class of
"publicly traded securities" of any person or entity which owns a business that
directly competes with ISE. For the purposes of this Section 2.1, the term
"publicly traded securities" shall mean securities that are traded on a national
securities exchange or listed on the National Association of Securities Dealers
Automated Quotation System.
Notwithstanding the foregoing, Employee will not be prohibited from
competing with ISE, if ISE, or any entity deriving title to its good will or
shares, ceases to carry out the business of testing semiconductor devices.
2.2 Savings Clause. If any restriction set forth in Section 2.1
--------------
above is held to be unreasonable, then both parties agree, and hereby submit, to
the reduction and limitation of such prohibition as shall be deemed reasonable.
ARTICLE III
Termination of Employment
-------------------------
3.1 Death. In the event of Employee's death during the term of his
-----
employment hereunder, ISE shall pay to Employee's estate within ten (10) days of
notice of Employee's death the sign-on bonus and other compensation as set forth
in 1.2.1 and 1.2.2 under the terms therein (unless such amounts have already
been paid to Employee) and any unpaid salary and benefits due to Employee
through the date of Employee's death.
3.2 Termination of Employment by ISE With Cause. Employee's
-------------------------------------------
employment hereunder may be terminated by ISE for Cause by giving Employee
written notice of such termination. For the purposes of this Agreement, "Cause"
shall be limited to: (a) Employee's willful failure to perform his or her
assigned job duties (other than as a result of sickness, accident or similar
cause beyond Employee's control) after receipt by Employee of not less than two
written warnings setting forth the specific performance deficiencies and a
reasonable period of time, not less than thirty (30) days, to cure such
performance deficiencies; (b) Employee's engaging in willful misconduct that is
demonstrably and materially injurious to the interests of ISE; (c) Employee's
misappropriation of ISE's material property or
<PAGE>
proprietary information; or (d) Employee's conviction of a felony that is
materially injurious to the business reputation of ISE.
Employee may be terminated for the reasons set forth in (a), (b), (c)
or (d) of this section. In the event that Employee is terminated for cause, ISE
shall pay to Employee the Sign-On Bonus and Other Compensation as set forth in
sections 1.2.1 and 1.2.2 under the terms therein (unless such amounts have
already been paid to Employee); and any unpaid salary earned through the date of
termination with Cause and such payment shall be made by ISE to Employee on the
date Employee is terminated with Cause.
3.3 Termination of Employment by ISE Without Cause. Employee's
----------------------------------------------
employment hereunder may be terminated by ISE without Cause upon ninety (90)
days written notice to Employee. In such event ISE shall pay to Employee the
Sign-On Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2
under the terms therein (unless such amounts have already been paid to
Employee); and any unpaid salary earned through the date of termination without
Cause and such payment shall be made by ISE to Employee on the date Employee is
terminated without Cause. ISE shall also pay to Employee a severance amount
solely equal to three months base salary.
3.4 Termination of Employment for Certain Reasons. Employee may
---------------------------------------------
terminate his employment with ISE hereunder for Certain Reasons. "Certain
Reasons" shall mean: (a) a reduction in cash compensation, or a material
reduction in employee benefits, each of which does not generally affect ISE's
employees; (b) a material demotion of job duties or; (c) relocation in excess of
one year of Employee's regular workplace from Santa Clara and Alameda Counties,
California, provided however, that in each event, Employee has provided ISE
written notice of Employee's intention to terminate for Certain Reasons, stating
the Certain Reasons and ISE has not cured the Certain Reasons within fifteen
(15) days after receipt of Employee's written notice. In the event of
Employee's termination for Certain Reasons, ISE shall pay Employee the Sign-On
Bonus and Other Compensation as set forth in sections 1.2.1 and 1.2.2 under the
terms therein (unless such amounts have already been paid to Employee); and any
unpaid salary earned through the date of termination for Certain Reasons and
such payment shall be made by ISE to Employee on the date Employee terminates
employment for Certain Reasons. ISE shall also pay to Employee a severance
amount on the date of termination for Certain Reasons. The severance amount
will be equal solely to three months base salary.
3.5 Termination of Employment by Employee Without Certain Reasons.
-------------------------------------------------------------
Employee may terminate his employment with ISE hereunder for any reason, without
cause, with a three months written notice. In such event, ISE shall pay to
employee any unpaid salary earned through the date of termination without
Certain Reasons and such payment shall be made by ISE to Employee on the date
Employee terminates employment without Certain Reasons.
<PAGE>
ARTICLE IV
Miscellaneous
-------------
4.1 Successors, Assigns, Merger. This Agreement shall be binding
---------------------------
upon and shall inure to the benefit of ISE and its successors and assigns. This
Agreement shall be 3binding upon Employee and shall inure to his benefit and to
the benefit of his heirs, executors, administrators and legal representatives,
but shall not be assignable by Employee.
4.2 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between ISE and/or DTS and/or Alphatec USA, Inc. and Employee relating
to his employment with any of such parties and the additional matters herein
provided for. This Agreement supersedes and replaces any prior verbal or
written agreements ("Prior Agreements") between such three parties. By
executing this Agreement, Employee agrees that he is not entitled to any
compensation under said Prior Agreements and will not have and will not assert
any rights or benefits thereunder. This Agreement may be amended or altered
only in writing signed by ISE and Employee.
4.3 Applicable Law Severability. This Agreement shall be construed
---------------------------
and interpreted in accordance with the laws of the State of California. Each
provision of this Agreement is severable from the others, and if any provision
hereof shall be to any extent unenforceable it and the other provisions hereof
shall continue to be enforceable to the full extent allowable, as if such
offending provision had not been a part of this Agreement.
4.4 No Setoff. No amounts payable and due to Employee by ISE
---------
herein shall be made without set-off or counterclaim.
4.5 Expense. In the event of any action (at law, equity or in
-------
arbitration) between or among any of the parties to this Agreement alleging a
breach of this Agreement or seeking enforcement of this Agreement, the
prevailing party shall be entitled to recover his reasonable attorneys' fees and
costs of such action from the non-prevailing party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
Dated: October 15, 1997.
ISE, INC.
By: /s/ Saeed Malik
--------------------------------------
Saeed Malik
Its: President
EMPLOYEE
/s/ Ray Grammer
--------------------------------------------
<PAGE>
EXHIBIT 10.7
ISE LABS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is entered into as of
the ___ day of ____________ 1997 by and between ISE Labs, Inc., a California
corporation (the "Company") and __________________ (the "Indemnitee").
RECITALS
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees,
shareholders, controlling persons, agents and fiduciaries, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, controlling persons, shareholders, agents and fiduciaries to
expensive litigation risks at the same time as the availability and coverage of
liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other directors,
officers, employees, shareholders, controlling persons, agents and fiduciaries
of the Company may not be willing to serve in such capacities without additional
protection.
D. The Company (i) desires to attract and retain the involvement of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to be involved with the Company and (ii)
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires
that Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee hereby agrees as
follows:
1. Indemnification.
---------------
a. Indemnification of Expenses. The Company shall indemnify
---------------------------
and hold harmless Indemnitee (including its respective directors, officers,
partners, employees, agents and spouses) and each person who controls any of
them or who may be liable within the meaning of Section 15 of the Securities Act
of 1933, as amended (the "Securities Act"), or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") to the
<PAGE>
fullest extent permitted by law if Indemnitee was or is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any threatened, pending or completed action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee believes might lead to the institution
of any such action, suit, proceeding or alternative dispute resolution
mechanism, whether civil, criminal, administrative, investigative or other
(hereinafter a "Claim") by reason of (or arising in part out of) any event or
occurrence related to the fact that Indemnitee is or was, or may be deemed, a
director, officer, shareholder, employee, controlling person, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was, or may be
deemed, to be serving at the request of the Company as a director, officer,
shareholder, employee, controlling person, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of Indemnitee while serving in such
capacity including, without limitation, any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any claim) under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, at common law or otherwise, which
relate directly or indirectly to the registration, purchase, sale or ownership
of any securities of the Company or to any fiduciary obligation owed with
respect thereto (hereinafter an "Indemnification Event") against any and all
expenses (including attorneys' fees and all other costs, expenses and
obligations incurred in connection with investigating, defending a witness in or
participating in (including on appeal), or preparing to defend, be a witness in
or participate in, any such action, suit, proceeding, alternative dispute
resolution mechanism, hearing, inquiry or investigation), judgments, fines,
penalties and amounts paid in settlement (if such settlement is approved in
advance by the Company, which approval shall not be unreasonably withheld) of
such Claim and any federal, state, local or foreign taxes imposed on Indemnitee
as a result of the actual or deemed receipt of any payments under this Agreement
(collectively, hereinafter "Expenses"), including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses.
Such payment of Expenses shall be made by the Company as soon as practicable but
in any event no later than five days after written demand by Indemnitee therefor
is presented to the Company.
b. Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(e) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) and Indemnitee
acknowledges and agrees that the obligation of the Company to make an advance
payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense
Advance") shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however,
2.
<PAGE>
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Reviewing
Party that Indemnitee would not be permitted to be indemnified under applicable
law shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(e) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
c. Contribution. If the indemnification provided for in
------------
Section 1(a) above for any reason is held by a court of competent jurisdiction
to be unavailable to an Indemnitee in respect of any losses, claims, damages,
expenses or liabilities referred to therein, then the Company, in lieu of
indemnifying Indemnitee thereunder, shall contribute to the amount paid or
payable by Indemnitee as a result of such losses, claims, damages, expenses or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and Indemnitee, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and Indemnitee
in connection with the action or inaction which resulted in such losses, claims,
damages, expenses or liabilities, as well as any other relevant equitable
considerations. In connection with the registration of the Company's securities,
the relative benefits received by the Company and Indemnitee shall be deemed to
be in the same respective proportions that the net proceeds from the offering
(before deducting expenses) received by the Company and Indemnitee, in each case
as set forth in the table on the cover page of the applicable prospectus, bear
to the aggregate public offering price of the securities so offered. The
relative fault of the Company and Indemnitee shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or Indemnitee and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
3.
<PAGE>
The Company and Indemnitee agree that it would not be just and
equitable if contribution pursuant to this Section 1(c) were determined by pro
rata or per capita allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall an Indemnitee be required to contribute any amount
under this Section 1(c) in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total securities sold under such registration statement
which is being sold by Indemnitee or (ii) the proceeds received by Indemnitee
from its sale of securities under such registration statement. No person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not found guilty of such fraudulent misrepresentation.
d. Survival Regardless of Investigation. The
------------------------------------
indemnification and contribution provided for in this Section 1 will remain in
full force and effect regardless of any investigation made by or on behalf of
Indemnitee or any officer, director, employee, agent or controlling person of
Indemnitee.
e. Change in Control. The Company agrees that if there is
-----------------
a Change in Control of the Company (other than a Change in Control which has
been approved by a majority of the Company's Board of Directors who were
directors immediately prior to such Change in Control) then, with respect to all
matters thereafter arising concerning the rights of Indemnitee to payments of
Expenses under this Agreement or any other agreement or under the Company's
Articles of Incorporation or Bylaws as now or hereafter in effect, Independent
Legal Counsel (as defined in Section 10(d) hereof) shall be selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law. The Company agrees to abide by
such opinion and to pay the reasonable fees of the Independent Legal Counsel
referred to above and to fully indemnify such counsel against any and all
expenses (including attorneys' fees), claims, liabilities and damages arising
out of or relating to this Agreement or its engagement pursuant hereto.
f. Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement, to the extent that Indemnitee have been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in the defense of any action, suit, proceeding,
inquiry or investigation referred to in Section 1(a) hereof or in the defense of
any claim, issue or matter therein, Indemnitee shall be indemnified against all
Expenses incurred by Indemnitee in connection herewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
4.
<PAGE>
a. Advancement of Expenses. The Company shall advance all
-----------------------
Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid
by the Company to Indemnitee as soon as practicable but in any event no later
than fifteen days after written demand by Indemnitee therefor to the Company.
b. Notice/Cooperation by Indemnitee. Indemnitee shall give
--------------------------------
the Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee).
c. No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
----
contendere, or its equivalent, shall not create a presumption that Indemnitee
- ----------
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
d. Notice to Insurers. If, at the time of the receipt by
------------------
the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company
has liability insurance in effect which may cover such Claim, the Company shall
give prompt written notice of the commencement of such Claim to the insurers in
accordance with the procedures set forth in each of the policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
e. Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim, with counsel reasonably approved
by the applicable Indemnitee, upon the delivery to Indemnitee of written notice
of its election to do so. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same Claim;
5.
<PAGE>
provided that, (i) Indemnitee shall have the right to employ Indemnitee's
counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there is a conflict of interest
between the Company and Indemnitee in the conduct of any such defense, or (C)
the Company shall not continue to retain such counsel to defend such Claim, then
the fees and expenses of Indemnitee's counsel shall be at the expense of the
Company. The Company shall have the right to conduct such defense as it sees fit
in its sole discretion, including the right to settle any claim against
Indemnitee without the consent of Indemnitee.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
a. Scope. The Company hereby agrees to indemnify Indemnitee
-----
to the fullest extent permitted by law, even if such indemnification is not
specifically authorized by the other provisions of this Agreement or any other
agreement, the Company's Articles of Incorporation, the Company's Bylaws or by
statute. In the event of any change after the date of this Agreement in any
applicable law, statute or rule which expands the right of a California
corporation to indemnify a member of its Board of Directors or an officer,
shareholder, employee, controlling person, agent or fiduciary, it is the intent
of the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. In the event of any change in any applicable
law, statute or rule which narrows the right of a California corporation to
indemnify a member of its Board of Directors or an officer, employee, agent or
fiduciary, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations hereunder except as set forth
in Section 8(a) hereof.
b. Nonexclusivity. The indemnification provided by this
--------------
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Articles of Incorporation, its Bylaws, any agreement, any
vote of shareholders or disinterested directors, the laws of the State of
California, or otherwise. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action Indemnitee took or did not take
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity and such indemnification shall inure to the benefit of
Indemnitee from and after the date hereof.
4. No Duplication of Payments. The Company shall not be
--------------------------
liable under this Agreement to make any payment in connection with any Claim
made against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, Articles of Incorporation, Bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.
6.
<PAGE>
5. Partial Indemnification. If Indemnitee is entitled
-----------------------
under any provision of this Agreement to indemnification by the Company for any
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgement. The Company and Indemnitee
----------------------
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees,
controlling persons, agents or fiduciaries under this Agreement or otherwise.
7. Liability Insurance. To the extent the Company maintains
-------------------
liability insurance applicable to directors, officers, employees, control
persons, agents or fiduciaries, each of Indemnitee shall be covered by such
policies in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director, or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees,
controlling persons, agents or fiduciaries, if Indemnitee is not an officer or
director but is a key employee, agent, control person, or fiduciary.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
a. Claims Initiated by Indemnitee. To indemnify or
------------------------------
advance expenses to Indemnitee with respect to Claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except (i) with respect to
actions or proceedings to establish or enforce a right to indemnify under this
Agreement or any other agreement or insurance policy or under the Company's
Articles of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under California statute or law, regardless of whether
Indemnitee ultimately is determined to be entitled to such indemnification,
advance expense payment or insurance recovery, as the case may be; or
b. Claims Under Section 16(b). To indemnify Indemnitee
--------------------------
for expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Exchange Act or
any similar successor statute; or
9. Period of Limitations. No legal action shall be
---------------------
brought and no cause of action shall be asserted by or in the right of the
Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or
personal or legal representatives after the expiration of five years from the
date of accrual of such cause of action, and any claim or cause of action of the
7.
<PAGE>
Company shall be extinguished and deemed released unless asserted by the timely
filing of a legal action within such five-year period; provided, however, that
-------- -------
if any shorter period of limitations is otherwise applicable to any such cause
of action, such shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
a. For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was or may be deemed a
director, officer, employee, agent, control person, or fiduciary of such
constituent corporation, or is or was or may be deemed to be serving at the
request of such constituent corporation as a director, officer, employee,
control person, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, Indemnitee shall
stand in the same position under the provisions of this Agreement with respect
to the resulting or surviving corporation as Indemnitee would have with respect
to such constituent corporation if its separate existence had continued.
b. For purposes of this Agreement, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan; and references to "serving at the request of the Company"
shall include any service as a director, officer, employee, agent or fiduciary
of the Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
c. For purposes of this Agreement a "Change in Control"
shall be deemed to have occurred if (i) any "person" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or a corporation owned directly or indirectly by the shareholders of the Company
in substantially the same proportions as their ownership of stock of the
Company, (A) who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his beneficial
ownership of such securities by 5% or more over the percentage so owned by such
person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Exchange Act), directly or indirectly, of securities of the Company
representing more than 30% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of
8.
<PAGE>
two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof, or (iii) the shareholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
d. For purposes of this Agreement, "Independent Legal
Counsel" shall mean an attorney or firm of attorneys, selected in accordance
with the provisions of Section 1(e) hereof, who shall not have otherwise
performed services for the Company or Indemnitee within the last three years
(other than with respect to matters concerning the right of Indemnitee under
this Agreement, or of other indemnitees under similar indemnity agreements).
e. For purposes of this Agreement, a "Reviewing Party"
shall mean any appropriate person or body consisting of a member or members of
the Company's Board of Directors or any other person or body appointed by the
Board of Directors who is not a party to the particular Claim for which
Indemnitee are seeking indemnification, or Independent Legal Counsel.
f. For purposes of this Agreement, "Voting Securities"
shall mean any securities of the Company that vote generally in the election of
directors.
11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement
--------------------------------------
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to
9.
<PAGE>
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place. This Agreement shall continue in effect with respect to Claims
relating to Indemnifiable Events regardless of whether Indemnitee continues to
serve as a director, officer, employee, agent, controlling person, or fiduciary
of the Company or of any other enterprise, including subsidiaries of the
Company, at the Company's request.
13. Attorneys' Fees. In the event that any action is
---------------
instituted by an Indemnitee under this Agreement or under any liability
insurance policies maintained by the Company to enforce or interpret any of the
terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee with respect to such action, regardless of whether
Indemnitee is ultimately successful in such action, and shall be entitled to the
advancement of Expenses with respect to such action, unless, as a part of such
action, a court of competent jurisdiction over such action determines that each
of the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous. In the event of an action instituted by or
in the name of the Company under this Agreement to enforce or interpret any of
the terms of this Agreement, Indemnitee shall be entitled to be paid all
Expenses incurred by Indemnitee in defense of such action (including costs and
expenses incurred with respect to Indemnitee counterclaims and cross-claims made
in such action), and shall be entitled to the advancement of Expenses with
respect to such action, unless, as a part of such action, a court having
jurisdiction over such action determines that each of Indemnitee's material
defenses to such action was made in bad faith or was frivolous.
14. Notice. All notices and other communications required or
------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given (a) five (5) days after deposit with
the U.S. Postal Service or other applicable postal service, if delivered by
first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c)
one business day after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid, or (d) one day after the business
day of delivery by facsimile transmission, if deliverable by facsimile
transmission, with copy by first class mail, postage prepaid, and shall be
addressed if to Indemnitee, at Indemnitee's address as set forth beneath
Indemnitee's signatures to this Agreement and if to the Company at the address
of its principal corporate offices (attention: Secretary) or at such other
address as such party may designate by ten days' advance written notice to the
other party hereto.
15. Consent to Jurisdiction. The Company and Indemnitee
-----------------------
each hereby irrevocably consent to the jurisdiction and venue of the courts of
the State of California for all purposes in connection with any action or
proceeding which arises out of or relates to this Agreement and agree that any
action instituted under this Agreement shall be commenced, prosecuted and
continued only in the courts of the State of California.
16. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section,
10.
<PAGE>
paragraph or sentence) are held by a court of competent jurisdiction to be
invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without
limitations, each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and
-------------
its provisions construed and enforced in accordance with the laws of the State
of California, as applied to contracts between California residents, entered
into and to be performed entirely within the State of California, without regard
to the conflict of laws principles thereof.
18. Subrogation. In the event of payment under this
-----------
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of Indemnitee who shall execute all documents required
and shall do all acts that may be necessary to secure such rights and to enable
the Company effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by all parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. No Construction as Employment Agreement. Nothing
---------------------------------------
contained in this Agreement shall be construed as giving Indemnitee any right to
be retained in the employ of the Company or any of its subsidiaries.
21. Corporate Authority. The Board of Directors of the
-------------------
Company and its shareholders have approved the terms of this Agreement.
11.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
ISE LABS, INC.,
a California corporation
By:
------------------------------------
Saeed A. Malik, President
2095 Ringwood Avenue
San Jose, CA 95131
INDEMNITEE:
---------------------------------------
12.
<PAGE>
[LETTERHEAD OF COMERICA]
March 30, 1998
EXHIBIT 10.8
Mr. Richard Bradford
Controller
Digital Testing Services, Inc.,
3600 Peterson Way
Santa Clara, CA 95054
Dear Richard:
Comerica Leasing, a Division of Comerica Bank ("Lessor") is pleased to offer the
following commitment for a finance/capital lease line of credit to ISE Labs,
Inc. and Digital Testing Services, Inc. ("Co-Lessees") for the acquisition of
Hewlett Packard and Creedence Integrated Circuit Test Systems and Seiko Epson
Handlers. Outlined below are the major terms and conditions of this commitment:
Lease Line Amount: $10,000,000
Lease Line Expiration: March 1, 1999
Lease Term: 60 Months
Net Lease: Lessee will be responsible for all
maintenance, taxes, insurance and all other
costs relating to the operation of the
equipment.
Benefits of Ownership: Title and all benefits of ownership will be
retained by Lessee.
Rental Payments: 60 fixed payments at 2.025247% of total
equipment cost, due monthly in arrears, the
first of which is due 30 days from lease
closing (7.95% A.P.R).
Interim Payments: Interim payments made by Comerica Leasing to
the vendors prior to equipment acceptance and
lease commencement shall be funded on an
Interim Lease Schedule at Comerica Bank's
prevailing prime rate of interest. Interest
only shall be due and payable upon the
expiration of the Interim Lease Schedule or
commencement of the base lease term,
whichever occurs first.
<PAGE>
[LOGO]
Mr. Richard Bradford
March 30, 1998
Page Two
Lease Termination The Lessee has the option to purchase the
Option: equipment for $1.00.
CONDITIONS: IF THIS COMMITMENT MEETS WITH YOUR APPROVAL, IT IS
THEN SUBJECT TO THE FOLLOWING ADDITIONAL CRITERIA:
1) Execution of all mutually agreeable
documentation necessary to effect each
takedown under the lease line of credit.
2) Rental payment quotations apply only to
leases closed on or before April 13, 1998,
after which they are subject to change.
Rental payments are based on a 5-year
constant yield-to-maturity treasury at 5.72%.
For leases closed after April 13, 1998,
rental payments will be adjusted to reflect
the treasury rates in effect at the time of
closing. The monthly rental factor will
become fixed for the term of the lease at
lease commencement.
3) The above commitment and Lessor's willingness
to enter into a lease is based upon there
being no developments which, in the sole
opinion of Lessor, would adversely affect the
Lessee's creditworthiness and/or ability to
meet any obligations.
4) Lessee must provide Lessor with a Certificate
of Insurance at closing showing Comerica
Leasing, a Division of Comerica Bank as a
named insured for physical damage risks.
<PAGE>
[LOGO]
Mr. Richard Bradford
March 30, 1998
Page Three
We appreciate the opportunity to extend this commitment for your consideration
and look forward to continuing our relationship with ISE Labs and Digital
Testing Services. Should there be any questions, please do not hesitate to
contact me at (408) 271-4060.
Sincerely,
/s/ Mark H. Freund
Mark H. Freund
Vice President
cc. Ray Grammer
Mary Beth Suhr
<PAGE>
EXHIBIT 10.9
ISE LABS, INC.
1998 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1998 Stock Incentive Plan is intended to promote the interests of
ISE Labs, Inc., a California corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special below-market option grants,
- the Stock Issuance Program under which eligible persons may,
at the discretion of the Plan Administrator, be issued shares of Common Stock
directly, either through the purchase of such shares or as a bonus for
performance of services rendered the Corporation (or any Parent or Subsidiary),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special below-market option grant.
<PAGE>
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee shall be made by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
2.
<PAGE>
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (ii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic
3.
<PAGE>
Option Grant Program at the time he or she first becomes a non-employee Board
member, but shall be eligible to receive periodic option grants under the
Automatic Option Grant Program while he or she continues to serve as a non-
employee Board member.
F. All non-employee Board members shall be eligible to participate
in the Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
4,500,000 shares, which shall consist of (i) the number of shares which remained
available for issuance under the Predecessor Plan on the date the Underwriting
Agreement for the offering is executed (the "Underwriting Date"), including the
shares subject to outstanding options under that Predecessor Plan, plus (ii) an
increase of one million (1,000,000) shares. In addition, the number of shares
of Common Stock reserved for issuance under the Plan will automatically be
increased on the first trading day of each calendar year, beginning in calendar
year 1999, by an amount equal to the lessor of three percent (3%) of the total
number of shares of Common Stock outstanding on the last trading day of the
preceding calendar year or one million (1,000,000) shares.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.
C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation (including unvested shares issued under the
Predecessor Plan and repurchased by the Corporation at or after the Plan
Effective Date), at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance. Shares of
Common Stock underlying one or more stock appreciation rights exercised
4.
<PAGE>
under Section IV of Article Two of the Plan shall NOT be available for
subsequent issuance under the Plan.
D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year, (iii) the number and/or
class of securities for which grants are subsequently to be made under the
Automatic Option Grant Program to new and continuing non-employee Board members,
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option under the Plan and (v) the number and/or
class of securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.
(iii) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
7.
<PAGE>
(ii) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number of vested
shares of Common Stock for which such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested had the
Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------
B. EXERCISE PRICE. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
8.
<PAGE>
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Common Stock. However, an outstanding option
shall NOT become exercisable on such an accelerated basis if and to the extent:
(i) such option is, in connection with the Corporate Transaction, to be assumed
by the successor corporation (or parent thereof) or (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.
B. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
9.
<PAGE>
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.
E. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed in the Corporate
Transaction, so that each such option shall, immediately prior to the effect
date of such Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to that option and
may be exercised for any or all of those shares as fully vested shares of Common
Stock. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Discretionary Option Grant Program so that those rights shall not be
assignable in connection with such Corporate Transaction and shall accordingly
terminate upon the consummation of such Corporate Transaction, and the shares
subject to those terminated rights shall thereupon vest in full.
F. The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
-------
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.
G. The Plan Administrator shall have the discretionary authority to
provide for the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program upon the occurrence of a Change in
Control so that each such option shall, immediately prior to the effect date of
such Change in Control, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to that option and may
10.
<PAGE>
be exercised for any or all of those shares as fully vested shares of Common
Stock. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Discretionary Option Grant Program so that those rights shall terminate
automatically upon the consummation of such Change in Control, and the shares
subject to those terminated rights shall thereupon vest in full. Alternatively,
the Plan Administrator may condition the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program and the
termination of one or more of the Corporation's outstanding repurchase rights
under such program upon the subsequent termination of the Optionee's Service by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of such Change in Control.
Each option so accelerated shall remain exercisable for fully vested shares
until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1) year period measured from the effective date of
Optionee's cessation of Service.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and
11.
<PAGE>
the surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then
the distribution to which the Optionee shall be entitled may be made in
shares of Common Stock valued at Fair Market Value on the option surrender
date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (A) the Take-Over Price of
the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be
paid within five (5) days following the option surrender date.
12.
<PAGE>
(iii) The grant of such limited stock appreciation right shall
automatically constitute pre-approval by the Plan Administrator of any
subsequent exercise of that right in accordance with the terms of this
Paragraph C. Accordingly, no further approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender and
cash distribution.
(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents evidencing
such option.
13.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the extent the Primary Committee approves the authorization, the
individual who filed that authorization shall automatically be granted an option
under the Salary Investment Grant Program on the first trading day in January of
the calendar year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33 1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
14.
<PAGE>
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66 2/3%), where
X is the number of option shares,Optionee's base salary for the
calendar year, and
A is the dollar amount of the approved reduction in the
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised
15.
<PAGE>
for any or all of those shares as fully-vested shares of Common Stock. Each
such outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier of (i) the expiration
-------
of the ten (10)-year option term, (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service or (iii)
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
D. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
16.
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. VESTING PROVISIONS.
------------------
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant
or the performance objectives to be attained,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
17.
<PAGE>
(iv) the effect which death, Permanent Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant's Service or the non-
attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
18.
<PAGE>
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
19.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 25,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary .
2. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 2,500 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 2,500-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.
B. EXERCISE PRICE.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any
unvested shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial 25,000-share
grant and each annual 2,500-share grant shall vest, and the Corporation's
repurchase
20.
<PAGE>
right shall lapse, with respect to twenty-five percent (25%) of the option
shares on the one (1) year anniversary of the option grant date and with respect
to the balance of the option shares in a series of twelve (12) successive equal
quarterly installments upon Optionee's completion of each additional month of
Service over the twelve (12) quarter period measured from the first anniversary
of the option grant date.
E. TERMINATION OF BOARD SERVICE. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution) shall have a
twelve (12)-month period following the date of such cessation of Board
service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as fully
-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve (12)-
month exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service for any
reason other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
21.
<PAGE>
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same.
22.
<PAGE>
F. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
23.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33 1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66 2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
24.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
----------------------------
exercisable in a series of twelve (12) equal monthly installments upon the
Optionee's completion of each month of Board service over the twelve (12)-month
period measured from the grant date. Each option shall have a maximum term of
ten (10) years measured from the option grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
-------
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the
25.
<PAGE>
total number of shares of Common Stock at the time subject to such option and
may be exercised for any or all of those shares as fully-vested shares of Common
Stock. Each such outstanding option shall be assumed by the successor
corporation (or parent thereof) in the Corporate Transaction and shall remain
exercisable for the fully-vested shares until the earlier of (i) the expiration
-------
of the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
-------
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.
D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
27.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately at the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12 Registration Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) April
--------
1, 2008, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Should the Plan
terminate on April 1, 2008, then all option grants and unvested stock issuances
outstanding at that time shall continue to have force and effect in accordance
with the provisions of the documents evidencing such grants or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
28.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
29.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
E. COMMON STOCK shall mean the Corporation's common stock.
------------
F. CORPORATE TRANSACTION shall mean either of the following stockholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
A-1.
<PAGE>
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean ISE Labs, Inc., a California corporation, and
-----------
its successors.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
---------------------------------
grant in effect for non-employee Board members under Article Six of the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
A-2.
<PAGE>
(iii) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
-----------------
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------
A-3.
<PAGE>
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant and Director
Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall
mean the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.
X. PLAN shall mean the Corporation's 1998 Stock Incentive Plan, as set
----
forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. PLAN EFFECTIVE DATE shall mean April 2, 1998.
-------------------
AA. PREDECESSOR PLAN shall mean the Corporation's pre-existing Stock
----------------
Option Plan in effect immediately prior to the Plan Effective Date hereunder.
A-4.
<PAGE>
AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
-----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.
AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment option grant program in effect under the Plan.
AD. SECONDARY COMMITTEE shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common
----------------------------
Stock is first registered under Section 12 of the 1934 Act.
AF. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AG. SERVICE shall mean the performance of services for the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.
AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
A-5.
<PAGE>
AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AM. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AO. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AP. UNDERWRITING DATE shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-6.
<PAGE>
EXHIBIT 10.10
ISE LABS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of ISE Labs, Inc. by providing eligible employees with the opportunity to
acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan designed to qualify under
Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The number of shares of Common Stock
initially authorized to be issued under the Plan is Six Hundred Thousand
(600,000) shares. In addition, the number of shares of Common Stock reserved
for issuance under the Plan will automatically be increased on the first trading
day of each calendar year, beginning in calendar year 1999, by an amount equal
to the lessor of three percent (3%) of the total number of shares of Common
Stock outstanding on the last trading day of the preceding calendar year or four
hundred thousand (1,000,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant on any one Purchase Date and (iii) the number and class of
securities and the price per share in effect under each outstanding purchase
right in order to prevent the dilution or enlargement of benefits thereunder.
<PAGE>
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in July
2000. The next offering period shall commence on the first business day in
August 2000, and subsequent offering periods shall commence as designated by the
Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in February each year to the last business day in July of the same
year and from the first business day in August each year to the last business
day in January of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in January 1999.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
any offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
2.
<PAGE>
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Base Salary paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of ten percent
(10%). The deduction rate so authorized shall continue in effect throughout the
offering period, except to the extent such rate is changed in accordance with
the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator.
The Participant may not, however, effect more than one (1) such reduction
per Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the ten percent (10%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
-----------------------
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common
--------------
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
-----
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common
----------------------------
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Five Hundred (1,500) shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. In
addition, the maximum aggregate number of shares of Common Stock purchasable by
all Participants on any one Purchase Date shall not exceed One Hundred Fifty
Thousand (150,000) shares, subject to periodic adjustments in the event of
certain changes in the Corporation's capitalization.
4.
<PAGE>
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to
-------------------------
the purchase of shares of Common Stock on any Purchase Date because they are
not sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the Purchase Interval in which such leave
commences, to (a) withdraw all the payroll deductions collected to date on
his or her behalf for that Purchase Interval or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event, however, shall any further payroll deductions
be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service within (i) ninety (90) days
following the commencement of such leave or, if longer, the period during
which such Participant's right to reemployment with the Corporation is
guaranteed by either statute or contract, his or her payroll
5.
<PAGE>
deductions under the Plan shall automatically resume at the rate in effect
at the time the leave began, unless the Participant withdraws from the Plan
prior to his or her return. If the Participant's leave of absence, whether
paid or unpaid, (i)
G. CORPORATE TRANSACTION. Each outstanding purchase right shall
---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
-----
Common Stock on the Participant's Entry Date into the offering period in which
such Corporate Transaction occurs or (ii) the Fair Market Value per share of
Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable limitation on the number of shares of
Common Stock purchasable per Participant and in the aggregate shall continue to
apply to any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair
6.
<PAGE>
Market Value per share on the date or dates such rights are granted) for each
calendar year such rights are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on April 2, 1998 and shall
become effective at the Effective Time, provided no purchase rights granted
--------
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in July 2008, (ii) the date on
--------
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction.
No further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Board may not, without the approval of the Corporation's
stockholders, (i) increase the number of shares of Common Stock issuable under
the Plan or the maximum number of shares purchasable per Participant on any one
Purchase Date, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, (ii) alter the purchase price
formula so as to reduce the purchase price payable for the shares of Common
Stock purchasable under the Plan or (iii) modify eligibility requirements for
participation in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
SCHEDULE A
----------
CORPORATIONS PARTICIPATING IN
EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
------------------------
ISE Labs, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. BASE SALARY shall mean the (i) regular base salary paid to a
-----------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. The
following items of compensation shall NOT be included in Base Salary: (i) all
overtime payments, bonuses, commissions (other than those functioning as base
salary equivalents), profit-sharing distributions and other incentive-type
payments and (ii) any and all contributions (other than Code Section 401(k) or
Code Section 125 contributions) made on the Participant's behalf by the
Corporation or any Corporate Affiliate under any employee benefit or welfare
plan now or hereafter established.
B. BOARD shall mean the Corporation's Board of Directors.
-----
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
----
D. COMMON STOCK shall mean the Corporation's common stock.
------------
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATE TRANSACTION shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation.
G. CORPORATION shall mean ISE Labs, Inc., a California corporation,
-----------
and any corporate successor to all or substantially all of the assets or voting
stock of ISE Labs, Inc. which shall by appropriate action adopt the Plan.
A-1.
<PAGE>
H. EFFECTIVE TIME shall mean the time at which the Underwriting
--------------
Agreement is executed and finally priced. Any Corporate Affiliate which becomes
a Participating Corporation after such Effective Time shall designate a
subsequent Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
--------
M. PARTICIPANT shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2.
<PAGE>
N. PARTICIPATING CORPORATION shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1998 Employee Stock Purchase
----
Plan, as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be January 29, 1999.
R. PURCHASE INTERVAL shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
----------------------
February and August each year on which an Eligible Employee may first enter an
offering period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
[LOGO OF SANWA BANK APPEARS HERE]
EXHIBIT 10.11
PROMISSORY NOTE
Principal Plus Interest -- Equal Principal Installment Payments
Variable Interest Rate
August 22, 1994 Mountain View, California
FOR VALUE RECEIVED, the undersigned (the "Borrower") hereby promises to pay to
the order of SANWA BANK CALIFORNIA (the "Bank"), at its Mountain View Office or
at such other place or to such other parties as the holder of this Note may
from time to time designate in writing, the principal sum of Two Million Five
Hundred Twenty Thousand & 00/100 Dollars ($2,520,000.00) with interest thereon
as set forth below.
Interest shall accrue and principal and interest shall be payable as follows:
1. INTEREST RATE. Interest shall accrue on the outstanding principal balance
under this Note at a variable rate equal to the Bank's "Reference Rate," as it
may change from time to time, where the "Reference Rate" is defined as an index
for a variable interest rate which is quoted, published or announced from time
to time by the Bank as its reference rate (and as to which loans may be made by
the Bank at, below or above such reference rate). Such interest rate shall be
adjusted concurrently with any change in the Reference Rate. Interest shall be
calculated on the basis of 360 days per year but charged on the actual number
of days elapsed.
2. PAYMENT OF INTEREST. The Borrower hereby promises and agrees to pay interest
monthly on the first day of each month, commencing on September 1, 1994. If
interest is not paid as it becomes due, without waiving any Event of Default
occasioned by such non-payment, the Bank may, at its option but without any
obligation to do so, add such unpaid interest to principal and it shall
thereafter become and be treated as part of the principal and shall thereafter
bear like interest.
3. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the terms of
this Note, the Borrower hereby promises and agrees to pay principal in 119
monthly installments of $21,000.00 per installment, commencing on September 1,
1994 and continuing on the first day of each month thereafter.
On August 1, 2004 the Borrower hereby promises and agrees to pay to the Bank in
full the aggregate unpaid principal balance then outstanding, together with all
accrued and unpaid interest thereon.
The acceptance by the holder of any payment under this Note after the date that
such payment is due shall not constitute a waiver of the right to require prompt
payment when due of future or succeeding payments or to declare a default as
herein provided for any failure to so pay. The acceptance by the holder of the
payment of a portion of any installment at any time that such installment is due
and payable in its entirety shall neither cure nor excuse the default caused by
failure to pay the whole of such installment and shall not constitute a waiver
of the holder's rights to require full payment when due of all future or
succeeding installments. At the Bank's option, any partial payments may first be
applied to pay any late fees or other fees then due and unpaid, and then to
accrued interest then due and unpaid and the remainder thereof (if any) shall be
applied to reduce principal.
4. LATE FEE. If any payment of principal or interest, or any portion thereof,
under this Note is not paid within ten (10) calendar days after it is due, a
late payment charge equal to five percent (5%) of such past due payment may be
assessed and shall be immediately payable.
5. PREPAYMENT. The Borrower shall be permitted to repay, without penalty or
charge, all or any portion of the principal balance of this Note prior to the
maturity date of this Note. Any prepayments shall first be applied to pay
accrued interest and the remaining portion of such prepayments shall then be
applied to reduce the outstanding principal balance.
6. TERMS AND CONDITIONS INCORPORATED BY REFERENCE. The Note shall be subject to
all the terms and conditions set forth in the following described credit
agreement between the Bank and the Borrower (the "Prior Agreement"): That
certain Equipment Purchase Line of Credit Agreement dated August 22, 1994. The
Borrower hereby re-confirms all representations and warranties and re-affirms
all covenants and agreements set forth in the Prior Agreement as if such
representations, warranties, covenants, and agreements were set forth in and
made a part of this Note. To the extent the Borrower has granted the Bank a
security interest in any collateral to secure the obligations under the Prior
Agreement (whether such grant is contained in the Prior Agreement or in a
separate document), the Borrower hereby grants to the Bank a security interest
in such collateral to additionally secure all of the obligations of the Borrower
to the Bank pursuant to this Note.
7. EVENTS OF DEFAULT. Any one or more of the following described events shall
constitute an Event of Default under this Note:
A. The Borrower shall fail to pay any amount under this Note when due.
B. There shall occur a default under any other indebtedness owed by the
Borrower (or any one or more of them) to the Bank or under any agreement
securing, guarantying or relating to such other indebtedness or the
indebtedness evidenced by this Note.
C. Any representation or warranty made by the Borrower under or in
connection with this Note or any financial statement given by the Borrower
or any guarantor of this Note shall prove to have been incorrect in any
material respect when made or given or when deemed to have been made or
given.
D. The Borrower or any guarantor of this Note shall; (i) become insolvent
or be unable to pay its debts as they mature; (ii) make an assignment for
the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary
petition in bankrupt or seeking reorganization or to effect a plan or
other arrangement with creditors; (iv) file an answer admitting the
material allegations of an involuntary petition relating to bankruptcy or
reorganization or join in any such petition; (v) become or be adjudicated a
bankruptcy; or (vi) apply for or consent to the appointment of, or consent
that an order be made, appointing any receiver, custodian or trustee for
itself or any of its properties, assets or businesses.
E. Any guaranty of this Note shall be revoked or limited or its
enforceability or validity shall be contested by any guarantor, by
operation of law, legal proceeding or otherwise or any guarantor who is a
natural person shall die.
F. The Borrower shall voluntarily suspend the transaction of business or
allow to be suspended, terminated, revoked or expired any permit, license
or approval of any governmental body necessary to conduct the Borrower's
business as now conducted, or any Borrower who is a natural person shall
die.
Upon the occurrence of any Event of Default described above, the holder of this
Note, at its election, may declare the entire balance of principal and interest
thereon immediately due and payable, together with all costs of collection,
including, but not limited to, reasonable attorneys' fees and all expenses
incurred in connection with the protection of, or realization on, the security
for this Note. Interest thereafter on the unpaid principal balance, accrued
interest and costs incurred shall be payable at a rate which is 3% per annum in
excess of the rate otherwise charged according to the terms of this Note.
<PAGE>
8. ASSUMPTION. This Note is not assumable without the express prior written
consent of the holder.
9. ATTORNEYS' FEES. In the event that an action is instituted to enforce or
collect this Note, or any portion hereof, or attorneys are engaged in connection
with the protection of or realization on any security for this Note, the
Borrower promises to pay all costs in connection therewith, including but not
limited to reasonable attorneys' fees, court costs and such other sums as the
court, may establish.
10. DISPUTE RESOLUTION.
A. DISPUTES. It is understood and agreed that, upon the request of any
party to this Note, any dispute, claim or controversy of any kind, whether
in contract or in tort, statutory or common law, legal or equitable, now
existing or hereinafter arising between the parties in any way arising out
of, pertaining to or in connection with: (i) this Note, or any related
agreements, documents or instruments, (ii) all past and present loans,
credits, accounts, deposit accounts (whether demand deposits or time
deposits), safe deposit boxes, safekeeping agreements, guarantees, letters
of credit, goods or services, or other transactions, contracts or
agreements of any kind, (iii) any incidents, omissions, acts, practices, or
occurrences causing injury to any party whereby another party or its
agents, employees or representatives may be liable, in whole or in part, or
(iv) any aspect of the past or present relationships of the parties, shall
be resolved through a two-step dispute resolution process administered by
the Judicial Arbitration & Mediation Services, Inc. ("JAMS") as follows:
B. STEP I - MEDIATION. At the request of any party to the dispute, claim
or controversy, the matter shall be referred to the nearest office of JAMS
for mediation, which is an informal, non-binding conference or conferences
between the parties in which a retired judge or justice from the JAMS panel
will seek to guide the parties to a resolution of the case.
C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY). Should
any dispute, claim or controversy remain unresolved at the conclusion of
the Step I Mediation Phase, then (subject to the restriction at the end of
this subparagraph) all such remaining matters shall be resolved by final
and binding arbitration before a different judicial panelist, unless the
parties shall agree to have the mediator panelist act as arbitrator. The
hearing shall be conducted at a location determined by the arbitrator in
Los Angeles, California (or such other city as may be agreed upon by the
parties) and shall be administered by and in accordance with the then
existing Rules of Practice and Procedure of JAMS and judgement upon any
award rendered by the arbitrator may be entered by any State or Federal
Court having jurisdiction thereof. The arbitrator shall determine which is
the prevailing party and shall include in the award that party's reasonable
attorneys' fees and costs. This subparagraph shall apply only if, at the
time of the submission of the matter to JAMS, the dispute or issues
involved do not arise out of any transaction which is secured by real
property collateral or, if so secured, all parties consent to such
submission.
As soon as practicable after selection of the arbitrator, the arbitrator,
or the arbitrator's designated representative, shall determine a reasonable
estimate of anticipated fees and costs of the arbitrator, and render a
statement to each party setting forth that party's pro-rata share of said
fees and costs. Thereafter, each party shall, within 10 days of receipt of
said statement, deposit said sum with the arbitrator. Failure of any party
to make such a deposit shall result in a forfeiture by the non-depositing
party of the right to prosecute or defend the claim which is the subject of
the arbitration, but shall not otherwise serve to abate, stay or suspend
the arbitration proceedings.
D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL
PROPERTY). If the dispute, claim or controversy is not one required or
agreed to be submitted to arbitration, as provided in the above
subparagraph, and has not been resolved by Step I mediation, then any
remaining dispute, claim or controversy shall be submitted for
determination by a trial on Order of Reference conducted by a retired judge
or justice from the panel of JAMS appointed pursuant to the provisions of
Section 638(1) of the California Code of Civil Procedure, or any amendment,
addition or successor section thereto, to hear the case and report a
statement of decision thereon. The parties intend this general reference
agreement to be specifically enforceable in accordance with said section.
If the parties are unable to agree upon a member of the JAMS panel to act
as referee, then one shall be appointed by the Presiding Judge of the
county wherein the hearing is to be held. The parties shall pay in advance,
to the referee, the estimated reasonable fees and costs of the reference,
as may be specified in advance by the referee. The parties shall initially
share equally, by paying their proportionate amount of the estimated fees
and costs of the reference. Failure of any party to make such a fee deposit
shall result in a forfeiture by the non-depositing party of the right to
prosecute or defend any cause of action which is the subject of the
reference, but shall not otherwise serve to abate, stay or suspend the
reference proceeding.
E. PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of, or
the exercise of any rights under any portion of this Dispute Resolution
provision, shall limit the right of any party to exercise self help
remedies such as set off, foreclosure against any real or personal property
collateral, or the obtaining of provisional or ancillary remedies, such as
injunctive relief or the appointment of a receiver, from any court having
jurisdiction before, during or after the pendency of any arbitration. At
the Bank's option, foreclosure under the a deed of trust or mortgage may be
accomplished either by exercise of power of sale under the deed of trust or
mortgage, or by judicial foreclosure. The institution and maintenance of an
action for provisional remedies, pursuit of provisional or ancillary
remedies or exercise of self help remedies shall not constitute a waiver of
the right of any party to submit the controversy or claim to arbitration.
11. WAIVER. The liability of the undersigned is joint and several. The makers,
endorsers and/or guarantors hereof do hereby severally waive presentment,
demand, protest and notice of protest, dishonor and non-payment. Such parties
expressly consent to the extension of time for the performance of any obligation
hereunder and the release of any party liable for the obligation. The release of
any party liable hereon shall not operate to release any other party liable
hereon.
12. SEVERABILITY. Every provision hereof is intended to be several. If any
provision of this Note is determined by a court of competent jurisdiction to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall not affect the other provisions hereof, which shall
remain binding and enforceable.
13. JURISDICTION. This Note is made in the State of California, and it is
mutually agreed that California law shall apply to the interpretation of the
terms and conditions of this Note.
14. ENTIRE AGREEMENT. This Note and all documents, instruments and agreements
mentioned herein constitute the entire and complete understanding of the
parties with respect to the transactions contemplated hereunder. All previous
conversations, memoranda and writings between the parties pertaining to the
transactions contemplated hereunder not incorporated or referenced in this Note
or in such documents, instruments and agreements are superseded hereby.
15. REAL PROPERTY SECURITY. This Note is secured by a certain deed of trust
dated August 22, 1994, encumbering the real property described therein and
located in Santa Clara County, State of California, (the "Deed of Trust"). In
the event the Borrower, or any holder of title to or any interest in the real
property encumbered by the Deed of Trust, sells, conveys, alienates, assigns,
transfers or disposes of the real property, or any part thereof or any interest
therein, or becomes divested of its title or any interest herein in any manner
or way, or enters into a master lease covering all or any portion thereof or an
undivided interest therein, whether voluntary, involuntary or otherwise, or
enters into an agreement to do so, without the prior written consent of the
holder of this Note, the holder may, at its election, declare this Note,
irrespective of the maturity date specified herein or in any written agreement
pertaining to this Note, immediately due and payable without notice. No waiver
of this right shall be effective unless in writing. Consent by the holder of
this Note to one such transaction shall not constitute or be deemed to be a
waiver of the rights of the holder provided herein as to future or succeeding
transactions.
<PAGE>
BORROWER:
ISE LABS, INC.
By: /s/ Saeed A malik
------------------------------------------
Saeed A. Malik, President
By: /s/ Alex M. Barrios
------------------------------------------
Alex M. Barrios, Vice President
By: /s/ Laurence F. Jorstad
------------------------------------------
Laurence F. Jorstad, Vice President
ADDRESS:
2095 Ringwood Avenue
San Jose, CA 95131
(3)
<PAGE>
EXHIBIT 11.1
ISE LABS, INC.
CALCULATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED OCTOBER 31, ENDED JANUARY 31,
----------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income........................... $ 4,930 $ 4,848 $ 5,740 $ 955 $ 2,631
======= ======= ======= ======== ========
Weighted average common shares
outstanding for basic net income per
share............................... 17,500 17,500 17,500 17,500 17,500
Potential shares issuable on exercise
of
employee stock options.............. -- -- -- -- 268
------- ------- ------- -------- --------
Total weighted average common shares
outstanding for diluted net income
per share........................... 17,500 17,500 17,500 17,500 17,768
======= ======= ======= ======== ========
Basic net income per share........... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
======= ======= ======= ======== ========
Diluted net income per share......... $ 0.28 $ 0.28 $ 0.33 $ 0.05 $ 0.15
======= ======= ======= ======== ========
</TABLE>
<PAGE>
EXHIBIT 21.1
The subsidiaries of ISE Labs, Inc. are as follows:
Digital Testing Services, Inc., a California corporation
ISE Technology, Inc., a California corporation
ISE Labs Hong Kong Limited, a Hong Kong Company
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 12, 1997,
except as to Note 10 which is as of April 2, 1998 relating to the consolidated
financial statements of ISE Labs, Inc. which appears in such Prospectus. We
also consent to the references to us under the headings "Experts" in such
Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
April 8, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 7, 1997
relating to the consolidated statements of operations, of shareholders
deficit, and of cash flows, of Alphatec USA, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings
"Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
April 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1998
<PERIOD-START> NOV-01-1996 NOV-01-1997
<PERIOD-END> OCT-31-1997 JAN-31-1998
<CASH> 4,969 6,077
<SECURITIES> 0 0
<RECEIVABLES> 13,870 16,466
<ALLOWANCES> 1,127 1,127
<INVENTORY> 78 192
<CURRENT-ASSETS> 19,130 22,494
<PP&E> 66,346 77,276
<DEPRECIATION> 17,124 20,310
<TOTAL-ASSETS> 71,593 82,499
<CURRENT-LIABILITIES> 27,853 29,691
<BONDS> 0 0
0 0
0 0
<COMMON> 17 17
<OTHER-SE> 23,505 26,136
<TOTAL-LIABILITY-AND-EQUITY> 71,593 82,499
<SALES> 35,532 20,291
<TOTAL-REVENUES> 35,532 20,291
<CGS> 17,950 9,483
<TOTAL-COSTS> 17,950 9,483
<OTHER-EXPENSES> 8,326 5,662
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 741 869
<INCOME-PRETAX> 9,319 4,244
<INCOME-TAX> 3,579 1,613
<INCOME-CONTINUING> 5,740 2,631
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,740 2,631
<EPS-PRIMARY> 0.33 0.15
<EPS-DILUTED> 0.33 0.15
</TABLE>
