<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTEGRATED SENSOR SOLUTIONS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 77-0212047
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
625 RIVER OAKS PARKWAY
SAN JOSE, CA 95134
(408) 324-1044
(Address and telephone number of principal executive office and principal place
of business)
MANHER D. NAIK
CHIEF EXECUTIVE OFFICER AND PRESIDENT
INTEGRATED SENSOR SOLUTIONS, INC.
625 RIVER OAKS PARKWAY
SAN JOSE, CA 95134
(408) 324-1044
(Name, address, including zip code, and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
GREGORY M. GALLO, ESQ. PATRICK DELANEY, ESQ. V. JOSEPH STUBBS, ESQ. LAURA B. HUNTER, ESQ.
SCOTT M. STANTON, ESQ. THOMAS LOVETT, ESQ. 550 SOUTH HOPE STREET MARTIN C. NICHOLS, ESQ.
PAMELA B. BURKE, ESQ. KRISTIN JOHNSON, ESQ. LOS ANGELES, CA 90071-2609 LANCE S. KURATA, ESQ.
GRAY CARY WARE & FREIDENRICH LINDQUIST & VENNUM P.L.L.P. (213) 239-1253 BROBECK PHLEGER & HARRISON LLP
400 HAMILTON AVENUE 4200 IDS CENTER 4675 MACARTHUR COURT
PALO ALTO, CA 94301 MINNEAPOLIS, MN 55402 SUITE 1000
(650) 328-6561 (612) 371-3211 NEWPORT BEACH, CA 92660-1846
(714) 752-7535
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
<S> <C> <C>
Common Stock, $.001 par value per share................................................ $20,000,000(1) $6,061
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(o) under the Securities Act of 1933.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL 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.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1997
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby, are being sold by Integrated Sensor Solutions,
Inc. ("ISS" or the "Company"). Prior to this offering, there has been no public
market for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company has filed an application to have
its Common Stock approved for quotation on the Nasdaq National Market under the
symbol "ISNR."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per share........................................ $ $ $
Total(3)......................................... $ $ $
</TABLE>
- ------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. In
addition, the Company has agreed to issue the Representative a five-year
warrant to purchase shares of Common Stock and to pay the
Representative a non-accountable expense allowance of $150,000. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $750,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock on the same terms per share solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, the total Underwriting Discounts and
Commissions, and the total Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part and to withdraw, cancel or modify this offering without
notice. It is expected that delivery of the share certificates will be made in
Minneapolis, Minnesota, on or about , 1998.
DOUGHERTY SUMMIT SECURITIES LLC
, 1998
<PAGE>
FRONT OF GATEFOLD
[Photos of End User Systems: Car, Truck, Factory]
[Photos of ISS Products: ASICs, Map ISD, Media Compatible Pressure ISDs]
ISS LOGO
INSIDE GATEFOLD
LEFT PAGE:
[Block Diagram of Conventional Approach to Sensor Products]
ISS Approach...
Electronic Integration
<TABLE>
<S> <C> <C>
ASIC Products ISD Products Single Chip Solutions
"One Sensor, One ASIC" "Combined Sensor and ASIC"
[Photo of ASIC] [Photo of ISD] [Photo of Monolithic Sensor]
</TABLE>
RIGHT PAGE:
Serving the needs of a demanding sensor market
ISS Business Model
[Diagram of ISS Business Model]
[Logo] Worldwide Customers
[Customer List Over World Map Graphic]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION 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 APPEARING ELSEWHERE IN THIS
PROSPECTUS, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. FOR A DESCRIPTION OF CERTAIN CAPITALIZED TERMS, PLEASE SEE
THE "GLOSSARY" ON PAGE 14.
THE COMPANY
Integrated Sensor Solutions, Inc. ("ISS" or the "Company") designs,
manufactures and markets high performance, intelligent sensor products that are
used in electronic control systems by customers in the automotive and industrial
markets. The Company's products are application specific integrated circuits
("ASICs") and integrated sensor devices ("ISDs"). The Company's initial focus on
automotive applications has resulted in its products being designed into a broad
range of electronic control systems such as fuel injection, tire pressure,
engine control, air bag, suspension and brake systems. While continuing its
efforts to further penetrate the automotive market, the Company has leveraged
its technology to develop products that address high volume industrial
applications including utility gas meters, refrigeration, air conditioning and
process control systems.
The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The Company's mixed signal ASIC
design technology, consisting of its Intelligent Sensing Architecture and its
advanced macrocell library tailored for sensor applications, enables ISS to
rapidly develop products in which multiple system functions are integrated into
a single integrated circuit ("IC"). The Company uses its behavioral simulation
software during the development process to create and assess alternative designs
to optimize the performance of its products within the customer's system. The
Company uses its calibration software during the manufacturing process to
correct for variances in sensing elements and system environments. In addition
to its ASIC design and software technology, the Company has substantial
experience in designing packages that meet customer requirements for integration
with diverse and rugged systems. The ASIC design and software technologies,
together with its packaging expertise, enable the Company to design and
manufacture intelligent sensor products rapidly, efficiently and cost
effectively with relatively low capital expenditures.
The Company has established strategic alliances with significant
manufacturers such as Bosch, Nagano and Michelin. These strategic alliances are
intended to be long term, mutually beneficial relationships focusing on joint
technology and product development, manufacturing and exclusive or preferred
supply arrangements. As a part of its relationship with the Company, Bosch has
selected the Company to develop and supply ISDs for applications such as diesel
fuel injection, vehicle stability and electronic hydraulic brake systems.
Similarly, the Company has become the exclusive supplier of ASICs to Nagano for
use in applications such as utility gas meters for Tokyo Gas and fuel injection
systems for Mitsubishi. In addition, the Company has entered into agreements
with Michelin for the development and supply of a new generation of ISDs for
in-tire pressure applications. These alliances may also encompass a variety of
other aspects such as strategic product development, manufacturing, marketing
and/or capital investment. The Company believes that OEM technical partnering
arrangements with its customers enable the Company to combine its technology
with the systems expertise of its customers and to rapidly introduce new
products based on the technology developed through these alliances.
According to industry sources, the high performance automotive and
industrial segments of the market for electronic sensor products was
approximately $2.1 billion in 1996, and these segments are expected to grow to
over $5.0 billion by 2001. The Company's objective is to become a leading
supplier of ASICs and ISDs for electronic control systems in these markets.
Currently, ISS has over 20 customers worldwide, including market leaders such as
Bosch, John Deere, Echlin, Honda, Knorr-Bremse, MascoTech, Michelin, Nagano and
Sumitomo. Through these and other customers, the Company's products have been
designed into the vehicles of leading manufacturers such as Fiat, Ford, Honda,
Mercedes Benz, Mitsubishi, Nissan and Peugeot and into industrial systems
manufactured by companies such as Tokyo Gas and Eaton Corporation. The Company
typically enters into contracts with customers to develop and supply products
customized to satisfy their specific system requirements. The Company also
offers standard products that it develops by leveraging the technology created
in the custom design process.
The Company incorporated in California in 1989 and reincorporated in
Delaware in October 1997. The Company's principal executive offices are located
at 625 River Oaks Parkway, San Jose, California 95134, and the Company maintains
manufacturing facilities in San Jose, California and Dresden, Germany. The
Company's telephone number is (408) 324-1044 and its facsimile number is (408)
324-1054. Unless the context requires otherwise, all references to ISS or the
Company include the Company's majority owned subsidiary ISS-Nagano GmbH.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... shares
Common Stock to be outstanding after the
offering.................................. shares(1)
Use of Proceeds............................. General corporate purposes, including
repayment of indebtedness, expansion of
manufacturing operations and working capital.
See "Use of Proceeds."
Proposed Nasdaq Symbol...................... ISNR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues................................................ $ 4,976 $ 8,330 $ 10,304 $ 4,950 $ 7,011
Income (loss) from operations................................. (1,644) (1,202) (2,917) (1,528) 205
Net income (loss)............................................. (1,116) (751) (2,629) (1,318) 103
Pro forma net income (loss) per share(2)...................... $ (0.56) $ (0.29) $ 0.02
Shares used in calculation of pro forma net income (loss) per
share(2).................................................... 4,658 4,600 5,055
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $ 378 $
Working capital............................................................................ 2,851
Total assets............................................................................... 8,743
Long-term debt and capital lease obligations, less current portion......................... 144
Stockholders' equity....................................................................... 4,467
</TABLE>
- ------------------------
(1) Based on 4,575,303 shares outstanding at September 30, 1997, and excluding
(i) 500,063 shares reserved as of such date for issuance upon the exercise
of outstanding stock options, (ii) 625,040 shares reserved for future grant
under the Company's stock plans and (iii) 127,544 shares for issuance on
exercise of outstanding warrants.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) Adjusted to reflect the receipt by the Company of the estimated net proceeds
of $ from the sale of shares of Common Stock offered hereby
by the Company at an assumed initial public offering price of $ per share,
and the anticipated application of the proceeds therefrom.
------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS ASSUMES (I)
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) NO EXERCISE OF
OUTSTANDING WARRANTS TO PURCHASE SHARES OF THE COMPANY'S COMMON STOCK, INCLUDING
THE REPRESENTATIVE'S WARRANT AND (III) THE CONVERSION OF ALL OUTSTANDING SHARES
OF PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON THE CLOSING OF THIS
OFFERING. SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON
STOCK OFFERED BY THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
LIMITED PROFITABILITY; HISTORY OF OPERATING LOSSES. The Company was founded
in 1989 and commenced shipments of its initial product in 1990. The Company did
not achieve profitability on a quarterly basis until the quarter ended June 30,
1997 and has never achieved profitability on an annual basis. Although the
Company achieved income from operations in the three most recent fiscal
quarters, the Company sustained net losses of $1.3 million in the quarter ended
December 31, 1996, $12,000 in the quarter ended March 31, 1997 and $2.6 million
in the fiscal year ended March 31, 1997. There can be no assurance that the
Company will remain profitable in the future on a quarterly basis or that it
will achieve profitability on an annual basis. As of September 30, 1997, the
Company had an accumulated deficit of approximately $8.1 million. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
DEPENDENCE ON CUSTOMER SPECIFIC PRODUCTS; LENGTHY SALES AND DEVELOPMENT
CYCLE. A substantial portion of the Company's products are designed to address
the specific needs of individual customers. As a result, the sales and
development cycle for these products can be lengthy, with the development cycle
alone ranging up to thirty months for new products in new applications in the
automotive industry and up to eighteen months for new products in new
applications in the industrial market. Because customer specific products are
developed for particular customers' applications, some of the Company's current
and future customer specific products may never be produced in high volume, or
at all, due to the Company's inability to introduce custom products in a timely
manner, delays in the introduction of the Company's customers' products, the
failure of the Company's customers' products to achieve and sustain commercial
success or the discontinuation of a customer's product line. Any of these
occurrences could have a material adverse effect on the Company's business,
financial condition or operating results. See "Business--Product Development."
FLUCTUATIONS IN OPERATING RESULTS. The Company's revenues and operating
results have varied on a quarterly and an annual basis in the past and may vary
significantly in the future. The Company's revenues and operating results are
difficult to forecast and could be materially adversely affected by many
factors, some of which are outside the control of the Company, including, among
others, the relatively long sales and development cycle for the Company's
products, the Company's ability to introduce new products and technologies on a
timely basis, market acceptance of the Company's and its customers' products,
the timing, deferral or cancellation of customer orders and related shipments,
competitive pressures on selling prices, availability of foundry capacity,
availability of raw materials, fluctuations in yields, changes in product mix,
changes in the lead time required to ship products after receipt of an order,
introduction of products and technologies by the Company's competitors and
customers, the ability to obtain product development contracts and the amount
and timing of recognition of product development contract revenue and expense
associated with such contracts, quality control of products sold, personnel
changes and difficulties in attracting and retaining qualified technical
personnel, foreign currency exchange rates and economic conditions generally and
in the automotive and industrial markets.
A significant portion of the Company's product sales are made pursuant to
standard purchase orders that are cancelable without significant penalties. In
addition, purchase orders are often subject to price renegotiations and to
changes in quantities of products and delivery schedules to reflect changes in
5
<PAGE>
customers' requirements and manufacturing availability. For instance, shipments
to three of the Company's major customers were delayed in the quarter ended
December 31, 1996 which materially adversely affected the Company's operating
results for the quarter, and there can be no assurance that a similar incident
will not occur in the future. The Company's actual shipments depend in part on
the manufacturing capacity of the Company's suppliers and the availability of
products from such suppliers. The Company's expense levels are based, in part,
on its expectations as to future revenues and to a large extent are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or any
material delay or deferral of customer orders would have a material adverse
effect on the Company's business, financial condition or operating results.
As a result of the foregoing and other factors, it is likely that in some
future period the Company's operating results will fail to meet the expectations
of public market analysts or investors. In such event, or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the trading price of the Company's Common Stock could
drop significantly. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT CUSTOMER CONCENTRATION. Historically, a relatively small number
of customers has accounted for a significant percentage of the Company's total
revenues, and the Company expects that this trend will continue. In each of
fiscal 1995, 1996, 1997 and the six months ended September 30, 1997, the Company
has had two or more customers, which each accounted for more than 10% of total
revenues. In fiscal 1995, two customers accounted for 69% of total revenues; in
fiscal 1996, four customers accounted for 71% of total revenues; in fiscal 1997,
four customers accounted for 75% of total revenues; and in the six months ended
September 30, 1997, four customers accounted for 73% of total revenues. The
Company's ability to achieve sales in the future will depend upon its ability to
obtain orders from, maintain relationships with and provide support to a small
number of existing and new customers. As a result, any cancellation, reduction,
rescheduling or delay in orders by or shipments to any customer or the
discontinuation or redesign by any customer of its products which currently
incorporate one or more of the Company's products would have a material adverse
effect on the Company's business, financial condition or operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers."
DEPENDENCE ON AUTOMOTIVE INDUSTRY; NEED TO PENETRATE NEW MARKETS. The
Company has historically derived a substantial majority of its total revenues
from products sold to customers in the automotive industry. Accordingly,
improvement in the Company's future operating results will depend in part on its
ability to increase its market share in the automotive industry. Further, the
Company believes that its operating results may be affected by the cyclical
nature of the automotive industry. Any downturn in any customer's business or
the economy in general may cause purchases of the Company's products to be
deferred, reduced or canceled resulting in a material adverse effect on the
Company's business, financial condition or operating results. The Company's
future operating results will also depend on its ability to continue to
penetrate the industrial market and to penetrate new markets such as the
consumer and office products markets. While the Company may devote substantial
resources to penetrate new markets, there can be no assurance that the revenues
generated from these efforts, if any, will exceed the costs of such efforts. To
the extent that the Company is unable to penetrate new markets, its future
success will be dependent upon its ability to further penetrate the automotive
industry and on the continued growth of that industry. If the Company is unable
to successfully penetrate new markets or to expand its penetration of the
automotive market, its business, financial condition or operating results would
be materially adversely affected.
DECLINING AVERAGE SELLING PRICES. The Company sells a substantial portion
of its products pursuant to exclusive contracts which typically contain
volume-pricing provisions that require the Company to reduce its per unit price
as certain volume levels are achieved. If the Company is unable to make
corresponding
6
<PAGE>
product cost reductions, the resulting decline in the average selling prices of
the products sold pursuant to such contracts may reduce the Company's product
gross margin. The Company anticipates that all of its products will experience
declining average selling prices over their life cycles with a similar potential
impact on gross margins if the Company is unable to reduce corresponding costs
or introduce new products with higher gross margins. If the Company is unable to
reduce its costs on existing products or introduce new products with higher
margins in a timely manner, the Company's business, financial condition or
operating results will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SENSING ELEMENT SUPPLIERS. The Company is currently dependent
upon a small number of third party vendors for substantially all of the sensing
elements incorporated into its ISDs. The Company currently purchases a pressure
sensing element incorporated in certain of its ISDs from a single source, Nagano
Keiki Co., Ltd. ("Nagano"). The Company believes that Nagano is currently the
only high volume supplier of this type of sensing element. The Company also
manufactures ISDs that incorporate sensing elements purchased solely from Lucas
NovaSensor. The Company historically has not manufactured sensing elements and
anticipates that it will continue to obtain sensing elements from third parties
for the foreseeable future. The Company's future success will be dependent upon
its ability to identify and work closely with manufacturers who are able to
provide high volume, technologically advanced and cost-effective sensing
elements. Any failure of the Company to maintain its existing relationships with
sensing element suppliers or to identify and work with new sensing element
suppliers could have a material adverse effect on the Company's business,
financial condition or operating results. See "Certain Transactions."
NARROW PRODUCT BASE. The Company currently depends upon the sale and
success of a limited number of product lines. Because the Company's primary
source of revenue is dependent upon a narrow product base, any interruption or
reduction in these sales due to production problems, lack of adequate demand,
replacement by new technologies or other internal or external problems resulting
in the failure of such product lines to win broad acceptance in the marketplace
would have a material adverse effect on the Company's business, financial
condition or operating results. See "Business--Products."
RAPID TECHNOLOGICAL CHANGE; NEED TO DEVELOP NEW PRODUCTS. The markets for
the Company's products are characterized by rapid technological change as well
as evolving industry standards that may render existing products obsolete. As a
result, the success of new products depends on a variety of factors, including
effective definition of products that meet evolving market needs, successful and
timely completion of development and introduction of these products, successful
design wins in new systems and the ability to offer products at competitive
prices. The development of new mixed signal integrated circuits is highly
complex, and from time to time the Company has experienced delays in developing
and introducing new products. There can be no assurance that the Company will be
able to define new products successfully and develop and bring to market new and
enhanced products on a timely and cost effective basis, develop or access new
process technologies, secure design wins or respond effectively to new
technological changes or new product announcements by others. A failure in any
of these areas could have a material adverse effect on the Company's business,
financial condition or operating results.
COMPETITION. The markets in which the Company competes are highly
competitive and characterized by diverse industry requirements and severe
pricing pressure in many applications. In the ASIC market, the Company competes
with analog and mixed signal semiconductor companies such as Motorola, Inc.
("Motorola"), Texas Instruments Incorporated ("TI") and Analog Devices, Inc. The
Company's products also compete indirectly with conventional hybrid circuits and
standard analog and mixed signal ICs. In the ISD market, the Company competes
with Delco, a subsidiary of General Motors ("GM"), Motorola, TI, Kavlico and
Denso Corporation ("Denso"). These companies all have substantially greater
financial, technical, manufacturing, marketing, distribution, personnel and
other resources than the Company. In addition, in the industrial market, the
Company competes with many small companies that have developed
7
<PAGE>
specialized electronic sensor products and formed close relationships with their
customers. The Company also competes with the in-house development staff of
certain of its current and potential customers.
The Company also anticipates that additional competitors may enter the
Company's markets, resulting in even greater competition. Many of the Company's
current or prospective competitors own or have investments in wafer foundries,
which provide dedicated capacity to these competitors and enable them to
influence or control costs more effectively than the Company. There can be no
assurance that the Company will be able to compete successfully with existing or
new competitors. Increased competition could result in significant price
reductions or the loss of current or potential customers or design wins which
could materially adversely affect the Company's business, financial condition or
operating results. See "Business--Competition."
MANAGEMENT OF GROWTH. The Company has recently experienced and may continue
to experience growth in the number of its employees and scope of its operating
and financial systems, resulting in increased responsibilities for the Company's
existing personnel and the need to hire additional personnel. To manage future
growth effectively, the Company will need to continue to implement and improve
its operational, financial and management information systems, particularly
those of its German subsidiary, and to hire, train, motivate, manage and retain
its employees. There can be no assurance that the Company will be able to manage
such growth effectively, and failure to do so could have a material adverse
effect on the Company's business, financial condition or operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Employees."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL TECHNICAL PERSONNEL. The
Company is substantially dependent upon the services of its executive officers.
The Company's future success depends on the continued contributions of such
officers, including the maintenance, enhancement and establishment of key
customer relationships and the management of operations. The loss of the
services of any of these officers by the Company could have a material adverse
effect on the Company's business, financial condition or operating results. Such
officers have not entered into employment agreements with the Company.
The Company believes that a key factor for competing successfully in the
mixed signal integrated circuit business is to attract and retain creative and
knowledgeable complementary metal oxide semiconductor ("CMOS") mixed signal
designers. The number of design engineers who have the training, creativity and
experience to design complex mixed signal integrated circuits is very limited,
and the competition for such personnel is intense. The Company's future success
will be heavily dependent upon its ability to attract and retain qualified
design, technical and management personnel. There can be no assurance that the
Company will be able to continue to attract and retain these personnel, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition or operating results. See "Business--Employees."
DEPENDENCE ON SOLE SOURCE SUPPLIERS. Certain components of the Company's
current products, such as fabricated wafers, sensing elements, packages and PC
boards, are acquired from single source suppliers. The Company purchases these
components on a purchase order basis and does not carry significant inventories.
If the Company were required to change any sole source component vendor or to
add vendors, the Company could be required to requalify its products
incorporating the new components with its existing customers. The qualification
could prevent or delay product shipments which could have a material adverse
effect on the Company's business, financial condition or operating results. In
addition, the Company's reliance on sole source component vendors involves
several risks, including reduced control over the price, timely delivery,
reliability and quality of the components. Any inability of the Company to
obtain timely deliveries of components of acceptable quality or any significant
increase in the prices of components for which the Company does not have
alternative sources could result in delays, cancellations or reductions in
product shipments which would have a material adverse effect on the Company's
business, financial condition or operating results. Although the Company has not
to date experienced any significant
8
<PAGE>
difficulty in obtaining these components, there can be no assurance that
shortages will not occur in the future. See "--Dependence on Independent Wafer
Suppliers."
DEPENDENCE ON INDEPENDENT ASSEMBLY CONTRACTORS. All of the Company's ASICs,
other than those incorporated in its ISDs, are assembled by independent
contractors in Hong Kong or the Philippines. In addition, the Company relies
solely on an independent contractor in Thailand for PC board level assembly of
the electronic portion of the Company's ISDs. The Company's reliance on
independent contractors to assemble and package its products involves
significant risks, including reduced control over quality and delivery
schedules, the potential lack of adequate capacity and discontinuance or
phase-out of such contractors' assembly processes. Historically, due to a lack
of significant volumes, the Company has experienced difficulty ensuring that
independent assembly contractors would continue to assemble or package the
Company's products and that alternate independent assembly contractors would be
available in such instances. In 1994, the independent contractor responsible for
the Company's PC board level assembly ceased its operations on very short
notice, which materially adversely affected the Company's operating results for
fiscal 1994 and 1995. There can be no assurance that the Company's current or
future contractors will continue to assemble and package products for the
Company or that alternate contractors will be available to assemble or package
the Company's products as necessary. Further, because the Company's assembly
contractors are located in foreign countries, the Company is subject to certain
risks generally associated with contracting with foreign suppliers, including
currency exchange fluctuations, political and economic instability, trade
restrictions and changes in tariff and freight rates. There can be no assurance
that the Company will not experience problems in timeliness, adequacy or quality
of product deliveries, any of which could have a material adverse affect on the
Company's business, financial condition or operating results. See
"Business--Manufacturing and Assembly."
DEPENDENCE ON INDEPENDENT WAFER SUPPLIERS. The Company relies on a small
number of independent foundries for the manufacture of all of its ASICs,
including those incorporated into its ISDs. None of the Company's ASICs is
currently fabricated by more than one foundry. Although processed CMOS wafer
capacity in the semiconductor industry is currently widely available, there can
be no assurance that the Company's foundries will continue to provide the
Company an adequate supply of wafers to meet its customers' demands.
The Company believes that as a result of fluctuations in demand and changing
technologies, processed wafer capacity may become limited from time to time,
resulting in greater difficulty in obtaining adequate supplies of wafers,
increased prices and increased lead times. Any increase in the demand for
processed wafers over expected levels or any failure of processed wafer supply
in the industry to grow at anticipated rates will magnify these shortages. The
Company currently receives fabricated wafers from American Microsystems, Inc.,
Micrel Semiconductor, Inc. and Silicon Systems, Inc. In an effort to secure a
second source for certain ASICs, the Company has recently begun to receive
fabricated wafers from Symbios Logic, Inc. ("Symbios") and is in the process of
qualifying products manufactured by Symbios. There can be no assurance that the
Company will be able to complete qualification of products fabricated by Symbios
in a timely manner or at all, and any such failure could have a material adverse
effect on the Company's business, financial condition or operating results.
Although the Company receives supply assurances from its foundry partners, the
Company obtains all of its wafers on a purchase order basis, and, as a result,
there can be no assurance that wafer foundries will allocate sufficient capacity
or any capacity to the Company to meet its processed wafer supply needs. In the
event that the Company's foundry partners are unable or unwilling to continue
supplying wafers to the Company, there can be no assurance that the Company will
be able to identify and qualify additional manufacturing sources in a timely
manner, that any such additional manufacturing sources would be able to produce
wafers with acceptable manufacturing yields or that the Company would not
experience delays in product availability, quality problems, increased costs or
disruption in product development activities. The Company's future operating
results will depend in part on its ability to reduce its product costs by
increasing the number of functional die per wafer by utilizing smaller geometry
processes and improving designs. Shifting the fabrication of the Company's
wafers to a
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<PAGE>
new semiconductor process or a new foundry is a highly complex undertaking
requiring a substantial commitment of engineering personnel and other resources,
which could materially adversely affect the Company's business, financial
condition or operating results. See "Business--Manufacturing."
The use of independent wafer foundries entails certain other risks,
including reduced control over manufacturing yields and production costs. The
Company has from time to time experienced lower than anticipated manufacturing
yields in connection with the introduction of new products. There can be no
assurance that the Company's wafer foundries will not produce wafers with lower
than expected manufacturing yields in the future, which could materially
adversely affect the Company's business, financial condition or operating
results.
VARIABILITY OF MANUFACTURING YIELDS. Manufacturing yields of the Company's
ASICs and ISDs may vary significantly depending on a variety of factors. ASIC
yields can be adversely affected by the level of contaminants in the
manufacturing environment, impurities in the materials used and the performance
of fabrication personnel and equipment, all of which are outside the control of
the Company. ISD yields can be adversely affected by defective sensing elements,
component quality and performance of assembly personnel and equipment.
Historically, the Company has experienced fluctuations in yields of its
products, particularly during initial production of new products, which have
adversely affected product gross margin. The Company believes that any new
product lines or manufacturing processes that it undertakes may create
difficulties in achieving acceptable yields, and, as a result, the Company may
experience production problems or shipment delays which could have a material
adverse effect on the Company's business, financial condition or operating
results. Regardless of the process technology used, the manufacturing of ASICs
and ISDs is a highly complex and precise process, and there can be no assurance
that the Company will be able to achieve or maintain acceptable yields on its
products in the future. Any such failure could have a material adverse effect on
the Company's business, financial condition or operating results. See
"Business--Manufacturing."
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company relies on a
combination of patents, maskwork rights, trade secret laws, copyrights,
trademarks and employee and third party non-disclosure agreements to protect its
intellectual property rights. The Company has been issued two patents and has
filed four patent applications in the United States and one foreign patent
application relating to ASIC designs. In addition, the Company has filed one
patent application in the United States relating to package design. There can be
no assurance that any patents will issue from any of the Company's pending
applications or that claims allowed from pending applications will be of
sufficient scope or strength, or be issued in all countries where the Company's
products can be sold, to provide meaningful protection or any commercial
advantage to the Company. Also, competitors of the Company may be able to design
around the Company's patents. The laws of certain foreign countries in which the
Company's products are or may be developed, manufactured or sold, including
various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as the laws of the United States
and thus make the possibility of piracy of the Company's technology and products
more likely. There can be no assurance that the steps taken by the Company to
protect its proprietary information will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company, the
Company may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any licenses will
be acceptable to the Company. A failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products requiring the technology.
Furthermore,
10
<PAGE>
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation by or against the Company could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation
results in a favorable determination for the Company. In the event of any
adverse result in any such litigation against the Company, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop noninfringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
commercially reasonable terms or at all, and any such development or license
could require expenditures by the Company of substantial time and resources. In
the event that a third party makes a successful claim against the Company or its
customers and a license is not made available to the Company on commercially
reasonable terms, or at all, the Company's business, financial condition or
operating results could be materially adversely affected.
DEPENDENCE ON INTERNATIONAL SALES AND SUPPLIERS. Sales to customers located
outside the United States accounted for approximately 22.0%, 38.6%, 46.0% and
51.7% of the Company's total revenues in fiscal 1995, 1996 and 1997 and the six
months ended September 30, 1997, respectively. The Company's sales to customers
outside the United States are subject to a variety of risks, including those
arising from fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory and
governmental licensing requirements, longer accounts receivable payment cycles
and potentially adverse tax consequences. Because a significant portion of the
Company's international sales and in particular its European sales have to date
been made through its German subsidiary and have been denominated in Deutsche
Marks, fluctuations in the value of the Deutsche Mark relative to the U.S.
Dollar or other currencies could adversely affect the pricing of the Company's
products in foreign markets and make the Company's products relatively more
expensive. In addition, fluctuations in the Deutsche Mark could adversely affect
the profitability of sales made in Europe and therefore materially adversely
affect the Company's business, financial condition or operating results.
Many of the components and contract services used by the Company are
procured from international sources, particularly in Asia. Accordingly, the
fluctuations of currency exchange rates may affect the prices of such components
and services. Significant price increases could have a material adverse effect
on the Company's business, financial condition or operating results.
As a result of conducting business internationally, the Company is subject
to general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
financial condition or operating results or require the Company to modify its
current business practices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEED FOR ISO 9001 AND QS-9000 CERTIFICATION. The Company currently does not
have either ISO 9001 or QS-9000 certification which increasingly are being
required by motor vehicle manufacturers. The lack of such certification may make
it more difficult or impossible for the Company to qualify its products with new
customers or to continue to sell products to existing customers, either of which
could have a material adverse effect on the Company's business, financial
condition or operating results.
RISKS OF PRODUCT LIABILITY. The automotive industry is characterized by
potential risks of product liability. The use of the Company's products in
various industrial or consumer applications in the future may also subject the
Company to potential risks of product liability claims. The Company's agreements
with its customers typically contain provisions designed to limit the Company's
exposure to product liability claims, and, although the Company has not
experienced any product liability claims to date, the sale of products by the
Company may entail the risk of such claims. Further, notwithstanding liability
limitation provisions in its agreements with its customers, due to various
industry or business practices or the need to
11
<PAGE>
maintain good customer relationships, the Company may be placed in a position
whereby it may make payments related to such product liability claims. The
Company currently maintains product liability insurance, but there can be no
assurance that product liability claims will be covered by such insurance or
will not exceed insurance coverage limits or that such insurance will continue
to be available on commercially reasonable terms or at all. Notwithstanding the
provisions in the agreements with its customers, a product liability claim
brought against the Company could have a material adverse effect upon the
Company's reputation, business, financial condition or operating results.
RISKS OF PRODUCT RECALLS. The automotive industry is heavily regulated by
government agencies which establish various vehicle safety standards that are
often indirectly related to the components and subcomponents in their vehicles.
To the extent that any vehicles or any parts therein are required to be or are
voluntarily recalled and the recall involves vehicles or parts that are directly
or indirectly related to any of the Company's products, the Company may be
required to repair or replace its products, redesign or reproduce its products
or halt production or shipment of its products. Further, any recall of vehicles
or parts directly or indirectly related to any of the Company's products may
have the effect of damaging the Company's reputation. Although no such recall
has involved the Company or its products in the past, there can be no assurance
that such a recall will not occur in the future or that if such a recall does
occur that the Company's reputation, business, financial condition or operating
results will not be materially adversely affected.
NO PRIOR TRADING MARKET; POSSIBLE PRICE VOLATILITY. Prior to this offering,
there has been no public market for the Company's Common Stock, and there can be
no assurance that an active trading market will develop or be sustained
following this offering. The initial public offering price will be determined
through negotiations between the Company and the Representative of the
Underwriters and may not be indicative of the market price of the Company's
Common Stock after this offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. 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 operating results, announcements of technological innovations, the
introduction of new products, new contracts or changes in pricing policies by
the Company or its competitors, developments with respect to proprietary rights,
changes in earnings estimates by analysts, conditions and trends in the
semiconductor, automotive, industrial or electronics industries, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the securities of technology
companies. These broad market fluctuations, as well as general economic, market
and political conditions, may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's common stock, securities class action litigation has often
occurred against such companies. 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 or operating results. There can be no assurance
that the trading price of the Common Stock will not decline below the initial
public offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Immediately upon the
effectiveness of this offering, the shares of Common Stock offered
hereby will be freely tradable. The sale of substantial amounts of Common Stock
in the public market following the offering made hereby could have an adverse
effect on the price of the Common Stock. Beginning 180 days after the date of
this offering, approximately shares will become eligible for sale upon
the expiration of agreements not to sell such shares, subject to compliance with
Rule 144 or 701 under the Securities Act of 1933, as amended (the "Securities
Act"). Dougherty Summit Securities LLC, as Representative of the Underwriters
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. In addition,
outstanding options to purchase approximately shares will be vested and
exercisable, and
12
<PAGE>
the shares issuable upon exercise thereof will become eligible for sale,
approximately 180 days following the date of this Prospectus, upon expiration of
certain lock-up agreements. The Company intends to file a registration statement
on Form S-8 promptly after the closing of this offering to register
approximately 1,383,100 shares of Common Stock reserved for issuance under its
employee stock option plans and its 1997 Employee Stock Purchase Plan. Shares of
Common Stock issued pursuant to these plans after the effective date of the
registration statement will be available for sale in the public market, subject
to certain lock-up agreements and the Rule 144 volume limitations applicable to
affiliates. See "Management-- Benefit Plans" and "Shares Eligible for Future
Sale."
As of the date of this Prospectus, the holders of approximately 2,160,000
shares of Common Stock are entitled to certain demand and piggyback registration
rights with respect to such shares. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have a material adverse effect on the market
price for the Company's Common Stock. If the Company were required to include
shares held by such holders in a Company initiated registration pursuant to the
exercise of their piggyback registration rights, such sale might have an adverse
effect on the Company's ability to raise needed capital. See "Shares Eligible
for Future Sale" and "Description of Capital Stock--Registration Rights."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. The Company's
officers, directors, principal stockholders and their affiliates will, in the
aggregate, beneficially own approximately % of the Company's outstanding
Common Stock after this offering ( % if the Underwriters' over-allotment option
is exercised). As a result, such persons will have, to a substantial degree, the
ability to control the vote on matters submitted to stockholders for approval
(including, but not limited to, the election of all directors, and any merger,
consolidation or sale of all or substantially all of the Company's assets) and
to control the management and affairs of the Company. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Management" and "Principal Stockholders."
POTENTIAL ISSUANCE OF PREFERRED STOCK; FACTORS INHIBITING
TAKEOVER Effective upon the closing of this offering, the Board or Directors
will have the authority to issue up to 7,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely and materially affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of preferred
stock, while potentially providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of preferred stock. The Company is subject to Section 203 of the
Delaware General Corporation Law, which restricts certain business combinations
with any interested stockholder as defined by such statute. The statute may have
the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will suffer immediate and substantial dilution in the net tangible book
value of the Common Stock. To the extent outstanding options or warrants to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
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<PAGE>
GLOSSARY
ANALOG: Pertaining to data that consist of continuously variable physical
quantities.
APPLICATION SPECIFIC INTEGRATED CIRCUIT ("ASIC"): An integrated circuit
designed, developed and intended for use by the manufacturer in a particular
application.
BEHAVIORAL SIMULATION SOFTWARE: Proprietary software of the Company used in the
development of ASICs and ISDs. This software aids designers in assessing
alternative ASIC architectures based on sensing element specifications and
product functional requirements, and in optimizing the design tradeoffs among
the sensing element, the electronics and the system.
BIPOLAR: A type of integrated circuit fabrication process developed for
precision analog products which typically require higher operating currents and
are thus limited in terms of integrating many functions into a single chip.
CALIBRATION SOFTWARE: Proprietary software of the Company used to adjust the
parameters in the ASIC to correct variances in sensing elements and system
environments in ISDs.
CHIP-ON-BOARD ("COB"): Method of attaching electronic components in unpackaged
die form to a printed circuit board, eliminating the need for separate ASIC
packaging.
COMPLEMENTARY METAL OXIDE SEMICONDUCTOR ("CMOS"): A type of integrated circuit
fabrication process that is characterized by low power consumption,
compatibility with non-volatile memory and logic, low noise and immunity to
electromagnetic interference.
DESIGN WIN: A product has achieved a design win when a manufacturer has (i)
purchased the Company's ASICs or ISDs and (ii) commenced development of a
product incorporating the purchased type of ISD or ASIC. Design wins do not
necessarily result in released products by the manufacturers.
DIGITAL: Pertaining to representation of information by encoded bits of 1's and
0's that indicate on and off states.
ELECTRONIC SENSOR: A sensor based on an electronic design (as opposed to a
mechanical or electro-mechanical device) that converts a physical parameter into
an electrical signal.
HYBRID CIRCUIT: A method of building an electronic circuit in which discrete
components are placed on the surface of a ceramic substrate that contains the
electrical interconnections. In addition to the electronic components, thick
film resistors can be screen printed onto the ceramic.
INTEGRATED CIRCUIT ("IC"): A single component that combines multiple electronic
circuit elements into a single chip.
INTELLIGENT SENSING ARCHITECTURE ("ISA"): An approach to designing and building
integrated circuits for sensing applications that allows customized solutions to
be produced at costs comparable to standardized products. All signal processing
functions as well as decision making intelligence, system level functions, and
communications circuitry can be integrated into a single chip to save cost and
space.
INTEGRATED SENSOR DEVICES ("ISDS"): Sensor products that consist of a sensing
element and an ASIC in one package.
LASER TRIMMING: Use of a laser to adjust the value of a screen-printed thick
film resistor or a deposited thin film resistor by removing part of the resistor
material in order to adjust its electrical resistance.
MACROCELL: A proven circuit block which implements a significant function such
as an amplifier, filter or data converter, in order to reduce development time
and risk.
MEDIA COMPATIBLE ISD: An ISD product in which the pressure sensing element
comes in direct contact with harsh media such as gasoline, diesel fuel, brake
fluids or other chemical compounds.
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<PAGE>
MIXED SIGNAL: Pertaining to an ASIC design that includes both analog and
digital circuits.
NONVOLATILE MEMORY: A storage medium that retains its data in the absence of
power.
PRINTED CIRCUIT BOARD ("PC BOARD"): A substrate for interconnecting electronic
components that consists of screen-printed conductive traces on a low cost,
non-conductive substrate.
SURFACE MOUNT TECHNOLOGY: The process of attaching electronic components to a
printed circuit board in which the electrical pins on the package are soldered
to the surface of the printed circuit board as opposed to the "through hole"
method in which the pins are placed through holes in the printed circuit board
and soldered on the back side.
THICK FILM NETWORKS: Electrical circuits made from individual thick film
resistors. These networks are used to correct, via laser trimming, errors
associated with sensing element variances and errors due to changes in the
system environment.
WAFER: A substrate of single crystal silicon that is used to batch manufacture
hundreds or thousands of identical integrated circuits.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $ ($ if the Underwriters' over-allotment option is
exercised in full) based on an assumed initial public offering price of $ per
share after deducting estimated underwriting discounts and commissions, the
Representative's non-accountable expense allowance and other estimated offering
expenses. The Company intends to use the proceeds of this offering primarily for
general corporate purposes, including the expansion of manufacturing operations,
working capital and the repayment of approximately $679,000 of indebtedness. A
portion of the net proceeds may also be used for investments in or acquisitions
of complementary businesses, products or technologies, although no such
transactions are presently contemplated or currently under negotiations. Pending
such uses, the Company expects to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain future earnings, if any,
to fund the development and growth of its business and does not anticipate
paying cash dividends in the foreseeable future. In addition, the Company's bank
credit agreement prohibits the Company from paying cash dividends on its Common
Stock without the bank's prior written consent.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the sale by the Company of
shares of Common Stock pursuant to this offering at an assumed initial public
offering price of $ per share and the receipt by the Company of the estimated
net proceeds therefrom, after deducting estimated underwriting discounts and
commissions, the Representative's non-accountable expense allowance and
estimated offering expenses, and the repayment of approximately $679,000 of
short-term debt. The capitalization information set forth in the table below is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus and should be read in conjunction
with such Consolidated Financial Statements and Notes.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations(1)........................................... $ 157 $
Short-term debt........................................................................... 1,279
--------- -----------
$ 1,436 $
--------- -----------
--------- -----------
Long-term debt and capital lease obligations, less current portion(1)..................... $ 144 $
Stockholders' equity
Preferred Stock, $.001 par value per share:
Authorized: 7,000,000 actual (7,000,000 as adjusted)
Issued and outstanding: 3,137,931 actual (no shares as adjusted)...................... 3
Common Stock, $.001 par value per share:
Authorized: 50,000,000 actual (50,000,000 as adjusted)
Issued and outstanding: 1,437,372 actual ( as adjusted)(2).................... 2
Additional paid in capital.............................................................. 12,883
Accumulated deficit..................................................................... (8,067)
Cumulative translation adjustment....................................................... 82
Deferred compensation................................................................... (436)
--------- -----------
Total stockholders' equity.............................................................. 4,467
--------- -----------
Total capitalization...................................................................... $ 4,611 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) As adjusted outstanding excludes 500,063 shares of Common Stock issuable
upon exercise of outstanding options as of September 30, 1997 at a weighted
average exercise price of $1.45 per share and 625,040 shares of Common Stock
reserved for future grant under the Company's stock plans. Also excludes
127,544 shares of Common Stock issuable upon exercise of outstanding
warrants as of September 30, 1997. See "Management--Benefit Plans" and Note
7 of Notes to Consolidated Financial Statements.
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<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of September
30, 1997 was $4,466,546, or $0.98 per share based on 4,575,303 shares
outstanding. Net tangible book value per share represents the amount of the
Company's total tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
Common Stock in this offering and the net tangible book value per share of
Common Stock immediately after completion of this offering. After giving effect
to the sale by the Company of the shares of Common Stock offered hereby
at an assumed initial public offering price of $ per share and after deducting
the estimated underwriting discounts and commissions, the Representative's
non-accountable expense allowance and estimated offering expenses payable by the
Company, the net tangible book value of the Company as of September 30, 1997
would have been $ or $ per share. This represents an immediate increase
in net tangible book value of $ per share to existing stockholders and an
immediate substantial dilution in net tangible book value of % or $ per
share to new investors in this offering. Dilution per share represents the
difference between the price per share paid by the new investors and the net
tangible book value per share after giving effect to the offering. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $
Net tangible book value as of September 30, 1997............ $
Increase per share attributable to the offering.............
Net tangible book value after the offering....................
---------
Dilution per share to new investors $
---------
---------
</TABLE>
The following table sets forth, as of September 30, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
holders of Common Stock and by the new investors, before deducting the estimated
underwriting discount, the Representative's non-accountable expense allowance
and estimated offering expenses payable by the Company, at an assumed initial
public offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................... $ $
New investors.......................................
---------- ----- ------------- ----- -----
Total............................................... 100.0% $ 100.0% $
---------- ----- ------------- ----- -----
---------- ----- ------------- ----- -----
</TABLE>
The foregoing computations exclude 500,063 shares of Common Stock issuable
upon exercise of outstanding options as of September 30, 1997 at a weighted
average exercise price of $1.45 per share and 625,040 shares of Common Stock
reserved for future grant under the Company's stock plans. The foregoing
computations also exclude 127,544 shares of Common Stock issuable upon exercise
of outstanding warrants as of September 30, 1997. See "Management--Benefit
Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data set forth below as of March 31,
1996 and 1997 and for the fiscal years ended March 31, 1995, 1996 and 1997, have
been derived from consolidated financial statements of the Company which have
been audited by Ernst & Young LLP, independent auditors, whose report thereon is
included elsewhere herein. The selected financial data set forth below as of
March 31, 1995 has been derived from audited financial statements not included
in this Prospectus. The selected financial data as of September 30, 1997 and for
the six months ended September 30, 1996 and 1997 has been derived from the
unaudited financial statements of the Company included elsewhere in this
Prospectus. In the opinion of management, all adjustments, consisting of only
normal recurring accruals, considered necessary for a fair presentation have
been made. These historical results are not necessarily indicative of the
results to be expected in the future. The following table is qualified by
reference to and should be read in conjunction with the consolidated financial
statements, related notes thereto and other financial data included elsewhere
herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product revenues............................................. $ 3,669 $ 5,337 $ 8,049 $ 3,805 $ 4,968
Contract revenues............................................ 1,307 2,993 2,255 1,145 2,043
--------- --------- --------- --------- ---------
Total revenues................................................. 4,976 8,330 10,304 4,950 7,011
Cost of revenues:
Cost of product revenues..................................... 3,624 5,250 7,292 3,510 3,455
Cost of contract revenues.................................... 996 2,150 2,731 1,408 1,578
--------- --------- --------- --------- ---------
Total cost of revenues......................................... 4,620 7,400 10,023 4,918 5,033
--------- --------- --------- --------- ---------
Gross profit................................................... 356 930 281 32 1,978
Operating expenses:
Research and development..................................... 701 742 1,438 715 839
Sales, general and administrative............................ 1,299 1,390 1,760 845 934
--------- --------- --------- --------- ---------
Total operating expenses....................................... 2,000 2,132 3,198 1,560 1,773
--------- --------- --------- --------- ---------
Income (loss) from operations.................................. (1,644) (1,202) (2,917) (1,528) 205
Interest expense............................................... (96) (226) (260) (152) (105)
Other income................................................... 587 366 27 66 65
Minority interest in net (income) loss of
ISS-Nagano GmbH.............................................. 37 311 521 296 (61)
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ (1,116) $ (751) $ (2,629) $ (1,318) $ 104
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income (loss) per share.......................... $ (0.56) $ (0.29) $ 0.02
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of pro forma net income (loss) per
share........................................................ 4,658 4,600 5,055
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 847 $ 521 $ 2,059 $ 378
Working capital................................................. 1,056 150 2,139 2,851
Total assets.................................................... 5,625 5,687 8,709 8,743
Long-term obligations........................................... 24 22 197 144
Total stockholders' equity...................................... 1,849 1,141 3,683 4,467
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ISS designs, manufactures and markets high performance, intelligent sensor
products that are used in electronic control systems by customers in the
automotive and industrial markets. The Company was incorporated in March 1989
and was principally engaged in research and development through fiscal 1993. In
fiscal 1991, the Company shipped its first product, an ASIC designed for use
with a very low pressure sensor used in industrial flow measurements. In fiscal
1992, the Company introduced its first ISD, an aftermarket product for manifold
absolute pressure ("MAP") sensor applications for General Motors automobile
engines. One of the major objectives in introducing the MAP ISDs was to
demonstrate the viability of the Company's technology in the rugged, "under the
hood" environment. The Company subsequently developed and introduced a variety
of other ASICs and ISDs. Principally as a result of an increase in product
sales, the Company's total revenues have increased from approximately $5.0
million in fiscal 1995 to $10.3 million in fiscal 1997. The Company has
experienced operating losses in each year since its inception and had an
accumulated deficit of $8.1 million as of September 30, 1997. Although the
Company had a net loss in the quarter ended March 31, 1997, it achieved income
from operations of
$122,000 in that period, and it achieved net income of $91,000 and $13,000 in
the quarters ended June 30, and September 30, 1997, respectively.
The Company derives its revenues from sales of its ASICs and ISDs and from
product development contracts. Beginning in fiscal 1995, product sales have
accounted for a significant majority of the Company's revenues, and the Company
anticipates that the percentage will increase in the future. The Company sells a
substantial portion of its products pursuant to long-term, exclusive contracts
that typically contain volume-pricing provisions that require the Company to
reduce its per unit price as certain volume levels are achieved. If the Company
is unable to make corresponding product cost reductions, the resulting decline
in the average selling prices of the Company's products sold pursuant to such
contracts will reduce the Company's product gross margin. The Company
anticipates that all of its products will experience declining average selling
prices over their life cycles with a similar potential impact on product gross
margin if the Company is unable to reduce corresponding costs or introduce new
products with higher gross margins. The Company's strategy is to improve its
product gross margin despite the declining average selling prices by reducing
cost of product revenues, introducing new products with higher gross margins and
addressing new markets. See "Risk Factors--Declining Average Selling Prices."
The Company's cost of product revenues includes the costs of wafer
fabrication, raw materials, third party assembly and direct and indirect costs
of procurement, scheduling, testing, calibration of ISDs, housing assembly for
ISDs and quality assurance. The Company is actively attempting to reduce these
costs by, among other things, improving yields on existing products, fabricating
its ASICs on larger wafers using smaller geometries and performing more
manufacturing, assembly and test operations in-house. In addition, to the extent
that the volume of product shipments increases, the Company may be able to
obtain volume discounts to lower its costs of raw materials, components and
services. Higher volumes may also result in allocation of fixed costs over a
larger revenue base and a corresponding reduction in per unit product costs.
Nonetheless, the Company's ability to reduce product costs may be adversely
affected by a number of factors outside the Company's control including, among
other things, fluctuations in manufacturing yields and availability and cost of
manufacturing and assembly capacity and of raw materials. In the past, the
Company has experienced significant, unanticipated price increases for wafer
fabrication and significant assembly supply disruptions which materially
adversely affected the Company's operating results. In addition to its efforts
to reduce cost of product revenues, the Company believes it can mitigate the
effects of declining average selling prices by continually introducing new
products and addressing new markets with existing and new products. The Company
has made significant investments in its product development and sales and
marketing resources to address these issues. There can be no assurance, however,
that the Company will be able to reduce its product costs or introduce new
products in a timely
20
<PAGE>
manner to maintain or increase its current product gross margin levels. Any
failure to maintain such gross margins could have a material adverse effect on
the Company's business, financial condition or operating results. See "Risk
Factors--Declining Average Selling Prices."
The Company's revenues in any period are substantially dependent upon sales
to and product development contracts with a small number of customers. Revenues
from customers that represented at least 10% of total revenues in each of fiscal
1995, 1996, 1997 and the six months ended September 30, 1997 accounted for 69%,
71%, 75% and 73% of total revenues, respectively. The Company expects that this
trend will continue for the foreseeable future. See "Risk Factors--Significant
Customer Concentration."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
consolidated statements of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH SEPTEMBER
31, 30,
------------------- ------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.................................................... 73.7% 64.1% 78.1% 76.9% 70.9%
Contract revenues................................................... 26.3 35.9 21.9 23.1 29.1
----- ----- ----- ----- -----
Total revenues........................................................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues............................................ 72.8 63.0 70.8 70.9 49.3
Cost of contract revenues........................................... 20.0 25.8 26.5 28.5 22.5
----- ----- ----- ----- -----
Total cost of revenues................................................ 92.8 88.8 97.3 99.4 71.8
----- ----- ----- ----- -----
Gross margin.......................................................... 7.2 11.2 2.7 0.7 28.2
Operating expenses:
Research and development............................................ 14.1 8.9 13.9 14.4 12.0
Sales, general and administrative................................... 26.1 16.7 17.1 17.1 13.3
----- ----- ----- ----- -----
Total operating expenses.............................................. 40.2 25.6 31.0 31.5 25.3
----- ----- ----- ----- -----
Income (loss) from operations......................................... (33.0) (14.4) (28.3) (30.8) 2.9
Interest expense...................................................... (1.9) (2.7) (2.5) (3.1) (1.5)
Other income.......................................................... 11.8 4.4 0.3 1.3 0.9
Minority interest in net (income) loss of
ISS-Nagano GmbH..................................................... 0.7 3.7 5.0 6.0 (0.8)
----- ----- ----- ----- -----
Net income (loss)..................................................... (22.4)% (9.0)% (25.5)% (26.6)% 1.5%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
21
<PAGE>
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES
The Company derives its revenues from sales of its ASICs and ISDs and from
fees earned under product development contracts. The Company recognizes revenues
from product sales upon shipment. Contract revenues are recognized only when
applicable customer milestones, including deliverables, have been met, but not
in excess of the amount that would be recognized using the percentage of
completion method.
PRODUCT REVENUES. Product revenues increased by 30.6% from $3.8 million in
the six months ended September 30, 1996 to $5.0 million in the six months ended
September 30, 1997. This increase resulted primarily from an increase in
shipments of ISDs to customers in Germany, partially offset by a decline in
sales of ASICs. The decline in ASIC sales resulted from one quarter delays in
purchases by two significant customers. The Company expects that product
revenues will increase as a percentage of total revenues in the future.
CONTRACT REVENUES. Revenues from product development contracts increased by
78.4% from $1.1 million in the six months ended September 30, 1996 to $2.0
million in the six months ended September 30, 1997. This increase was due to the
achievement of significant milestones under new product development contracts.
The Company's contract revenues have fluctuated in the past and may continue to
fluctuate depending on the number and size of product development contracts and
the timing of related milestones and deliverables. The Company anticipates that
contract revenues will decrease as a percentage of total revenues over time as
the Company's product offering increases. However, because the Company's product
portfolio expands as a direct result of product development contracts, the
Company intends to enter into new product development contracts with its
customers in the future.
International revenues (export revenues and revenues from the Company's
German subsidiary) were $2.2 million and $3.6 million in the six months ended
September 30, 1996 and 1997, respectively, representing 44.1% and 51.7% of total
revenues, respectively, in each period. The increase in international revenues
was principally the result of increased sales in Germany and export sales in
Canada and Japan. The Company intends to continue to expand its international
operations and to enter additional international markets. The Company's sales in
Asia have been concentrated in Japan to date, but the Company has initiated
marketing efforts to penetrate additional Asian markets. All of the Company's
sales in Europe are denominated in Deutsche Marks. Accordingly, a portion of the
Company's international revenues is subject to foreign currency fluctuation
risks, and fluctuations in the value of the Deutsche Mark could adversely affect
the profitability of sales made in Europe and therefore materially adversely
affect the Company's business, financial condition or operating results. The
Company has not engaged in any hedging transactions to minimize its risk to
foreign currency fluctuations. The Company may, however, engage in such
transactions in the future.
COST OF REVENUES
COST OF PRODUCT REVENUES. The following table sets forth the Company's
product revenues and the associated costs in the six months ended September 30,
1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1997
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Product revenues.......................................................................... $3,805 $4,968
Cost of product revenues.................................................................. 3,510 3,455
------ ------
Product gross profit...................................................................... $ 295 $1,513
Product gross margin...................................................................... 7.8% 30.5%
</TABLE>
22
<PAGE>
The Company's product gross margin improved from 7.8% in the six months
ended September 30, 1996 to 30.5% in the six months ended September 30, 1997,
primarily as a result of improved gross margin on the Company's MAP product line
and the introduction of new ISDs with higher gross margin. The improved gross
margin on the MAP product line resulted from a design change to incorporate a
new ASIC that reduced component costs and improved yields. In addition, higher
volume shipments, primarily of MAP products, resulted in allocation of fixed
costs over a higher revenue base. Product gross margin was also favorably
affected by the commencement of higher volume shipments of media compatible ISDs
which have higher average selling prices than the Company's other ISDs. Such
shipments were primarily to customers in Germany. The Company expects to
commence shipments of media compatible ISDs to North American customers in late
1998.
COST OF CONTRACT REVENUES. Cost of contract revenues is comprised
principally of compensation for engineering personnel and related costs. The
cost of contract revenues is recorded as incurred. Cost of contract revenues
increased from $1.4 million in the six months ended September 30, 1996 to $1.6
million in the six months ended September 30, 1997 as the result of increased
development contract activities. The product development contracts are primarily
intended to develop new products and not necessarily to increase the Company's
profitability through funds earned under these contracts. Accordingly, the
Company expects that the gross margin on contract revenues will fluctuate
substantially from period to period because expenses are recorded as incurred,
while recognition of revenues occurs only when contractual milestones are
reached. The Company does not anticipate that gross margin on contract revenues
will grow or even remain positive in future periods.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include compensation and associated costs relating to development personnel not
assigned to product development contract projects, as well as depreciation of
certain equipment and development costs related to software, test and
manufacturing. Research and development costs are expensed as incurred. Research
and development expenses increased in absolute dollars from $715,000 in the six
months ended September 30, 1996 to $839,000 in the six months ended September
30, 1997, but decreased as a percentage of revenues due to the higher level of
revenues. The Company believes that research and development is critical to the
Company's future success, and the Company intends to make continued significant
investments in research and development. Research and development expenses are
expected to increase in absolute dollars but may fluctuate as a percentage of
revenues depending on a variety of factors including the product development
contract activity in future periods.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses consist of compensation for sales, marketing, finance
and administration personnel, commissions paid to sales representatives and
promotional activities. Sales, general and administrative expenses increased
from $845,000 in the six months ended September 30, 1996 to $934,000 in the six
months ended September 30, 1997. This increase in absolute dollars was
principally the result of increased sales commissions. To the extent that the
Company is successful in expanding its operations and as a result of becoming a
public entity, the Company expects sales, general and administrative expenses to
increase in absolute dollars in future periods. Sales, general and
administrative expenses have historically been relatively low as a percentage of
revenues due to the Company's strategy of developing custom products for
specific customers and due to its use of technical personnel in the sales
process. To the extent that the Company's offering of standard products
increases and the Company markets these products through conventional means such
as advertising in product catalogues, the Company's sales, general and
administrative expenses may increase in absolute dollars, although total sales,
general and administrative expenses are not expected to increase as a percentage
product revenues.
23
<PAGE>
INTEREST EXPENSE
Interest expense decreased from $151,000 in the six months ended September
30, 1996 to $106,000 in the six months ended September 30, 1997 due to lower
borrowings in the first half of fiscal 1997.
OTHER INCOME
Other income in the six months ended September 30, 1996 consisted primarily
of a recognized gain of $172,000 from the final installment of the sale of an
interest in the Company's subsidiary and foreign exchange losses of $105,000 on
trade payables and notes to related parties denominated in foreign currencies.
Other income for the six months ended September 30, 1997 consisted primarily of
$42,000 of foreign exchange gains on trade payables denominated in foreign
currencies and $28,000 from the gain on sale of assets. The Company has not
engaged in any hedging transactions to minimize its risk to foreign currency
fluctuations. The Company may, however, engage in such transactions in the
future.
MINORITY INTEREST IN NET (INCOME) LOSS OF ISS-NAGANO GMBH
Minority interest in net (income) loss of ISS-Nagano GmbH represents the
portion of net income or loss of the Company's majority-owned German subsidiary,
ISS-Nagano GmbH ("ISS-Nagano") which is attributed to the interest of minority
shareholders of that entity. Otherwise, all operating results of ISS-Nagano are
consolidated with the Company's. The portion of ISS-Nagano's net loss
attributable to the minority shareholders' interest for the six months ended
September 30, 1996 was $296,000, which resulted in a corresponding $296,000
decrease in the Company's net loss for that period. The portion of ISS-Nagano's
net income attributable to the minority shareholders' interest for the six
months ended September 30, 1997 was $61,000, which resulted in a corresponding
$61,000 decrease in the Company's net income for that period.
On July 31, 1997, the Company entered into an agreement to increase its
ownership of ISS-Nagano by converting approximately $1.1 million in long-term
intercompany indebtedness owed by ISS-Nagano into an increased equity interest.
Accordingly, the Company now owns 74% of the equity of ISS-Nagano. For periods
subsequent to July 1997, 26% of ISS-Nagano's net income (loss) has been
attributed to the minority shareholders' interest.
COMPARISON OF YEARS ENDED MARCH 31, 1995, 1996 AND 1997
REVENUES
PRODUCT REVENUES. Product revenues increased by 50.8% from $5.3 million in
fiscal 1996 to $8.0 million in fiscal 1997. This increase was principally the
result of shipments of new custom ASICs and ISDs and increased unit shipments of
existing custom products. The increase in product revenues in fiscal 1997 was
also the result of the introduction of the Company's first standard products.
Product revenues increased by 45.5% from $3.7 million in fiscal 1995 to $5.3
million in fiscal 1996. This increase was principally the result of the
introduction of the Company's media compatible ISDs and increased sales of
ASICs.
CONTRACT REVENUES. Contract revenues decreased by 24.7% from $3.0 million
in fiscal 1996 to $2.3 million in fiscal 1997. This decrease was due to the
significant number of new product development contracts which were initiated in
fiscal 1996 that continued through fiscal 1997. Based on completed milestones,
most of the revenue under these contracts was recognized in fiscal 1996.
Contract revenues increased by 129.0% from $1.3 million in fiscal 1995 to $3.0
million in fiscal 1996 principally as the result of the initiation of new
product development contracts in fiscal 1996.
International revenues (export revenues and revenues of ISS-Nagano) were
$1.1 million, $3.2 million and $4.7 million in fiscal 1995, 1996 and 1997,
respectively, representing 22.0%, 38.6% and 46.0% of total revenues,
respectively, in each year. The increase in international revenues from fiscal
1995 to fiscal 1996
24
<PAGE>
was due to increased sales in Japan and Germany. The increase in international
revenues from fiscal 1996 to fiscal 1997 was principally the result of increased
sales in Germany.
COST OF REVENUES
COST OF PRODUCT REVENUES. The Company's product gross margin improved from
1.6% in fiscal 1996 to 9.4% in fiscal 1997 primarily as a result of a reduction
in material costs and improved yields of the MAP ISDs during the fourth quarter
of fiscal 1997. The introduction in the fourth quarter of fiscal 1997 of new
ASICs with higher product gross margin also contributed to the improvement in
product gross margin. These improvements were partially offset by an increase in
manufacturing support costs in fiscal 1997 related to implementation of in-house
test capabilities, product and process engineering to support yield enhancement
programs and qualification of an offshore assembly vendor. The Company's product
gross margin remained relatively constant at 1.2% and 1.6% in fiscal 1995 and
fiscal 1996, respectively. The low product gross margins during the periods were
principally the result of high costs associated with the commencement of volume
production and the allocation of fixed costs over a relatively small revenue
base.
COST OF CONTRACT REVENUES. Cost of contract revenues increased from $2.1
million in fiscal 1996 to $2.7 million in fiscal 1997 but declined as a
percentage of total revenues as a result of increased product revenues. Cost of
contract revenues increased from $996,000 in fiscal 1995 to $2.1 million in
fiscal 1996 due to a significant increase in the number of new product
development contracts initiated in fiscal 1996.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by 93.9% from $742,000 in fiscal 1996 to $1.4 million in fiscal 1997.
The Company's research and development expenses increased in fiscal 1997 as a
result of implementing in-house test capabilities and expanding research and
development activities in Germany. Research and development expenses increased
in absolute dollars from $701,000 in fiscal 1995 to $742,000 in fiscal 1996 but
decreased as a percentage of total revenues from 14.1% in fiscal 1995 to 8.9%
for fiscal 1996. The decrease as a percentage of revenues was partially due to
the effect of the grant from the German government and partially due to an
increase in the number of product development contracts in fiscal 1996 which
absorbed resources that would otherwise have been allocated to research and
development.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES. Sales, general and
administrative expenses increased by 26.6% from $1.4 million in fiscal 1996 to
$1.8 million in fiscal 1997. This increase was principally due to increased
personnel, sales commission and travel expenses associated with the increased
level of operations. Sales, general and administrative expenses were relatively
constant in absolute dollars in fiscal 1995 and fiscal 1996 but decreased as a
percentage of revenues from 26.1% to 16.7% due to the increase in revenues.
INTEREST EXPENSE
Interest expense increased from $96,000 in fiscal 1995 to $226,000 in fiscal
1996 and to $260,000 in fiscal 1997 due to higher average borrowings.
OTHER INCOME
Other income decreased from $587,000 in fiscal 1995 to $366,000 in fiscal
1996 and to $28,000 in fiscal 1997. Other income in fiscal 1995 consisted
primarily of a gain of $166,000 from the first installment of the sale of a
minority interest in ISS-Nagano and of a $343,000 grant from the German
government. Other income in fiscal 1996 consisted primarily of $235,000 of gain
recognized from the second and third installments of the sale of a minority
interest in ISS-Nagano and a $165,000 foreign exchange gain on trade payables
and notes to related parties denominated in foreign currencies. Other income in
fiscal 1997 consisted primarily of $172,000 of gain recognized from the fourth
installment of the sale of a minority
25
<PAGE>
interest in ISS-Nagano which was partially offset by a $144,000 foreign exchange
loss on trade payables and notes to related parties denominated in foreign
currencies.
MINORITY INTEREST IN NET (INCOME) LOSS OF ISS-NAGANO GMBH
Minority interest in net loss of ISS-Nagano GmbH increased from $37,000 in
fiscal 1995 to $311,000 in fiscal 1996 and to $521,000 in fiscal 1997 due to the
increased net losses of ISS-Nagano. As a result, the Company's net loss was
reduced by corresponding amounts in each respective fiscal year.
INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
in fiscal 1995, 1996 or 1997. For federal tax purposes as of March 31, 1997, the
Company had net operating loss and research and development credit carryforwards
of approximately $6.5 million and $114,000, respectively, which will expire in
fiscal years 2005 through 2012. For California tax purposes as of March 31,
1997, the Company had net operating loss and research and development credit
carryforwards of approximately $3.0 million and $67,000, respectively, which
will expire in fiscal years 1998 through 2002. The Company also has net
operating loss carryforwards of $525,000 in ISS-Nagano as of March 31, 1997.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards and credits before utilization.
At March 31, 1997, the Company had net deferred tax assets of $3.0 million
relating principally to the net operating loss carryforwards and capitalized
research costs. Realization of deferred tax assets is dependent on future
earnings, if any, the timing of which is uncertain. A valuation allowance has
been recorded for the entire net deferred tax asset as a result of uncertainties
regarding the realization of the assets due to the lack of earnings history of
the Company.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected consolidated statements of
operations data for each of the six quarters in the period ended September 30,
1997, as well as the percentage of the Company's total revenues represented by
such data. The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements contained herein
and include all adjustments, consisting only of normal recurring adjustments,
that the Company considers necessary for a fair presentation of such information
when read in conjunction with the audited Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. The operating results for
any interim period are not necessarily indicative of results to be expected for
any future period.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......................................... $1,753 $ 2,052 $ 1,369 $2,875 $2,553 $ 2,415
Contract revenues......................................... 710 435 396 714 948 1,095
-------- -------- -------- -------- -------- ---------
Total revenues.............................................. 2,463 2,487 1,765 3,589 3,501 3,510
Cost of revenues:
Cost of product revenues.................................. 1,837 1,673 1,923 1,859 1,848 1,607
Cost of contract revenues................................. 640 768 616 707 689 889
-------- -------- -------- -------- -------- ---------
Total cost of revenues...................................... 2,477 2,441 2,539 2,566 2,537 2,496
Operating expenses:
Research and development.................................. 324 391 319 404 355 484
Sales, general and administrative......................... 422 424 417 497 438 496
-------- -------- -------- -------- -------- ---------
Total operating expenses.................................... 746 815 736 901 793 980
-------- -------- -------- -------- -------- ---------
Income (loss) from operations............................... (760) (769) (1,510) 122 171 34
Interest expense............................................ (83) (69) (48) (60) (54) (51)
Other income................................................ 72 (6) 25 (64) 4 61
Minority interest in net (income) loss of
ISS-Nagano GmbH........................................... 125 171 235 (10) (30) (31)
-------- -------- -------- -------- -------- ---------
Net income (loss)........................................... $ (646) $ (673) $ (1,298) $ (12) $ 91 $ 13
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......................................... 71.2% 82.5% 77.6% 80.1% 72.9% 68.8%
Contract revenues......................................... 28.8 17.5 22.4 19.9 27.1 31.2
-------- -------- -------- -------- -------- ---------
Total revenues.............................................. 100 100 100 100 100 100
Cost of revenues:
Cost of product revenues.................................. 74.6 67.3 109.0 51.7 52.8 45.8
Cost of contract revenues................................. 26.0 30.9 34.9 19.7 19.7 25.3
-------- -------- -------- -------- -------- ---------
Total cost of revenues...................................... 100.6 98.2 143.9 71.4 72.5 71.1
Operating expenses:
Research and development.................................. 13.2 15.7 18.1 11.3 10.1 13.8
Sales, general and administrative......................... 17.1 17.0 23.6 13.8 12.5 14.1
-------- -------- -------- -------- -------- ---------
Total operating expenses.................................... 30.3 32.7 41.7 25.1 22.6 27.9
-------- -------- -------- -------- -------- ---------
Income (loss) from operations............................... (30.9) (30.9) (85.6) 3.4 4.9 1.0
Interest expense............................................ (3.3) (2.8) (2.7) (1.6) (1.5) (1.5)
Other income................................................ 2.9 0.3 1.4 (1.8) 0.1 1.7
Minority interest in net (income) loss of
ISS-Nagano GmbH........................................... 5.1 6.9 13.4 (0.3) (0.9) (0.9)
-------- -------- -------- -------- -------- ---------
Net income (loss)........................................... (26.2)% (27.1)% (73.5)% (0.3)% 2.6% 0.3%
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
</TABLE>
27
<PAGE>
The Company's operating results in the quarter ended December 31, 1996 were
materially adversely affected by, among other things, significant shipment
delays to three of its major customers. Shipments of MAP ISDs and of ASICs to
certain customers were delayed due to these customers' year-end inventory
adjustments. Anticipated shipments of certain ISDs to Bosch were also delayed
while the Company completed a product redesign requested by Bosch to enable
compatibility with additional engine control computers. Because a significant
amount of the Company's costs are relatively fixed, the revenue shortfall caused
by the shipment delays resulted in a substantial operating loss in the quarter.
Revenue in the quarter ended March 31, 1997 increased substantially over the
prior quarter as the Company shipped, in addition to its normal shipments, a
portion of the MAP ISDs and substantially all of the Bosch ISDs that were
delayed. In addition, the Company made substantial unit shipments of a standard
ASIC which had a significant impact on total revenues for the quarter.
Product gross margin in the quarter ended March 31, 1997 also improved
substantially over the prior quarter primarily as a result of improved gross
margin on the Company's MAP product line and the shipment of ISDs with higher
gross margins. The improved gross margin on the MAP product line resulted from a
design change to incorporate a new ASIC that reduced component costs and
improved yields. In addition, higher volume shipments, primarily of MAP
products, resulted in allocation of fixed costs over a higher revenue base.
Product gross margin was also favorably affected by the commencement of higher
volume shipments of media compatible ISDs which have higher average selling
prices than the Company's other ISDs. Further, the increased shipments of ASICs
in the quarter also favorably affected product gross margin because ASICs
typically have higher gross margins than ISDs.
The product revenues in the quarter ended March 31, 1997 were higher than
product revenues in the quarter ended June 30, 1997 because a significant amount
of the anticipated shipments for the quarter ended December 31, 1996 were
shipped in the fourth quarter ended March 31, 1997. Product revenues were
relatively constant in the quarter ended September 30, 1997 due to production
constraints. Product gross margin decreased slightly in the quarter ended June
30, 1997 but remained significantly higher than product gross margins in
previous periods as shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996 1996 1996 1997 1997 1997
-------- --------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Product revenues............................................ $1,753 $ 2,052 $ 1,369 $2,875 $2,553 $ 2,415
Cost of product revenues.................................... 1,837 1,673 1,923 1,859 1,848 1,607
-------- --------- -------- -------- -------- ---------
Product gross profit........................................ (84) 379 (554) 1,016 705 808
Product gross margin........................................ (4.8)% 18.5% (40.5)% 35.3% 27.6% 33.4%
</TABLE>
The decrease in product gross margin in the quarter ended June 30, 1997 was
primarily due to change in product mix as the Company made increased shipments
of ISDs which typically have lower gross margins than ASICs. The Company
anticipates that the average selling prices of its products may fluctuate
significantly in future periods, generally declining over time. Any significant
decrease in average selling prices could result in a material decline in the
Company's product gross margin if the Company is unable to implement cost
reductions or introduce new products with higher product gross margin. See "Risk
Factors--Declining Average Selling Prices."
The Company's revenues and operating results have varied on a quarterly and
an annual basis in the past and may vary significantly in the future. The
Company's revenues and operating results are difficult to forecast and could be
materially adversely affected by many factors, some of which are outside the
control of the Company, including, among others, the timing, deferral or
cancellation of customer orders and related shipments, the relatively long sales
and development cycles for the Company's products, competitive pressures on
selling prices, availability of foundry capacity, availability of raw materials,
fluctuations in yields, changes in product mix, changes in the lead time
required to ship products after receipt of an order,
28
<PAGE>
the Company's ability to introduce new products and technologies on a timely
basis, introduction of products and technologies by the Company's competitors
and customers, market acceptance of the Company's and its customers' products,
the ability to obtain product development contracts and the amount and timing of
recognition of product development contract revenue and expense associated with
such contracts, quality control of products sold, personnel changes and
difficulties in attracting and retaining qualified technical personnel, foreign
currency exchange rates and economic conditions generally and in the automotive
and industrial markets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations principally through
sales of equity securities, product revenues and contract revenues. At September
30, 1997, the Company had cash and cash equivalents of $378,000 and working
capital of $2.9 million. The Company also has available a $2.0 million bank line
of credit agreement secured by the assets of the Company that permits borrowings
of the lesser of $2.0 million or 75% of eligible accounts receivable. Eligible
accounts receivable are defined as those outstanding less than 90 days from date
of invoice. Borrowings under the line of credit bear interest at the bank's
prime rate plus 1.75%. The Company also has available a $250,000 term loan
facility for capital equipment that bears interest at the bank's prime rate plus
1.5%. At September 30, 1997, the Company had outstanding borrowings of $600,000
under the line of credit agreement, $301,000 under various capital equipment
lease financing arrangements and notes payable to a related party of $679,000.
See Notes 3, 4 and 5 of Notes to Consolidated Financial Statements.
Net cash used in operating activities was $881,000 in the six months ended
September 30, 1997 and $1.5 million, $1.7 million and $2.7 million in fiscal
1995, 1996 and 1997, respectively. For fiscal 1997, net cash used in operations
was primarily attributable to the net loss adjusted for non-cash items, an
increase in accounts receivable partially offset by an increase in accounts
payable and other accrued liabilities. For the six months ended September 30,
1997, cash used in operating activities was primarily attributable to increases
in accounts receivable and inventories partially offset by net income adjusted
for non-cash items.
Net cash used in investing activities was $307,000 in the six months ended
September 30, 1997, and $899,000, $974,000 and $1.1 million in fiscal 1995, 1996
and 1997, respectively. Cash used in investing activities was primarily for the
purchase of equipment.
Net cash provided by (used in) financing activities was ($492,000) for the
six months ended September 30, 1997 and $2.3 million, $2.3 million and $5.4
million in fiscal 1995, 1996 and 1997, respectively. In fiscal 1997, cash
provided by financing activities was primarily due to the sale of convertible
preferred stock and proceeds from the issuance of notes payable. For the six
months ended September 30, 1997, the Company used cash in financing activities
primarily to make payments on notes payable and capital lease obligations.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high degree of risk. The Company expects
that, in the future, cash in excess of current requirements will be invested in
short-term, investment grade, interest-bearing securities.
The Company plans to finance its working capital and other capital resource
needs with its current cash and cash equivalents, cash generated from future
operations, if any, and proceeds from this offering. The Company believes that
these resources will be sufficient to satisfy its working capital and other
capital needs for at least the next 24 months.
29
<PAGE>
BUSINESS
OVERVIEW
ISS designs, manufactures and markets high performance, intelligent sensor
products that are used in electronic control systems by customers in the
automotive and industrial markets. The Company's objective is to become a
leading supplier of ASICs and ISDs for electronic control systems in these
markets. Currently, ISS has over 20 customers worldwide, including market
leaders such as Bosch, John Deere, Echlin, Honda, Knorr-Bremse, MascoTech,
Michelin, Nagano and Sumitomo. Through these and other customers, the Company's
products have been designed into the vehicles of leading manufacturers such as
Fiat, Ford, Honda, Mercedes Benz, Mitsubishi, Nissan and Peugeot as well as into
industrial systems manufactured by companies such as Tokyo Gas and Eaton
Corporation.
The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The ASIC design and software
technologies, together with the Company's packaging expertise, enable ISS to
design ASICs and ISDs that meet customer requirements for integration with
diverse and rugged systems and to manufacture them efficiently and cost
effectively with relatively low capital expenditures.
The Company has established strategic alliances with a number of significant
manufacturers such as Bosch, Nagano and Michelin. These strategic alliances are
intended to be long term, mutually beneficial relationships focusing on joint
technology and product development, manufacturing and exclusive or preferred
supply arrangements. The Company believes that OEM technical partnering
arrangements with its customers allow the Company to combine its technology with
the systems expertise of its customers and to rapidly introduce new products
based on the technology developed through these alliances.
INDUSTRY BACKGROUND
According to industry sources, the high performance automotive and
industrial segments of the market for electronic sensor products were estimated
to be approximately $2.1 billion in 1996, and these segments are expected to
grow to over $5.0 billion by 2001. Companies in the automotive and industrial
markets are increasingly incorporating electronic sensors into their products to
respond to developments in the competitive global marketplace. For example, a
typical automobile manufactured today contains approximately 20 electronic
sensors with some vehicles having as many as 60 electronic sensors. Electronic
sensors can enable manufacturers to satisfy customer demands for longer
warranties, increased product performance, reliability and energy efficiency and
to comply with environmental, safety and other governmental regulations.
Sensors rely on sensing elements that convert physical variables such as
pressure, speed, acceleration and temperature into electrical signals that
provide information that can be the basis of action such as deploying an airbag,
sounding an alarm or changing the amount of fuel supplied to an engine. The
first widely used sensors were electro-mechanical devices that provided only
basic on/off functions. Recent technological advances have enabled the
deployment of electronic sensing elements with outputs that continuously vary in
proportion to the sensed variable. These electronic sensing elements can be
combined with electronic circuits to provide dramatic reductions in size and
weight compared to older electro-mechanical devices. With these improvements,
companies in the automotive industry increasingly use electronic sensors in new
and enhanced applications such as safety, emissions control, engine management
and other systems. Similarly, companies in industrial markets are incorporating
electronic sensors into new and enhanced applications such as process control,
test and measurement, refrigeration, utility metering and HVAC systems.
Electronic sensing elements require substantial electronics to process or
condition their outputs in order to make them useful over varying operating
conditions and to convert the signals into a form that is compatible with the
processor or computer controlling the system. Conventional signal conditioning
30
<PAGE>
electronics make use of precision analog bipolar integrated circuits to
interface with the sensing element. These ICs are commonly used in conjunction
with discrete components mounted on a ceramic substrate. This hybrid circuit
configuration results in relatively large size, high cost and reduced
reliability due to the large component count required. In addition, the
analog-only nature of these circuits is not compatible with the single-chip
integration of complex system functions that manufacturers are demanding in
sensor products to facilitate wide deployment of advanced systems. These
features include self and system diagnostics, fault detection and communications
capabilities. The Company believes that these needs create a significant market
opportunity for its ASICs and ISDs.
THE ISS SOLUTION
To meet the emerging needs of this market, ISS designs, manufactures and
sells proprietary ASICs and ISDs which enable customers in the automotive and
industrial markets to deploy advanced, high performance electronic control
systems. The ASICs are designed using commercially available CMOS processes
which enable all functions--from interface with sensing element to signal
conditioning as well as system functions--to be implemented in a single ASIC.
Further, these ASICs work with the Company's proprietary software for sensor
calibration. The Company's ASICs are also packaged with commercially available
sensing elements to produce ISDs that meet each customer's specifications. The
Company's products have been designed into a broad range of high performance,
high volume automotive control systems such as fuel injection and transmission
systems, automotive safety systems such as air bags, anti-lock brakes and
suspension systems, and industrial systems such as gas flow, refrigeration and
hydraulic control systems.
The Company's core competencies are its (i) ASIC design technology, (ii)
behavioral simulation software, (iii) calibration software, (iv) package design
technology and (v) manufacturing processes. The Company's mixed signal ASIC
design technology, consisting of its Intelligent Sensing Architecture and its
advanced macrocell library tailored for sensor applications, enables ISS to
rapidly develop products in which multiple system functions are integrated into
a single IC. The Company uses its behavioral simulation software during the
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. The Company uses its
calibration software during the manufacturing process to correct for variances
in sensing elements and system environments. In addition to its ASIC design and
software technology, the Company has substantial experience in designing
packages that meet customer requirements for integration with diverse and rugged
systems. The ASIC design and software technologies, together with the Company's
packaging expertise, enable ISS to design and manufacture intelligent sensor
products efficiently and cost effectively with relatively low capital
expenditures.
An integral part of the ISS solution is its customer approach and strategy.
The Company's strategy is to identify leading manufacturers within each of its
target market segments, work with these customers to understand their needs and
develop jointly with these customers product solutions that offer a combination
of high performance, increased functionality and cost savings. By combining its
technology with its customers' systems expertise, ISS and its customers can
achieve concurrent engineering, system partitioning and optimum product
definition. The Company believes that providing its customers access to highly
trained ISS engineers, who assist in defining, designing and qualifying customer
systems, fosters shared goals and shared responsibilities for making these
customers' systems successful. The Company has entered into such relationships
with a number of companies including Bosch, Michelin and Sumitomo in the
automotive market and Nagano in the industrial market. An additional benefit of
working with leading manufacturers is the ability to gain insight into their
next generation product requirements. The Company believes that its
relationships with market leaders position the Company to sell products to other
significant market participants.
31
<PAGE>
STRATEGY
The Company's objective is to be a leading supplier of innovative and
proprietary ASICs and ISDs for high performance electronic control systems. The
key elements of the Company's strategy to achieve this objective are:
EXPAND AND LEVERAGE STRATEGIC ALLIANCES. An important element of the
Company's strategy is to form alliances and joint development arrangements
with suppliers and customers to create ASICs and ISDs that are designed into
high performance, high volume products and systems. The Company believes
that strong strategic alliances enable it to sell multiple products to
select manufacturers in the automotive and industrial markets. By working
with such customers, the Company gains an understanding of the customers'
product development strategies and insight into their future needs. Forming
alliances with industry leaders also increases the Company's visibility and
acceptance of the Company's products and technologies in the marketplace.
LEVERAGE LOW COST ISD MANUFACTURING PROCESSES. The Company's technologies
enable it to manufacture its ISDs on automated, high volume, low cost
assembly lines. Because of the relatively low capital expenditures required
to construct these facilities, the Company can locate them in close
proximity to its customers. The Company has established one such facility in
Dresden, Germany which has enhanced the Company's relationships with its
German customers by enabling the Company to provide them with quick response
and effective technical support. The Company intends to establish additional
manufacturing operations near other customer bases in North America, Asia
and Europe.
MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company's Intelligent Sensing
Architecture, advanced macrocell library, behavioral simulation software,
calibration software and ISD package design technology and manufacturing
know-how enable it to develop and manufacture ASICs and ISDs with high
levels of accuracy, functionality and performance. The Company plans to
continue to enhance its core technologies and to integrate them with new
generations of sensing elements, such as fiber optic and chemical sensing
elements. The Company is entering the production phase of its low power
ASICs, wireless sensing products and single chip sensor solutions in which
the sensing element is integrated into the Company's ASIC. The Company is
also exploring technologies to enable in-system programmability and to
extend the range of operating conditions for electronic control systems
incorporating its ISDs.
INCREASE PRODUCT OFFERING AND PENETRATE NEW MARKETS. The Company intends to
develop and introduce new ASICs and ISDs for the automotive, industrial,
office and consumer markets. Building on the technology developed for custom
products, the Company can shorten the development time of similar products
for new applications and markets and rapidly introduce standard products.
ISS believes that continuously developing and introducing new ASICs and ISDs
will enable the Company to enter markets at a competitive price point with
opportunities for future cost reductions to strengthen the Company's
competitive position. The Company also believes that it can expand into new
industrial applications and identify and exploit office and consumer markets
with new products based on its proprietary technology.
CAPITALIZE ON FABLESS SEMICONDUCTOR MODEL. ISS does not own or operate a
semiconductor fabrication facility and relies on third parties for the
manufacture of its ASICs. The Company's fabless business model allows it to
focus its resources on developing new technologies and products, while
minimizing capital and operating infrastructure requirements. The Company
seeks to leverage the flexibility of its fabless semiconductor business
model to lower technology and production risks and increase profitability.
In addition, the Company's reliance on mainstream semiconductor
manufacturing technologies rather than newer, more expensive manufacturing
processes reduces the risks inherent in newer, less proven process
technologies.
32
<PAGE>
PRODUCT DEVELOPMENT
A principal element of the Company's business strategy is to work closely
with its customers to develop custom ASICs and ISDs. The Company's joint
development arrangements generally provide that the customer funds a portion of
the Company's development efforts and obtains an exclusive right to the
resulting product subject to certain limitations and provided that the customer
satisfies certain minimum volume requirements. The Company retains intellectual
property rights to the underlying technology and frequently retains the right to
sell the products for use in non-competing applications.
The development cycle for a new product in a new application in the
automotive industry begins with a three to six month period during which the
Company and the customer engage in technical and business discussions about
capabilities and requirements. Following this, the Company and the customer
enter a three to twelve month product development period followed by a six to
twelve month period for field trials and qualification. At the other extreme,
the development cycle of an existing product in a new application in the
industrial market can be as short as four to six months as shown in the diagram
below. Once ASICs or ISDs are designed into systems, the production life is
quite long. For example, in the automotive industry, a product's production life
typically ranges from five to seven years, and customers rarely request
retooling or redesign during this time. Because of the complexity, length and
cost of the product development cycle for both the Company and its customers,
competitors cannot replace the Company's product unless both the competitor and
the customer make significant investments of time and resources. Therefore,
achieving a design win that leads to a production release can enable the Company
to enjoy the supply position for the duration of the production phase.
The following diagram illustrates the Company's typical life cycle for new
applications for new and existing products:
[FLOW CHART OF DEVELOPMENT AND PRODUCTION CYCLES]
33
<PAGE>
The majority of the Company's standard products have been derived from
custom products for other markets or applications. The Company has also
developed standard products without customer assistance to address particular
markets, sensing elements or types of electronic control systems. The Company's
standard products help it address a broader market and can provide a platform
for rapidly developing custom products with similar features.
Because the Company's existing products address the functional requirements
of a variety of electronic control systems, the Company is often able to shorten
the product development cycle for similar products addressing new applications.
For example, if one of the Company's existing ASICs satisfies most but not all
of a customer's requirements, the Company can modify the product to create a new
ASIC that specifically addresses that customer's needs. Similarly, if an
existing ISD addresses most but not all of the requirements of an application
that does not compete with the principal application of the ISD, the Company can
use the existing ISD design to create a new modified ISD. The Company believes
that its ability to shorten product development times by leveraging existing
product designs increases its ability to develop and introduce new products
rapidly and cost-effectively.
PRODUCTS
The Company's two product lines are application specific integrated circuits
("ASICs") and integrated sensor devices ("ISDs"). These product lines include
both standard products and customized solutions that have been developed to
address the needs of a broad range of specific applications and to enhance the
value of customer systems. The Company develops its custom products by working
closely with its customers and builds on this experience to create standard
products.
APPLICATION SPECIFIC INTEGRATED CIRCUITS
The Company designs, manufactures and markets ASICs for individual sale and
ISDs that incorporate its ASICs. ASICs incorporated into the Company's ISDs
complement selected sensing elements and integrate signal conditioning,
calibration, diagnostics, fault detection and other system functions. In this
way the Company leverages its ASICs and design, manufacturing and packaging
processes into proprietary value-added products.
The Company's ASICs are sold to manufacturers that integrate these ASICs
into their own ISDs and electronic control systems. Custom ASICs are developed
pursuant to arrangements with specific customers for incorporation into
particular electronic control systems. For example, the Company has developed
custom ASICs for use in gas flow meters that detect leaks and measure gas flow
for certain Japanese utility companies. These ASICs are designed to work with
very low power consumption battery powered systems. These ASICs amplify, correct
and filter very low level analog signals from the sensing elements and convert
them to digital form for processing by the meter. Another custom ASIC is used
with accelerometers in air bag systems. This ASIC amplifies and corrects the
accelerometer sensing element signal and performs diagnostics to alert the
electronic control computer in the event of a sensing element problem.
The Company's standard ASICs are sold to a variety of customers, including
sensing element manufacturers and systems integrators, for use in a broad range
of electronic control systems. For example, the Company's SCA2095 is a signal
conditioning ASIC used by manufacturers of resistive sensing elements such as
pressure transducers, strain gauges and accelerometers. Because the SCA2095 is a
single chip that permits digital calibration of sensor variances, it is less
expensive and easier to integrate with a variety of sensing elements than
conventional sensor electronics. The average selling prices of the Company's
ASICs range from approximately $1.50 to $8.00 per unit depending on the volume.
34
<PAGE>
The Company has a variety of ASIC products in production, in qualification
and under development, including those shown in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------
MARKET APPLICATION STATUS
Automotive Airbag crash sensor In Production
Oil pressure sensor
Pressure sensor with frequency output
Vehicle Stability In Qualification
Automotive accelerometer Under
Navigation Development
Brake System
Industrial Temperature control and instrumentation In Production
Hydraulic control system
OEM pressure sensors
Industrial pressure sensor
Low power pressure monitoring for gas meter In Qualification
Low power gas flow monitor for natural gas
Low power gas flow monitor for propane Under Development
</TABLE>
INTEGRATED SENSOR DEVICES
The Company's ISDs consist of commercially available or custom sensing
elements that are packaged together with the Company's proprietary ASICs. The
Company sells ISDs to customers in the automotive and industrial markets for
incorporation into a wide variety of electronic control systems in vehicles and
industrial systems. The Company has several families of ISDs, examples of which
are manifold absolute pressure ("MAP") sensors, tire pressure sensors and media
compatible pressure sensors for fuel systems. The MAP ISDs are sold into the
aftermarket for use in engine control in Ford, Chrysler and GM automobile
engines to measure the vacuum in the intake manifold enabling the engine control
computer to measure and adjust the air/fuel ratio.
Certain of the media compatible ISDs are incorporated into a new generation
of diesel fuel injection systems known as "common rail." In these systems, the
diesel fuel is pumped into a manifold at very high pressures (over 20,000 psi).
This pressurized fuel is then delivered along a common rail through the fuel
injectors into each cylinder. The Company's ISD measures the common rail
pressure and communicates this information to the system control computer which
then adjusts the pressure. Engines incorporating common rail injection systems
with the Company's ISDs are quieter, produce more power, use less fuel
35
<PAGE>
and emit less carbon monoxide than conventional diesel engines. The following
diagram illustrates the Company's ISD incorporated in the common rail diesel
fuel injection system.
[PICTURE OF COMMON RAIL DIESEL FUEL INJECTION SYSTEM]
The Company is currently developing a new family of ISDs for tire
performance monitoring. These products measure and transmit tire pressure,
temperature and identification to a remote transceiver over a wireless link for
tire performance monitoring and trend analysis. The Company's tire performance
monitoring ISDs feature a "single-chip sensor" construction in which pressure
and temperature sensing elements are combined on a single chip along with ASIC
functions, including analog sensor signal conditioning circuits, nonvolatile
memory for tire identification and sensor data storage, digital logic and
transceiver communications circuits. The Company expects to introduce a low
power wireless, valve stem-mounted ISD into the aftermarket in calendar 1998.
The Company also expects to introduce OEM in-tire products for both on-road
trucks as well as off-road construction and other heavy duty vehicles in
calendar 1999. The average selling prices of the Company's ISDs range from
approximately $9.00 to $50.00 per unit depending on the volume.
36
<PAGE>
The Company has a number of ISDs in production, in qualification and under
development, including those shown in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------
MARKET APPLICATION STATUS
Automotive MAP for automotive engine management In Production
XKP pressure sensor for natural gas engine control
Dual pressure sensor for pneumatic braking system
XKP pressure sensor for common rail diesel fuel injection
HVP pressure sensor for common rail diesel fuel injection
Tire performance monitor--valve stem-mounted In Qualification
Pressure sensor for vehicle chassis control
HVP pressure sensor for braking systems
Tire performance monitor--in-tire installation Under
Gasoline direct injection pressure sensor Development
Pressure sensor for electronic hydraulic braking system
Tire performance monitor--offroad vehicles
Combined pressure and temperature sensor
Pressure sensor for common rail diesel fuel injection
Industrial XKP pressure sensor for industrial applications including In Production
hydraulic control, agricultural sprayers, compressor
control, and others
HVP pressure sensor for refrigeration control system In Qualification
Industrial pressure sensor Under
XKP pressure sensor with built-in temperature sensor Development
</TABLE>
CUSTOMERS
The Company sells its ASICs and ISDs to customers in North America, Europe
and Asia. Although the majority of the Company's customers are suppliers in the
automotive industry, the Company's customer base also includes industrial system
manufacturers, sensing element manufacturers and vehicle manufacturers. Most of
the Company's customers are suppliers that purchase components and subassemblies
such as ASICs and ISDs and perform system integration functions for vehicle
makers and industrial equipment manufacturers.
To establish a supply relationship with a customer, the Company typically
must satisfy exacting product requirements and qualify its manufacturing lines.
Although this process is lengthy and can be costly for the Company and the
customer, it often results in a long-term supply arrangement and can create a
barrier to entry for other suppliers. To improve its ability to satisfy
customers' product and manufacturing requirements, the Company works closely
with its customers' engineering teams to develop and implement advanced
manufacturing processes. The Company has undertaken programs to implement ISO
9001 and QS-9000 quality systems in order to minimize the time required to
qualify its products and manufacturing lines with customers.
37
<PAGE>
The Company's customers include the following companies:
Allied Signal GFI Control Systems Mercedes Benz
Bosch Honda Michelin
John Deere Hydraulic Ring Nagano
Eaton Corporation Johnson Controls Omron
Echlin Knorr-Bremse Sumitomo
EG&G/IC Sensors Lucas Diesel White
Freightliner Systems Industries
MascoTech
The Company's revenues in any period are substantially dependent upon a
relatively small number of large customer orders. The Company expects that this
trend will continue. See "Risk Factors--Significant Customer Concentration."
STRATEGIC ALLIANCES
The Company considers strategic alliances a key part of its overall business
strategy and plans to maintain and strengthen its existing relationships and to
develop additional relationships to accomplish its business objectives. Examples
of the Company's strategic alliances include the following.
ROBERT BOSCH GMBH
Robert Bosch GmbH is a Germany-based multi-national supplier of automobile
systems and subsystems with annual revenues in excess of $27 billion. In 1995,
Bosch contracted with ISS to design an ISD with the ability to measure very high
pressures in a common rail diesel fuel injection system. The Company worked
closely with Bosch system designers and used its behavioral simulation software,
ASIC design technology and macrocell library to develop a customized ISD that
satisfied Bosch's specifications. The Company was able to solve problems Bosch
had encountered with previous development attempts and now manufactures the ISDs
used in Bosch's common rail diesel fuel injection systems. As a result of the
successful development of the diesel injection ISD, Bosch requested that ISS
compete for the design of an ISD for a vehicle stability system and ultimately
selected the Company to design and manufacture the ISD for this system.
Following these successful programs, Bosch has expanded its involvement with the
Company and engaged ISS to design and supply ISDs for both an electronic
hydraulic brake system and a gasoline direct fuel injection system. The Company
believes that its strong relationship with Bosch may result in design wins in
more of Bosch's widely distributed products.
To enhance the relationship with Bosch, the Company encourages its
management, engineers and sales and marketing personnel to work closely with
Bosch managers, system designers and sales and marketing executives. Further,
because these efforts have lead to an alliance which goes beyond that of a
typical customer or supplier, the Company has attained a level of market
credibility and access to significant system expertise that would otherwise be
unavailable to the Company. The Company intends to build additional
relationships modeled on the Bosch alliance with manufacturers that do not
directly compete with Bosch.
NAGANO KEIKI CO., LTD.
Nagano Keiki Co., Ltd. is a Japan-based supplier of sensors and ISDs with
annual revenues in excess of $200 million. In calendar years 1990 and 1991, the
Company developed two custom ASICs for Nagano for industrial and automotive
applications. During the course of working with Nagano to develop these ASICs,
the Company became familiar with Nagano's proprietary stainless steel pressure
sensing element technology and developed ISDs integrating the Company's ASICs
with Nagano's sensing elements for automotive applications. The resulting ISDs
are compatible with a wide range of harsh media such as gasoline, diesel fuel,
refrigerants and hydraulic fluids. These media-compatible ISDs are an important
strategic element of the Company's product portfolio.
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<PAGE>
The Company has developed six custom ASICs for Nagano, including the two
initial products, and Nagano has become a major customer of the Company. Nagano
also purchases standard ASICs from the Company. The relationship between the
Company and Nagano has facilitated Nagano's entry into the Japanese automotive
market as a supplier of high performance ISDs.
As a result of these successful collaborations, Nagano has expanded its
relationship with the Company through equity investments in the Company and its
German subsidiary. The subsidiary is focused on the manufacture of ISDs that
incorporate Nagano's sensing elements and the Company's ASICs. Finally, the
Company and Nagano are currently engaged in joint product development and
marketing efforts. Through this arrangement, Nagano manufactures and markets the
resulting products in Japan, while ISS manufactures and markets these products
in North America and Europe.
MICHELIN
Michelin is a multi-national tire manufacturer with significant North
American operations and annual revenues of approximately $14 billion. The
Company has entered into an agreement with Michelin of North America for the
development and supply of a new product for Earthmover tire performance
monitoring. This product measures and transmits tire pressure, temperature and
identification to a remote transceiver over a wireless link for tire performance
monitoring and trend analysis. The Company's relationship with Michelin is
expanding through close engineering cooperation involving programs in which the
Company's core competencies are combined with Michelin's complementary
expertise.
COMPETITION
The markets in which the Company competes are highly competitive and
characterized by diverse industry requirements and severe pricing pressure in
many applications. In the ASIC market, the Company competes with analog and
mixed signal semiconductor companies such as Motorola, TI and Analog Devices.
The Company's products also compete indirectly with conventional hybrid circuits
and standard analog and mixed signal ICs. In the ISD market, the Company
competes with Delco, a subsidiary of GM, Motorola, TI, Kavlico and Denso. These
companies all have substantially greater financial, technical, manufacturing,
marketing, distribution, personnel and other resources than the Company. In
addition, in the industrial market, the Company competes with many small
companies that have developed specialized electronic sensor products and formed
close relationships with their customers. The Company also competes with the
in-house development staff of certain of its current and potential customers.
The Company anticipates that additional competitors may enter the Company's
markets, resulting in even greater competition. Many of the Company's current or
prospective competitors own or have investments in wafer foundries, which
provide dedicated capacity to these competitors and enable them to influence or
control costs more effectively than the Company. There can be no assurance that
the Company will be able to compete successfully with existing or new
competitors. Increased competition could result in significant price reductions
or the loss of current or potential customers or design wins which could
materially adversely affect the Company's business, financial condition or
operating results.
The Company believes that the principal competitive factors affecting its
markets include price, supply assurance, product performance and quality,
flexibility and responsiveness. The Company believes that it competes favorably
with respect to these competitive factors. The Company's technology and products
have been well accepted by leaders in the automotive and industrial markets.
Through strategic alliances the Company is uniquely positioned to address the
emerging needs of the market. Finally, the singular focus on sensor applications
enables the Company to respond quickly to meet the customers' needs. See "Risk
Factors--Competition."
TECHNOLOGY
The Company's technology is driven by the demands of the automotive and high
volume industrial markets for high performance, electronic sensor products. The
Company is committed to maintaining
39
<PAGE>
leading edge technology in the areas of mixed signal ASIC design, behavioral
simulation software, calibration software, package design and manufacturing
know-how. The Company's technologies facilitate cost-effective development and
timely introduction of products designed to address customer needs.
The Company's mixed signal ASIC design technology, based on its Intelligent
Sensing Architecture, enables the Company to integrate signal conditioning,
calibration, diagnostics, networking and other system functions into a single
IC. The use of a single IC results in a "one sensor-one ASIC" structure, forming
an intelligent sensor that can interface with a variety of control devices in
high performance electronic control systems. The Company designs its ASICs using
its proprietary macrocell library which contains proven circuit blocks optimized
to perform sensor signal conditioning functions such as amplification, error
correction and filtering. The macrocell library also contains system level
functions including diagnostics, analog-to-digital conversion and output
formatting. The Company's ASICs utilize CMOS fabrication processes to combine
high performance analog sensor interfaces with digital system functions and
nonvolatile memory, eliminating the need for bipolar ICs, ceramic substrates,
thick film networks and laser trimming that are characteristic of traditional
hybrid circuits.
The Company uses its behavioral simulation software during the product
development process to create and assess alternative designs to optimize the
performance of its products within the customer's system. In addition, the
software demonstrates how potential configurations can be achieved with
different architectures, development times, manufacturing methods and costs.
This process provides the opportunity to identify the product features that
address the technical and time-to-market requirements of the customer's specific
application.
The Company uses its proprietary calibration software to correct for errors
associated with various sensing elements and system environmental conditions. As
a result, the Company can construct its ISDs using ASICs combined with low cost
sensing elements that have broad variances, while increasing system accuracy.
This software is embedded in the Company's automated test and calibration
systems which can simultaneously calibrate and characterize hundreds of ISDs
over specified operating conditions.
In addition to its ASIC design and software technology, the Company has
substantial package design expertise and manufacturing know-how. The Company
designs the packages that house its ISDs to meet customer requirements for
integration with diverse and rugged systems such as engines, tires, brakes and
compressors. The Company's packaging process consists of assembling the sensing
element with the ASIC, enclosing these components in a metal or plastic housing,
and establishing an electrical connector to interface with the customer's
control system. Packaging is a critical element in ISD design because packaging
can affect the sensing element, thereby affecting the performance of the ISD.
Package design also has a significant impact on product reliability, durability
and assembly costs. The Company's advanced packaging techniques enable it to
produce reliable, durable products in a cost effective manner.
The Company's ASIC design, software and package design are brought together
in the Company's proprietary ISD manufacturing process, which includes sensing
element assembly and automated calibration and testing. The Company's
manufacturing lines in Germany are automated to implement a zero defect
philosophy and enable it to satisfy customer demands rapidly and efficiently.
Further, the automated manufacturing lines have low labor costs and leverage the
Company's calibration software to reduce capital equipment requirements.
Therefore the Company has the ability to establish manufacturing sites near its
customer base with relatively low capital investments.
MANUFACTURING
The Company focuses its capital and human resources on those operations that
leverage its proprietary technology, provide significant added value or are key
determinants of product quality. The Company complements its internal operations
with products and services from a small base of strategic, long-term suppliers.
The Company out-sources widely available, commodity services to benefit from
economies of scale.
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The Company has adopted the "fabless" model in its approach to ASIC
manufacturing. Consistent with this approach, the Company does not own or
operate a semiconductor manufacturing facility. Instead, the Company has
established relationships with three CMOS wafer foundries that supply the bulk
of its semiconductor needs. In addition, the Company manages ASIC package
assembly through leading suppliers in the Philippines and Hong Kong. The Company
conducts most of its ASIC wafer sort and all of its ASIC final product testing
and outgoing quality assurance at its facility in San Jose, California. This
approach enables the Company to concentrate its resources on product development
and technology where it believes it has significant competitive advantages,
eliminating the high cost of owning and operating a semiconductor wafer
fabrication facility.
The Company currently relies on American Microsystems, Inc., Micrel
Semiconductor, Inc. and Silicon Systems, Inc. for the fabrication of essentially
all of its ASICs, including those incorporated into its ISDs. The Company is
currently qualifying products from a fourth foundry, Symbios Logic. The
Company's ASIC design technology does not rely on state-of-the-art or specialty
semiconductor processes and instead uses CMOS wafer fabrication processes that
are a generation behind the leading edge processes in high demand by the
computer and communications industries. As a result, fluctuations in the supply
and demand for wafer fabrication capacity have less impact on the Company than
on companies whose products require the more advanced, small geometry processes.
Nonetheless, continued access to high quality wafer foundry capacity is critical
to the Company's ability to meet customer demands. The Company has from time to
time experienced lower than anticipated manufacturing yields and long supply
lead times from its foundry suppliers.
The Company's ISDs incorporate electronic subassemblies in which the
Company's ASICs are assembled together with sensing elements. This PC
board-level assembly is performed by an independent vendor in Thailand that
ships the subassemblies to ISS for ISD product-level assembly, calibration, test
and final quality assurance monitoring. These latter operations are carried out
in-house by ISS personnel. These operations are critical, value-added steps that
use proprietary ISS manufacturing technology necessary for the control of
outgoing product quality, production yields and delivery to customers.
The Company's ISDs are assembled, calibrated and tested at the Company's
facilities in California and Germany. The Company's calibration software and its
automated manufacturing lines in Germany are designed to enable a much
simplified manufacturing flow, lowering product cost and reducing the capital
requirements for establishing and expanding manufacturing facilities. In a fully
automated test and calibration system operating under control of the Company's
software, hundreds of ISDs can be simultaneously measured, calibrated and
characterized over specified operating conditions.
ISD packaging and assembly technologies are key determinants of both
performance and cost in ISDs. The Company's ISDs utilize standard PC board
substrates and widely available surface mount and chip-on-board technologies,
replacing the costly ceramics and thick film printing operations commonly used.
In the assembly of its ISDs, the Company employs variations on standard product
assembly technologies such as wirebonding, soldering, dispense/cure and
crimping. The use of standard assembly technologies has permitted the Company to
focus on the development and implementation of technologies that define critical
performance parameters such as sensing element mounting and passivation,
materials selection and automated white light soldering. The Company has also
developed techniques in the areas of design for manufacturability and zero
defect philosophy assembly. ISS maintains significant in-house expertise in
mechanical and electrical design, including insert injection molded plastics, PC
board design and layout, automated manufacturing and production tools and
fixtures.
The Company's technology brings significant benefits to the manufacturing
process. ISDs, which leverage the Company's ASIC design and software technology,
require relatively low capital expenditures in the manufacturing process due to
low component count, automated calibration and innovative package design. The
relatively low capital intensity of the manufacturing lines makes it possible to
locate manufacturing operations close to customer bases to meet just-in-time
delivery requirements and to enhance customer relationships.
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<PAGE>
The Company has been a qualified supplier to various automotive
manufacturers for a number of years and has commenced the process to obtain ISO
9001 and QS-9000 certification. ISO 9001 is a quality assurance model that is
used by companies in the course of the design, production, inspection, test,
installation and service processes. The ISO quality specifications are
comprehensive and internationally supported. QS-9000 is the Quality Management
System that automakers are increasingly requiring of their suppliers. QS-9000 is
an ISO 9001-based system that incorporates industry specific features agreed
upon by Chrysler, Ford and GM. These quality systems are designed to reduce
errors and cost while improving design control and productivity. The Company has
targeted completion of the ISO and QS accreditation processes in calendar 1998.
See "Risk Factors--Dependence on Sole Source Suppliers," "--Dependence on
Independent Wafer Suppliers," and "--Need for ISO 9001 and QS-9000
Certification."
RESEARCH AND DEVELOPMENT
As of September 30, 1997, the Company's research and development
organization consisted of 35 full-time employees. During 1995, 1996 and 1997 and
the six months ended September 30, 1997, research and development expenses were
approximately $701,000, $742,000, $1.4 million and $839,000, respectively. In
addition, during 1995, 1996 and 1997 and the six months ended September 30,
1997, the Company had $996,000, $2,150,000, $2,731,000 and $1,578,000 of costs
related to contract revenue.
The Company has committed, and expects to continue to commit in the future,
substantial resources to research and development in areas including wireless
communications, next generation ASIC designs, software, package design,
manufacturing automation, test systems and standard product development. In
particular, the Company's research and development focus areas include
monolithic sensors, multiple sensing elements in a single ISD and system level
products. Concurrently, the Company intends to continue research and development
efforts pursuant to joint development arrangements for custom products where the
customer provides significant funding. In addition to the advantages it gains by
working closely with its customers, its joint development strategy allows the
Company to commit substantial resources to research and development without
diverting a significant portion of its capital resources. The Company intends to
continue to follow this strategy in the future.
The Company's future success will depend in part upon its ability to develop
new products on a timely basis that keep pace with technological developments,
emerging industry standards and increasingly sophisticated needs of its
customers. There can be no assurance that the Company will be successful in
developing new products that respond to technological change or evolving
industry standards or that the Company will not experience difficulties that
could delay or prevent the successful development of these products. If the
Company is unable, for technological or other reasons, to develop new products,
the Company's business, financial condition or operating results could be
materially adversely affected.
SALES AND MARKETING
The Company focuses its marketing efforts on potential and existing
customers that are leaders in selected segments of the automotive and industrial
markets. The objective is to develop and maintain long-term, strategic customer
partnerships that lead to multiple programs across a range of applications. This
is achieved, in part, by establishing and maintaining close ties at all levels,
including strong management and engineering relationships which complement the
traditional marketing and sales purchasing interface. Marketing personnel work
closely with customers to identify high volume opportunities which require high
performance products that leverage the Company's technology. The Company's
marketing and sales staff has the requisite technical expertise and industry
knowledge in order to support the lengthy and complex design-in process. To
complement its sales and marketing staff, the Company utilizes its engineering
staff to assist customers in defining, designing and qualifying the Company's
products in the context of the customer's system. Company engineers provide
continuous customer support from pre-sales activities to applications and
product definition through product development, qualification and
post-production technical support. The Company believes that the depth and
quality of this technical support are key to
42
<PAGE>
improving customers' time to market, maintaining a high level of customer
satisfaction and encouraging customers to provide additional product
opportunities to ISS as an exclusive or preferred supplier. Furthermore, the
Company has established a program management function in which ISS provides a
single point customer contact for all key customer program issues. The Company
plans to extend and expand this program management concept as a means to further
improve focus and coordination between the customer and all Company departments.
Typically, the Company sells more than one product to the same customer to
address multiple applications. Because of this marketing approach, the Company
expects that its customer base will remain relatively small consisting of large,
well known companies. A substantial majority of the Company's sales are made
through direct sales without commission. This trend is expected to continue.
Further, the Company expects that advertising and promotional activities will
remain limited, with primary focus on standard products and corporate awareness
and positioning. For standard products, the Company relies on marketing
techniques such as press releases and public relations, trade shows, technical
conferences and a web site.
Consistent with this strategy, the Company employed six marketing and sales
personnel as of September 1, 1997. The Company has also retained seven
independent sales representative organizations in selected U.S. regions. Sales
representatives/distributors in France, Germany, Italy and Switzerland as well
as Japan and Korea, also support the Company's sales efforts with targeted
accounts. The Company expects that its marketing and sales expenses will remain
a relatively small percentage of total revenues.
PROPRIETARY RIGHTS
The Company relies on a combination of patents, maskwork rights, trade
secret laws, copyrights, trademarks and employee and third party non-disclosure
agreements to protect its intellectual property rights. In addition, the Company
limits the access of its wafer fabrication suppliers to information necessary to
process the wafers and does not allow access to the proprietary circuit designs.
The software used for the behavioral simulation and calibration is proprietary
to the Company and resides only in systems developed by the Company. Further,
the Company believes that its technology is not easily duplicated and is
difficult to reverse engineer due to limited access to system know-how and the
coupling of its ASICs with software.
The Company has been issued two patents and has four patent applications in
the United States and one foreign patent application relating to ASIC designs.
In addition, the Company has one patent application in the United States
relating to package design. There can be no assurance that any patents will
issue from any of the Company's pending applications or that claims allowed from
pending applications will be of sufficient scope or strength, or be issued in
all countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company. Also, competitors of the
Company may be able to design around the Company's patents. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's products or intellectual property rights to the same extent as through
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. Although the Company is not aware
of the development, distribution or sale of any illegal copies of the Company's
products, any infringements of its patents, copyrights or trademarks, or any
violation of its trade secrets or confidentiality procedures to date, there can
be no assurance that the steps taken by the Company to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company, the
Company may from time to time be notified of claims that the Company may be
infringing patents or other
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intellectual property rights owned by third parties. If it is necessary or
desirable, the Company may seek licenses under such patents or other
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any licenses will be acceptable to the
Company. A failure to obtain a license from a third party for technology used by
the Company could cause the Company to incur substantial liabilities and to
suspend the manufacture of products requiring the technology. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of the Company's proprietary rights or to establish the validity of the
Company's proprietary rights. Litigation by or against the Company could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation results in a
favorable determination for the Company. In the event of any adverse result in
such litigation, the Company could be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, expend significant
resources to develop noninfringing technology, discontinue the use of certain
processes or obtain licenses to the infringing technology. There can be no
assurance that the Company would be successful in such development or that such
licenses would be available on reasonable terms or at all, and any such
development or license could require expenditures by the Company of substantial
time and resources. In the event that a third party makes a successful claim
against the Company or its customers and a license is not made available to the
Company on commercially reasonable terms, the Company's business, financial
condition or operating results would be adversely effected.
FACILITIES
The Company's principal administrative, sales, marketing, engineering,
research and development facility is located in 18,000 square feet of space in
San Jose, California. The space is leased by the Company through June 1999. The
Company also leases a 12,000 square foot manufacturing and sales facility in
Dresden, Germany. The Dresden facility is occupied under a lease that expires
August 1, 2000. The Company believes that its current facilities are adequate
for its needs through the end of fiscal 1998, and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
EMPLOYEES
As of September 30, 1997, the Company had 95 full-time employees, including
35 employees in Germany. Of its total work force, 35 are engaged in research and
development activities, 29 are engaged in manufacturing operations, 13 are
engaged in manufacturing engineering and quality assurance and 18 are engaged in
sales, marketing, support and administrative activities. None of the Company's
employees is represented by a labor union with respect to his or her employment
by the Company. The Company has experienced no work stoppages and believes that
its relations with its employees are good.
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MANAGEMENT
The following table sets forth the executive officers and directors of the
Company as of September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Manher D. Naik..................... 54 President, Chief Executive Officer and Chairman of the Board of
Directors
Donald E. Paulus................... 40 Chief Operating Officer
Ramesh Sirsi, Ph.D................. 53 Executive Vice President, Marketing and Sales
David Satterfield.................. 45 Vice President, Finance and Administration
Yutaka Mori........................ 56 Director
Vinod K. Sood(1)................... 61 Director
Y.S. Fu(1)(2)...................... 49 Director
Shigeru Miyashita.................. 62 Director
Stuart D. Boyd(2).................. 41 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MANHER D. NAIK founded the Company in March 1989 and has served as
President, Chief Executive Officer and Chairman of the Board of Directors since
March 1989. From August 1979 through March 1989 Mr. Naik served as Vice
President of Strategic Marketing of National Semiconductor Corporation, a
semiconductor manufacturer. Mr. Naik received a BS in Mechanical Engineering
from the Indian Institute of Technology, an MS degree in Industrial Engineering
from Cornell University, and an MBA degree from Pepperdine University.
DONALD E. PAULUS joined the Company as Vice President of Engineering
Operations in December 1990 and currently serves as Chief Operating Officer.
Prior to joining the Company, beginning in January 1989, Mr. Paulus served as
Product Line Director at Sierra Semiconductor Corporation, now known as PMC-
Sierra, Inc., a company specializing in mixed signal integrated circuits. From
December 1984 to January 1989, Mr. Paulus served as a Design Manager with
Honeywell Inc.'s Solid State Electronics Division. From June 1979 to December
1984, Mr. Paulus served as a Member of the Technical Staff and as an Engineering
Supervisor at AT&T Bell Laboratories. Mr. Paulus received a BSEE degree from
Lehigh University, an MSEE degree from Stanford University and an MBA from the
University of Colorado.
RAMESH SIRSI, PH.D. joined the Company in September 1994 as Executive Vice
President, Marketing and Sales. Prior to joining the Company, beginning in March
1989, Dr. Sirsi served as Director of Marketing at Siemens Components, Inc., an
electronic component manufacturer. From October 1984 to July 1988, Dr. Sirsi
served as a Product Line Director at Honeywell Inc. From January 1978 to October
1984, Dr. Sirsi served as Director of Telecommunications IC product development
at Harris Corporation. From June 1973 to December 1977, he was employed by Bell
Northern Research as a Member of the Technical Staff. Dr. Sirsi received his
BSEE degree from Bangalore University and his MSEE and Ph.D. degrees from
Carleton University.
DAVID SATTERFIELD joined the Company as Vice President, Finance and
Administration and Secretary in April 1994. Prior to joining the Company,
beginning in June 1992, Mr. Satterfield served as Corporate Controller of Austek
Microsystems Limited, Inc., a semiconductor manufacturer. From April 1991 to
June 1992, Mr. Satterfield served as Corporate Controller of Free-Flow Packaging
Corporation, a packaging company. From June 1985 to April 1991, Mr. Satterfield
served as Corporate Controller of Micro Power Systems, Inc., a semiconductor
manufacturer. Mr. Satterfield holds a BS degree in accounting from San Jose
State University.
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YUTAKA MORI has served as a director of the Company since August 1996. Mr.
Mori has been the General Manager of Corporate Planning at TDK Corporation, a
manufacturer of electronic components, since January 1997. Prior to that time,
beginning in July 1996, Mr. Mori was the President and Chief Executive Officer
of TDK Semiconductor Corporation, a fabless ASIC company. From November 1994 to
June 1996, Mr. Mori served as President and Chief Executive Officer of Silicon
Systems, Inc., a semiconductor manufacturer. From May 1989 to October 1994, Mr.
Mori served as Senior Vice President of Corporate Planning at Silicon Systems,
Inc.
VINOD K. SOOD has served as a director of the Company since March 1989. Mr.
Sood has been self-employed as an advisor and director to technology and
telecommunication companies since 1992. From 1969 to 1992, Mr. Sood was the
Project Administrator/Principal Engineer of the Overseas Projects Division at
General Electric Nuclear. Mr. Sood is also currently a director at a privately
held software company.
Y.S. FU has served as a director of the Company since February 1997. Mr. Fu
has been a Partner of WK Technology Fund, an investment company, since 1995.
Prior to that time, beginning in 1993, Mr. Fu served as Senior Vice
President--OEM (Worldwide) of Logic Technology, Inc. and from 1986 to 1993
served as Chairman/General Manager (Far East Region) of Logic Technology, Inc.
From 1982 to 1986, Mr. Fu was Plant Manager at Qume.
SHIGERU MIYASHITA has served as a director of the Company since February
1997. Mr. Miyashita has been the General Corporate Manager at Nagano Keiki Co.,
Ltd. since April 1992.
STUART D. BOYD has served as a director of the Company since June 1997. Mr.
Boyd has been the Vice President, Associate General Counsel and Assistant
Secretary at Breed Technologies, Inc., an automotive safety system and component
manufacturer, since March 1992.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. The Company's
Certificate of Incorporation provides that, upon closing of the offering
contemplated by this Prospectus, the Board of Directors will be divided into
three classes, with each class serving staggered three-year terms. There are no
family relationships among the directors or executive officers of the Company.
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EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation paid or
accrued by the Company during the fiscal year ended March 31, 1997 to the
Company's chief executive officer and each of the two other executive officers
whose total compensation for services in all capacities to the Company exceeded
$100,000 during such year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) BONUS OPTIONS
- ------------------------------------------------------------------------------ ---------- ----------- -------------
<S> <C> <C> <C>
Manher D. Naik ............................................................... $ 136,667 -- 40,000
President and Chief Executive Officer
Donald E. Paulus ............................................................. 116,400 -- 14,000
Chief Operating Officer
Ramesh Sirsi ................................................................. 104,850 -- 32,000
Executive Vice President, Marketing and Sales
</TABLE>
- ------------------------
(1) Includes amounts deferred at the election of the Named Executive Officer
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended.
STOCK OPTION INFORMATION
The following table sets forth certain information with respect to grants of
options to purchase the Company's Common Stock made during the fiscal year ended
March 31, 1997 to the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR(2) PER SHARE(3) DATE
- ----------------------------------------------- ------------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Manher D. Naik................................. 40,000 21.80% $ 1.13 05/16/2001
Donald E. Paulus............................... 14,000 7.63 2.00 03/10/2002
Ramesh Sirsi................................... 12,000 6.54 1.13 05/16/2001
20,000 10.90 2.00 03/10/2002
</TABLE>
- ------------------------
(1) Options granted in fiscal 1997 generally vest over a four-year period: 1/8
of the total number of shares subject to each option vest and become
exercisable six months after the vesting start date, which is stated in the
option agreement; and 1/48 vest and become exercisable monthly thereafter.
Each option may be terminated earlier upon the cessation of the individual's
employment with the Company.
(2) The Company granted options to purchase 183,520 shares of Common Stock
during fiscal 1997.
(3) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant.
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<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers
certain information concerning options exercised during the fiscal year ended
March 31, 1997 and the number of shares subject to both exercisable and
unexercisable stock options as of March 31, 1997. Also reported are values for
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding options and the fair market value of the
Company's Common Stock as of March 31, 1997. No options or stock appreciation
rights were exercised during the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END (2)
---------------------------- --------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Manher D. Naik.......................................... 26,041 43,958 $ 56,966 $ 96,159
Donald E. Paulus........................................ 24,500 15,500 72,344 3,281
Ramesh Sirsi............................................ 24,500 47,500 53,594 77,344
</TABLE>
- ------------------------
(1) Exercisable in accordance with the vesting provisions described above in
Note 1 to the table entitled "Option Grants in Fiscal Year 1997."
(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at March 31, 1997 ($2.00 as determined
by the Company's Board of Directors) and the exercise price of the Named
Executive Officer's option.
DIRECTOR COMPENSATION
The directors generally do not receive cash compensation for their services
as directors. However, Vinod K. Sood receives compensation of $150 per board
meeting. In addition, the Company's directors are eligible to receive option
grants under the Company's 1997 Stock Option Plan.
BENEFIT PLANS
1997 STOCK OPTION PLAN. The Board of Directors has reserved 800,000 shares
of Common Stock for issuance under the Company's 1997 Stock Option Plan (the
"1997 Plan"). As of September 30, 1997, there were outstanding options to
purchase 168,360 shares of Common Stock under the 1997 Plan of which 3,984
shares of Common Stock subject to those options were vested and exercisable.
Options may be granted to the Company's employees (including officers),
directors and consultants, although only employees and officers and directors
who are also employees may receive "incentive stock options" intended to satisfy
the requirements of Section 442 of the Internal Revenue Code of 1986, as
amended. Nonemployees, including nonemployee directors, may receive nonstatutory
stock options, which do not qualify for such treatment. The exercise price of
incentive stock options under the 1997 Plan must at least equal the fair market
value of the Common Stock on the date of grant, while the exercise price of
nonstatutory options must at least equal 85% of such market value and must be no
less than 100% of such market value if such options are to qualify for certain
tax treatment as performance based compensation. Options granted under the 1997
Plan generally vest over a four-year period of service: 1/8 of the total number
of shares subject to each option vest and become exercisable six months after
the vesting start date, which is stated in the option agreement; and 1/48 vest
and become exercisable monthly thereafter. The term of each option is no more
than ten years from the date of grant unless terminated sooner pursuant to the
provisions of the 1997 Plan. In the event of a change of control of the Company,
including a merger or sale of substantially all of the Company's assets,
outstanding options will become fully vested and exercisable unless they are
assumed by the acquiring corporation.
PRIOR PLAN. Prior to the adoption of the 1997 Plan, the Company granted
options to purchase shares of Common Stock under a separate option plan (the
"Prior Plan"), the terms of which are substantially
48
<PAGE>
identical to the 1997 Plan. As of September 30, 1997, there were outstanding
options to purchase 331,703 shares of Common Stock under the Prior Plan of which
222,078 were vested and exercisable. The Company does not anticipate granting
any additional options to purchase Common Stock under the Prior Plan, and any
shares subject to options under the Prior Plan which terminate or are canceled
will not be issued or used for new options.
1997 EMPLOYEE STOCK PURCHASE PLAN. A total of 250,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1997
Employee Stock Purchase Plan (the "Purchase Plan"), none of which have yet been
issued. The Purchase Plan permits eligible employees to purchase Common Stock at
a discount, but only through payroll deductions, not to exceed ten percent (10%)
of each participant's total cash earnings during concurrent 24-month offering
periods. Each offering period will be divided into four consecutive six-month
purchase periods. The price at which stock is purchased under the Purchase Plan
is equal to 85% of the fair market value of the Common Stock on the first day of
the offering period or the last day of the purchase period, whichever is lower.
The initial offering period will commence on the effective date of this
offering.
LIMITATIONS OF DIRECTORS' LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by resolution, agreement or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and officers
which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
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 which may result in a claim for such indemnification.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 1, 1997, and as adjusted
to reflect the sale of the shares offered hereby (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) by each of the Named Executive Officers and (iii) by all officers and
directors as a group. Except pursuant to applicable community property laws or
as indicated in the footnotes to this table, each stockholder identified in the
table possesses sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by such stockholder. Unless otherwise
noted, the address for the individuals listed below is: c/o Integrated Sensor
Solutions, Inc., 625 River Oaks Parkway, San Jose, CA 95134.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED AFTER
OWNED BEFORE OFFERING OFFERING
----------------------- -------------
BENEFICIAL OWNER(1) NUMBER PERCENT PERCENT
- ------------------------------------------------------------------------------ ---------- ----------- -------------
<S> <C> <C> <C>
Breed Technologies, Inc.(2) .................................................. 530,038 11.6%
Stuart A. Boyd
5300 Old Tampa Highway
P.O. Box 33050
Lakewood, FL 33807-3050
WK Technology Fund(3) ........................................................ 502,039 10.9
Y.S. Fu
10th Floor, 115, Sec. 3
Ming Sheng E. Road
Taipei, Taiwan, R.O.C.
TDK Semiconductor Corporation(4) ............................................. 445,524 9.7
Yutaka Mori
14351 Myford Road
Tustin, CA 92780-7068
Nagano Keiki Co., Ltd.(5) .................................................... 278,896 6.1
Shigeru Miyashita
1-30-4 Higashimagome
Ohta-ku
Tokyo 162
JAPAN
Vinod K. Sood(6) ............................................................. 180,454 3.9
Manher D. Naik(7) ............................................................ 240,860 5.3
Donald E. Paulus(8) .......................................................... 148,250 3.2
Ramesh Sirsi(9) .............................................................. 63,083 1.4
All directors and executive officers as a group (9 persons)(10) .............. 2,421,148 49.5
</TABLE>
- ------------------------
* Denotes less than 1%
(1) Percent ownership is based on: (i) before this offering, 4,575,303 shares
of Common Stock, plus any shares issuable pursuant to options or warrants
held by the person in question which may be exercised within 60 days of
November 1, 1997; and (ii) after this offering, shares of Common
Stock outstanding plus any shares issuable pursuant to options held by the
person in question which may be exercised within 60 days of November 1,
1997.
50
<PAGE>
(2) Includes 530,038 shares held by Breed Technologies, Inc. Stuart Boyd, a
director of the Company, is an officer of Breed Technologies, Inc. with
certain voting and investment power over such shares. Although Mr. Boyd may
be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest therein
which he may have.
(3) Includes 453,059 shares held by WK Technology Fund and affiliated funds and
48,980 shares subject to warrants which are exercisable within 60 days of
November 1, 1997 held by such funds. Y.S. Fu, a director of the Company, is
a partner of WK Technology Fund with certain voting and investment power
over such shares. Although Mr. Fu may be deemed to be a beneficial owner of
such shares he disclaims all such beneficial ownership except to the extent
of any pecuniary interest therein which he may have.
(4) Includes 445,524 shares held by TDK Semiconductor Corporation. Yutaka Mori,
a director of the Company, is an officer of TDK Semiconductor Corporation
with certain voting and investment power over such shares. Although Mr. Mori
may be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest therein
which he may have.
(5) Includes 278,896 shares held by Nagano Keiki Co., Ltd. Shigeru Miyashita, a
director of the Company, is an officer of Nagano Keiki Co., Ltd. Although
Mr. Miyashita may be deemed to be a beneficial owner of such shares, he
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which he may have.
(6) Includes 178,704 shares held by the Sood Family Trust and 1,750 shares
subject to options which are exercisable within 60 days of November 1, 1997.
(7) Includes 193,360 shares held by the Naik, Manher & Gita M. Family Trust and
47,500 shares subject to options which are exercisable within 60 days of
November 1, 1997.
(8) Includes 28,250 shares subject to options which are exercisable within 60
days of November 1, 1997.
(9) Includes 39,083 shares subject to options which are exercisable within 60
days of November 1, 1997.
(10) Includes 150,333 shares subject to options which are exercisable within 60
days of November 1, 1997.
51
<PAGE>
CERTAIN TRANSACTIONS
Since November 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or beneficial holder of more than 5% of any class of
voting securities of the Company or members of such person's immediate family
had or will have a direct or indirect material interest other than the
transactions described below.
In December 1996 and October 1997, the Company sold 249,616 and 12,111
shares of Series E Preferred Stock, respectively, at a price of $3.78 per share.
In addition, in December 1996, the Company issued warrants to purchase shares of
Series E Preferred Stock at $6.38 per share. In December 1996, February 1997 and
June 1997, the Company sold 766,818 shares of Series F Preferred Stock at a
price of $6.13 per share. The following executive officers, directors,
beneficial holders of more than 5% of a class of the Company's capital stock and
immediate family members of such persons purchased Series E and Series F
Preferred Stock:
<TABLE>
<CAPTION>
WARRANTS TO
SERIES E PURCHASE SERIES SERIES F
PREFERRED F PREFERRED PREFERRED
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) STOCK STOCK STOCK
- -------------------------------------------------------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Nagano Keiki Co., Ltd.(2)..................................... 131,007(3)
TDK Semiconductor Corporation(2).............................. 17,978(4)
WK Technology Fund(2)......................................... 48,978(5) 453,059(6)
Vinod K. Sood(7).............................................. 34,493(8)
</TABLE>
- ------------------------
(1) See notes to table of beneficial ownership in "Principal Stockholders" for
information relating to the beneficial ownership of such shares.
(2) A beneficial holder of more than 5% of a class of the Company's capital
stock.
(3) Represents shares of Series E Preferred Stock issued in exchange for the
cancellation of indebtedness.
(4) Represents shares of Series E Preferred Stock issued in exchange for the
cancellation of indebtedness.
(5) Represents warrants to purchase 13,714 shares held by WK Technology Fund,
10,285 shares held by WK Technology Fund II, 18,612 shares held by WK
Technology Fund III and 6,367 shares held by WK Technology Fund IV. These
warrants were exercised in November 1997.
(6) Represents 123,591 shares held by WK Technology Fund, 103,306 shares held by
WK Technology Fund II, 155,836 shares held by WK Technology Fund III and
70,326 shares held by WK Technology Fund IV.
(7) A director of the Company.
(8) Represents shares issued in exchange for the cancellation of the Company's
Promissory Note dated June 15, 1996 in the amount of $211,268.75 payable to
the Sood Family Trust.
During fiscal 1996 and 1997, respectively, the Company designed and
manufactured specific products for Breed Technologies, Inc. which resulted in
sales of approximately $1,233,000 and $181,000 to Breed Technologies, Inc. of
which approximately $310,000 and $0 is included in the accounts receivable
balance at March 31, 1996 and 1997, respectively.
During fiscal years 1996 and 1997, the Company purchased goods and services
from TDK Semiconductor Corporation resulting in payments of $2,005,000 and
$2,323,000, respectively. At March 31, 1996 and 1997, the accounts payable
balance included approximately $396,000 and $304,000 payable to TDK
Semiconductor Corporation. Included in the notes payable balance at March 31,
1996 and 1997, were approximately $679,000 and $679,000 payable to TDK. On April
15, 1993, the Company issued a promissory note to TDK Semiconductor Corporation
in the amount of $500,000 with an interest rate of 9% per year. On June 14,
1995, the Company repaid the principal amount of the loan and issued 41,488
52
<PAGE>
shares of Common Stock to TDK Semiconductor Corporation in exchange for the
cancellation of accrued and unpaid interest on such indebtedness. On December
15, 1995, the Company issued a promissory note to TDK Semiconductor Corporation
in the amount of $679,000 with an interest rate of 10% per year. All amounts are
due and payable by June 15, 1998. In December 1996, the Company issued Series E
Preferred Stock to TDK Semiconductor Corporation in exchange for the
cancellation of interest payments for the fiscal year ended March 31, 1997 in
the amount of $67,868 on the December 1995 promissory note.
During fiscal 1996 and 1997, the Company performed development services for
and sold ASICs to Nagano resulting in approximately $692,000, and $1,119,000 of
revenues in those periods, of which approximately $136,000 and $709,000 are
included in the accounts receivable balance at March 31, 1996 and 1997,
respectively. Included in the accounts payable balance at March 31 1996, and
1997 are approximately $303,000 and $381,000, respectively, payable to Nagano
for purchases of sensing elements of $157,000 and $295,000. In addition,
included in the notes payable balance at March 31, 1996 and 1997 are
approximately $466,000 and $437,000, respectively, payable to Nagano. In August
1995, the Company issued a promissory note to Nagano in the amount of $453,000
with an interest rate of 9.5% per year. In December 1996 and October 1997, the
Company issued Series E Preferred Stock to Nagano in exchange for the
cancellation of interest and principal amounts due and payable on the August
1995 promissory note. On November 1, 1996, the Company issued a promissory note
to Nagano in the amount of $437,000 with an interest rate of 10% per year. The
Company repaid all interest and principal on the November 1996 promissory note
on May 30, 1997. On July 31, 1997, the Company entered into an agreement to
increase its ownership of ISS-Nagano by converting approximately $1.1 million in
long-term intercompany indebtedness owed by ISS-Nagano into an increased equity
interest. Accordingly, the Company now owns 74% of the equity of ISS-Nagano. For
periods subsequent to July 1997, 26% of ISS-Nagano's net income (loss) has been
attributed to the minority shareholders' interest.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 7,000,000 shares of Preferred Stock, $.001 par value per share.
Each outstanding share of Preferred Stock will be converted into one share of
Common Stock upon the closing of the offering being made hereby. Upon such
conversion, such Preferred Stock will revert to authorized but unissued shares
of preferred stock. The following summary of certain provisions of the Common
Stock and the Preferred Stock of the Company does not purport to be complete and
is subject to, and qualified in its entirety by, the Certificate of
Incorporation and the Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
As of September 30, 1997, there were 4,575,303 shares of Common Stock
outstanding held of record by 103 stockholders, as adjusted to reflect the
conversion of the outstanding shares of Preferred Stock upon the closing of this
offering. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the holders of Common
Stock. Subject to preferences that may be applicable to any outstanding shares
of Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available for the payment of dividends. In the event of a
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 and liquidation preferences of any outstanding shares of Preferred
Stock. Holders of Common Stock have no preemptive rights or rights to convert
their Common Stock into any other securities. 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
issued upon completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, upon closing of the
offering contemplated by this Prospectus, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 7,000,000
shares of preferred stock in one or more series and to determine or alter the
designation, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the Common Stock and may
adversely affect the voting and other rights of the holders of Common Stock. At
present, there are no shares of preferred stock outstanding, and the Company has
no plans to issue any of the preferred stock.
WARRANTS
REPRESENTATIVE'S WARRANTS. The Company has issued to the Representative of
the Underwriters warrants (the "Representative's Warrants") to purchase up to
shares of Common Stock at an exercise price per share equal to 120% of
the price to public in this offering. The Representative's Warrants are
exercisable for a period of five years from the date of this Prospectus
commencing one year after the effective date of the Registration Statement of
which this Prospectus forms a part. The holders of the Representative's Warrants
have the right, on one occasion while such warrants are exercisable, to require
the Company at the Company's expense to register under the Securities Act the
offer and sale of
54
<PAGE>
the shares of Common Stock underlying the Representative's Warrants. In
addition, holders of the Representative's Warrants may include the shares of
Common Stock underlying the Representative's Warrants in any registration (other
than on Form S-8) filed by the Company while such Warrants are exercisable. See
"Underwriting."
REGISTRATION RIGHTS
After this offering, the holders of 2,160,000 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the agreement between the Company and the
holders of such registrable securities, if the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other securityholders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
shares of such Common Stock therein. Subject to certain limitations in the
agreement, the holders of more than 50% of such shares may require, on two
occasions, that the Company use its best efforts to register such shares for
public resale, subject to certain limitations. Further, holders may require the
Company to file additional registration statements on Form S-3 at the Company's
expense. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in such registration in certain circumstances.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and thus subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any "business
combination" (as defined) with any interested stockholder (defined generally as
a person owning 15% or more of a corporation's outstanding voting stock) for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder. The existence of this
provision would be expected to have an anti-takeover effect, including attempts
that might result in a premium over the market price for the shares of Common
Stock held by stockholders.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as an entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
55
<PAGE>
The Company's Certificate of Incorporation provides that all stockholder
action must be effected at a duly called meeting of stockholders and not by a
consent in writing. In addition, the Company's Certificate of Incorporation and
Bylaws provide that only the Company's Chief Executive Officer, a majority of
the members of the Company's Board of Directors or holders of at least 10% of
the outstanding voting power may call a special meeting of stockholders. These
provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions also may have the effect of preventing changes
in the management of the Company.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation has been appointed as the transfer agent and
registrar for the Company.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Upon completion of this offering, the Company will have outstanding
approximately shares of Common Stock. Of these shares, the
shares sold in this offering will be freely tradeable without restriction under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 4,575,303 shares
of Common Stock held by existing stockholders were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act. The Company's executive officers and directors
(including funds affiliated with directors), who following the offering together
will beneficially own an aggregate of shares of the Company's Common
Stock (including shares subject to options held by such persons), have executed
lock-up agreements with the Underwriters providing that they will not directly
or indirectly sell, contract to sell, grant any option to purchase or otherwise
transfer or dispose of any securities of the Company until 180 days after the
effective date of this offering. Dougherty Summit Securities LLC may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements.
As a result of the foregoing lock-up agreements, only the shares of
the Company's Common Stock being offered hereby will be eligible for resale
without restriction on the effective date of this offering. Approximately
4,575,303 shares will be eligible for resale, pursuant to either Rule 701 or
Rule 144, beginning 180 days after the effective date of this offering. The
remaining shares will become eligible for resale from time to time thereafter as
the requisite holding periods required by Rule 144 are met.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner except an affiliate) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after
this offering) or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. Each holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.
Shortly after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's option plans or reserved for issuance
under the Purchase Plan. Based upon the number of shares subject to outstanding
options at September 30, 1997 and reserved for future issuance under all such
plans, such registration
57
<PAGE>
statement would cover approximately, 1,383,100 shares. This registration
statement will automatically become effective upon filing. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market immediately following the expiration of lock-up agreements.
58
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below, for whom
Dougherty Summit Securities LLC is acting as representative (the
"Representative"), have severally agreed to purchase from the Company an
aggregate of 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
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Dougherty Summit Securities LLC..................................................
----------
Total..........................................................................
----------
----------
</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 overallotment option described below) must be so
purchased.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price 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, a concession not to exceed $ per share
to any other Underwriter and certain other dealers. After the initial public
offering of the shares offered hereby, the offering price and other selling
terms may be changed by the Representative. The Representative has advised the
Company that the Underwriters do not intend to confirm any shares to any
accounts over which they exercise discretionary control.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price
less underwriting discounts and commissions. Such option may be exercised solely
for the purpose of converting overallotments, if any, in connection with the
offering of the shares offered hereby. 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 additional shares proportionate to
such Underwriter's initial commitment as indicated in the preceding table.
The offering of the shares offered hereby is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
The Company has agreed to pay the Representative a non-accountable expense
allowance of $150,000 to cover certain underwriting costs and due diligence
expenses related to this offering and to sell to the Representative for nominal
consideration the Representative's Warrants to purchase from the Company up to
shares of Common Stock (subject to certain antidilution adjustments) at
an exercise price
59
<PAGE>
per share equal to 120% of the initial public offering price per share. The
exercise price may be paid in cash or on a cashless net issuance basis by
foregoing receipt of a number of shares otherwise issuable upon exercise having
a fair market value equal to the aggregate exercise price. The Representative's
Warrants will be exercisable for a period beginning one year from the date of
this Prospectus until five years from the date of this Prospectus. The
Representative's Warrants may not be sold, transferred, assigned, pledged or
hypothecated by the Representative for a period of one year from the date of
issuance except to officers and partners of the Representative, the Underwriters
or officers and partners of the Underwriters. In addition, the Company has
granted certain demand and piggyback registration rights to the holders of the
Representative's Warrants, which enable them to register resale of the Common
Stock underlying the Representative's Warrants under the Securities Act.
The Company, all directors and executive officers of the Company, and
certain stockholders and optionholders of the Company have agreed that, without
the prior written consent of the Representative, they will not, with certain
limited exceptions, directly or indirectly, offer, sell, contract to sell, grant
any option to purchase or otherwise dispose of any shares of 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, for a period of 180 days after the
Effective Date, other than the shares of Common Stock offered hereby. See
"Shares Eligible for Future Sale."
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as
amended, pursuant to which such persons may bid for or purchase shares of Common
Stock for the purpose of stabilizing the market price for shares of Common
Stock. The Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with this
offering than they are committed to purchase from the Company and in such case
may purchase shares of Common Stock in the open market following the completion
of this offering to cover all or a portion of the shares of Common Stock or by
exercising the Underwriters' over-allotment option referred to above. In
addition, Dougherty Summit Securities LLC, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the other Underwriters
whereby it may reclaim for an Underwriter (or a dealer participating in this
offering) for the account of the other Underwriters, the selling concession with
respect to shares of Common Stock that are distributed in this offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, may be discontinued at any
time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock offered hereby has
been determined by negotiation between the Company and the Representative. Among
the factors to be considered in determining the initial public offering price
are prevailing market conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the history of and prospects for the
Company's business and the industry in which it competes, the Company's
management and other factors deemed relevant.
60
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Gray Cary Ware & Freidenrich, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck Phleger & Harrison LLP, Newport
Beach, California and Lindquist & Vennum P.L.L.P, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Integrated Sensor Solutions, Inc.
at March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form SB-2 relating to the 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 and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Public Reference Branch of the Commission upon the payment of
certain fees prescribed by the Commission. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission
(http://www.sec.gov).
The Company intends to furnish its stockholders annual reports containing
financial statements audited by its independent auditors and quarterly reports
containing unaudited financial statements for each of the first three quarters
of each year.
61
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows................................ F-6
Notes to Consolidated Financial Statements........................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Integrated Sensor Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Integrated
Sensor Solutions, Inc. as of March 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Integrated
Sensor Solutions, Inc. at March 31, 1996 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
June 15, 1997,
except for Note 11,
as to which the date is
October 7, 1997
F-2
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ ------------ SEPTEMBER 30, PRO FORMA
1997 STOCKHOLDERS'
------------- EQUITY
SEPTEMBER 30, 1997
(UNAUDITED) ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 520,508 $ 2,059,050 $ 378,147
Accounts receivable--trade, net of allowance for
doubtful accounts of $0, $164,000, and $0 at March
31, 1996, March 31, 1997, and September 30, 1997,
respectively......................................... 1,134,846 2,225,548 3,100,172
Accounts receivable from related parties............... 834,888 884,295 451,467
Other accounts receivable.............................. -- -- 261,231
Inventories............................................ 1,607,524 1,679,107 2,570,967
Prepaid expenses....................................... 156,858 63,730 104,291
------------ ------------ -------------
Total current assets..................................... 4,254,624 6,911,730 6,866,275
Property and equipment, at cost:
Machinery and equipment................................ 2,331,752 3,535,424 3,789,599
Furniture and fixtures................................. 192,921 219,387 236,513
Leasehold improvements................................. 49,437 131,009 188,717
Software............................................... 155,445 234,345 253,827
------------ ------------ -------------
2,729,555 4,120,165 4,468,656
Accumulated depreciation................................. 1,297,304 2,323,196 2,742,392
------------ ------------ -------------
1,432,251 1,796,969 1,726,264
Other assets............................................. -- -- 150,761
------------ ------------ -------------
Total assets............................................. $ 5,686,875 $ 8,708,699 $ 8,743,300
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit......................................... $ 600,000 $ 600,000 $ 600,000
Notes payable to related parties....................... 1,526,504 1,515,365 678,684
Accounts payable--trade................................ 780,328 1,245,521 1,053,138
Accounts payable--other................................ -- -- 261,231
Accounts payable to related parties.................... 698,707 684,634 551,451
Accrued payroll and related expenses................... 134,438 131,421 128,350
Other accrued liabilities.............................. 355,880 436,652 585,637
Current portion of capital lease obligations........... 8,697 158,772 156,869
------------ ------------ -------------
Total current liabilities................................ 4,104,554 4,772,365 4,015,360
Long-term portion of capital lease obligations........... 22,075 197,149 144,059
Minority interest in joint venture....................... 419,525 56,028 117,335
Commitments
Stockholders' equity:
Noncumulative convertible preferred stock, $0.001 par
value issuable in series (aggregate liquidation
preference of $11,210,322 at March 31, 1997 and
$11,648,939 September 30, 1997, respectively)
Authorized shares - 3,400,000 at September 30, 1997
and 7,000,000 pro forma
Issued and outstanding shares--2,121,497 at March 31,
1996, 3,066,317 at March 31, 1997, 3,137,931 at
September 30, 1997, and none pro forma............. 2,122 3,066 3,138 $ --
Common stock, $0.001 par value:
Authorized shares--6,200,000 at March 31, 1997 and
50,000,000 at September 30, 1997
Issued and outstanding shares 1,280,913 at March
31, 1996, 1,390,680 at March 31, 1997, 1,437,372 at
September 30, 1997, and 4,575,303 pro forma........ 1,281 1,391 1,437 4,575
Additional paid-in capital............................. 6,652,311 12,199,411 12,883,378 12,883,378
Accumulated deficit.................................... (5,541,998) (8,170,843) (8,067,273) (8,067,273)
Cumulative translation adjustment...................... 27,005 (68,758) 82,020 82,020
Deferred compensation.................................. -- (281,110) (436,154) (436,154)
------------ ------------ ------------- ------------------
Total stockholders' equity............................... 1,140,721 3,683,157 4,466,546 $ 4,466,546
------------ ------------ ------------- ------------------
------------------
Total liabilities and stockholders' equity............... $ 5,686,875 $ 8,708,699 $ 8,743,300
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------- ---------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................... $ 3,668,851 $ 5,336,771 $ 8,049,359 $ 3,805,162 $ 4,968,295
Contract revenue.............................. 1,307,593 2,993,319 2,254,720 1,144,920 2,042,759
------------- ------------- ------------- ------------- ------------
Total revenues (related party revenues of
$1,300,000, $2,404,000, $1,506,000, $411,000
and $850,000 for 1995, 1996, 1997 and
September 30, 1996 and 1997................... 4,976,444 8,330,090 10,304,079 4,950,082 7,011,054
Cost of revenues:
Cost of product revenue (Note 9).............. 3,624,128 5,250,504 7,292,491 3,509,958 3,455,446
Cost of contract revenue...................... 996,454 2,149,917 2,731,063 1,407,699 1,577,621
------------- ------------- ------------- ------------- ------------
Total cost of revenues.......................... 4,620,582 7,400,421 10,023,554 4,917,657 5,033,067
------------- ------------- ------------- ------------- ------------
Gross profit.................................... 355,862 929,669 280,525 32,425 1,977,987
Operating expenses:
Research and development...................... 700,674 741,577 1,438,212 715,318 838,810
Sales, general, and administrative............ 1,298,919 1,389,894 1,759,774 845,419 934,004
------------- ------------- ------------- ------------- ------------
Total operating expenses........................ 1,999,593 2,131,471 3,197,986 1,560,736 1,772,814
------------- ------------- ------------- ------------- ------------
Income (loss) from operations................... (1,643,731) (1,201,802) (2,917,461) (1,528,310) 205,173
Interest expense................................ (96,318) (225,957) (259,735) (151,395) (105,587)
Other income.................................... 586,913 366,129 27,525 66,339 65,435
Minority interest in net (income) loss of joint
venture....................................... 37,201 311,000 520,826 295,642 (61,307)
------------- ------------- ------------- ------------- ------------
Net income (loss)............................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (1,317,724) $ 103,712
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Pro forma net income (loss) per share......... $ (0.56) $ (0.29) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Shares used in calculation of pro forma net
income (loss) per share..................... 4,657,522 4,600,255 5,054,524
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at March 25, 1994............................... 1,591,459 $ 1,592 528,687 $ 529 $ 4,031,942
Issuance of common stock for notes payable and accrued
interest............................................ -- -- 407,654 408 458,212
Issuance of common stock upon exercise of stock
options............................................. -- -- 171,217 171 40,598
Issuance of Series D preferred stock, net of issuance
costs of $14,198 for cash........................... 530,038 530 -- -- 1,985,272
Issuance of common stock for services................. -- -- 3,000 3 3,372
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1995............................... 2,121,497 2,122 1,110,558 1,111 6,519,396
Issuance of common stock upon exercise of stock
options............................................. -- -- 103,400 103 29,009
Issuance of common stock for extension of payment
terms............................................... -- -- 66,955 67 103,906
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1996............................... 2,121,497 2,122 1,280,913 1,281 6,652,311
Issuance of common stock upon exercise of stock
options............................................. -- -- 109,767 110 76,430
Issuance of Series E preferred stock for notes payable
and accrued interest................................ 249,616 249 -- -- 942,056
Issuance of Series F preferred stock for notes
payable, accrued interest, and cash, net of $11,959
of issuance costs................................... 695,204 695 -- -- 4,247,504
Deferred compensation................................. -- -- -- -- 281,110
Translation adjustment................................ -- -- -- -- --
Net loss.............................................. -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at March 31, 1997............................... 3,066,317 3,066 1,390,680 1,391 12,199,411
Issuance of common stock upon exercise of stock
options (unaudited)................................. -- -- 46,692 46 35,842
Issuance of Series F preferred stock for note payable
and accrued interest (unaudited).................... 71,614 72 -- -- 436,550
Deferred compensation (unaudited)..................... -- -- -- -- 211,575
Amortization of deferred compensation (unaudited)..... -- -- -- -- --
Translation adjustment (unaudited).................... -- -- -- -- --
Net income (unaudited)................................ -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at September 30, 1997 (unaudited)............... 3,137,931 $ 3,138 1,437,372 $ 1,437 $ 12,883,378
--------- ----------- --------- ----------- --------------
--------- ----------- --------- ----------- --------------
<CAPTION>
CUMULATIVE TOTAL
ACCUMULATED TRANSLATION DEFERRED STOCKHOLDERS'
DEFICIT ADJUSTMENT COMPENSATION EQUITY
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at March 25, 1994............................... $(3,675,433) $ -- $ -- $ 358,630
Issuance of common stock for notes payable and accrued
interest............................................ -- -- -- 458,620
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 40,769
Issuance of Series D preferred stock, net of issuance
costs of $14,198 for cash........................... -- -- -- 1,985,802
Issuance of common stock for services................. -- -- -- 3,375
Translation adjustment................................ -- 117,655 -- 117,655
Net loss.............................................. (1,115,935) -- -- (1,115,935)
------------ ----------- ------------- ------------
Balance at March 31, 1995............................... (4,791,368) 117,655 -- 1,848,916
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 29,112
Issuance of common stock for extension of payment
terms............................................... -- -- -- 103,973
Translation adjustment................................ -- (90,650) -- (90,650)
Net loss.............................................. (750,630) -- -- (750,630)
------------ ----------- ------------- ------------
Balance at March 31, 1996............................... (5,541,998) 27,005 -- 1,140,721
Issuance of common stock upon exercise of stock
options............................................. -- -- -- 76,540
Issuance of Series E preferred stock for notes payable
and accrued interest................................ -- -- -- 942,305
Issuance of Series F preferred stock for notes
payable, accrued interest, and cash, net of $11,959
of issuance costs................................... -- -- -- 4,248,199
Deferred compensation................................. -- -- (281,110) --
Translation adjustment................................ -- (95,763) -- (95,763)
Net loss.............................................. (2,628,845) -- -- (2,628,845)
------------ ----------- ------------- ------------
Balance at March 31, 1997............................... (8,170,843) (68,758) (281,110) 3,683,157
Issuance of common stock upon exercise of stock
options (unaudited)................................. -- -- -- 35,888
Issuance of Series F preferred stock for note payable
and accrued interest (unaudited).................... -- -- -- 436,622
Deferred compensation (unaudited)..................... -- -- (211,575) --
Amortization of deferred compensation (unaudited)..... -- -- 56,531 56,531
Translation adjustment (unaudited).................... -- 150,778 -- 150,778
Net income (unaudited)................................ 103,570 -- -- 103,570
------------ ----------- ------------- ------------
Balance at September 30, 1997 (unaudited)............... $(8,067,273) $ 82,020 $ (436,154) $4,466,546
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $(1,115,935) $ (750,630) $(2,628,845) $(1,317,724) $ 103,712
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.............................. 409,997 769,743 1,025,892 362,626 419,196
Amortization of deferred compensation...................... -- -- -- -- 56,531
Issuance of common stock for services...................... 3,375 -- -- -- --
Minority interest in net income (loss) of joint venture.... (37,201) (311,000) (520,826) (295,642) 61,307
Gain on sale of interest in joint venture.................. (166,032) (235,472) (171,618) (171,618) --
Foreign currency (gains) losses............................ -- (165,000) 143,921 105,279 (35,078)
Changes in operating assets and liabilities:
Accounts receivable...................................... (704,071) (79,700) (1,358,435) (595,344) (533,350)
Inventories.............................................. (957,619) (163,988) (95,289) 165,946 (885,579)
Prepaid expenses and other assets........................ (50,214) (70,522) 92,228 123,683 (190,840)
Accounts payable......................................... 1,483,917 (862,773) 577,743 996,511 (59,777)
Accrued payroll and related expenses..................... 15,705 18,518 (3,017) 5,809 (3,071)
Deferred revenue......................................... (182,209) (53,732) (3,568) 17,333 --
Other accrued liabilities................................ (240,445) 210,254 219,480 (129,052) 185,577
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities.......................... (1,540,732) (1,694,302) (2,722,334) (732,193) (881,372)
INVESTING ACTIVITIES
Purchase of property and equipment............................. (748,563) (1,124,317) (1,092,413) (436,407) (353,695)
Proceeds from sale of property and equipment................... -- -- -- -- 46,205
Proceeds from sale of short-term investment.................... (150,000) 150,000 -- -- --
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.......................... (898,563) (974,317) (1,092,413) (436,407) (307,490)
FINANCING ACTIVITIES
Borrowings under line of credit................................ -- 600,000 600,000 600,000 --
Proceeds from notes payable.................................... 250,000 1,757,377 1,086,681 650,000 --
Payments on line of credit..................................... -- -- (600,000) (600,000) --
Payments of principal on notes payable......................... (270,005) (750,000) -- -- (431,965)
Payments of principal on capital lease obligations............. (4,524) (9,890) (126,922) (26,707) (95,964)
Issuance of convertible preferred stock, net of issuance
costs........................................................ 1,985,802 -- 3,988,043 -- --
Net proceeds from issuance of common stock..................... 40,769 29,112 76,540 15,112 35,888
Net proceeds from investment in joint venture.................. 322,830 715,199 328,947 328,947 --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities............ 2,324,872 2,341,798 5,353,289 967,352 (492,041)
---------- ---------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............... (114,423) (326,821) 1,538,542 (201,248) (1,680,903)
Cash and cash equivalents at beginning of year................. 961,752 847,329 520,508 520,508 2,059,050
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year....................... $ 847,329 $ 520,508 $2,059,050 $ 319,260 $ 378,147
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................................. $ 27,082 $ 164,255 $ 118,135 $ 43,636 $ 63,861
Taxes paid..................................................... $ 1,021 $ -- $ -- $ -- $ --
SCHEDULE OF NONCASH FINANCING ACTIVITIES
Capital asset additions under capital leases................... $ 35,914 $ 9,272 $ 298,197 $ 23,205 $ 41,001
Accounts payable converted to capital leases................... $ -- $ -- $ 153,874 $ 153,874 $ --
Issuance of preferred stock for payment of notes payable....... $ 458,620 $ -- $1,067,321 $ -- $ 400,000
Issuance of preferred stock for payment of interest on notes
payable...................................................... $ -- $ 103,973 $ 135,140 $ -- $ 36,622
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Integrated Sensor Solutions, Inc. (ISS or the Company) designs, manufactures
and markets high performance, intelligent sensor products that are used in
electronic control systems by customers in the automotive and industrial
markets. The Company was incorporated in March 1989 and was principally engaged
in research and development through 1993.
BASIS OF PRESENTATION
The consolidated financial statements through March 31, 1997 include the
accounts of the Company and ISS-Nagano GmbH, its approximately 52% owned joint
venture (see Note 2), after elimination of all intercompany accounts and
transactions.
On July 31, 1997, the Company entered into an agreement to increase its
ownership of ISS-Nagano GmbH by converting approximately $1,100,000 in long-term
intercompany indebtedness owed by ISS-Nagano GmbH into an increased equity
interest. Accordingly, the Company now owns 74% of the equity of ISS-Nagano
GmbH. For periods subsequent to July 31, 1997, 26% of ISS-Nagano GmbH's net
income (loss) has been attributed to the minority shareholders' interest.
As of March 31, 1997, the Company had an accumulated deficit of $8,170,843
and had used cash of $2,722,334 in operations for the fiscal year then ended.
Management believes that the March 31, 1997 working capital of $2,139,365 and
its line of credit together with the results of operations will be sufficient to
support the Company's planned activities through the end of fiscal 1998. The
Company believes that, to the extent existing resources and anticipated revenues
are insufficient to fund the Company's planned activities, additional debt or
equity financing will be available from existing investors and others.
FOREIGN CURRENCY TRANSLATION
The financial statements of ISS-Nagano GmbH are denominated in Deutsche
Marks which is its functional currency in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" (FAS 52). All assets
and liabilities in the balance sheets of ISS-Nagano GmbH are translated into
U.S. Dollar equivalents at exchange rates as follows: (1) balance sheet accounts
at year-end rates and (2) statement of operations accounts at weighted average
exchange rates for the year. Translation gains or losses are recorded in
stockholders' equity, and the transaction gains and losses are included in other
income. The Company has not undertaken hedging transactions to cover its
currency transaction exposure. In 1996 and 1997, the Company recognized a
transaction gain of $165,000 and a transaction loss of $144,000, respectively,
on trade payables and notes to related parties denominated in foreign
currencies.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid financial instruments
that are readily convertible to cash and have original maturities of three
months or less at the time of acquisition.
F-7
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
The cost of advertising is generally expensed as incurred. The Company's
advertising costs through 1997 have been immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is estimated using a
discounted cash flow analysis based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market. The major components of
inventory are as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Raw materials...................................... $ 1,269,494 $ 1,422,396 $ 2,109,937
Work-in-process.................................... 120,941 123,813 312,025
Finished goods..................................... 217,089 132,898 149,005
------------ ------------ -------------
$ 1,607,524 $ 1,679,107 $ 2,570,967
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over the estimated useful lives of
the assets (generally three to five years) using the straight-line method.
Equipment under capital leases and leasehold improvements are amortized using
the straight-line method, based on the shorter of the estimated useful lives of
the assets or the term of the lease.
REVENUES
Revenues from product shipments are recognized as products are shipped. The
Company performs research and product development work under development
contracts. Due to technological risk factors, the costs of these contracts are
expensed as incurred and revenues are recognized when applicable customer
milestones have been met, including deliverables, and in any case, not in excess
of the amount that would be recognized using the percentage of completion
method. Costs incurred under development contracts are included in cost of
contract revenues in the consolidated statements of operations.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of common stock and common equivalent shares, when dilutive, from
convertible preferred stock (using the if-converted method) and from stock
options and warrants (using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent
F-8
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method at an assumed public offering price).
Historical net income (loss) per share information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)
per share.................. $ (0.51) $ (0.31) $ (1.04) $ (0.53) $ 0.02
Shares used in
computing net
income (loss)
per share.................. 2,183,621 2,431,384 2,526,668 2,468,901 5,054,524
</TABLE>
PRO FORMA NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Pro forma net income (loss) per share has been computed as described above
and also gives effect even if antidilutive to the conversion of convertible
preferred shares not included above that will automatically convert upon
completion of the Company's initial public offering (using the if-converted
method) from the original date of issuance. In the event of a public offering of
the Company's Common Stock, all of the convertible preferred stock outstanding
as of the closing date will be converted into an aggregate of 3,137,931 shares
of common stock, based on the shares of convertible preferred stock outstanding
at September 30, 1997. Unaudited pro forma stockholders' equity at September 30,
1997, as adjusted for the conversion of preferred stock, is disclosed on the
balance sheet.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and restate all prior periods. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded. The
impact is not expected to be material. The impact of FAS 128 on the calculation
of fully-diluted earnings per share for the year ended March 31, 1997 is also
not expected to be material.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISKS
Many of the Company's customers are primarily involved in the automotive
market. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations.
F-9
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant customers accounted for the following percentages of net
revenues:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------------------------------- ------------------------------------
1995 1996 1997 1996 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Customer A.................... 53% 31% 22% 21% 24%
Customer B.................... 16% 13% < 10% < 10% --
Customer C.................... < 10% < 10% 11% < 10% 11%
Customer D.................... < 10% 17% 22% 24% 26%
Customer E.................... < 10% 10% 20% 27% < 10%
Customer F.................... -- -- < 10% < 10% 12%
</TABLE>
RECLASSIFICATION
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. FAS 121 was effective for the fiscal year ended March 31, 1997. The
adoption of FAS 121 did not have a material impact on the Company's financial
position or results of operations.
ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
The Company accounts for its employee stock compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25). In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), which the Company adopted in fiscal 1997. Under FAS 123, companies may
elect, but are not required, to use a fair value methodology to recognize
compensation expense for all stock-based awards. In 1997, the Company
implemented the disclosure-only provisions of FAS 123 (see Note 7).
F-10
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information at September 30, 1997 and for the six
months ended September 30, 1996 and 1997 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
results of operations for the six months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. ISS-NAGANO GMBH
In July 1993, the Company organized a German entity, ISS GmbH, in which ISS
retained a 79% interest. In December 1994, a related party purchased 34% of ISS
GmbH for approximately $1,290,000 (2,000,000 Deutsche Marks). As a result of
this transaction, the entity was renamed ISS-Nagano GmbH, and the Company's
ownership interest therein was reduced to 52%. Under the terms of the purchase
arrangement, the related party was obligated to pay for the stock in four
installments of 500,000 Deutsche Marks each. The sale has resulted in ISS
recognizing a gain of approximately $166,000, $235,000, and $172,000 in fiscal
1995, 1996, and 1997, respectively, and $172,000 for the six months ended
September 30, 1996, which is included in other income in the accompanying
consolidated statement of operations. The gain on the sale was fully recognized
as of June 30, 1996. ISS-Nagano GmbH is engaged in the manufacturing and
marketing of integrated sensor devices (ISDs).
From 1994 through 1997, the Company received approximately $1,961,000 in
research grants from two divisions of the German government as part of the
organization of ISS-Nagano GmbH. The grants have been provided to support the
research and development of ISS-Nagano GmbH and have been applied against its
operating expenditures and fixed asset purchases. The subsidiary must maintain
certain employment levels as part of the agreements and have restrictions
related to the purchasing of fixed assets. The Company has maintained operations
in compliance with the guidelines of the agreements. Penalties that may arise
related to the restrictions would not have a material impact on the consolidated
statement of operations.
The Company received $45,000 and $189,000 in grant revenue for the fiscal
years ended March 31, 1996 and 1997, respectively, and $71,000 and $0 for the
six months ended September 30, 1996 and 1997, respectively, as reimbursement for
operating expenses incurred related primarily to research and development
expenses. This grant revenue has been offset against research and development
expenses for presentation in these financial statements. During the fiscal year
ended March 31, 1995, the Company received $654,000 in grant revenue of which
$311,000 was used to reduce research and development expenses. The remaining
$343,000 of grant revenue for fiscal 1995 has been included in other income.
F-11
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
3. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- SEPT. 30,
1996 1997 1997
------------ ------------ ----------
<S> <C> <C> <C>
Promissory note with related party, subordinated
to the bank line, bearing interest at 10% per
annum; with principal due and payable on
May 31, 1997............................................. $ 678,684 $ 678,684 $ 678,684
Promissory note with related party, subordinated
to the bank line, denominated in Yen,
bearing interest at 10% per annum; with
principal plus interest due on April 30, 1997.
This note was repaid on May 30, 1997..................... -- 436,681 --
Promissory notes with related party, subordinated
to the bank line, bearing interest at 9.75% per
annum; with principal due and payable on
June 15, 1997. All principal and accumulated
interest were converted to Series F Preferred
Stock upon maturity of the note at $6.13 per
share.................................................... -- 400,000 --
Promissory note with related party, denominated
in Yen, bearing interest at 10% per
annum; with principal due and payable on
July 31, 1996. All principal and accumulated
interest were converted to Series E Preferred
Stock upon maturity of the note at $3.78 per
share.................................................... 381,750 -- --
Promissory note with related party, denominated
in Yen, bearing interest at 9.5% per
annum; with principal plus interest due on
August 31, 1996. All principal and interest were
converted to Series E Preferred Stock upon
maturity of the note at $3.78 per share.................. 466,070 -- --
------------ ------------ ----------
$ 1,526,504 $ 1,515,365 $ 678,684
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
F-12
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
4. LINE OF CREDIT
The Company has a bank line of credit that expired on July 9, 1997.
Borrowings under the line, which are limited to the lesser of $1,000,000 or 75%
of eligible accounts receivable, bear interest at the bank's prime rate plus
1.75% (10.75% at March 31, 1996 and 10.25% at March 31, 1997) and are secured by
the assets of the Company. The credit agreement requires the Company to maintain
certain financial ratios, minimum working capital, minimum tangible net worth,
and minimum profitability levels. The Company was not in compliance with one of
the covenants at March 31, 1997 and obtained a waiver. As of March 31, 1996 and
1997 and September 30, 1997, the Company had borrowings totaling $600,000 under
the line of credit.
On August 22, 1997, the Company's bank line of credit agreement was amended
to a maximum of the lesser of $2,000,000 or 75% of eligible accounts receivable.
Eligible accounts receivable are defined as those outstanding less than 90 days
from date of invoice. Borrowings under the line of credit bear interest at the
bank's prime rate plus 1.75% and are secured by the assets of the Company. The
Company also has available a $250,000 term loan facility for equipment that
bears interest at the bank's prime rate plus 1.50%. The facility requires the
Company to maintain certain financial covenants including profitability for each
fiscal quarter beginning July 31, 1997.
5. CAPITAL LEASES
At March 31, 1996 and 1997 and September 30, 1997, equipment under capital
leases amounted to $43,825, $495,896, and $536,897, respectively. Lease terms
ranged from three to five years. Accumulated amortization on these assets at
March 31, 1996 and 1997 and June 30, 1997 was $10,675, $104,357, and $186,519,
respectively. The majority of these assets are financed under the Company's
$750,000 capital lease line. At March 31, 1997 and September 30, 1997, $377,456
and $352,118, respectively, remained available under the lease line.
The following is a schedule of future minimum fiscal lease payments under
capital leases:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
1998 (six months for September 30)................................. $ 214,177 $ 108,603
1999............................................................... 177,751 191,799
2000............................................................... 65,150 77,408
2001............................................................... -- 5,416
2002............................................................... -- 1,690
---------- -------------
Total minimum lease payments....................................... 457,078 384,916
Amount representing interest....................................... 101,157 83,988
---------- -------------
355,921 300,928
Less current portion............................................... 158,772 156,869
---------- -------------
$ 197,149 $ 144,059
---------- -------------
---------- -------------
</TABLE>
F-13
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
6. COMMITMENTS
The Company has facility operating leases that expire through fiscal 2001.
Future fiscal minimum lease and maintenance payments are as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
1998(six months for September 30).................................. $ 328,787 $ 165,230
1999............................................................... 333,143 336,329
2000............................................................... 151,238 151,496
2001............................................................... 41,800 41,800
---------- -------------
$ 854,968 $ 694,855
---------- -------------
---------- -------------
</TABLE>
Total rent expense for the years ended March 31, 1995, 1996, and 1997 was
approximately $121,000, $261,000, and $246,000, respectively. Rent expense for
the six month periods ended September 30, 1996 and 1997 was approximately
$123,000 and $136,000, respectively.
As of March 31, 1997 and September 30, 1997, the Company had outstanding
noncancelable purchase orders of approximately $1,500,000 and $2,905,000,
primarily relating to inventory purchases.
7. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at March 31, 1996 and 1997 and September 30,
1997 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-------------------------------------
DESIGNATED MARCH 31, SEPTEMBER 30,
SERIES SHARES 1996 1997 1997
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
A....................................... 800,000 800,000 800,000 800,000
B....................................... 271,465 271,459 271,459 271,459
C....................................... 536,000 520,000 520,000 520,000
D....................................... 530,038 530,038 530,038 530,038
E....................................... 261,729 -- 249,616 249,616
F....................................... 960,732 -- 695,204 766,818
---------- ---------- ---------- -------------
Total Preferred Stock................... 3,359,964 2,121,497 3,066,317 3,137,931
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
Each share of Series A, B, C, D, E, and F Preferred Stock is convertible at
the holder's option into one share of Common Stock, and such conversion is
subject to adjustment under the antidilution provisions as stated in the
Certificate of Incorporation. The holders of the Company's outstanding Preferred
Stock have elected to convert all outstanding shares of Preferred Stock into an
equal number of common shares in the event of a public offering of the Company's
common stock prior to March 31, 1998 provided that the aggregate gross proceeds
to the Company are not less than $8,000,000 and the public offering price per
share is not less than $7.50.
F-14
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The holder of each share of Series A, B, C, D, E, and F Preferred Stock
shall be entitled to receive, prior and in preference to any declaration and
payment of any dividend on the common stock, noncumulative dividends at an
annual rate equal to $0.031, $0.188, $0.625 $0.378, $0.378, and $0.613 per
share, respectively. Through September 30, 1997, there have been no dividends
declared.
The Series A, B, C, D, E, and F preferred stockholders are entitled to
liquidation preferences of $0.31, $1.88, $6.25, $3.78, $3.78, and $6.13,
respectively, plus any declared but unpaid dividends for each share of Series A,
B, C, D, E, and F Preferred Stock then held. After payment of these liquidation
preferences, the remaining assets will be distributed to the common
stockholders. The holders of preferred shares are entitled to the number of
votes that they would be entitled to if their preferred shares had been
converted into common shares.
WARRANTS
In connection with the issuance of Series C Preferred Stock, the Company
granted warrants to purchase 16,326 shares of Series C Preferred Stock. The
warrants are exercisable at $6.13 per share and have an expiration date of June
1, 2001. In connection with the issuance of Series F Preferred Stock, the
Company granted warrants to purchase 68,978 shares of Series F Preferred Stock.
The warrants are exercisable at $6.38 per share and have an expiration date of
November 30, 1997. In connection with the Company's capital lease line, the
Company issued warrants to purchase 30,000 shares of Series F Preferred Stock.
The warrants are exercisable at $6.25 per share and have an expiration date of
May 21, 2006. On August 22, 1997 in connection with the renewal of its line of
credit, the Company issued warrants to purchase 12,240 shares of Series F
Preferred Stock at an exercise price of $6.38 per share which expire on August
21, 2001.
The fair value of the warrants issued in conjunction with the Company's line
of credit and capital lease line was immaterial.
STOCK OPTION PLANS
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that are not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the grant date, there is no compensation expense recognized.
Pro forma information regarding net income (loss) is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to March 31, 1995
under the fair value method of that statement. The fair value for these
F-15
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
options was estimated at the date of grant using the minimum value method with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Expected dividend yield.................................................. 0.00% 0.00%
Risk-free interest rate.................................................. 5.96% 6.30%
Weighted average expected life........................................... 4 years 4 years
</TABLE>
Option valuation models were developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying FAS 123 was not material to the Company's reported net loss
in fiscal 1996 or 1997. Because FAS 123 is applicable only to options granted
subsequent to March 31, 1995, its pro forma effect will not be fully reflected
until fiscal 1999 and thereafter.
During fiscal 1990, the Company adopted a stock option plan (the 1990 Plan)
whereby a committee, as appointed by the Board of Directors, may grant incentive
and nonstatutory stock options. The options granted under the 1990 Plan are
exercisable, vest at the discretion of the committee, and expire no later than
ten years from the date of grant. Such options may be granted at an exercise
price of not less than 100% or 85% of fair market value as determined by the
committee for incentive stock options and nonstatutory stock options,
respectively.
During fiscal 1997, the Company adopted a stock option plan (the 1997 Plan).
The provisions of the 1997 Plan are similar to those of the 1990 Plan.
F-16
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------
WEIGHTED
OPTIONS RANGE OF AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICES EXERCISE
FOR GRANT SHARES PER SHARE PRICE
---------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Balance at March 25, 1994................ 694,970 556,000 $ 0.15-$1.125
Options granted........................ (150,000) 150,000 $ 1.125
Options exercised...................... -- (171,217) $ 0.15-$1.125
Options canceled....................... 15,800 (15,800) $ 0.75-$1.125
---------- -----------
Balance at March 31, 1995................ 560,770 518,983 $ 0.15-$1.125
Options granted........................ (94,400) 94,400 $ 1.125
Options exercised...................... -- (103,400) $ 0.275
Options canceled....................... 65,283 (65,283) $ 0.825
---------- -----------
Balance at March 31, 1996................ 531,653 444,700 $ 0.95
Authorized............................. 307,313 -- $ --
Options granted........................ (183,520) 183,520 $ 1.45
Options exercised...................... -- (109,767) $ 0.70
Options canceled....................... 44,036 (44,036) $ 1.05
---------- -----------
Balance at March 31, 1997................ 699,482 474,417 $ 1.20
Options granted........................ (75,640) 75,640 $ 2.71
Options exercised...................... -- (46,692) $ 0.77
Options canceled....................... 1,198 (3,302) $ 2.41
---------- -----------
Balance at September 30, 1997............ 625,040 500,063 $ 1.45
---------- -----------
---------- -----------
</TABLE>
There were 243,452 options exercisable at March 31, 1997 at prices ranging
from $0.75 to $2.00. The weighted average fair value of grants made in fiscal
1996 and 1997 was $0.25 and $0.30, respectively. The average remaining
contractual life of all options outstanding at March 31, 1997 was 2.9 years.
DEFERRED COMPENSATION
For certain options granted in late fiscal 1997 and the first quarter of
fiscal 1998, the Company recognized as deferred compensation the excess of the
deemed value for accounting purposes of the common stock issuable upon exercise
of such options over the aggregate price of such options. The deemed value for
accounting purposes represents the fair value at the date of grant. The
compensation expense will be amortized ratably over the vesting period of the
option.
F-17
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED
Common Stock reserved for future issuance was as follows:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Stock option plans:
Outstanding..................................................... 474,417 500,063
Reserved for future grants...................................... 699,482 625,040
---------- -------------
1,173,899 1,125,103
Series C Preferred Stock warrants................................. 16,326 16,326
Series F Preferred Stock warrants................................. 98,977 111,218
Conversion of Preferred Stock..................................... 3,066,325 3,137,931
---------- -------------
4,355,527 4,390,578
---------- -------------
---------- -------------
</TABLE>
8. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for fiscal 1995, 1996, or 1997. For the six months ended September 30, 1997 the
Company recorded no tax provision as the Company can utilize net operating loss
carryforwards to offset any taxes due.
Deferred income taxes reflect the net tax effects of operating loss and
credit carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax assets
are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 1,063,000 $ 2,630,000
Research credit carryforwards................................. 147,000 159,000
Capitalized research costs.................................... 468,000 236,000
Other temporary differences................................... 77,000 7,000
------------- -------------
Total deferred tax assets....................................... 1,775,000 3,032,000
Valuation allowance for deferred tax assets..................... (1,775,000) (3,032,000)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The change in the valuation allowance was a net decrease of $5,000 for
fiscal 1995 and a net increase of $85,000 and $1,257,000 for fiscal 1996 and
1997.
For federal tax purposes at March 31, 1997, the Company has net operating
loss and research and development credit carryforwards of approximately
$6,500,000 and $114,000, respectively, which will expire in the fiscal years
2005 through 2012. For California tax purposes at March 31, 1997, the Company
has net operating loss and research and development credit carryforwards of
approximately $3,000,000 and
F-18
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
8. INCOME TAXES (CONTINUED)
$67,000, respectively, which will expire in the fiscal years 1998 through 2002.
The Company also has at March 31, 1997 net operating loss carryforwards of
approximately $525,000 in its German subsidiary.
Utilization of the federal net operating losses and credits may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
9. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1995, 1996, and 1997 and the six months
ended September 30, 1996 and 1997, the Company made sales of approximately
$800,000, $1,233,000, $181,000, $164,000, and $0 respectively, to a related
party of which approximately $310,000, $0, and $0 is included in the accounts
receivable balance at March 31, 1996, and 1997, and September 30, 1997,
respectively.
In addition, at March 31, 1996, and 1997 and September 30, 1997, the
accounts payable balance includes approximately $396,000, $304,000, $35,000 due
a related party on purchases of $2,005,000, $2,323,000, $1,216,000, and $165,000
during the years ended March 31, 1996 and 1997 and the six months ended
September 30, 1996 and 1997, respectively. Included in the notes payable balance
at March 31, 1996, and 1997 and September 30, 1997 is approximately $679,000,
due the related party.
During the years ended March 31, 1995, 1996, and 1997 and six months ended
September 30, 1996 and 1997, the Company made sales of approximately $500,000,
$692,000, $1,119,000, $220,000, and $766,000, respectively, to another related
party of which approximately $136,000, $709,000, and $376,000 is included in the
accounts receivable balance at March 31, 1996, 1997 and September 30, 1997,
respectively. Included in the accounts payable balance at March 31, 1996, 1997
and September 30, 1997, is approximately $303,000, $381,000, and $516,000,
respectively, due the related party. The Company purchased $213,000, $376,000,
$630,000, $161,000, and $577,000 of materials from the related party in fiscal
1995, 1996, 1997 and the six months ended September 30, 1996 and 1997,
respectively. In addition, included in the notes payable balance at March 31,
1996 and 1997 are approximately $466,000 and $437,000, respectively, due the
related party.
During the years ended March 31, 1996 and 1997 and the six months ended
September 30, 1996 and 1997, the Company made sales of approximately $479,000,
$206,000, $27,000 and $84,000, respectively, to another related party of which
approximately $389,000, $175,000 and $75,000 is included in the accounts
receivable balance at March 31, 1996 and 1997 and September 30, 1997,
respectively. Included in the notes payable balance at March 31, 1996 is
approximately $382,000, due the related party.
Gross margins realized on related party transactions have not been
materially different from the gross margins realized on similar types of
transaction with unaffiliated customers.
F-19
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
10. GEOGRAPHIC AND SEGMENT INFORMATION
The Company operates in one business segment, which is to design,
manufacture, and sell end-market specific integrated subsystems and perform
nonrecurring engineering projects for the sensor control applications market.
The following table summarizes the Company's operations in different geographic
areas:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 4,719,800 $ 256,644 $ -- $ 4,976,444
Transfers between geographic areas..................... 137,371 -- (137,371) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 4,857,171 $ 256,644 $ (137,371) $ 4,976,444
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (1,319,427) $ (541,485) $ 217,181 $ (1,643,731)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 4,777,264 $ 1,541,956 $ (693,750) $ 5,625,470
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 6,921,837 $ 1,408,253 $ -- $ 8,330,090
Transfers between geographic areas..................... 687,277 230,519 (917,796) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 7,609,114 $ 1,638,772 $ (917,796) $ 8,330,090
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (633,708) $ (712,763) $ 144,669 $ (1,201,802)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 5,317,132 $ 1,906,090 $ (1,536,347) $ 5,686,875
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 7,685,002 $ 2,619,077 $ -- $ 10,304,079
Transfers between geographic areas..................... 1,668,258 594,861 (2,263,119) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 9,353,260 $ 3,213,938 $ (2,263,119) $ 10,304,079
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (1,921,330) $ (893,303) $ (102,828) $ (2,917,461)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 9,169,204 $ 2,290,287 $ (2,750,792) $ 8,708,699
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
F-20
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
10. GEOGRAPHIC AND SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 3,498,800 $ 1,451,282 $ -- $ 4,950,082
Transfers between geographic areas..................... 894,027 95,750 (989,777) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 4,392,827 $ 1,547,032 $ (989,777) $ 4,950,082
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating loss......................................... $ (995,189) $ (424,048) $ (109,073) $ (1,528,310)
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 5,702,181 $ 1,858,956 $ (1,761,440) $ 5,799,697
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................ $ 4,809,865 $ 2,201,189 $ -- $ 7,011,054
Transfers between geographic areas..................... 676,764 282,333 (959,097) --
------------- ------------ ------------- -------------
Total net sales........................................ $ 5,486,629 $ 2,483,522 $ (959,097) $ 7,011,054
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating income (loss)................................ $ 321,953 $ (38,417) $ (78,363) $ 205,173
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets.................................... $ 8,277,540 $ 2,833,409 $ (2,317,649) $ 8,743,300
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
Export revenues consisting of sales from the Company's U.S. operating
subsidiary to nonaffiliated customers were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
---------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Canada......................................... $ 307,000 $ 299,000 $ 188,000 $ 66,000 $ 241,000
Japan and Korea................................ 531,000 1,509,000 1,936,000 664,000 1,183,000
---------- ------------ ------------ ---------- ------------
Total.......................................... $ 838,000 $ 1,808,000 $ 2,124,000 $ 730,000 $ 1,424,000
---------- ------------ ------------ ---------- ------------
---------- ------------ ------------ ---------- ------------
</TABLE>
11. SUBSEQUENT EVENTS
In October 1997, the Board of Directors approved, subject to stockholder
approval, a one-for-two and one-half reverse split of the Company's common and
preferred stock and reincorporation of the Company into the State of Delaware.
All share and per share amounts in the accompanying consolidated financial
statements have been adjusted retroactively.
The Company's Certificate of Incorporation authorizes 7,000,000 shares of
preferred stock. Upon the closing of the offering contemplated by this
Prospectus, the Board of Directors will have the authority, without further
action by the stockholders, to issue up to 7,000,000 shares of preferred stock
in one or more series and determine or alter the designation, powers,
preferences, privileges and relative participating, optional or special rights
and the qualifications, limitations or restrictions thereof, including dividend
F-21
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of September 30, 1997
and for the six months ended
September 30, 1996 and 1997 is unaudited)
11. SUBSEQUENT EVENTS (CONTINUED)
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of common stock.
On August 8, 1997, the Company's Board of Directors approved an employee
Stock Purchase Plan. A total of 250,000 shares of the Company's common stock
have been reserved for issuance under the Company's 1997 Employee Stock Purchase
Plan (the Purchase Plan). The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll deductions, during
concurrent 24-month offering periods. Each offering period will be divided into
four consecutive six-month purchase periods. The price at which stock is
purchased under the Purchase Plan is equal to 85% of the fair market value of
the common stock on the first day of the offering period or the last day of the
purchase period, whichever is lower. The initial offering period will commence
on the effective date of the offering contemplated by this Prospectus.
F-22
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Glossary................................................................. 14
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.......................................................... 20
Business................................................................. 30
Management............................................................... 45
Principal Stockholders................................................... 50
Certain Transactions..................................................... 52
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 59
Legal Matters............................................................ 61
Experts.................................................................. 61
Additional Information................................................... 61
Index to Consolidated Financial Statements............................... F-1
---------------------
UNTIL 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
---------
PROSPECTUS
--------------
DOUGHERTY SUMMIT SECURITIES LLC
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation provides that each person
who is or was or who had agreed to become a director or officer of the
Registrant or who had agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by DGCL or any other
applicable laws. Such Certificate of Incorporation also provides that the
Registrant may enter into one or more agreements with any person which provides
for indemnification greater or different than that provided in such Certificate,
and that no amendment or repeal of such Certificate shall apply to or have any
effect on the right to indemnification permitted or authorized thereunder for or
with respect to claims asserted before or after such amendment or repeal arising
from acts or omissions occurring in whole or in part before the effective date
of such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant intends to purchase and maintain insurance on behalf of any
person who is a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
See also the undertaking set out in response to Item 28 herein.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC Registration fee.............................................................. $ 6,061
NASD filing fee................................................................... $ 2,500
Nasdaq listing fee................................................................ $ *
Printing and engraving expenses................................................... $ 100,000
Legal fees and expenses........................................................... $ 150,000
Accounting fees and expenses...................................................... $ 185,000
Blue Sky fees and expenses........................................................ $ 5,000
Transfer agent and registrar fees................................................. $ 10,000
Representative's Non-Accountable Expense Allowance................................ $ 150,000
Miscellaneous expenses............................................................ $ *
----------
Total......................................................................... $ 750,000
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since March 31, 1994, the Registrant or its predecessors has sold and issued
the following unregistered securities:
1. In August 1994, the Registrant issued 530,038 shares of Series D Preferred
Stock to an accredited corporate investor for aggregate cash consideration
of $2,000,895.
2. In July 1996, the Registrant issued warrants to a bank to purchase an
aggregate of 16,326 shares of Series C Preferred Stock at an exercise price
of $6.25 per share.
3. In May 1996, the Registrant issued warrants to a commercial lender to
purchase an aggregate of 30,000 shares of Common Stock at an exercise price
of $6.25 per share.
4. In December 1996, February 1997 and June 1997, the Registrant issued 766,822
shares of Series F Preferred Stock to accredited investors for aggregate
cash consideration and the cancellation of indebtedness equal to
approximately $438,656. In December 1996, the Registrant issued warrants to
purchase an aggregate of 68,979 shares of Series F Preferred Stock at an
exercise price of $6.375 per share.
5. In December 1996, the Registrant issued 249,617 shares of Series E Preferred
Stock to accredited corporate investors in exchange for cancellation of
$942,305 in indebtedness to such accredited investors.
6. In August 1997, the Registrant issued warrants to a bank to purchase an
aggregate of 12,240 shares of Series F Preferred Stock at an exercise price
of $6.375 per share.
7. In September 1997, the Registrant issued 12,111 shares of Series F Preferred
Stock to an accredited corporate investor in exchange for cancellation of
indebtedness equal to $45,719.78.
8. From March 1994 to September 30, 1997, the Registrant issued options to
purchase an aggregate of 503,360 shares of Common Stock under the 1989 and
1997 Option Plans, of which options to purchase 24,891 shares of Common
Stock have been exercised.
II-2
<PAGE>
The issuances of securities described in Item 26(a)(1) through (7) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The issuances of securities described in Item 26(a)(8) were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 promulgated thereunder as transactions pursuant to a compensatory
benefit plan or a written contract relating to compensation.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
1.2* Form of Representative's Warrant.
3.1* Certificate of Incorporation of Registrant.
3.2 Bylaws of Registrant.
4.1* Restated Registration Rights Agreement.
5.1* Opinion of Gray Cary Ware & Freidenrich.
10.1* 1989 Stock Option Plan and form of option agreement thereunder.
10.2* 1997 Stock Option Plan and form of option agreement thereunder.
10.3 1997 Employee Stock Purchase Plan and form of subscription agreement thereunder.
10.4 Form of Indemnity Agreement for Officers and Directors.
10.5+ Development Agreement between ISS-GmbH and Robert Bosch GmbH dated May 25, 1995.
10.6+ Development Agreement among ISS-Nagano GmbH, ISS Incorporated and Robert Bosch GmbH
dated May 17, 1996.
10.7+ Supply Agreement between ISS-Nagano GmbH and Robert Bosch GmbH dated November 18,
1996.
10.8 Lease between Montague Oaks Associates Phase III and Integrated Sensor Solutions,
Inc. dated June 2, 1994, as amended.
10.9 Continuous Sales and Purchase Agreement by and between Nagano Keiki Seisakusho,
Ltd. and Integrated Sensor Solutions, Inc. dated December 1, 1996.
10.10 Continuous Sales and Purchase Agreement by and between Nagano Keiki Seisakusho,
Ltd. and ISS-Nagano GmbH dated June 1, 1997.
10.11 Security Agreement by and between Integrated Sensor Solutions, Inc. and Silicon
Systems, Inc. dated December 1, 1995.
10.12 Credit Agreement between Integrated Sensor Solutions, Inc. and Silicon Systems,
Inc. dated December 1, 1995.
10.13 Loan and Security Agreement by and between Silicon Valley Bank and Integrated
Sensor Solutions, Inc. dated July 10, 1996, as amended.
10.14 Lease Agreement between Geschaftsraum-Mietvertrag and ISS-Integrated Sensor
Solutions GmbH dated September 12, 1994.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-7).
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
24.1 Power of Attorney (See Page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 26 of this Registration Statement
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 hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or (4) or
497 (h) under the 1933 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospects shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of San
Jose, State of California, on this 2nd day of December, 1997.
<TABLE>
<S> <C> <C>
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ MANHER D. NAIK
-----------------------------------------
Manher D. Naik
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Manher D. Naik and David Satterfield and
each of them acting individually, as his or her attorney-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any and
all amendments to this Registration Statement, including post-effective
amendments and amendments 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 our signatures as they may be signed by our said
attorney to any and all amendment to said Registration Statement.
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 DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MANHER D. NAIK Chairman, President and December 2, 1997
- ------------------------------ Chief Executive Officer
Manher D. Naik (Principal Executive
Officer)
/s/ DAVID SATTERFIELD Vice President, Finance December 2, 1997
- ------------------------------ and Administration
David Satterfield (Principal Financial and
Principal Accounting
Officer)
/s/ YUTAKA MORI Director December 2, 1997
- ------------------------------
Yutaka Mori
/s/ VINOD K. SOOD Director December 2, 1997
- ------------------------------
Vinod K. Sood
/s/ STUART D. BOYD Director December 2, 1997
- ------------------------------
Stuart D. Boyd
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ Y.S. FU Director December 2, 1997
- ------------------------------
Y.S. Fu
/s/ SHIGERU MIYASHITA Director December 2, 1997
- ------------------------------
Shigeru Miyashita
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
June 15, 1997 (except for Note 11, as to which the date is October 7, 1997), in
the Registration Statement (Form SB-2) and related Prospectus of Integrated
Sensor Solutions, Inc. for the registration of shares of its common stock.
/s/ ERNST & YOUNG LLP
San Jose, CA
December 2, 1997
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------ -------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
1.2* Form of Representative's Warrant.
3.1* Certificate of Incorporation of Registrant.
3.2 Bylaws of Registrant.
4.1* Restated Registration Rights Agreement.
5.1* Opinion of Gray Cary Ware & Freidenrich.
10.1* 1989 Stock Option Plan and form of option agreement thereunder.
10.2* 1997 Stock Option Plan and form of option agreement thereunder.
10.3 1997 Employee Stock Purchase Plan and form of subscription agreement thereunder.
10.4 Form of Indemnity Agreement for Officers and Directors.
10.5+ Development Agreement between ISS-GmbH and Robert Bosch GmbH dated May 25, 1995.
10.6+ Development Agreement among ISS-Nagano GmbH, Integrated Sensor Solutions, Inc. and Robert
Bosch GmbH dated May 17, 1996.
10.7+ Supply Agreement between Integrated Sensor Solutions, Inc. ISS-Nagano GmbH and Robert
Bosch GmbH dated November 18, 1996.
10.8 Lease between Montague Oaks Associates Phase III and Integrated Sensor Solutions, Inc.
dated June 2, 1994, as amended.
10.9 Continuous Sales and Purchase Agreement by and between Nagano Keiki Seisakusho, Ltd. and
Integrated Sensor Solutions, Inc. dated December 1, 1996.
10.10 Continuous Sales and Purchase Agreement by and between Nagano Keiki Seisakusho, Ltd. and
Integrated Sensor Solutions, Inc. dated June 1, 1997.
10.11 Security Agreement by and between Integrated Sensor Solutions, Inc. and Silicon Systems,
Inc. dated December 1, 1995.
10.12 Credit Agreement between Integrated Sensor Solutions, Inc. and Silicon Systems, Inc. dated
December 1, 1995.
10.13 Loan and Security Agreement by and between Silicon Valley Bank and Integrated Sensor
Solutions, Inc. dated July 10, 1996, as amended.
10.14 Lease Agreement between Geschaftsraum-Mietvertrag and ISS-Integrated Sensor Solutions GmbH
dated September 12, 1994.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page II-7).
23.2* Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1).
24.1 Power of Attorney (See Page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
<PAGE>
BYLAWS
OF
INTEGRATED SENSOR SOLUTIONS DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.1 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.2 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.3 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . .1
Section 1.4 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1.5 Conduct of the Stockholders' Meeting. . . . . . . . . . . . . .2
Section 1.6 Conduct of Business . . . . . . . . . . . . . . . . . . . . . .2
Section 1.7 Notice of Stockholder Business. . . . . . . . . . . . . . . . .2
Section 1.8 Proxies and Voting. . . . . . . . . . . . . . . . . . . . . . .3
Section 1.9 Stock List. . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARTICLE II BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .4
Section 2.1 Number and Term of Office . . . . . . . . . . . . . . . . . . .4
Section 2.2 Vacancies and Newly Created Directorships . . . . . . . . . . .4
Section 2.3 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 2.4 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . .5
Section 2.5 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . .5
Section 2.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Section 2.7 Participation in Meetings by Conference Telephone . . . . . . .5
Section 2.8 Conduct of Business . . . . . . . . . . . . . . . . . . . . . .5
Section 2.9 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Section 2.10 Compensation of Directors . . . . . . . . . . . . . . . . . . .6
Section 2.11 Nomination of Director Candidates . . . . . . . . . . . . . . .6
ARTICLE III COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 3.1 Committees of the Board of Directors. . . . . . . . . . . . . .7
Section 3.2 Conduct of Business . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE IV OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 4.1 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 4.2 Chairman of the Board . . . . . . . . . . . . . . . . . . . . .8
Section 4.3 President . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 4.4 Vice President. . . . . . . . . . . . . . . . . . . . . . . . .8
Section 4.5 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 4.6 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 4.7 Delegation of Authority . . . . . . . . . . . . . . . . . . . .9
Section 4.8 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 4.9 Action With Respect to Securities of Other Corporations . . . .9
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
----
ARTICLE V STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 5.1 Certificates of Stock . . . . . . . . . . . . . . . . . . . . .9
Section 5.2 Transfers of Stock. . . . . . . . . . . . . . . . . . . . . . .9
Section 5.3 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 5.4 Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . 10
Section 5.5 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.2 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7.1 Facsimile Signatures. . . . . . . . . . . . . . . . . . . . . 10
Section 7.2 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.3 Reliance Upon Books, Reports and Records. . . . . . . . . . . 11
Section 7.4 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.5 Time Periods. . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . 11
Section 8.1 Right to Indemnification. . . . . . . . . . . . . . . . . . . 11
Section 8.2 Right of Claimant to Bring Suit . . . . . . . . . . . . . . . 12
Section 8.3 Non-Exclusivity of Rights . . . . . . . . . . . . . . . . . . 12
Section 8.4 Indemnification Contracts . . . . . . . . . . . . . . . . . . 12
Section 8.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.6 Effect of Amendment . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 9.1 Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . 13
ii
<PAGE>
INTEGRATED SENSOR SOLUTIONS DELAWARE CORPORATION
A DELAWARE CORPORATION
BYLAWS
ARTICLE I
STOCKHOLDERS
SECTION 1.1 ANNUAL MEETING. An annual meeting of the stockholders,
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, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
SECTION 1.2 SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes prescribed in the notice of the meeting, may be
called only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exists any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption) or (ii) by the
holders of not less than 10% of all shares entitled to cast votes at the
meeting, voting together as a single class and shall be held at such place, on
such date, and at such time as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.
SECTION 1.3 NOTICE OF MEETINGS. Written notice of the place, date,
and time of all meetings of the stockholders shall be given, not less than ten
(10) nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
SECTION 1.4 QUORUM. At any meeting of the stockholders, the holders
of a majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
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If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
SECTION 1.5 CONDUCT OF THE STOCKHOLDERS' MEETING. At every meeting of
the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by
the Chairman, attendance at the stockholders' meeting is restricted to
stockholders of record, persons authorized in accordance with Section 8 of these
Bylaws to act by proxy, and officers of the Corporation.
SECTION 1.6 CONDUCT OF BUSINESS. The Chairman shall call the meeting
to order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section 1.7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.6 and
Section 1.7, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
SECTION 1.7 NOTICE OF STOCKHOLDER BUSINESS. At an annual or special
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(b) properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly
2
<PAGE>
brought before a special meeting by a stockholder, but if, and only if, the
notice of a special meeting provides for business to be brought before the
meeting by stockholders. For business to be properly brought before a meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder
proposal to be presented at an annual meeting shall be received at the
Corporation's principal executive offices not less than 120 calendar days in
advance of the date that the Corporation's (or the Corporation's predecessor's)
proxy statement was released to stockholders in connection with the previous
year's annual meeting of stockholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the previous
year's proxy statement, or in the event of a special meeting, notice by the
stockholder to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual or special meeting (a) a brief description of the
business desired to be brought before the annual or special meeting and the
reasons for conducting such business at the special meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business.
SECTION 1.8 PROXIES AND VOTING. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his or her name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
SECTION 1.9 STOCK LIST. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within
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<PAGE>
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 NUMBER AND TERM OF OFFICE. The number of directors shall
initially be seven (7) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Upon the closing of the
first sale of the Corporation's common stock pursuant to a firmly underwritten
registered public offering (the "IPO"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the IPO, the term of office of the
second class to expire at the second annual meeting of stockholders held after
the IPO, the term of office of the third class to expire at the third annual
meeting of stockholders held after the IPO and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. A vacancy resulting from the removal of a director by the
stockholders as provided in Article II, Section 2.3 below may be filled at
special meeting of the stockholders held for that purpose. All directors shall
hold office until the expiration of the term for which elected and until their
respective successors are elected, except in the case of the death, resignation
or removal of any director.
SECTION 2.2 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to the
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
SECTION 2.3 REMOVAL. Subject to the rights of holders of any series
of Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of the directors then in office, though less than a
quorum, or by the stockholders as
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provided in Article II, Section 2.1 above. Directors so chosen shall hold
office until the new annual meeting of stockholders.
SECTION 2.4 REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
SECTION 2.5 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by one-third of the directors then in office (rounded up
to the nearest whole number) or by the chief executive officer and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
SECTION 2.6 QUORUM. At any meeting of the Board of Directors, a
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
SECTION 2.7 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee thereof, may participate
in a meeting of such Board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other and such participation shall constitute presence
in person at such meeting.
SECTION 2.8 CONDUCT OF BUSINESS. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
requited by law. Action may be taken by the Board of Directors without a
meeting if all members thereof consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors.
SECTION 2.9 POWERS. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with
law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
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<PAGE>
(c) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(d) To remove any officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any officer
upon any other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(g) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent
with these bylaws, for the management of the Corporation's business and affairs.
SECTION 2.10 COMPENSATION OF DIRECTORS. Directors, as such, may
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
SECTION 2.11 NOMINATION OF DIRECTOR CANDIDATES. Subject to the rights
of holders of any class or series of Preferred Stock then outstanding,
nominations for the election of Directors may be made by the Board of Directors
or a proxy committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of Directors generally. However, any
stockholder entitled to vote in the election of Directors generally may nominate
one or more persons for election as Directors at a meeting only if timely notice
of such stockholder's intent to make such nomination or nominations has been
given in writing to the Secretary of the Corporation. To be timely, a
stockholder nomination for a director to be elected at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the date that the Corporation's (or the
Corporation's Predecessor's) Proxy statement was released to stockholders in
connection with the previous year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, or in the event
of a nomination for director to be elected at a special meeting, notice by the
stockholders to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
special meeting was mailed or such public disclosure was made. Each such notice
shall set forth: (a) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be nominated; (b) a
representation that the
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stockholder is a holder of record of stock of the Corporation entitled to vote
for the election of Directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.11 and shall thereafter become unable or unwilling to stand
for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.11,
such nomination shall be void; provided, however, that nothing in this
Section 2.11 shall be deemed to limit any voting rights upon the occurrence of
dividend arrearages provided to holders of Preferred Stock pursuant to the
Preferred Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
SECTION 3.1 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or disqualification of any
member of any committee and any
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alternate member in his place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
SECTION 3.2 CONDUCT OF BUSINESS. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the authorized members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
SECTION 4.1 GENERALLY. The officers of the Corporation shall consist
of a President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board and such other officers as may from time to time be
appointed by the Board of Directors. Officers shall be elected by the Board of
Directors, which shall consider that subject at its first meeting after every
annual meeting of stockholders. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The Chairman of the Board, if there shall be such an officer, and the
President shall each be members of the Board of Directors. Any number of
offices may he held by the same person.
SECTION 4.2 CHAIRMAN OF THE BOARD. The Chairman of the Board, if
there shall be such an officer, shall, if present, preside at all meetings of
the Board of Directors, and exercise and perform such other powers and duties as
may be from time to time assigned to him by the Board of Directors or prescribed
by these bylaws.
SECTION 4.3 PRESIDENT. The President shall be the chief executive
officer of the Corporation. Subject to the provisions of these bylaws and to
the direction of the Board of Directors, he or she shall have the responsibility
for the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
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SECTION 4.4 VICE PRESIDENT. Each Vice President shall have such
powers and duties as may be delegated to him or her by the Board of Directors.
One Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability.
SECTION 4.5 TREASURER. Unless otherwise designated by the Board of
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the responsibility for maintaining the
financial records of the Corporation and shall have custody of all monies and
securities of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.
SECTION 4.6 SECRETARY. The Secretary shall issue all authorized
notices for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
SECTION 4.7 DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
SECTION 4.8 REMOVAL. Any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.
SECTION 4.9 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
SECTION 5.1 CERTIFICATES OF STOCK. Each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the President
or a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
him or her. Any of or all the signatures on the certificate may be facsimile.
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SECTION 5.2 TRANSFERS OF STOCK. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
SECTION 5.3 RECORD DATE. The Board of Directors may fix a record
date, which shall not be more than sixty (60) nor fewer than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for the other action hereinafter described, as of which there
shall be determined the stockholders who are entitled: to notice of or to vote
at any meeting of stockholders or any adjournment thereof; to receive payment of
any dividend or other distribution or allotment of any rights; or to exercise
any rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
SECTION 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of
the loss, theft or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations as the Board of Directors may
establish concerning proof of such loss, theft or destruction and concerning the
giving of a satisfactory bond or bonds of indemnity.
SECTION 5.5 REGULATIONS. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
SECTION 6.1 NOTICES. Except as otherwise specifically provided herein
or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial courier service. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
SECTION 6.2 WAIVERS. A written waiver of any notice, signed by a
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
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ARTICLE VII
MISCELLANEOUS
SECTION 7.1 FACSIMILE SIGNATURES. In addition to the provisions for
use of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
SECTION 7.2 CORPORATE SEAL. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
SECTION 7.3 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
SECTION 7.4 FISCAL YEAR. The fiscal year of the Corporation shall be
as fixed by the Board of Directors.
SECTION 7.5 TIME PERIODS. In applying any provision of these bylaws
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 8.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
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while serving as a director, officer or employee, shall be indemnified and
heldharmless by the Corporation to the fullest extent authorized by Delaware
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said Law permitted the
Corporation to provide prior to such amendment) against all expenses, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, amounts paid or to be paid in settlement and amounts expended in
seeking indemnification granted to such person under applicable law, this bylaw
or any agreement with the Corporation) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer or employee and shall inure to
the benefit of his or her heirs, executors and administrators; PROVIDED,
HOWEVER, that, except as provided in Section 8.2 of this Article VIII, the
Corporation shall indemnify any such person seeking indemnity in connection with
an action, suit or proceeding (or part thereof) initiated by such person only if
(a) such indemnification is expressly required to be made by law, (b) the
action, suit or proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation, (c) such indemnification is provided by the
Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Delaware General Corporation Law, or (d) the action, suit
or proceeding (or part thereof) is brought to establish or enforce a right to
indemnification under an indemnity agreement or any other statute or law or
otherwise as required under Section 145 of the Delaware General Corporation Law.
Such right shall be a contract right and shall include the right to be paid by
the Corporation expenses incurred in defending any such proceeding in advance of
its final disposition; PROVIDED, HOWEVER, that, unless the Delaware General
Corporation Law then so prohibits, the payment of such expenses incurred by a
director or officer of the Corporation in his or her capacity as a director or
officer (and not in any other capacity in which service was or is tendered by
such person while a director or officer, including, without limitation. service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this Section or otherwise.
SECTION 8.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under
Section 1 of this Article VIII is not paid in full by the Corporation within
ninety (90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other then an action
brought to enforce a claim for expenses incurred in defending any proceeding in
advance of its final disposition where the required undertaking, if any, has
been tendered to this Corporation) that the claimant has not met the standards
of conduct which make it permissible under the Delaware General Corporation Law
for the Corporation to indemnify the claimant for the amount claimed. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set
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forth in the Delaware General Corporation Law, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
SECTION 8.3 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person in Sections 1 and 2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
SECTION 8.4 INDEMNIFICATION CONTRACTS. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determinates, greater than, those provided for in this
Article VIII.
SECTION 8.5 INSURANCE. The Corporation shall maintain insurance to
the extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
SECTION 8.6 EFFECT OF AMENDMENT. Any amendment, repeal or
modificationof any provision of this Article VIII by the stockholders and the
directors of the Corporation shall not adversely affect any right or protection
of a director or officer of the Corporation existing at the time of such
amendment, repeal or modification.
ARTICLE IX
AMENDMENTS
SECTION 9.1 AMENDMENT OF BYLAWS. The Board of Directors is expressly
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have power to adopt, amend
or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of
By-Laws of the Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the Corporation required
by law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
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INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Integrated Sensor Solutions, Inc. 1997
Employee Stock Purchase Plan (the "PLAN") is hereby established effective as of
the effective date of the initial registration by the Company of its Stock under
Section 12 of the Securities Exchange Act of 1934, as amended (the "EFFECTIVE
DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock.
The Company intends that the Plan qualify as an "employee stock purchase plan"
under Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.
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(d) "COMPANY" means Integrated Sensor Solutions, Inc., a
Delaware corporation, or any successor corporation thereto.
(e) "COMPENSATION" means, with respect to any Offering Period,
base wages or salary, commissions, overtime, bonuses, annual awards, other
incentive payments, shift premiums, and all other compensation paid in cash
during such Offering Period before deduction for any contributions to any plan
maintained by a Participating Company and described in Section 401(k) or Section
125 of the Code. Compensation shall not include reimbursements of expenses,
allowances, long-term disability, workers' compensation or any amount deemed
received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock option
plan, or any other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in
good faith and in the exercise of its discretion whether an individual has
become or has ceased to be an Employee and the effective date of such
individual's employment or termination of employment, as the case may be. For
purposes of an individual's participation in or other rights, if any, under the
Plan as of the time of the Company's determination, all such determinations by
the Company shall be final, binding and conclusive, notwithstanding that the
Company or any governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices if the Stock is so quoted instead) as
quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, as reported in THE WALL STREET JOURNAL or such
other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market
system, the date on which the Fair Market Value shall be established shall be
the last day on which the Stock was so traded prior to the relevant date, or
such other appropriate day as shall be determined by the Board, in its sole
discretion. If there is then no public market for the Stock, the Fair Market
Value on any relevant date shall be as determined by the Board. Notwithstanding
the foregoing, the Fair Market Value per share of Stock on the Effective Date
shall be deemed to be the public offering
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price set forth in the final prospectus filed with the Securities and Exchange
Commission in connection with the initial public offering of the Stock.
(i) "OFFERING" means an offering of Stock as provided in
Section 6.
(j) "OFFERING DATE" means, for any Offering, the first day of
the Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in accordance
with Section 6.1.
(l) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "PURCHASE DATE" means, for any Purchase Period, the last day
of such period.
(q) "PURCHASE PERIOD" means a period established in accordance
with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(s) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
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(u) "SUBSCRIPTION AGREEMENT" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(v) "SUBSCRIPTION DATE" means the last business day prior to the
Offering Date of an Offering Period or such earlier date as the Company shall
establish.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise
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effecting a Participant's election under the Plan or as advisable to comply with
the requirements of Section 423 of the Code, and (e) determination of the date
and manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand (250,000) and
shall consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right shall again be available for issuance under the
Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
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5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however, that the first
Offering Period shall commence on the Effective Date and end on October 31, 1999
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first day of May and November of each year and end on the last day of the second
April and October, respectively, occurring thereafter. Notwithstanding the
foregoing, the Board may establish a different duration for one or more future
Offering Periods or different commencing or ending dates for such Offering
Periods; provided, however, that no Offering Period may have a duration
exceeding twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4)
consecutive Purchase Periods of approximately six (6) months duration, or such
other number or duration as the Board shall determine. The Purchase Period
commencing on the Offering Date of the Initial Offering Period shall end on
April 30, 1998. A Purchase Period commencing on or about May 1 shall end on or
about the next October 31. A Purchase Period commencing on or about November 1
shall end on or about the next April 30. Notwithstanding the foregoing, the
Board may establish a different duration for one or more future Purchase Periods
or different commencing or ending dates for such Purchase Periods. If the first
or last day of a Purchase Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall specify
the trading day that will be deemed the first or last day, as the case may be,
of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless such Eligible Employee
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subsequently delivers a properly completed Subscription Agreement to the
appropriate office of the Company on or before the Subscription Date for such
subsequent Offering Period. An Employee who becomes an Eligible Employee after
the Offering Date of an Offering Period shall not be eligible to participate in
such Offering Period but may participate in any subsequent Offering Period
provided such Employee is still an Eligible Employee as of the Offering Date of
such subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new
Subscription Agreement for a subsequent Offering Period in accordance with the
procedures set forth in Section 7.1 if the Participant desires to change any of
the elections contained in the Participant's then effective Subscription
Agreement. Eligible Employees may not participate simultaneously in more than
one Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase the lesser of (a) that number of whole shares of Stock determined by
dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a share of
Stock on such Offering Date or (b) five thousand (5,000) shares of Stock. No
Purchase Right shall be granted on an Offering Date to any person who is not, on
such Offering Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of any
duration other than twenty-four months, then (a) the dollar amount in Section
8.1 shall be determined by multiplying $2,083.33 by the number of months
(rounded to the nearest whole month) in the Offering Period and rounding to the
nearest whole dollar, and (b) the share amount in Section 8.1 shall be
determined by multiplying 208.33 shares by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision
of the Plan to the contrary, no Participant shall be granted a Purchase Right
which permits his or her right to purchase shares of Stock under the Plan to
accrue at a rate which, when aggregated with such Participant's rights to
purchase shares under all other employee stock purchase plans of a Participating
Company intended to meet the requirements of Section 423 of the Code, exceeds
Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other
limit, if any, as may be imposed by the Code) for each calendar year in which
such Purchase Right is outstanding
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at any time. For purposes of the preceding sentence, the Fair Market Value of
shares purchased during a given Offering Period shall be determined as of the
Offering Date for such Offering Period. The limitation described in this
Section 8.3 shall be applied in conformance with applicable regulations under
Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set
forth the percentage of the Participant's Compensation to be deducted on each
payday during an Offering Period in whole percentages of not less than one
percent (1%) (except as a result of an election pursuant to Section 10.3 to stop
payroll deductions made effective following the first payday during an Offering)
or more than ten percent (10%). Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of any future Offering
Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall be a date
prior to the beginning of the first pay period for which such election is to be
effective as established by the Company from time to time and announced to the
Participants. A Participant who elects to decrease the rate of his or her
payroll deductions to zero
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<PAGE>
percent (0%) shall nevertheless remain a Participant in the current Offering
Period unless such Participant withdraws from the Plan as provided in Section
12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during a calendar year under the
limit set forth in Section 8.3. Payroll deductions shall be resumed at the rate
specified in the Participant's then effective Subscription Agreement at the
beginning of the next Purchase Period the Purchase Date of which falls in the
following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the
entire remaining balance credited to his or her Plan account shall be deemed to
have withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn
shall be returned to the Participant as soon as practicable after the withdrawal
and may not be applied to the purchase of shares in any Offering under the Plan.
The Company may from time to time establish or change limitations on the
frequency of withdrawals permitted under this Section, establish a minimum
dollar amount that must be retained in the Participant's Plan account, or
terminate the withdrawal right provided by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Plan and whose
participation in the Offering has not terminated before such Purchase Date shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole shares of Stock determined by dividing (a) the total
amount of the Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. However, in no event shall the
number of shares purchased by the Participant during an Offering Period exceed
the number of shares subject to the Participant's Purchase Right. No shares of
Stock shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering or the Plan has terminated before such Purchase
Date.
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11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all
or part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the cash balance, if any, remaining immediately after such purchase
that is to be refunded or retained in the Participant's Plan account pursuant to
Section 11.4. The report required by this Section may be delivered in such form
and by such means, including by electronic transmission, as the Company may
determine.
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12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw
from the Plan by signing and delivering to the Company's designated office a
written notice of withdrawal on a form provided by the Company for such purpose.
Such withdrawal may be elected at any time prior to the end of an Offering
Period; provided, however, that if a Participant withdraws from the Plan after
the Purchase Date of a Purchase Period, the withdrawal shall not affect shares
of Stock acquired by the Participant on such Purchase Date. A Participant who
voluntarily withdraws from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering by again satisfying the requirements of Sections 5
and 7.1. The Company may impose, from time to time, a requirement that the
notice of withdrawal from the Plan be on file with the Company's designated
office for a reasonable period prior to the effectiveness of the Participant's
withdrawal.
12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date of an Offering Period (other than the
final Purchase Date of such offering) is less than the Fair Market Value of a
share of Stock on the Offering Date for such Offering Period, then every
Participant shall automatically be (a) withdrawn from such Offering Period after
the acquisition of shares of Stock on the Purchase Date and (b) enrolled in the
new Offering Period effective on its Offering Date. A Participant may elect not
to be automatically withdrawn from an Offering Period pursuant to this Section
12.2 by delivering to the Company's designated office not later than the close
of business on Offering Date new Offering Period a written notice indicating
such election.
12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Sections 12.1 or automatic withdrawal from
an Offering pursuant to Section 12.2, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares of Stock
(except, in the case of an automatic withdrawal pursuant to Section 12.2, for an
amount necessary to purchase an additional whole share as provided in Section
11.4) shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan or the Offering, as applicable, shall terminate. Such accumulated
payroll deductions to be refunded in accordance with this Section may not be
applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned pursuant to this Section 13. A Participant whose participation has
been so terminated
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may again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company: (i) the direct or
indirect sale or exchange in a single or series of related transactions by the
stockholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of
a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Purchase Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
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15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise than
by will or the laws of descent and distribution and shall be exercisable during
the lifetime of the Participant only by the Participant.
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16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
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"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORA-
TION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE
STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL
NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGIS-
TERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two years from the date of granting such Purchase Right or one year from
the date of exercise of such Purchase Right. The Company may require that until
such time as a Participant disposes of shares acquired upon exercise of a
Purchase Right, the Participant shall hold all such shares in the Participant's
name (or, if elected by the Participant, in the name of the Participant and his
or her spouse but not in the name of any nominee) until the lapse of the time
periods with respect to such Purchase Right referred to in the preceding
sentence. The Company may direct that the certificates evidencing shares
acquired by exercise of a Purchase Right refer to such requirement to give
prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have
as members of the Board or officers or employees of the Participating Company
Group, members of the Board and any officers or employees of the Participating
Company Group to whom authority to act for the Board or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
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proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except that
(a) such termination shall not affect Purchase Rights previously granted under
the Plan, except as permitted under the Plan, and (b) no amendment may adversely
affect a Purchase Right previously granted under the Plan (except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must
be approved by the stockholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Integrated Sensor Solutions, Inc. 1997 Employee Stock
Purchase Plan was duly adopted by the Board of Directors of the Company on
August 8, 1997.
/s/ David Satterfield
------------------------------------
Secretary
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INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): ___________________________________________________________
(Last) (First) (Middle)
/ / Original Application for the Offering Period beginning _________________,
199__.
/ / Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan (the
"PLAN") of Integrated Sensor Solutions, Inc. (the "COMPANY") and subscribe to
purchase shares of the Company's Stock in accordance with this Subscription
Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________ percent (in
whole percentages not less than 1% (unless an election to stop deductions is
being made) or more than 10%) of my "COMPENSATION" on each payday throughout the
"OFFERING PERIOD" in accordance with the Plan. I understand that these payroll
deductions will be accumulated for the purchase of shares of Stock at the
applicable purchase price determined in accordance with the Plan. I understand
that, except as otherwise provided by the Plan, I will automatically purchase
shares on each Purchase Date under the Plan unless I withdraw from the Plan by
giving written notice on a form provided by the Company or unless my employment
terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S): _______________________________________________________________
ADDRESS: _______________________________________________________________
MY SOCIAL SECURITY NUMBER: ______________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may,
but will not be obligated to, withhold from my compensation the amount necessary
to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose of
the shares I purchased under the Plan, I will hold such shares in the name(s)
entered above (and not in the name of any nominee) for at least two years from
the first day of the Offering Period in which, and at least one year from the
Purchase Date on which, I acquired such shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING PARAGRAPH
(A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE PLAN. I
FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF A DISQUALI-
FYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE COMPANY MAY
TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A DISQUALIFYING DISPOSITION
AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE SERVICE THE ORDINARY INCOME I
MUST RECOGNIZE UPON SUCH DISQUALIFYING DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate in
the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
<PAGE>
Date: _______________________ Signature:____________________________________
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INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): ______________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Integrated Sensor
Solutions, Inc. 1997 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
/ / A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll deduc-
tions credited to my account under the Plan (if any) not previously
used to purchase shares under the Plan shall NOT be used to purchase
shares on the next Purchase Date of the Current Offering. Instead, I
request that all such amounts be paid to me as soon as practicable. I
understand that this election immediately terminates my interest in
the Current Offering and in the Plan.
/ / B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on next Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll deduc-
tions credited to my account under the Plan (if any) not previously
used to purchase shares under the Plan shall be used to purchase
shares on the next Purchase Date of the Current Offering to the extent
permitted by the Plan. I understand that this election will terminate
my interest in the Current Offering and in the Plan immediately
following such purchase. I request that any cash balance remaining in
my account under the Plan after my purchase of shares be paid to me as
soon as practicable.
I understand that by making this election I am terminating my interest in
the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date:_________________________ Signature:________________________________
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INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of___________, 1997, is made by and
between Integrated Sensor Solutions, Inc., a Delaware corporation (the
"Company"), and _________________________ (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of
corporations unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of
such directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that
the defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or
its subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters,
and that the long period of time which usually elapses before the trial or
other disposition of such litigation often extends beyond the time that the
director, officer or agent can reasonably recall such matters; and may extend
beyond the normal time for retirement for such director, officer or agent with
the result that he, after retirement or in the event of his death, his spouse,
heirs, executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and
attract talented and experienced individuals to serve as directors, officers
and agents of the Company and its subsidiaries and to encourage such
individuals to take the business risks necessary for the success of the Company
and its subsidiaries, it is necessary for the Company to contractually
indemnify its directors,
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officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for itself maximum liability for expenses and
damages in connection with claims against such directors, officers and agents
in connection with their service to the Company and its subsidiaries, and has
further concluded that the failure to provide such contractual
indemnification could result in great harm to the Company and its
subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. DEFINITIONS.
(a) AGENT. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at
the request of, for the convenience of, or to represent the interests of the
Company or a subsidiary of the Company as a director, officer, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise; or was a director, officer, employee or agent of a
foreign or domestic corporation which was a predecessor corporation of the
Company or a subsidiary of the Company, or was a director, officer, employee or
agent of another enterprise at the request of, for the convenience of, or to
represent the interests of such predecessor corporation.
(b) EXPENSES. For purposes of this Agreement, "expenses" include
all direct and indirect costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements, other
out-of-pocket costs and reasonable compensation for time spent by the
Indemnitee for which he is not otherwise compensated by the Company or any
third party) actually and reasonably incurred by the Indemnitee in connection
with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to
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indemnification under this Agreement or Section 145 or otherwise; provided,
however, that "expenses" shall not include any judgments, fines, ERISA excise
taxes or penalties, or amounts paid in settlement of a proceeding.
(c) PROCEEDING. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) SUBSIDIARY. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue
to serve as agent of the Company, at its will (or under separate agreement, if
such agreement exists), in the capacity Indemnitee currently serves as an agent
of the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is
intended to create any right to continued employment by Indemnitee.
3. LIABILITY INSURANCE.
(a) MAINTENANCE OF D&O INSURANCE. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable
insurers.
(b) RIGHTS AND BENEFITS. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is
an officer; or of the Company's key employees, if the Indemnitee is not a
director or officer but is a key employee.
(c) LIMITATION ON REQUIRED MAINTENANCE OF D&O INSURANCE.
Notwithstanding the foregoing, the Company shall have no obligation to obtain
or maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. MANDATORY INDEMNIFICATION. Subject to Section 9 below, the Company
shall indemnify the Indemnitee as follows:
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(a) SUCCESSFUL DEFENSE. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) THIRD PARTY ACTIONS. If the Indemnitee is a person who was or
is a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him
in any such capacity, the Company shall indemnify the Indemnitee against any
and all expenses and liabilities of any type whatsoever (including, but not
limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) actually and reasonably incurred by him in connection with
the investigation, defense, settlement or appeal of such proceeding, provided
the Indemnitee acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company and its stockholders,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
(c) DERIVATIVE ACTIONS. If the Indemnitee is a person who was or is
a party or is threatened to be made a party to any proceeding by reason of the
fact that he is or was an agent of the Company, or by reason of anything done
or not done by him in any such capacity, the Company shall indemnify the
Indemnitee against any amounts paid in settlement of any such proceeding and
all expenses actually and reasonably incurred by him in connection with the
investigation, defense, settlement, or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders. The
Company shall indemnify the Indemnitee against judgments, fines, and ERISA
excise taxes and penalties to the same extent and subject to the same
conditions as described in the immediately preceding sentence. Notwithstanding
the foregoing, no indemnification under this subsection 4(c) shall be made in
respect to any claim, issue or matter as to which such person shall have been
finally adjudged to be liable to the Company by a court of competent
jurisdiction unless and only to the extent that the court in which such
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such amounts
which the court shall deem proper.
(d) ACTIONS WHERE INDEMNITEE IS DECEASED. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if
prior to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant
to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
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(e) Notwithstanding the foregoing, the Company shall not be
obligated to indemnify the Indemnitee for expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) for which payment is actually
made to Indemnitee under a valid and collectible insurance policy of D&O
Insurance, or under a valid and enforceable indemnity clause, by-law or
agreement.
5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement
or appeal of a proceeding, but not entitled, however, to indemnification for
all of the total amount hereof, the Company shall nevertheless indemnify the
Indemnitee for such total amount except as to the portion hereof to which the
Indemnitee is not entitled.
6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 8(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to
which the Indemnitee is a party or is threatened to be made a party by reason
of the fact that the Indemnitee is or was an agent of the Company. Indemnitee
hereby undertakes to repay such amounts advanced only if, and to the extent
that, it shall be determined ultimately that the Indemnitee is not entitled to
be indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20)
days following delivery of a written request therefor by the Indemnitee to the
Company.
7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement
of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance
in effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such proceeding in accordance with the terms
of such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee
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shall have the right to employ his counsel in any such proceeding at the
Indemnitee's expense; and (ii) if (A) the employment of counsel by the
Indemnitee has been previously authorized by the Company, (B) the Indemnitee
shall have reasonably concluded that there may be a conflict of interest
between the Company and the Indemnitee in the conduct of any such defense; or
(C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
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 the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, unless
(i) such indemnification is expressly required to be made by law, (ii) the
proceeding was authorized by the Board, (iii) such indemnification is provided
by the Company, in its sole discretion, pursuant to the powers vested in the
Company under the General Corporation Law of Delaware or (iv) the proceeding is
brought to establish or enforce a right to indemnification under this Agreement
or any other statute or law or otherwise as required under Section 145.
(b) LACK OF GOOD FAITH. To indemnify the Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted
by the Indemnitee to enforce or interpret this Agreement, if a court of
competent jurisdiction determines that each of the material assertions made by
the Indemnitee in such proceeding was not made in good faith or was frivolous;
or
(c) UNAUTHORIZED SETTLEMENTS. To indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement, which consent shall not be unreasonably
withheld.
9. NON-EXCLUSIVITY. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both
as to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. ENFORCEMENT. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim
is made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement
(other than an action brought to enforce a claim for expenses pursuant to
Section 6 hereof, provided that the required undertaking has
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been tendered to the Company) that Indemnitee is not entitled to
indemnification because of the limitations set forth in Sections 4 and 8
hereof. Neither the failure of the Corporation (including its Board of
Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Indemnitee is
proper in the circumstances, nor an actual determination by the Company
(including its Board of Directors or its stockholders) that such
indemnification is improper, shall be a defense to the action or create a
presumption that Indemnitee is not entitled to indemnification under this
Agreement or otherwise.
11. 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.
12. SURVIVAL OF RIGHTS.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and
shall continue thereafter so long as Indemnitee shall be subject to any
possible claim or threatened, pending or completed action, suit or proceeding,
whether civil, criminal, arbitrational, administrative or investigative, by
reason of the fact that Indemnitee was serving in the capacity referred to
herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to 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.
13. INTERPRETATION OF AGREEMENT. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. SEVERABILITY. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of
the Agreement (including without limitation, all portions of any paragraphs of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver
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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.
16. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. GOVERNING LAW. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
18. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
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 brought only in the state courts of the State of Delaware.
The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
THE COMPANY:
INTEGRATED SENSOR SOLUTIONS, INC.
By ________________________________________
Its ________________________________________
Address: 625 River Oaks Parkway
San Jose, California 95134
INDEMNITEE:
____________________________________________
Print Name
____________________________________________
Signature
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"[ ]" indicates that
the confidential
DEVELOPMENT AGREEMENT portion has been
omitted and filed
BETWEEN separately with
the Commission
ISS GmbH
Konigsbrucker Landstrasse 159
Haus 335
01109 Dresden
Germany
- hereinafter called "ISS" or "party" -
and
Robert Bosch GmbH
Postfach 10 60 50
70049 Stuttgart
Germany
- hereinafter called "RB" or "party" -
PREAMBLE
RB is currently developing a new diesel injection system called "Common Rail
diesel fuel injection system" - hereinafter called "CR" -, which shall be
introduced in the market with competitive prices in 1996. This system uses a
high pressure sensor to measure and control the system pressure in the CR.
ISS Incorporated, San Jose, USA - hereinafter called "ISS Inc." through its
strategic alliance with Nagano Keiki Seisakusho, Ltd., Ohta-Ku, Japan -
hereinafter called "Nagano" - has an exclusive access to media compatible
pressure sensing elements. ISS Inc. has developed a broad portfolio of media
compatible pressure transducers known as the XKP series using Nagano's pressure
sensor elements. These products are currently in volume production for
automotive and industrial applications.
To support and service European customers, ISS Inc. has established a
subsidiary, ISS in Dresden, Germany. ISS is installing necessary capacity and
quality systems to support automotive sensor production requirements.
ISS intends to utilise the technology and experience gained with the product
line of ISS Inc. and Nagano to develop - together with ISS Inc. and Nagano -
high pressure transducers optimised to meet stringent requirements specified by
RB for CR application. During this development a new
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sensor elementary generation, better mounting technologies, a new ASIC
generation and two custom specific connectors will be implemented and
qualified for the high volume mass production.
RB and ISS will establish an "Open Relationship" during the development phase
and institute frank exchange of information between the two companies in a
timely manner for successful introduction of the CR to the automotive market.
1. SCOPE
1.1 RB hereby gives and ISS accepts the order to carry out
development, mass-production application and test (hereinafter
called "work") of a high pressure sensor - hereinafter called
"Contractual Product" - for Common Rail diesel fuel injection on
the basis of the XKP/HVP product family
in accordance with the attached work program and schedule (Attachment 1).
Details of the work (cf. Attachment 1) and any changes shall be - as far
as necessary - agreed upon from case to case by the parties. Co-ordinator
shall be for RB Department K5/ESK.
1.2 ISS will entrust suitable employees with the work and assumes
responsibility that these employees fulfil the obligations of this
Agreement, especially those of Sections 2, 4 and 5.
1.3 In performing the work ISS will apply the time and the degree of care
necessary to achieve the best results according the acknowledged
technical rules.
1.4 Meetings on the state of work and its further performance shall be held
at ISS's or RB's at intervals as agreed upon from case to case.
1.5 Quarterly during the performance of the work ISS will submit to RB
written reports about the results and will, not later than four weeks
after the work has been fulfilled, submit a final written report about
the results achieved.
1.6 ISS will inform RB without delay, if any of her employees is or becomes
aware of property rights which may be relevant in connection with the
work. ISS is not obliged to make inquiries.
2. WORKING RESULTS/INVENTIONS/PROPERTY
2.1 Any results, inventions or improvements, patentable or not, made by
either of the parties hereto during the course of performing its
obligations hereunder shall be property solely
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CONFIDENTIAL
TREATMENT
REQUESTED
owned by such inventing party. As far as the above results, inventions or
improvements, patentable or not, are related to the design of the
Contractual Products, the other party shall have a right, on a
non-exclusive, non-transferable and royalty-free basis, to use the above
results, inventions or improvements in connection with the RB CR. In
other cases (e.g. inventions or improvements related to either party's
core technology) such right is subject to the prior written approval of
the inventing party.
It is expressly understood between the parties that the inventions or
improvements, patentable or not, having been made by the inventing party
before performing its obligations hereunder or being made by the inventing
party during the term of this Agreement but irrespectively from the
performance of its obligations hereunder shall not be included in the
above right under which the other party may use non-exclusively,
non-transferable and free of charge the inventions and/or improvements of
the inventing party, even if they are disclosed to the other party
hereunder orally or in writing such as drawings.
2.2 Any results, inventions or improvements, patentable or not, jointly made
by the parties hereto during the course of performing their obligations
hereunder shall be the common property of both parties. A result,
invention or improvement shall be deemed jointly made if employees of both
parties contribute to the development work for such result, invention or
improvement itself and such contribution is not insignificant with respect
to the contribution of the employee(s) of the other party.
The costs and expenses for the industrial property rights for such common
property shall be equally borne by both parties. Either party shall
obtain a prior written consent from the other if it intends to give a
license to any third party with regard to such common property.
Either party shall obtain a prior written consent from the other if it
intends to give a license to any third party with regard to such common
property.
2.3 Until December 31, 1999, RB is entitled to use and exploit results,
inventions and improvements including common property (Section 2.2) only
for diesel CR-applications, and ISS is entitled to use and exploit such
results, inventions and improvements, including common property, only for
non CR-applications. After that date the parties hereto are entitled to
unrestricted use and exploitation of such results, inventions,
improvements and common property.
3. COMPENSATION
3.1 In return for the performance of the work and the rights granted to RB by
this Agreement, RB shall pay a total amount of [ ], to be paid in
instalments as follows:
3
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
- [ ] of the total amount, [ ] after the effective date of
this Agreement,
- [ ] of the total amount, [ ] after the delivery of the
[ ],
- [ ] of the total amount, [ ] after the delivery of the
[ ],
- [ ] of the total amount, [ ] after the final report
according to Section 1.5 has been submitted.
Payments shall be made with additional VAT on ISS's account 04590 077 00
Dresdner Bank 850 800 00
3.2 Invoices referring to the number B-2643 under which this Agreement is
filed shall be addressed to the co-ordinator according to Section 1.1.
3.3 The costs for additional work - to be agreed upon in advance and in
writing - shall be borne by the parties on a 50:50 basis, except the costs
for RB-specific variants, which shall be borne 100% by RB.
4. COMPETING WORK FOR THIRD PARTIES/SUPPLY/MISCELLANEOUS
4.1 ISS agrees not to carry out CR application related work for third parties
in which results (concerning the Contractual Product) arising from this
Agreement may be used during the term of this Agreement and within 2.5
years after its expiration (i.e. until December 31, 1999), unless ISS has
obtained RB's prior written approval. ISS will have the approval from RB
to carry out CR-related work with third parties if - after the work has
been carried out as stated in Section 1.1 - RB should not procure the
minimum volumes of contractual Products as stated in Attachment 2.
4.2 ISS is not entitled to hand out any Contractual Products (samples,
developed standard products) to a third party.
4.3 If RB is introducing a mass-production of the CR with Contractual
Products, ISS will submit an offer for supply and, if accepted, supply RB.
Details of the Supply Agreement, performance, number of pieces etc. are to
be agreed upon from time to time.
4.4 Competitive conditions (price, quality, period of delivery time etc.)
provided RB is willing to procure its demand, but at least a part of its
demand of Contractual Products of ISS for a period of 3 years beginning
after the implementation.
4.5 To ensure reliable production and supply of Contractual Products ISS, ISS
Inc., Nagano and RB are prepared to conclude a respective agreement by the
end of June, 1995, covering especially investment and ownership of the
facilities for production, back-end packaging, testing and calibration of
contractual products.
4
<PAGE>
4.6 ISS shall specify her suppliers and sub-suppliers with regard to
Contractual Products and RB-specific variants.
4.7 ISS shall submit to RB the results of design and process FMEA-analysis,
documents, specifications, processes for quality management and cases of
problems.
5. CONFIDENTIALITY/PUBLICATION
Either party shall keep strictly confidential and secret towards third
parties CR-application related working results arising from this Agreement
as well as technical and commercial information obtained from the other
party under this Agreement as long and as far as this information is not
in the public domain or unless the disclosing party waived further secrecy
in writing. The obligation to keep confidential technical and commercial
information terminates five years after expiration of this Agreement.
ISS Inc. and Nagano, to the extent they have a need to know working
results arising from this Agreement as well as technical or commercial
information received from RB for the purposes set forth above, shall not
be deemed third parties provided they abide by the obligations of this
Agreement. Insofar, ISS shall be fully responsible to ensure that the
obligations of this Agreement are respected by ISS Inc. and Nagano.
6. TERM
6.1 This Agreement shall come into effect after it has been duly signed by
the parties and shall terminate on June 30, 1997 unless mutually prolonged
in writing.
6.2 RB may terminate this Agreement prematurely without notice,
- if it appears that the expected result cannot be obtained at all or not
without considerably exceeding the projected costs or the date set forth
above, or
- if extraordinary circumstances occur, under which the continuation of
this Agreement appears to be unreasonable for RB.
In these cases ISS is obliged to submit the working results already
obtained to RB as planned. Costs of ISS arisen up to the point of
premature termination shall be borne by RB up to the maximum of the amount
as stated in Section 3.1.
6.3 Sections 2, 4 and 5 shall survive any termination of this Agreement.
7. MODIFICATIONS OR SUPPLEMENTS
5
<PAGE>
7.1 This Agreement in English constitutes the entire understanding between
the parties with respect to the subject matter indicated above and
supersedes any previous oral or written agreement.
7.2 Any modifications or supplements to this Agreement as well as to this
Section 7.2 shall be in writing and duly signed by the parties hereto to
become legally binding.
8. COURT OF ARBITRATION/APPLICABLE LAW/PLACE OF PERFORMANCE
All disputes arising under this Agreement including those that may evolve
from its coming into effect shall be settled in a final manner in
accordance with the rules of arbitration of the Deutsche Institution fur
Schiedsgerichtsbarkeit e.V. (DIS). The court of arbitration decides about
the validity of this arbitration contract. The judges decision is final
and binding.
The chairmen of the court of arbitration must possess the qualification
to become a judge.
Exclusive place of performance, jurisdiction and arbitration is Stuttgart.
9. LICENSE
If RB intends to make or have made by a subsidiary, which is at least 50%
owned or controlled, directly or indirectly, by RB, the back-end
packaging, testing and calibration of the contractual high pressure sensor
for the CR and/or other RB-systems, ISS and ISS Inc. hereby agree to grant
a non-exclusive license (for reasonable conditions to be agreed upon) for
back-end packaging, testing and calibration of the high pressure sensor
for its own use. This license shall include the respective intellectual
property rights, such as patents, patent applications, utility models.
The know-how license for the design of the sensor impacts in any case no
costs.
Dresden 18.5.1995 Stuttgart 12.5.1995
ISS GMBH ROBERT BOSCH GMBH
Read and agreed:
San Jose, May 25, 1995
ISS INCORPORATED
6
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
Attachment 1
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
Attachment 2
[ ]
<PAGE>
"[ ]" INDICATES THAT
THE CONFIDENTIAL
DEVELOPMENT AGREEMENT PORTION HAS BEEN
OMITTED AND FILED
AMONG SEPARATELY WITH
THE COMMISSION.
CONFIDENTIAL
TREATMENT
REQUESTED
ISS-Nagano GmbH
Grenzstrasse 28
D-01109 Dresden
Germany
- hereinafter called "ISS-Nagano" or "party" -
ISS Incorporated
625 River Oaks Parkway
San Jose, California 95134
- hereinafter called "ISS Inc." or "party" -
and
Robert Bosch GmbH
Postfach 30 02 20
D-70442 Stuttgart
Germany
- hereinafter called "RB" or "party" -
PREAMBLE
RB has developed and is in series production with an automotive stability
control system for cars called "Vehicle Dynamics System" - hereinafter called
"VDS". The VDS presently uses [ ] to be developed under this Agreement.
ISS Inc. through its strategic alliance with Nagano Keiki Seisakusho, Ltd. -
hereinafter called "Nagano" - has exclusive access to media compatible
pressure sensor elements. ISS Inc. has developed a broad portfolio of media
compatible pressure transducers known as the HVP series using Nagano's
pressure sensor elements. These products are currently in volume production
at ISS Inc. for automotive and industrial applications.
1
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
To support and service European customers, ISS Inc. has established a
subsidiary, ISS-Nagano in Dresden, Germany, in which Nagano holds an equity
interest. ISS-Nagano is installing the necessary capacity and quality
control systems to support automotive sensor production requirements.
ISS-Nagano intends to utilise the technology and experience gained with the
product line of ISS Inc. and Nagano to develop - with the technical
assistance of ISS Inc. and Nagano - pressure sensors with on-board
diagnostics optimised to meet the stringent performance requirements
specified by RB for VDS application. Under this Agreement a corresponding
pressure sensor using a new ASIC will be developed and qualified for high
volume production at ISS-Nagano with a provision for assembly, calibration
and testing of these sensors by RB at a later date under appropriate business
agreements.
The parties will establish an "Open Relationship" during the development
phase and institute frank exchange of information among them in a timely
manner for successful introduction of the pressure sensor with on-board
diagnostics for VDS application.
1. SCOPE
1.1 RB hereby gives and ISS-Nagano and ISS Inc. accept the order to carry
out
the development and testing of a pressure sensor with [ ] suited for
mass-production - hereinafter called "Contractual Product" - for the
Vehicle Dynamics system VDS on the basis of the HVP product family
(hereinafter called "work")
in accordance with the attached
- specification (Attachment 1),
- schedule including work program (Attachment 2).
Further details of the work and any changes shall be agreed upon from
case to case by the parties. A Coordinator shall be nominated by RB and
by ISS-Nagano/ISS Inc.
1.2 ISS-Nagano will entrust suitable employees with the work and assumes
responsibility that these employees fulfill the obligations of this
Agreement.
1.3 In performing the work ISS-Nagano will apply the time and the degree
of care necessary to achieve the best results in accordance with the
newest acknowledged technical rules and know-how available at ISS-Nagano,
ISS Inc. and Nagano.
1.4 Regular meetings on the state of work and its further performance shall
be held at ISS-Nagano or RB at periodic intervals as agreed upon from
time to time.
2
<PAGE>
1.5 During the performance of the work ISS-Nagano will submit to RB written
reports about the results at the report points as defined in Attachment 2
and will, not later than four weeks after the work has been fulfilled,
submit a final written report about the results achieved.
1.6 ISS-Nagano will inform RB without delay, if any of their employees are
or become aware of industrial property rights which may be relevant in
connection with the work. ISS-Nagano is not obliged to make inquiries.
2. WORKING RESULTS/INVENTIONS/PROPERTY
2.1 Any results, inventions or improvements, patentable or not, insofar as
they represent secret know-how and are not state of the art made by
either of the parties hereto during the course of performing its
obligations hereunder shall be property solely owned by such inventing
party.
As far as the above results, inventions or improvements, patentable or
not, are related to the manufacture, application, testing of or any other
use in connection with the Contractual Products, the other party shall
hereby have the right to use the above results, inventions or improvements
in connection with the RB VDS.
This license is irrevocable, non-exclusive, non-transferable and
royalty-free and includes for RB the right to use on the same basis and
to the same extent as mentioned before any and all results, inventions or
improvements, patentable or not, related to the application, testing or
resale in connection with the Contractual Products and/or background
rights used therein which are owned or controlled by either ISS Inc. or
ISS-Nagano.
2.2 Any results, inventions or improvements, patentable or not, jointly
made by the parties hereto during the course of performing their
obligations hereunder shall be jointly owned by both parties. A
result, invention or improvement shall be deemed jointly and equally
made if employees of both parties contribute to the development work
for such result, invention or improvement itself and such contribution
is not insignificant with respect to the contribution of the
employee(s) of the other party.
The costs and expenses for the industrial property rights jointly owned
shall be equally borne by both parties.
Either party is entitled to use such jointly owned property rights free
of charge for its own requirements.
Either party shall obtain the prior written consent from the other if it
intends to give a license to any third party with regard to such jointly
owned property rights.
2.3 Until three years after the Start of Production of Contractual
Products ISS Nagano is entitled to use and exploit results, inventions
and improvements made hereunder including jointly owned industrial
property rights for third parties only outside the
3
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
automotive brake field. ISS Nagano can, however, use and exploit such
results, inventions and improvements in the automotive brake field during
such three year period if RB has given its prior written consent to ISS
Nagano or if RB is not purchasing from ISS Nagano at least the minimum
volume of Contractual Products as stated in Attachment 3.
After the end of the above-mentioned three year period, ISS Nagano is
entitled to an unrestricted use and exploitation of such results,
inventions, improvements and joint intellectual property.
"Start of Production" of the Contractual Product shall mean that point in
time when RB accepts the Initial Sample Inspection Report (ISIR) submitted
by ISS-Nagano for the Contractual Product.
Working results, inventions and improvements concerning the package body
are excluded from Article 2.3.
3. COMPENSATION
3.1 As consideration for the performance of the work and the rights granted to
RB by this Agreement, RB shall pay to ISS-Nagano a total amount of
[ ] at the completion of the corresponding Milestones as defined in
Attachment 2, Page 1.
Payments shall be made with additional VAT on ISS-Nagano's account
04 590 07700 Dresdner Bank, Bank code 850 800 00.
3.2 Invoices referring to the number B- . . . . under which this Agreement
is filed shall be addressed to the RB-Coordinator mentioned in
Section 1.1.
4. COMPETING WORK FOR THIRD PARTIES
4.1 ISS Inc. and ISS-Nagano shall not make use of the specification of the
Contractual Product or components thereof and not actively propose to
third parties the specification of the Contractual Product or
components thereof including modifications thereof made by RB in the
design or manufacture of automotive sensors or components thereof for
third parties.
4.2 ISS-Nagano is not entitled to hand out or sell any Contractual
Products (A-, B- or C-samples or samples of final products) to a third
party.
5. SUPPLY
5.1 If RB is installing Contractual Products in series production into its
VDS, ISS-Nagano will submit an offer for supply of such Contractual
Products to RB and, if accepted,
4
<PAGE>
supply RB on the basis of a supply agreement the details of which
(specifications, volume, price, delivery schedule, quality etc.) are to
be agreed upon in due time.
5.2 Competitive conditions (price, quality, delivery time etc.) provided,
RB is willing to procure its requirements of Contractual Products from
ISS-Nagano for a period of at least 3 years beginning after the start
of series production.
5.3 ISS-Nagano shall specify its suppliers and sub-suppliers with regard
to Contractual Products and RB-specific variants.
5.4 ISS-Nagano shall submit to RB the results of design and process FMEA-
analysis, documents, specifications, processes for quality management
and all relevant information in case of quality problems with regard
to the development, manufacture, application and testing of Contractual
Products.
6. CONFIDENTIALITY/PUBLICATION
Either party shall keep strictly confidential and secret towards third
parties VSD-application related working results arising from this
Agreement as well as technical and commercial information obtained from
the other party under this Agreement as long and as far as this
information is not in the public domain or unless the disclosing party
waived further secrecy in writing. The obligation to keep confidential
technical and commercial information terminates five years after
expiration of this Agreement.
ISS Inc. and ISS-Nagano, to the extent they have a need to know working
results arising from this Agreement as well as technical or commercial
information received from RB for the purposes set forth above, shall not
be deemed third parties provided they abide by the obligations of this
Agreement.
7. TERM
7.1 This Agreement shall become effective after it has been duly signed by
the parties and shall terminate at the Start of Production of Contractual
Products at ISS-Nagano as defined in Attachment 2 but not later than
31.12.1999 unless mutually prolonged in writing.
7.2 RB may terminate this Agreement prematurely without notice,
- if it appears that the expected result cannot be obtained at all
or not without considerably exceeding the projected costs or the
date set forth above, or
- if extraordinary circumstances occur, under which the continuation
of this Agreement appears to be unreasonable for RB.
In these cases ISS-Nagano is obliged to submit the working results already
obtained to RB as planned. Costs of ISS-Nagano arisen up to the point of
premature termination shall be borne by RB up to the maximum of the amount
as stated in Section 3.1.
5
<PAGE>
7.3 Sections 2, 4, 5, 6 and 9 shall survive any termination of this Agreement.
8. MODIFICATIONS OR SUPPLEMENTS
8.1 This Agreement in English constitutes the entire understanding between
the parties with respect to the subject matter indicated above and
supersedes any previous oral or written agreement.
8.2 Any modifications or supplements to this Agreement as well as to this
Section 8.2 shall be in writing and duly signed by the parties hereto
to become legally binding.
9. COURT OF ARBITRATION/APPLICABLE LAW/PLACE OF PERFORMANCE
All disputes arising under this Agreement including those that may evolve
from its coming into effect shall be settled in a final manner in
accordance with the rules of arbitration of the Deutsche Institution
fur Schiedsgerichtsbarkeit e.V. (DIS). The court of arbitration decides
about the validity of this arbitration contract. The court's decision
is final and binding.
The chairman of the court of arbitration must possess the qualification
to become a judge.
Exclusive place of performance, jurisdiction and arbitration is Stuttgart.
The language used for the proceedings of the court of arbitration shall
be the German language.
Dresden, 17.5.96 Stuttgart, 30.4.1996
--------------------------- ---------------------------
/s/ WOLFRAM BEYER /S/ KLAUS G. BORCHERS
ISS-NAGANO GMBH ROBERT BOSCH GMBH
San Jose, 17.5.1996
---------------------------
/s/ RAMESH SIRSI
ISS INCORPORATED
6
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
Attachment 1
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
Attachment 2
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
Attachment 3
[ ]
<PAGE>
"[ ]" INDICATES THAT
THE CONFIDENTIAL
SUPPLY AGREEMENT PORTION HAS BEEN
OMITTED AND FILED
BETWEEN SEPARATELY WITH
THE COMMISSION
ISS-NAGANO GmbH,
GRENZSTR. 28
01109 DRESDEN
- HEREINAFTER CALLED "ISS" -
AND
ROBERT BOSCH GmbH
POSTFACH 10 60 50
70049 STUTTGART
- HEREINAFTER CALLED "BOSCH" -
WHEREAS Bosch is currently developing a new Common Rail Diesel Injection System
which shall be introduced into the market in 1996;
WHEREAS this new Injection System uses a high pressure sensor to measure and
control the system pressure;
WHEREAS ISS Inc., San Jose, USA - hereinafter called "ISS Inc." through its
strategic alliance with Nagano Keiki Seisakusho Ltd., Otaku, Japan - hereinafter
called "Nagano" - has developed such high pressure sensor elements which are
currently produced for automotive and industrial applications also by ISS;
WHEREAS ISS and Bosch entered into a Development Agreement on May 18, 1995 for
the development, mass production, application and test of a high pressure sensor
for these new Common Rail Diesel Fuel Injection Systems on the basis of the
existing ISS XKP- and HVP-product family;
WHEREAS ISS is prepared to manufacture for and to supply to Bosch such newly
developed high pressure sensors;
WHEREAS Bosch is willing to purchase such sensors from ISS;
<PAGE>
NOW, therefore in consideration of the mutual agreements herein contained it is
agreed by and between ISS and Bosch as follows:
1. DEFINITIONS
As used in this Agreement the following terms shall have the meanings set
forth below:
(i) "CR" means the new Common Rail Diesel Injection System currently
developed by Bosch.
(ii) "PRODUCTS" means high pressure sensors for CR as described in the
drawing (with the components as specified therein) and in the detailed
technical and performance specifications attached hereto as
APPENDIX 1, including its improvements and/or design changes as
specified in Section 1.l of the Development Agreement ((iii) below).
(iii)"DEVELOPMENT AGREEMENT" means the Development Agreement between ISS
and Bosch of May 18, 1995.
2. GENERAL RULES
This Agreements sets forth the general terms and conditions of the sale by
ISS and the purchase by Bosch of the Products and shall apply to all such
purchases and sales.
3. SUBJECT MATTER
3.1 During the term of this agreement ISS, using the best of its design and
manufacturing knowledge, will design and manufacture Products in
accordance with the specifications and the quality standards as attached
in APPENDIX 1 and referred to in SECTION 5 and will sell and ship the
Products as will be ordered from time to time by Bosch. ISS has the
right to propose and will propose to Bosch process or component
modifications which, to the best of ISS knowledge, will improve the
efficiency, quality or yield of the manufacturing process. Bosch will
examine such proposal and, within reasonable amount of time, will have
the right to either accept or refuse them. Once accepted by Bosch in
writing, the modification will become integral part of the Products.
3.2 ISS will manufacture and supply the Products in accordance with Bosch's
requirements as set out in SECTION 3.1 above and will make design and
styling changes as mutually agreed upon in writing.
3.3 If so required by Bosch, ISS shall place or affix trademarks and/or
tradenames of Bosch or its customers on the Products and their packaging
in the design and at the location as designated by Bosch to ISS.
2
<PAGE>
ISS agrees not to sell or otherwise dispose of such marked Products to
any person other than Bosch or designated by Bosch. Any necessary
tooling charges for affixing trademarks on the Products based on Bosch
specification will be borne by Bosch, and such toolings will become the
property of Bosch.
4. MARKETING
During the term of this Agreement, ISS shall manufacture and supply the
Products, which form the result of the common development work by the
parties to Bosch only as set out in the Development Agreement.
Competitive conditions (price, quality, meeting of delivery deadlines,
technical performance etc.) provided, RB is willing to procure its
demand of the Products but at least a part of its demand with ISS, for a
period ending at least December 31st, 1999.
APPENDIX 2 shows the expected yearly demand until December 31st, 1999.
The figures quoted in APPENDIX 2 constitute a non-binding forecast based
on the best knowledge of Bosch; they do not represent binding orders.
Due to circumstances beyond the control of Bosch the volumes may
decrease.
5. QUALITY
Bosch and ISS shall cooperate closely to ensure that the Products
conform with the specifications and satisfy the quality standards as
hereinafter. Accordingly, ISS will design the Products, buy the
components and produce and ship the Products in accordance with the
quality management system requirements and specifications of the Bosch
Quality Assurance Guide for Suppliers (APPENDIX 3). ISS intends to
comply with ISO 9000 quality principles at a later date. ISS,
particularly, will use a documentation and traceability system capable
to determine the manufacturing conditions under which the Products have
been produced. In case of rejects of Products due to their
nonconformity to Bosch specification ISS will, notwithstanding the
respective warranty provisions, provide Bosch upon request a
manufacturing report stating the results of the quality controls and the
root causes and the corrective actions to be taken.
ISS agrees to allow Bosch on request to inspect quality control and
production activities of ISS associated with the design and production
of said Products. Such information shall be deemed confidential.
6. PRODUCT LIABILITY
6.1 ISS shall bear the product liability risk and undertakes to hold Bosch
harmless against product liability claims by third parties, unless Bosch
on its own responsibility issues instructions which have not been agreed
upon with ISS. If such an instruction is a contributing factor to
damages arising in connection with product liability, the legal
provisions apply.
3
<PAGE>
6.2 ISS is obliged to take all measures necessary with regard to product
liability, particularly with regard to faultless design, manufacture,
instructions and after sales product observation, and to keep Bosch
continuously informed regarding these measures and any changes made
thereto. Bosch is entitled to check these measures to the extent
necessary in each case.
6.3 In case of defects in the Products which may necessitate a recall
campaign, Bosch shall keep ISS at all times fully informed about all
relevant facts and both parties shall negotiate and determine in good
faith the actions to be taken. It is understood that Bosch shall have
the ultimate decision as to the necessity of a recall campaign. ISS
shall negotiate a fair and mutually acceptable reimbursement of Bosch's
recall expenses, based on the principle that the reimbursement shall be
Proportional to the degree of ISS's responsibility.
6.4 ISS shall subscribe for a General Liability Insurance, including a
Product Liability Insurance and recall coverage with a limit of
liability of 5 million DM each and shall provide evidence thereof to
Bosch. ISS shall inform its insurance company expressly that ISS is
supplier to the Automotive Industry.
7. PRICES AND TERMS
7.1 Prices and delivery terms shall be set out in annual agreements
effective for a calendar year, taking into account the price projection
as per ANNEX 4.
7.2 If necessary, the parties will negotiate in good faith price adjustments
at least 3 months before a new annual agreement comes into force. In
case the parties cannot agree on a price adjustment, the prices of the
previous annual agreement shall remain in force.
8. HANDLING BOSCH DEPARTMENT
Price agreements HoW Purchasing Dept. (HoW/EKF)
Calls by HoW Material Planning Dept.
(HoW1/ALP)
Shipment to Robert Bosch GmbH
Homburg Plant
Bexbacher Strasse 72
66424 Homburg/Saar
Invoices to HoW Controlling Accounting Dept.
(HoW/WIR)
Coordination HoW/EKF
Quality assurance HoW1/QSG5
4
<PAGE>
9. DELIVERY
9.1 Orders for quantities of Products will be made by schedules consisting
usually of fixed orders and non-binding order forecasts. In order to
organize the manufacturing of Products, Bosch grants to ISS a production
and material release for a defined period of time to be mutually agreed
upon by both parties. The fixed orders and the production and material
releases shall constitute binding commitments upon ISS to manufacture,
sell and ship the Products within the specified schedule in accordance
to this Agreement.
If Bosch's demand for the products reduces completely or to a
significant extent due to circumstances beyond the control of Bosch and
if ISS has committed to commercially reasonable quantities of material
for the production of the products covered by Bosch's fixed orders and
production and material releases, Bosch shall reimburse ISS the cost for
such appropriately ordered material upon evidence, provided, however,
such materials cannot be cancelled or rescheduled subsequent to the
receipt of an abrupt reduction or cancellation of orders by Bosch which
do not originate from a defect in the products.
Title to these goods shall pass to Bosch subsequently to such
reimbursement.
9.2 Supply Assurance:
In order to guarantee a steady and punctual supply of the Products ISS
agrees to keep a minimum stock of Products at ISS's expense. The volume
of products in this minimum stock shall cover Bosch's demand for the
Products in one month and the volume of components in this minimum stock
shall cover Bosch's demand in one month, especially for the
sensor-subassembly, the printed circuit board and the connector. The
calculation of such minimum volumes stock shall be based on the figures
as stated in SECTION 9.1 above.
Following termination of this Agreement Bosch will be entitled to
purchase the pressure sensor-subassembly, the ASIC, the connector and
the sensor element itself for Bosch's own CR application from ISS at
fair market prices.
10. INSPECTION PRIOR TO DELIVERY
10.1 Prior to delivery all Products shall be tested and inspected by ISS at
ISS's factory so as to ensure that the Products are in accordance with
the specifications.
10.2 Bosch reserves the right to inspect at its own expense all Products at
ISS's factory before delivery. Bosch will provide sufficient notice
prior to any inspection.
11. INCOMING INSPECTION
As soon as this is feasible in the normal course of business, Bosch
shall conduct an incoming spot-check inspection of the Products. Bosch
will give notice of any failings
5
<PAGE>
immediately on discovery; to this extent the supplier waives the rights
to object those complaints as being late.
If due to defects or failures a 100% inspection is necessary, ISS shall
bear the costs. If defects can be narrowed to specific lots this will
cover those lots only.
12. WARRANTY
12.1 ISS hereby warrants that the Products to be delivered and sold hereunder
will meet the agreed specifications and quality standards and will be
merchantable and free from defects in material and workmanship.
12.2 If the Products are found to be defective during the warranty period,
Bosch may at its option ask ISS for replacement of such products free of
all charges and shipping costs to Bosch, or to the enterprises of its
service organization, or may ask for refund of the purchase price. In
case defectiveness will be discovered during or after installation of
the Product in Bosch's products, ISS will bear the costs Bosch incurs
for discovering the defect or for repairing the Bosch product.
12.3 If, on the basis of provisions of law and/or contractual agreements with
its customers or with enterprises of its service network, Bosch is
required to pay incidental expenses such as, for instance, transport
charges, cost of materials, cost of labour, ISS will also bear those
costs. However, if such incidental expenses, taken as a whole, would
operate to threaten the existence of ISS, then Bosch and ISS will
negotiate in good faith a fair and reasonable amount ISS has to pay for
such incidental costs.
12.4 The warranty period is 36 months following the first registration of the
vehicle equipped with the Bosch CR System containing the Product.
13. MACHINERY AND EQUIPMENT
Bosch agrees to purchase from ISS and ISS agrees to sell to Bosch its
machinery and equipment used for production of the HVP-Version of the
Products. Such machinery and equipment as well as the purchase
consideration therefor not exceeding 2.4 million USD and payable in
installments will be specified and agreed upon separately. Title to
those machinery and equipment shall pass to Bosch in proportion to the
purchase consideration actually paid. Bosch offers to attend the
installation of the machinery and equipment and to provide appropriate
inputs; however, ISS has the final responsibility to assure the Products
meet the agreed quality requirements. Bosch will make such machinery
and equipment available to ISS on the basis of a contract of loan as set
out in APPENDIX 5. Notwithstanding other provisions of such loan
contract, ISS shall be entitled to manufacture high pressure sensors for
non-CR use on such machinery and equipment. Prior to any such
production with reference to the utilization of capacity for non-CR
applications, ISS has to get RB's written consent, such consent not to
be withheld if any
6
<PAGE>
such production will cover surplus capacity of the machinery and
equipment not needed for any production for Bosch.
Bosch hereby grants to ISS the option to purchase such machinery and
equipment on December 31st, 1999 at a purchase price equivalent to the
book value of the machinery and equipment (according to linear
depreciation ending five years after complete installation of such
machinery and equipment) at that date. Notice to exercise such option
shall be given until December 31st, 1998.
In case ISS does not exercise its option, Bosch is prepared to reimburse
to ISS engineering costs related to such machines and equipment at an
amount equal to the depreciated value of an initial amount of 400,000
USD on December 31st, 1999; depreciation method: linear; depreciation
period: five years, starting with complete installation of such
machinery and equipment.
14. PROPRIETARY RIGHTS
14.1 If the Products are used as stipulated, ISS is liable for claims arising
as a result of the infringement of proprietary rights, applications for
proprietary rights and/or of copyrights (proprietary rights). ISS shall
hold Bosch and the parties purchasing from Bosch harmless against all
claims arising from the use of such proprietary rights. This shall not
apply if ISS has manufactured the Products on the basis of drawings,
models or other comparable descriptions provided by Bosch and did not
know or was not bound to know that proprietary rights were infringed as
a result.
14.2 Both parties to this Agreement undertake to inform each other without
delay of risks of infringement and alleged cases of infringement which
became known to them.
14.3 If required by Bosch, ISS will inform Bosch concerning the use of
published or unpublished proprietary rights held by ISS, as well as of
applications for such proprietary rights and of licenses issued for
proprietary rights related to the Contract Products.
15. FORCE MAJEURE
If any Party to this Agreement cannot perform its obligations out of
this Agreement because of an event of Force Majeure, it shall notify the
other Party in writing within undue delay about the occurrence of such
an event and provide accurate supporting evidence thereof.
Force Majeure shall mean any of the following:
Earthquake, storm, flood, fire or other acts of nature, epidemic, war,
riot, public disturbance, strike or lock-out, government actions or
other events beyond the control of the Parties and where their
occurrence is unpreventable and unavoidable.
7
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If an event of Force Majeure occurs, neither Party may be responsible
for any damage, incurred cost or losses which the other Party may
sustain by reason of such failure or delay of performance. The Party
claiming Force Majeure shall adopt measures to minimize or remove the
effects of Force Majeure and within the shortest possible time attempt
to resume the performance of obligations affected by the event of Force
Majeure. If the consequences of such an event cannot be remedied within
ninety days from the occurrence, both Parties shall through
consultations decide whether to modify or terminate the Agreement
according to the effects of the event of Force Majeure on the
performance of this Agreement.
16. TERM OF AGREEMENT/TERMINATION
16.1 This Agreement comes into force upon signature by both parties and is
concluded for an indefinite period of time. It may be terminated at the
end of a calendar year, observing a period of written notice of six
months; however, such ordinary termination is not possible before
December 31st, 1999.
16.2 Bosch is entitled to terminate this Agreement at any time without
observing a notice period, if the requirements of Bosch for the Products
decrease substantially due to reasons beyond the control of Bosch or if
the Development Agreement is terminated prematurely.
16.3 The right to terminate this Agreement for extraordinary reasons without
complying with the period of notice as a result of a serious breach of
duty by one of the parties remains unaffected. The overrun of delivery
deadlines by more than 2 months shall be regarded as a serious breach of
duty.
16.4 Regardless of the reason for the termination of this Agreement, all
outstanding credits and liabilities resulting from previous orders
accepted prior to the date of termination shall continue to remain in
force.
17. CONFIDENTIALITY
17.1 Either party shall keep strictly confidential and secret towards third
parties the existence of this Agreement, related working results arising
from this Agreement as well as technical and commercial information
obtained from the other party under this Agreement as long and as far as
this information is not in the public domain or unless the disclosing
party waived further secrecy in writing. This obligation of
confidentiality terminates five years after expiration of this Agreement.
17.2 ISS Inc. and Nagano, to the extent they have a need to know information
arising from this Agreement as well as technical or commercial
information received from RB for the purposes set forth above, shall not
be deemed third parties provided they abide by the obligations of this
Agreement. Insofar, ISS shall be fully responsible to ensure that the
obligations of this Agreement are respected by ISS Inc. and Nagano.
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17.3 Neither party hereto may, without the prior written consent of the other
party, disclose or publish the name of the other party or the contents
of this Agreement in any advertisement, publicity release or the like.
18. MISCELLANEOUS
18.1 All prior negotiations between the parties are merged in this Agreement.
This Agreement including all its annexes constitutes the entire
agreement between the parties with respect to the subject matter hereof,
and there are no understandings, representations or warranties of any
kind except as expressly set forth therein, notwithstanding sections 4.2
to 4.4 of the Development Agreement.
18.2 Changes and additions to this Agreement - including this Article 18 as
well as any additional agreement must be made in writing in order to
become legally effective.
18.3 If one of the provisions of this Agreement becomes invalid, this shall
not affect the contract's remaining provisions. Instead of the
provision that has become invalid, a new provision shall come into
effect which shall come as near as possible to the business aims of both
parties. The same applies with regard to agreement loopholes.
19. APPLICABLE LAW/PLACE OF JURISDICTION
This Agreement shall be governed by the substantive laws of Germany to
the exclusion of the provisions for conflict of laws and international
conventions relating to the sale of goods.
Place of jurisdiction shall be Stuttgart/Germany.
Dresden, 04.11.1996 Stuttgart, 22.10.1996
ISS-NAGANO GMBH ROBERT BOSCH GMBH
/s/ WOLFRAM BEYER /S/ KLAUS G. BORCHERS
- ------------------------ --------------------------
9
<PAGE>
Nagano Keiki Seisakusho Ltd., Tokyo, Japan, and ISS Inc. read and approve
the conditions herein and are prepared to sell and deliver the sensor
subassembly and printed circuit board and, after establishment of the relevant
production lines to be accomplished not later than Dec. 31, 1997, also the
Products to Bosch at the terms and conditions as stipulated hereinabove in order
to ensure timely fulfillment of this agreement, in case ISS is prevented from
doing so.
Tokyo, 11.18.1996 San Jose, 11.11.1996
Nagano Keiki Seisakusho Ltd. ISS Inc., San Jose, CA., USA
/s/ SHIGERU MIYASHITO /s/ RAMESH SIRSI
- ----------------------------------- ----------------------------------------
APPENDIX 1: Product Specification and Model Drawing
APPENDIX 2: Delivery Forecast
APPENDIX 3: Quality Assurance Guide for Suppliers
APPENDIX 4: Price Projection
APPENDIX 5: Loan Contract
10
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 1
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 2
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 3
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 4
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 5
[ ]
<PAGE>
MONTAGUE OAKS ASSOCIATES PHASE III,
a California limited partnership
Landlord
and
INTEGRATED SENSOR SOLUTIONS, INC.,
a California corporation
Tenant
LEASE
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Use.................................................................. 1
2. Term................................................................. 1
3. Possession........................................................... 2
4. Monthly Rent......................................................... 2
(a) Basic Rent...................................................... 2
(b) Common Area Charges............................................. 2
(c) Manner and Place of Payment..................................... 2
(d) Second Month's Rent............................................. 3
(e) Security Deposit................................................ 3
5. Adjustment of Basic Rent............................................. 3
6. Restriction on Use................................................... 4
7. Compliance with Laws................................................. 4
8. Alterations.......................................................... 5
9. Repair and Maintenance............................................... 6
10. Liens................................................................ 6
11. Insurance............................................................ 7
12. Utilities and Service................................................ 9
13. Taxes and Other Charges.............................................. 9
14. Entry by Landlord....................................................10
15. Common Area; Parking.................................................10
16. Common Area Charges..................................................11
17. Damage By Fire; Casualty.............................................12
18. Indemnification......................................................14
19. Assignment and Subletting............................................14
20. Default..............................................................17
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TABLE OF CONTENTS
PAGE
----
21. Landlord's Right to Cure Tenant's Default............................18
22. Eminent Domain.......................................................19
23. Notice and Covenant to Surrender.....................................19
24. Tenant's Quitclaim...................................................20
25. Holding Over.........................................................20
26. Subordination........................................................21
27. Certificate of Estoppel..............................................21
28. Sale by Landlord.....................................................21
29. Attornment to Lender or Third Party..................................21
30. Default by Landlord..................................................22
31. Construction Changes.................................................22
32. Measurement of Premises..............................................22
33. Attorney Fees........................................................22
34. Surrender............................................................23
35. Waiver...............................................................23
36. Easements; Airspace Rights...........................................23
37. Rules and Regulations................................................23
38. Notices..............................................................24
39. Name.................................................................24
40. Governing Law; Severability..........................................24
41. Definitions..........................................................24
42. Time.................................................................25
43. Interest on Past Due Obligations; Late Charges.......................25
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TABLE OF CONTENTS
PAGE
----
44. Entire Agreement.....................................................25
45. Corporate Authority..................................................26
46. Recording............................................................26
47. Real Estate Brokers..................................................26
48. Exhibits and Attachments.............................................26
49. Environmental Matters................................................26
(a) Tenant's Covenants Regarding Hazardous Materials................26
(i) Hazardous Materials Handling..............................26
(ii) Notices...................................................27
(b) Indemnification of Landlord.....................................27
(c) Survival........................................................28
50. Signage..............................................................28
51. Submission of Lease..................................................28
52. Tenant Improvements..................................................29
53. Additional Rent......................................................29
54. Option to Extend Term................................................29
55. Right of First Negotiation...........................................30
iii
<PAGE>
LEASE
THIS LEASE is made this 2nd day of June, 1994, by and between MONTAGUE OAKS
ASSOCIATES PHASE III, a California limited partnership ("Landlord") and
INTEGRATED SENSOR SOLUTIONS, INC., a California corporation ("Tenant").
WITNESSETH:
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises") commonly known as 625
River Oaks Parkway, San Jose, California, which Landlord and Tenant hereby
agree consists of approximately seventeen thousand four hundred seventy
(17,470) square feet in the Project. As used herein the term "Project" shall
mean and include all of the land described in Exhibit B and all the
buildings, improvements, fixtures and equipment now or hereafter situated on
said land.
Tenant covenants, as a material part of the consideration of this lease,
to perform and observe each and all of the terms, covenants and conditions
set forth below, and this lease is made upon the condition of such
performance and observance.
1. USE. Subject to the restrictions contained in paragraph 6 hereof,
Tenant shall use the Premises for general office, research and development
and final assembly and test of components and shall not use or permit the
Premises to be used for any other purpose.
2. TERM.
(a) The term shall be for five (5) years (unless sooner terminated as
hereinafter provided) and, subject to paragraphs 2 (b) and 3, shall commence
on July 1, 1994 and end on June 30, 1999.
(b) Possession of the Premises shall not be deemed tendered and the
term shall not commence until the first to occur of the following:
(i) One day after a final building permit acknowledging completion
and permitting occupancy is granted by the proper governmental agency;
(ii) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(iii) Upon substantial completion of all work to be done by Landlord
pursuant to Exhibit C to this lease, exclusive of telephones or other
communication systems and punchlist items, or, if Landlord is prevented from
or delayed in completing its work under Exhibit C to this lease due to the
acts or omissions of Tenant, then upon the date by which such work would have
been substantially completed but for such acts or omissions by Tenant.
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3. POSSESSION.
(a) If Landlord for any reason cannot deliver possession of the
Premises to Tenant by the scheduled commencement date set forth in paragraph
2 (a), this lease shall not be void or voidable, Landlord shall not be liable
to Tenant for any loss or damage on account thereof and, unless Landlord's
failure to deliver possession of the Premises to Tenant by the scheduled
commencement date set forth in paragraph 2 (a) is caused by Tenant caused
delays as defined in Exhibit C to this lease, Tenant shall not be liable for
rent until the commencement of the term is determined in accordance with
paragraph 2 (b). If the term commences on a date other than the date
specified in paragraph 2 (a) above, then the parties shall immediately
execute an amendment to this lease stating the actual date of commencement
and the revised expiration date. The expiration date of the term shall be
extended by the same number of days that Tenant's possession of the Premises
was delayed from that set forth in paragraph 2 (a).
(b) Tenant's inability or failure to take possession of the Premises
when delivery is tendered by Landlord (with the improvements to be done
pursuant to Exhibit C to this lease substantially completed) shall not delay
the commencement of the term of this lease or Tenant's obligation to pay
rent. Tenant acknowledges that Landlord shall incur significant expenses
upon the execution of this lease, even if Tenant never takes possession of
the Premises, including without limitation brokerage commissions and fees,
reasonable legal and other reasonable professional fees, the costs of space
planning and the costs of construction of improvements in the Premises.
Tenant acknowledges that all of said expenses shall be included in measuring
Landlord's damages should Tenant breach the terms of this lease.
4. MONTHLY RENT.
(a) BASIC RENT. Tenant shall pay to Landlord, in advance, as basic
rent for the Premises and subject to adjustment as provided in paragraph 5,
the sum of Eight Thousand Three Hundred Eighty-five Dollars and Sixty Cents
($8,385.60) on or before the first day of the first full calendar month of
the term and on or before the first day of each and every successive calendar
month, except that no basic rent shall be due for the first and twelfth
months of the lease. Basic rent for any partial month shall be payable in
advance and shall be prorated at the rate of 1/30th of the monthly basic rent
per day.
(b) COMMON AREA CHARGES. In addition to the above basic rent and as
additional rent, Tenant shall pay to Landlord, subject to adjustments and
reconciliation as provided in paragraph 16 of this lease, the sum of Two
Thousand Five Hundred Fifty Dollars and Sixty-Two Cents ($2,550.62) on or
before the first day of the first full calendar month of the term and on the
first day of each and every successive calendar month, said sum representing
Tenant's estimated payment of its percentage share of common area charges as
provided for in paragraph 16 of this lease. Payment of common area charges
for any partial month shall be payable in advance and shall be prorated at
the rate of 1/30th of the monthly payment of common area charges per day.
2
<PAGE>
(c) MANNER AND PLACE OF PAYMENT. All payments of basic rent and common
area charges shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, at the office of Landlord at
3945 Freedom Circle, Suite 640, Santa Clara, California 95054, or to such
other person or place as Landlord may from time to time designate in writing.
(d) SECOND MONTH'S RENT. Concurrently with Tenant's execution of this
lease, Tenant shall deposit with Landlord the sum of Ten Thousand Nine
Hundred Thirty-six Dollars and Twenty-two Cents ($10,936.22) to be applied
against the basic rent and common area charges for the second lease month of
the term.
(e) SECURITY DEPOSIT. Concurrently with Tenant's execution of this
lease, Tenant shall deposit with Landlord the sum of Eleven Thousand One
Hundred Eighty-one Dollars ($11,181), which sum shall be held by Landlord as
a security deposit for the faithful performance by Tenant of all of the
terms, covenants and conditions of this lease to be kept and performed by
Tenant. If Tenant defaults with respect to any provision of this lease,
including but not limited to, the provisions relating to the payment of basic
rent and common area charges, Landlord may (but shall not be required to)
use, apply, or retain all or any part of this security deposit for the
payment of any amount which Landlord may spend by reason of Tenant's default
or to compensate Landlord for any other loss or damage which Landlord may
suffer by reason of default. If any portion of said deposit is so used,
Tenant shall, within ten (10) days after written demand therefor, deposit
cash with Landlord in the amount sufficient to restore the security deposit
to the original amount thereof; Tenant's failure to do so shall be a material
breach of this lease. Landlord shall not be required to keep this security
deposit separate from its general funds and Tenant shall not be entitled to
interest on such deposit. If Tenant is not in default at the expiration or
termination of this lease, the security deposit or any balance thereof shall
be returned to Tenant after Tenant has vacated the Premises. In the event of
termination of Landlord's interest in this lease, Landlord shall transfer
said deposit to Landlord's successor in interest, and Tenant agrees that
Landlord shall thereupon be released from liability for the return of such
deposit or any accounting therefor.
5. ADJUSTMENT OF BASIC RENT. The basic rent provided for in paragraph 4
(a) shall be adjusted periodically and the monthly basic rent for each period
shall be as set forth below:
Year 1
------
Lease Months 1 - 12 $8,385.60 per month
Year 2
------
Lease Months 13 - 24 $10,482.00 per month
Year 3
------
Lease Months 25 - 36 $11,704.90 per month
Year 4
------
Lease Months 37 - 48 $13,102.50 per month
Year 5
------
3
<PAGE>
Lease Months 49 - 60 $13,626.60 per month
6. RESTRICTION ON USE. Tenant shall not do or permit to be done in or
about the Premises or the Project, nor bring or keep or permit to be brought
or kept in or about the Premises or Project, anything which is prohibited by
or will in any way increase the existing rate of, or otherwise affect, fire
or any other insurance covering the Project or any part thereof, or any of
its contents, or will cause a cancellation of any insurance covering the
Project or any part thereof, or any of its contents. Tenant shall not do or
permit to be done anything in or about the Premises or the Project which will
constitute waste or which will in any way obstruct or interfere with the
rights of other tenants or occupants of the Project or injure or annoy them,
or use or allow the Premises to be used for any unlawful purpose, nor shall
Tenant cause, maintain or permit any nuisance in or about the Premises or the
Project. No loudspeaker or other device, system or apparatus which can be
heard outside the Premises shall be used in or at the Premises without the
prior written consent of Landlord. Tenant shall not use the Premises in any
manner that will cause or emit any objectionable odor, noise or light into
the adjoining premises or Common Area. Tenant shall not do anything on the
Premises that will cause damage to the Project and Tenant shall not overload
the floor capacity of the Premises or the Project. No machinery, apparatus
or other appliance shall be used or operated in or on the Premises that will
in any manner injure, vibrate or shake the Premises. Landlord shall be the
sole judge, of whether such odor, noise, light or vibration is such as to
violate the provisions of this paragraph. No waste materials or refuse shall
be dumped upon or permitted to remain upon any part of the Premises or the
Project except in trash containers placed inside exterior enclosures
designated for that purpose by Landlord, or where otherwise designated by
Landlord; and no toxic or hazardous materials shall be disposed of through
the plumbing or sewage system. No materials, supplies, equipment, finished
products or semi-finished products, raw materials or articles of any nature
shall be stored or permitted to remain outside of the building proper. No
retail sales shall be made on the Premises. Tenant shall comply with any
covenant, condition or restriction ("C.C. & R.'s") now or hereafter affecting
the Premises.
7. COMPLIANCE WITH LAWS. Tenant shall, in connection with its use and
occupation of the Premises, at its sole cost and expense, promptly observe
and comply with (i) all laws, statutes, ordinances and governmental rules,
regulations and requirements of federal, state, county, municipal and other
governmental authorities, now or hereafter in effect, which shall impose any
duty upon Landlord or Tenant with respect to the use, occupancy or alteration
of the Premises, (ii) with the requirements of any board of fire underwriters
or other similar body now or hereafter constituted and (iii) with any
direction or occupancy certificate issued pursuant to law by any public
authority; provided, however, that no such failure shall be deemed a breach
of these provisions if Tenant, immediately upon notification, commences to
remedy or rectify said failure. The judgment of any court of competent
jurisdiction or the admission of Tenant in any action against Tenant (whether
or not Landlord is a party thereto) that Tenant has violated any such law,
statute, ordinance or governmental rule, regulation, requirement, direction
or provision, shall be conclusive of that fact as between Landlord and
Tenant. This lease shall remain in full force and effect notwithstanding any
loss of use or other effect on Tenant's enjoyment of the Premises by reason
of any governmental laws, statutes, ordinances, rules, regulations and
requirements now or hereafter in effect.
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8. ALTERATIONS. Tenant shall not make or suffer to be made any
alteration, addition or improvement to or of the Premises or any part thereof
(collectively referred to herein as "alterations") without (i) the prior
written consent of Landlord, (ii) a valid building permit issued by the
appropriate governmental authority and (iii) otherwise complying with all
applicable laws, regulations and requirements of governmental agencies having
jurisdiction and with the rules, regulations and requirements of any board of
fire underwriters or similar body. Notwithstanding the foregoing, Tenant may
make alterations to the Premises costing in the aggregate less than Five
Thousand Dollars ($5,000.00) per year without the prior written consent of
Landlord; provided, however, that (i) no such alterations shall be made to
the structural elements or building systems in the Premises, (ii) Tenant
shall give Landlord at least one (1) day written notice of its intent to
commence such alterations, and (iii) Tenant shall comply with all other
provisions of this paragraph 8 with respect to such alterations, other than
the obligation to obtain Landlord's prior written consent thereto.
Landlord's consent to any requested alteration or agreement to permit
alterations without Landlord's consent shall not create on the part of
Landlord or cause Landlord to incur any responsibility or liability for such
alteration's compliance with all laws, rules and regulations of federal,
state, county, municipal and other governmental authorities. Any alteration
made by Tenant (excluding moveable furniture and trade fixtures not attached
to the Premises) shall at once become a part of the Premises and belong to
Landlord. Without limiting the foregoing, all heating, lighting, electrical
(including all wiring, conduit, outlets, drops, buss ducts, main and
subpanels) , air conditioning, partitioning, drapery and carpet installations
made by Tenant, regardless of how attached to the Premises, together with all
other alterations that have become an integral part of the Project in which
the Premises are a part, shall be and become part of the Premises and belong
to Landlord upon installation and shall not be deemed trade fixtures, and
shall remain upon and be surrendered with the Premises at the termination of
the lease.
Any alterations made by Tenant shall be made by Tenant at its sole risk,
cost and expense and only after Landlord's written approval of any contractor
or person selected by Tenant for that purpose, and the same shall be made at
such time and in such manner as Landlord may from time to time designate.
Tenant shall, if required by Landlord, secure at Tenant's cost a completion
and lien indemnity bond for such work. Upon the expiration or sooner
termination of the term, Landlord may, at its sole option, require Tenant, at
Tenant's sole cost and expense, to promptly both remove any such alteration
made by Tenant and designated by Landlord to be removed and repair any damage
to the Premises caused by such removal, and restore the Premises to the
condition that existed prior to such alteration in accordance with all
applicable laws, statutes, building codes and regulations in effect as of the
date of such restoration. Tenant improvements originally provided by
Landlord shall not be alterations for purposes of this lease. Any moveable
furniture and equipment or trade fixtures remaining on the Premises at the
expiration or other termination of the term shall become the property of the
Landlord unless promptly removed by Tenant.
If during the term any alteration, addition or change of the Premises is
required by law, regulation, ordinance or order of any public authority due
to Tenant's specific use, occupancy, or alteration to the Premises, Tenant,
at its sole cost and expense, shall promptly make the same. If during the
term any alterations, additions or changes to the Common Area or to the
Project in
5
<PAGE>
which the Premises is located is required by law, regulation, ordinance or
order of any public or quasi-public authority, and it is impractical in
Landlord's judgment for the affected tenants to individually make such
alterations, additions or changes, Landlord shall make such alterations,
additions or changes and the cost thereof shall be a common area charge and
Tenant shall pay its percentage share of such cost to Landlord as provided in
paragraph 16.
9. REPAIR AND MAINTENANCE. By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair (excepting
only "punch list items"). Except as expressly provided below, Tenant shall
at its sole cost keep and maintain the entire Premises and every part thereof
including, without limitation, the windows, window frames, plate glass,
glazing, truck doors, doors and all door hardware, the interior walls and
partitions, lighting and the electrical, mechanical, and plumbing systems.
Tenant shall also repair and maintain the heating and air conditioning
systems (unless Landlord has elected to keep and maintain the heating and air
conditioning systems as provided below) which shall include, without
limitation, a periodic maintenance agreement with a reputable and licensed
heating and air conditioning service company. If Tenant's use of the heating
and air conditioning systems is limited to normal business hours (8:00 a.m.
to 6:00 p.m.) such agreement shall provide for service at least as often as
every 90 days; if Tenant's use of the heating or air conditioning systems
extends beyond such normal business hours this service shall be as often as
may be required by Landlord and in any event such service shall meet all
warranty enforcement requirements of such equipment and comply with all
manufacturer recommended maintenance. Landlord may elect, at its option, to
keep and maintain the heating and air conditioning systems of the Premises
and in such event, Tenant shall pay to Landlord upon demand the full cost of
such maintenance. Notwithstanding the foregoing, prior to the commencement
of the term of the lease, Landlord shall make such repairs, if any, necessary
to cause the existing heating, ventilating, and air conditioning units
serving the Premises to operate in accordance with the specifications for
such systems based upon twelve (12) hours per day, five (5) days per week.
If major repairs or replacements (other than routine maintenance and repair)
to the heating, ventilating, and air conditioning units serving the Premises
become necessary during the first ninety (90) days commencing with the
commencement of the term of the lease, then Landlord shall make such major
repairs and replacements at its sole cost and expense.
Subject to the provisions of paragraph 17, Landlord shall keep and
maintain the roof, structural elements, building foundations, and exterior
walls of the buildings constituting the Project and Common Area in good order
and repair. Tenant waives all rights under and benefits of California Civil
Code Sections 1932(1), 1941, and 1942 and under any similar law, statute or
ordinance now or hereafter in effect. The cost of the repairs and
maintenance which are the obligation of Landlord hereunder, including without
limitation, maintenance contracts and supplies, materials, equipment and
tools used in such repairs and maintenance shall be a common area charge and
Tenant shall pay its percentage share of such costs to Landlord as provided
in paragraph 16; provided, however, that if any repairs or maintenance is
required because of an act or omission of Tenant, or its agents, employees or
invitees, Tenant shall pay to Landlord upon demand the full cost of such
repairs or maintenance.
6
<PAGE>
10. LIENS. Tenant shall keep the Premises and the Project free from any
liens arising out of any work performed, materials furnished or obligations
incurred by Tenant, its agents, employees or contractors. Upon Tenant's
receipt of a preliminary twenty (20) day notice filed by a claimant pursuant
to California Civil Code Section 3097, Tenant shall immediately provide
Landlord with a copy of such notice. Should any lien be recorded against the
Project, Tenant shall give immediate notice of such lien to Landlord. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums
paid by Landlord for such purpose, and all expenses (including attorneys'
fees) incurred by it in connection therewith, shall be payable to Landlord by
Tenant on demand with interest at the rate of twelve percent (12%) per annum
or the maximum rate permitted by law, whichever is less. Landlord shall have
the right at all times to post and keep posted on the Premises any notices
permitted or required by law, or which Landlord shall deem proper for the
protection of Landlord, the Premises and the Project and any other party
having an interest therein, from mechanics' and materialmen's liens and like
liens. Tenant shall give Landlord at least fifteen (15) days prior notice of
the date of commencement of any construction on the Premises in order to
permit the posting of such notices. In the event Tenant is required to post
an improvement bond with a public agency in connection with any work
performed by Tenant on or to the Premises, Tenant shall include Landlord as
an additional obligee.
11. INSURANCE. Tenant, at its sole cost and expense, shall keep in force
during the term (i) commercial general liability and property damage
insurance with a combined single limit of at least $2,000,000 per occurrence
insuring against personal or bodily injury to or death of persons occurring
in, on or about the Premises or Project and any and all liability of the
insureds with respect to the Premises or arising out of Tenant's maintenance,
use or occupancy of the Premises and all areas appurtenant thereto, (ii)
direct physical loss-special insurance covering the leasehold improvements in
the Premises and all of Tenant's equipment, trade fixtures, appliances,
furniture, furnishings, and personal property from time to time located in,
on or about the Premises, with coverage in the amount of the full replacement
cost thereof, and (iii) Worker's Compensation Insurance as required by law,
together with employer's liability coverage with a limit of not less than
$1,000,000 for bodily injury for each accident and for bodily injury by
disease for each employee. Tenant's commercial general liability and
property damage insurance and Tenant's Workers Compensation Insurance shall
be endorsed to provide that said insurance shall not be canceled or reduced
except upon at least thirty (30) days prior written notice to Landlord.
Further, Tenant's commercial general liability and property damage insurance
shall be primary and shall be endorsed to provide that Landlord and
McCandless Management Corporation, and their respective partners, officers,
directors and employees and such other persons or entities as directed from
time to time by Landlord shall be named as additional insureds for all
liability using ISO Bureau Form CG20111185 (or a successor form) or such
other endorsement form reasonably acceptable to Landlord; shall contain a
severability of interest clause and a cross-liability endorsement; shall be
endorsed to provide that the limits and aggregates apply per location using
ISO Bureau Form CG25041185 (or a successor form) or such other endorsement
form reasonably acceptable to Landlord; and shall be issued by an
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insurance company admitted to transact business in the State of California
and rated A+VIII or better in Best's Insurance Reports (or a successor
report). The deductibles for all insurance required to be maintained by
Tenant hereunder shall be satisfactory to Landlord. The commercial general
liability insurance carried by Tenant shall specifically insure the
performance by Tenant of the indemnification provisions set forth in
paragraph 18 of this lease provided, however, nothing contained in this
paragraph 11 shall be construed to limit the liability of Tenant under the
indemnification provisions set forth in said paragraph 18. If Landlord or
any of the additional insureds named on any of Tenant's insurance, have other
insurance which is applicable to the covered loss on a contributing, excess
or contingent basis, the amount of the Tenant's insurance company's liability
under the policy of insurance maintained by Tenant shall not be reduced by
the existence of such other insurance. Any insurance carried by Landlord or
any of the additional insureds named on Tenant's insurance policies shall be
excess and non-contributing with the insurance so provided by Tenant.
Tenant shall, prior to the commencement of the term and at least thirty
(30) days prior to any renewal date of any insurance policy required to be
maintained by Tenant pursuant to this paragraph, provide Landlord with a
completed Certificate of Insurance, using a form acceptable in Landlord's
reasonable judgment, attaching thereto copies of all endorsements required to
be provided by Tenant under this lease. Tenant agrees to increase the
coverage or otherwise comply with changes in connection with said commercial
general liability, property damage, direct physical loss and Worker's
Compensation Insurance as Landlord or Landlord's lender may from time to time
require.
Landlord shall obtain and keep in force a policy or policies of insurance
covering loss or damage to the Premises and Project, in the amount of the
full replacement value thereof, providing protection against those perils
included within the classification of "all risk" insurance, with increased
cost of reconstruction and contingent liability (including demolition), plus
a policy of rental income insurance in the amount of one hundred percent
(100%) of twelve (12) months' rent (including sums paid as additional rent)
and such other insurance as Landlord or Landlord's lender may from time to
time require. Landlord may, but shall not be obligated to, obtain flood
and/or earthquake insurance. Landlord shall have no liability to Tenant if
Landlord elects not to obtain flood and/or earthquake insurance. The cost of
all such insurance purchased by Landlord, plus any charges for deferred
payment of premiums and the amount of any deductible incurred upon any
covered loss within the Project, shall be common area charges and Tenant
shall pay to Landlord its percentage share of such costs as provided in
paragraph 16. If the cost of insurance is increased due to Tenant's use of
the Premises, then Tenant shall pay to Landlord upon demand the full cost of
such increase.
Landlord and Tenant hereby mutually waive any and all rights of recovery
against one another for real or personal property loss or damage occurring to
the Premises or the Project, or any part thereof, or to any personal property
therein, from perils insured against under fire and extended insurance and
any other property insurance policies existing for the benefit of the
respective parties so long as such insurance permits waiver of liability and
contains a waiver of subrogation without additional premiums.
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If Tenant does not take out and maintain insurance as required pursuant to
this paragraph 11, Landlord may, but shall not be obligated to, take out the
necessary insurance and pay the premium therefor, and Tenant shall repay to
Landlord promptly on demand, as additional rent, the amount so paid. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
additional rent, any and all reasonable expenses (including attorney fees)
and damages which Landlord may sustain by reason of the failure of Tenant to
obtain and maintain such insurance, it being expressly declared that the
expenses and damages of Landlord shall not be limited to the amount of the
premiums thereon.
12. UTILITIES AND SERVICE. Tenant shall pay for all water, gas, light,
heat, power, electricity, telephone, trash pickup, sewer charges and all
other services supplied to or consumed on the Premises. In the event that
any service is not separately metered or billed to the Premises, the cost of
such utility service or other service shall be a common area charge and
Tenant shall pay its percentage share of such cost to Landlord as provided in
paragraph 16. In addition, the cost of all utilities and services furnished
by Landlord to the Common Area shall be a common area charge and Tenant shall
pay its percentage share of such cost to Landlord as provided in paragraph 16.
If Tenant's use of any such utility or service is materially in excess of
the average furnished to the other tenants of the Project, and such utility
or service is not separately metered, then Tenant shall pay to Landlord upon
demand, as additional rent, the full cost of such excess use, or Landlord may
cause such utility or service to be separately metered, in which case Tenant
shall pay the full cost of such utility or service and reimburse Landlord
upon demand for the cost of installing the separate meter.
Landlord shall not be liable for, and Tenant shall not be entitled to any
abatement or reduction of rent by reason of, the failure of any person or
entity to furnish any of the foregoing services when such failure is caused
by accident, breakage, repairs, strikes, lockouts or other labor disturbances
or labor disputes of any character, governmental moratoriums, regulations or
other governmental actions, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord. In addition, Tenant shall not be
relieved from the performance of any covenant or agreement in this lease
because of any such failure, and no eviction of Tenant shall result from such
failure.
13. TAXES AND OTHER CHARGES. All real estate taxes and assessments and
other taxes, fees and charges of every kind or nature, foreseen or
unforeseen, which are levied, assessed or imposed upon Landlord and/or
against the Premises, building, Common Area or Project, or any part thereof
by any federal, state, county, regional, municipal or other governmental or
quasi-public authority, together with any increases therein for any reason,
shall be a common area charge and Tenant shall pay its percentage share of
such costs to Landlord as provided in paragraph 16. By way of illustration
and not limitation, "other taxes, fees and charges" as used herein include
any and all taxes payable by Landlord (other than state and federal personal
or corporate income taxes measured by the net income of Landlord from all
sources, and premium taxes) , whether or not now customary or within the
contemplation of the parties hereto, (i) upon, allocable to, or measured by
the rent payable hereunder, including, without limitation, any gross
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income or excise tax levied by the local, state or federal government with
respect to the receipt of such rent, (ii) upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises or any part thereof, (iii) upon or
measured by the value of Tenant's personal property or leasehold improvements
located in the Premises, (iv) upon this transaction or any document to which
Tenant is a party creating or transferring an interest or estate in the
Premises, (v) upon or with respect to vehicles, parking or the number of
persons employed in or about the Project, and (vi) any tax, license,
franchise fee or other imposition upon Landlord which is otherwise measured
by or based in whole or in part upon the Project or any portion thereof. If
Landlord contests any such tax, fee or charge, the reasonable cost and
expense incurred by Landlord thereby (including, but not limited to,
reasonable costs of attorneys and experts) shall also be common area charges
and Tenant shall pay its percentage share of such costs to Landlord as
provided in paragraph 16. In the event the Premises and any improvements
installed therein by Tenant or Landlord are valued by the assessor
disproportionately higher than those of other tenants in the building or
Project or in the event alterations or improvements are made to the Premises,
Tenant's percentage share of such taxes, assessments, fees and/or charges
shall be readjusted upward accordingly and Tenant agrees to pay such
readjusted share. Such determination shall be made by Landlord from the
respective valuations assigned in the assessor's work sheet or such other
information as may be reasonably available and Landlord's determination
thereof shall be conclusive.
Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed during the term hereof upon Tenant's equipment, furniture, fixtures
and other personal property located in the Premises, including carpeting and
other property installed by Tenant notwithstanding that such carpeting or
other property has become a part of the Premises. If any of Tenant's
personal property shall be assessed with the Project, Tenant shall pay to
Landlord, as additional rent, the amount attributable to Tenant's personal
property within thirty (30) days after receipt of a written statement from
Landlord setting forth the amount of such taxes, assessments and public
charges attributable to Tenant's personal property.
14. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable
times have the right, upon reasonable prior notice to Tenant, except in an
emergency, to enter the Premises (i) to inspect the Premises, (ii) to supply
services to be provided by Landlord hereunder, (iii) to show the Premises to
prospective purchasers, lenders or tenants and to put 'for sale' or 'for
lease' signs thereon, (iv) to post notices required or allowed by this lease
or by law, (v) to alter, improve or repair the Premises and any portion of
the Project, and (vi) to erect scaffolding and other necessary structures in
or through the Premises or the Project where reasonably required by the
character of the work to be performed. During Landlord's entry into the
Premises for any of the foregoing purposes, Landlord shall not unreasonably
interfere with Tenant's use of the Premises; provided, however, Landlord
shall not be liable in any manner for any inconvenience, disturbance, loss of
business, nuisance or other damage arising from Landlord's entry and acts
pursuant to this paragraph and Tenant shall not be entitled to an abatement
or reduction of rent if Landlord exercises any rights reserved in this
paragraph. For each of the foregoing purposes, Landlord shall at all times
have and retain a key with which to unlock all of the doors in, on and about
the Premises (excluding Tenant's vaults, safes and similar areas designated
in writing by Tenant in advance), and Landlord shall have the right to use
any and all means which Landlord
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may deem proper to open said doors in an emergency in order to obtain entry
to the Premises. Any entry by Landlord to the Premises pursuant to this
paragraph shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
15. COMMON AREA; PARKING. Subject to the terms and conditions of this
lease and such rules and regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees and invitees shall, in common with
other occupants of the Project, and their respective employees and invitees
and others entitled to the use thereof, have the nonexclusive right to use
the access roads, parking areas and facilities within the Project provided
and designated by Landlord for the general use and convenience of the
occupants of the Project which areas and facilities shall include, but not be
limited to, sidewalks, parking, refuse, landscape and plaza areas, roofs and
building exteriors, which areas and facilities are referred to herein as
"Common Area." This right shall terminate upon the termination of this lease.
Landlord reserves the right from time to time to make changes in the
shape, size, location, amount and extent of the Common Area. Landlord shall
also have the right at any time to change the name, number or designation by
which the Project is commonly known. Landlord further reserves the right to
promulgate such rules and regulations relating to the use of the Common Area,
and any part thereof, as Landlord may deem appropriate for the best interests
of the occupants of the Project. The rules and regulations shall be binding
upon Tenant upon delivery of a copy of them to Tenant and Tenant shall abide
by them and cooperate in their observance. Such rules and regulations may be
amended by Landlord from time to time, with or without advance notice.
Tenant shall have the nonexclusive use of sixty-nine (69) parking spaces
in the Common Area as designated from time to time by Landlord. During the
initial term of this lease, or any extension thereof, Landlord shall not
impose any charge on Tenant for the use of the parking spaces except for any
charges that are imposed by applicable governmental agencies having
jurisdiction for the use of such parking spaces. Landlord reserves the right
at its sole option to assign and label parking spaces, but it is specifically
agreed that Landlord is not responsible for policing any such parking spaces.
Tenant shall not at any time park or permit the parking of Tenant's trucks
or other vehicles, or the trucks or other vehicles of others, adjacent to
loading areas so as to interfere in any way with the use of such areas; nor
shall Tenant at any time park or permit the parking of Tenant's vehicles or
trucks, or the vehicles or trucks of Tenant's suppliers or others, in any
portion of the Common Area not designated by Landlord for such use by Tenant.
Tenant shall not park or permit any inoperative vehicle or equipment to be
parked on any portion of the Common Area.
Landlord shall operate, manage and maintain the Common Area. The manner
in which the Common Area shall be operated, managed and maintained and the
expenditures for such operation, management and maintenance shall be at the
sole discretion of Landlord. The reasonable cost of such maintenance,
operation and management of the Common Area, including but not limited to
landscaping, repair of paving, parking lots and sidewalks, security and
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exterminator services and salaries and employee benefits (including union
benefits) of on-site and accounting personnel engaged in such maintenance and
operations management, shall be a common area charge and Tenant shall pay to
Landlord its percentage share of such costs as provided in paragraph 16.
16. COMMON AREA CHARGES. Tenant shall pay to Landlord, as additional
rent, an amount equal to nineteen and seventy-five one hundredths percent
(19.75%) of the total common area charges as defined below. Tenant's
percentage share of common area charges is determined by the square footage
of the Premises (17,470 square feet) divided by the total square footage of
the Project (88,450 square feet). Tenant's percentage share of common area
charges shall be paid as follows:
Tenant's estimated monthly payment of common area charges payable by
Tenant during the calendar year in which the term commences is set forth in
paragraph 4 (b) of this lease. Prior to the commencement of each succeeding
calendar year of the term (or as soon as practicable thereafter), Landlord
shall deliver to Tenant a written estimate of Tenant's monthly payment of
common area charges. Tenant shall pay, as additional rent, on the first day
of each month during the term in accordance with paragraph 4 (b) of this
lease, its monthly share of common area charges as estimated by Landlord.
Within one hundred twenty (120) days of the end of each calendar year and of
the termination of this lease (or as soon as practicable thereafter) ,
Landlord shall deliver to Tenant a statement of actual common area charges
incurred for the preceding year. If such statement shows that Tenant has
paid less than its actual percentage then Tenant shall on demand pay to
Landlord the amount of such deficiency. If Tenant fails to pay such excess
amount due within ten (10) days after demand, Tenant shall pay an additional
ten percent (10%) of the amount due as a penalty. If such statement shows
that Tenant has paid more than its actual percentage share then Landlord
shall, at its option, promptly refund such excess to Tenant or credit the
amount thereof to the rent next becoming due from Tenant. Landlord reserves
the right to revise any estimate of common area charges if actual or
projected common area charges show an increase or decrease in excess of 10%
from any earlier estimate for the same period. In such event, Landlord shall
deliver the revised estimate to Tenant, together with an explanation of the
reasons therefor, and Tenant shall revise its payments accordingly.
Landlord's and Tenant's obligation with respect to adjustments at the end of
the term or earlier expiration of this lease shall survive such termination
or expiration.
"Common area charges," as used in this lease, shall include, but not be
limited to, (i) all items identified in paragraphs 8, 9, 11, 12, 13 and 15 as
being common area charges; (ii) amortization of such capital improvements
having a useful life greater than one year required to be made by Landlord to
the Common Area pursuant to this lease or that Landlord may have installed
for the purpose of reducing operating costs and/or to comply all laws, rules
and regulations of federal, state, county, municipal and other governmental
authorities now or hereinafter in effect (Tenant's share of any such capital
improvement shall equal Tenant's proportionate share of the fraction of the
cost of such capital improvement equal to the remaining term of the lease
over the useful life of such capital improvement and the determination of
what constitutes a capital improvement and the useful life thereof shall be
reasonably made by Landlord in accordance with generally accepted accounting
principles); (iii) salaries and
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employee benefits (including union benefits) of personnel engaged in the
operation and maintenance of the Project (or the building in which the
Premises are located) and payroll taxes applicable thereto; (iv) supplies,
materials, equipment and tools used or required in connection with the
operation and maintenance of the Project; (v) licenses, permits and
inspection fees; (vi) a reasonable reserve for repairs and replacement of
equipment used in the maintenance and operation of the Project; and (vii) all
other reasonable operating costs incurred by Landlord in maintaining and
operating the Project.
17. DAMAGE BY FIRE; CASUALTY. In the event the Premises are damaged by
any casualty which is covered under an insurance policy required to be
maintained by Landlord pursuant to paragraph 11, Landlord shall be entitled
to the use of all insurance proceeds and shall repair such damage as soon as
reasonably possible and this lease shall continue in full force and effect.
In the event the Premises are damaged by any casualty not covered under an
insurance policy required to be maintained pursuant to paragraph 11, Landlord
may, at Landlord's option, either (i) repair such damage, at Landlord's
expense, as soon as reasonably possible, in which event this lease shall
continue in full force and effect, or (ii) give written notice to Tenant
within thirty (30) days after the date of the occurrence of such damages of
Landlord's intention to cancel and terminate this lease as of the date of the
occurrence of the damages; provided, however, that if such damage is caused
by an act or omission of Tenant or its agent, servants or employees, then
Tenant shall repair such damage promptly at its sole cost and expense. In
the event Landlord elects to terminate this lease pursuant hereto, Tenant
shall have the right within ten (10) days after receipt of the required
notice to notify Landlord in writing of Tenant's intention to repair such
damage at Tenant's expense, without reimbursement from Landlord, in which
event this lease shall continue in full force and effect and Tenant shall
proceed to make such repairs as soon as reasonably possible. If Tenant does
not give such notice within the ten (10) day period, this lease shall be
cancelled and terminated as of the date of the occurrence of such damage.
Under no circumstances shall Landlord be required to repair any injury or
damage to (by fire or other cause), or to make any restoration or replacement
of, any of Tenant's personal property, trade fixtures or property leased from
third parties, whether or not the same is attached to the Premises.
If the Premises are totally destroyed during the term from any cause
(including any destruction required by any authorized public authority)
whether or not covered by the insurance required under paragraph 11, this
lease shall automatically terminate as of the date of such total destruction;
provided, however, that if the Premises can reasonably and lawfully be
repaired or restored within twelve (12) months of the date of destruction to
substantially the condition existing prior to such destruction and if the
proceeds of the insurance payable to the Landlord by reason of such
destruction are sufficient to pay the cost of such repair or restoration,
then the insurance proceeds shall be so applied, Landlord shall promptly
repair and restore the Premises and this lease shall continue, without
interruption, in full force and effect.
If Landlord is required or has elected to restore damage caused by a
casualty, regardless of whether or not such casualty is covered under an
insurance policy required to be maintained
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by Landlord, Landlord shall give written notice to Tenant within thirty (30)
days of the date of the event of damage or destruction setting forth
Landlord's reasonable estimate of the period required to effect the repair.
If such period is in excess of one hundred eighty (180) days, then provided
Tenant is not in default hereunder and that the damage was not caused by
Tenant or its agents, invitees, or employees, Tenant shall have, within three
(3) days after the date of such notice, the right to terminate this lease by
written notice of such election delivered to Landlord within said three (3)
day period. Failure of Tenant to so notify Landlord within said three (3)
day period shall constitute Tenant's irrevocable election not to terminate
this lease. If Tenant gives written notice of termination within said three
(3) day period, then the lease shall automatically terminate as of the date
of such damage or destruction. If Tenant does not elect to terminate the
lease within said three (3) day period, the lease shall remain in full force
and effect, and Landlord shall repair the Premises in accordance with this
paragraph 17. If the Premises are totally destroyed during the last twelve
(12) months of the term, either party may cancel and terminate this lease as
of the date of occurrence of such damage by giving written notice to the
other party of such party's election to do so within thirty (30) days after
the occurrence of such damage.
If the Premises are partially or totally destroyed or damaged and Landlord
or Tenant repair them pursuant to this lease, the rent payable hereunder for
the period during which such damage and repair continues shall be abated only
in proportion to the square footage of the Premises rendered untenantable to
Tenant by such damage or destruction. Tenant shall have no claim against
Landlord for any damage, loss or expense suffered by reason of any such
damage, destruction, repair or restoration. The parties waive the provisions
of California Civil Code sections 1932(2) and 1933(4) (which provisions
permit the termination of a lease upon destruction of the leased premises),
and hereby agree that the provisions of this paragraph 17 shall govern in the
event of such destruction.
18. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant
hereby waives all claims against Landlord for any injury to or death of any
person or damage to or destruction of property in or about the Premises or
the Project by or from any cause whatsoever except the failure of Landlord to
perform its obligations under this lease where such failure has persisted for
an unreasonable period of time after notice of such failure. Without
limiting the foregoing, Landlord shall not be liable to Tenant for any injury
to or death of any person or damages to or destruction of property by reason
of, or arising from, any latent defect in the Premises or Project or the act
or negligence of any other tenant of the Project. Tenant shall immediately
notify Landlord of any defect in the Premises or Project.
Except as to injury to persons or damage to property the principal cause
of which is the failure by Landlord to observe any of the terms and
conditions of this lease, Tenant shall hold Landlord harmless from and defend
Landlord against any claim, liability, loss, damage or expense (including
attorney fees) arising out of any injury to or death of any person or damage
to or destruction of property occurring in, on or about the Premises from any
cause whatsoever or on account of the use, condition, occupational safety or
occupancy of the Premises. Tenant shall further hold Landlord harmless from
and defend Landlord against any claim, liability, loss, damage or expense
(including reasonable attorney fees) arising (i) from Tenant's use of the
Premises or from the conduct of its business or from any activity or work
done, permitted or
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suffered by Tenant or its agents or employees in or about the Premises or
Project, (ii) out of the failure of Tenant to observe or comply with Tenant's
obligation to observe and comply with laws or other requirements as set forth
in paragraph 7, (iii) by reason of Tenant's use, handling, storage, or
disposal of toxic or hazardous materials or waste, (iv) by reason of any
labor or service performed for, or materials used by or furnished to, Tenant
or any contractor engaged by Tenant with respect to the Premises, or (v) from
any other act, neglect, fault or omission of Tenant or its agents or
employees.
The provisions of this paragraph 18 shall survive the expiration or
earlier termination of this lease.
19. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily assign,
encumber or otherwise transfer its interest in this lease or in the Premises,
or sublease all or any part of the Premises, or allow any other person or
entity to occupy or use all or any part of the Premises, without first
obtaining Landlord's written consent and otherwise complying with the
requirements of this paragraph 19. Any assignment, encumbrance or sublease
without Landlord's consent, shall constitute a default.
If Tenant desires to sublet or assign all or any portion of the Premises,
Tenant shall give Landlord written notice thereof, specifying the projected
commencement date of the proposed sublet or assignment (which date shall be
not less than thirty (30) days or more than ninety (90) days after the date
of such notice), the portions of the Premises proposed to be sublet or
assigned, and the identity of the proposed assignee or subtenant. Tenant
shall further provide Landlord with such other information concerning the
proposed assignee or subtenant as requested by Landlord. Any proposed
assignee or sublessee must agree to assume and agree to perform all the
covenants and conditions of Tenant under this lease, to the extent applicable
to the assigned or subleased premises. In the case of any proposed
assignment, or in the case of a proposed sublet of all of the Premises at a
time when Tenant has not occupied the Premises, or if the proposed sublet is
for the entire Premises for a sublet term ending within the last twelve (12)
months of the term of this lease, Landlord shall have the right, exercisable
by written notice to be delivered to Tenant within thirty (30) days of
receipt of Tenant's notice, to terminate this lease effective as of the date
specified in Tenant's notice as the proposed commencement date of the
assignment or sublease. If Landlord does not elect to terminate this lease
and if Landlord consents in writing to the proposed assignment or sublet,
Tenant shall be free to assign or sublet all or a portion of the Premises
subject to the following conditions: (i) any sublease shall be on the same
terms set forth in the notice given to Landlord; (ii) no sublease shall be
valid and no subtenant shall take possession of the sublet premises until an
executed counterpart of such sublease has been delivered to Landlord; (iii)
no subtenant shall have a further right to sublet; (iv) fifty percent (50%)
of any sums or other economic consideration received by Tenant as a result of
such assignment or sublet (except rental or other payments received which are
attributable to the amortization over the term of this lease of the cost of
leasehold improvements constructed for such assignees or subtenant, and
brokerage fees) whether denominated rentals or otherwise, which exceed, in
the aggregate, the total sums which Tenant is obligated to pay Landlord under
this lease (prorated to reflect obligations allocable to that portion of the
Premises subject to such sublease), shall be payable to Landlord as
additional rent under this lease without
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affecting or reducing any other obligation of Tenant hereunder; and (v) no
sublet or assignment shall release Tenant of Tenant's obligation or alter the
primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder. Tenant shall pay to
Landlord promptly upon demand as additional rent, Landlord's actual
attorneys' fees (not to exceed $500 if Tenant uses Landlord's standard form
of assignment, sublease, or consent) and other costs incurred for reviewing,
processing or documenting any requested assignment or sublease, whether or
not Landlord's consent is granted. Tenant shall not be entitled to assign
this lease or sublease all or any part of the Premises (and any attempt to do
so shall be voidable by Landlord) during any period in which Tenant is in
default under this lease.
If Tenant is a partnership, a withdrawal or change, voluntary or
involuntary or by operation of law, of any general partner or the dissolution
of the partnership shall be deemed an assignment of this lease subject to all
the conditions of this paragraph 19. If Tenant is a corporation, sale or
other transfer of a controlling percentage of the capital stock of Tenant
shall be an assignment of this lease subject to all the conditions of this
paragraph 19. The term "controlling percentage" means the ownership of, and
the right to vote, stock possessing more than 50% of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding and
entitled to vote. This paragraph shall not apply if Tenant is a corporation
the stock of which is traded through an exchange. Notwithstanding anything
contained in this paragraph 19, Tenant may, without Landlord's prior written
consent and without triggering any recapture right on the part of Landlord,
sublet the Premises or assign the lease to a (i) subsidiary, affiliate,
division, or corporation controlled or under common control with Tenant, (ii)
a successor corporation related to Tenant by merger, consolidation, or other
reorganization, or (iii) a purchaser of all or substantially all of Tenant's
assets so long as Tenant provides evidence satisfactory to Landlord that
Tenant is the surviving entity, the net worth of the assignee or subtenant is
greater than or equal to the net worth of Tenant at the execution of this
lease, the use and occupancy of the Premises shall remain the same, and
Tenant remains fully liable under the lease.
The acceptance of rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provision hereof. Consent to one
assignment or sublet shall not be deemed consent to any subsequent assignment
or sublet. In the event of default by any assignee of Tenant or any
successor of Tenant in the performance of any of the terms hereof, Landlord
may proceed directly against Tenant without the necessity of exhausting
remedies against such assignee or successor. Landlord may consent to
subsequent assignments or sublets of this lease or amendments or
modifications to this lease with assignees of Tenant, without notifying
Tenant, or any successor of Tenant, and without obtaining its or their
consent thereto and such action shall not relieve Tenant of liability under
this lease.
No interest of Tenant in this lease shall be assignable by operation of
law (including, without limitation, the transfer of this lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a
partnership or consists of more than one person or entity, if any partner of
the partnership or other person or entity is or becomes bankrupt
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or insolvent, or makes an assignment for the benefit of creditors; (ii) if a
writ of attachment or execution is levied on this lease; or (iii) if, in any
proceeding or action to which Tenant is a party, a receiver is appointed with
authority to take possession of the Premises. An involuntary assignment
shall constitute a default by Tenant and Landlord shall have the right to
elect to terminate this lease, in which case this lease shall not be treated
as an asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as security for
Tenant's obligations under this lease, all rent from any subletting of all or
a part of the Premises as permitted by this lease, and Landlord, as assignee
and as attorney-in-fact for Tenant, or a receiver of Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this lease; except that, until the occurrence of an act or
default by Tenant, Tenant shall have the right to collect such rent,, subject
to promptly forwarding to Landlord any portion thereof to which Landlord is
entitled pursuant to this paragraph 19.
20. DEFAULT. The occurrence of any of the following shall constitute a
default by Tenant: (i) failure of Tenant to pay any rent or other sum
payable hereunder within five (5) days of when due; (ii) abandonment of the
Premises (Tenant's failure to occupy and conduct business in the Premises for
fourteen (14) consecutive days shall be deemed an abandonment); or (iii)
failure of Tenant to perform any other term, covenant or condition of this
lease if the failure to perform is not cured within thirty (30) days after
notice thereof has been given to Tenant (provided that if such default cannot
reasonably be cured within thirty (30) days, Tenant shall not be in default
if Tenant commences to cure such failure to perform within the thirty (30)
day period and diligently and in good faith continues to cure the failure to
perform). The notice referred to in clause (iii) above shall specify the
failure to perform and the applicable lease provision and shall demand that
Tenant perform the provisions of this lease within the applicable period of
time. No notice shall be deemed a forfeiture or termination of this lease
unless Landlord so elects in the notice. No notice shall be required in the
event of abandonment or vacation of the Premises.
In addition to the above, the occurrence of any of the following events
shall also constitute a default by Tenant: (i) Tenant fails to pay its debts
as they become due or admits in writing its inability to pay its debts, or
makes a general assignment for the benefit of creditors (for purposes of
determining whether Tenant is not paying its debts as they become due, a debt
shall be deemed overdue upon the earliest to occur of the following: thirty
(30) days from the date a statement therefor has been rendered; the date on
which any action or proceeding therefor is commenced; or the date on which a
formal notice of default or demand has been sent); or (ii) any financial
statements given to Landlord by Tenant, any assignee of Tenant, subtenant of
Tenant, any guarantor of Tenant, or successor in interest of Tenant
(including, without limitation, any schedule of Tenant's aged accounts
payable) are materially false. At any time during the term of this lease
Landlord, at Landlord's option, shall have the right to receive from Tenant,
upon Landlord's request, a current annual balance sheet for Landlord's
review. If the balance sheet shows a negative net worth, Landlord may
terminate this lease by giving Tenant sixty (60) days prior written notice.
In the event of a default by Tenant, then Landlord, in addition to any
other rights and
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remedies of Landlord at law or in equity, shall have the right either to
terminate Tenant's right to possession of the Premises (and thereby terminate
this lease) or, from time to time and without termination of this lease, to
relet the Premises or any part thereof for the account and in the name of
Tenant for such term and on such terms and conditions as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs
to the Premises.
Should Landlord elect to keep this lease in full force and effect,
Landlord shall have the right to enforce all of Landlord's rights and
remedies under this lease, including but not limited to the right to recover
and to relet the Premises and such other rights and remedies as Landlord may
have under California Civil Code Section 1951.4 or successor Code section or
any other California statute. If Landlord relets the Premises, then Tenant
shall pay to Landlord, as soon as ascertained, the costs and expenses
incurred by Landlord in such reletting and in making alterations and repairs.
Rentals received by Landlord from such reletting shall be applied (i) to the
payment of any indebtedness due hereunder, other than basic rent and common
area charges, from Tenant to Landlord; (ii) to the payment of the cost of any
repairs necessary to return the Premises to good condition normal wear and
tear excepted, including the cost of alterations and the cost of storing any
of Tenant's property left on the Premises at the time of reletting; and (iii)
to the payment of basic rent or common area charges due and unpaid hereunder.
The residue, if any, shall be held by Landlord and applied in payment of
future rent or damages in the event of termination as the same may become due
and payable hereunder and the balance, if any at the end of the term of this
lease, shall be paid to Tenant. Should the basic rent and common area
charges received from time to time from such reletting during any month be
less than that agreed to be paid during that month by Tenant hereunder,
Tenant shall pay such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. No such reletting of the Premises by Landlord
shall be construed as an election on its part to terminate this lease unless
a notice of such intention is given to Tenant or unless the termination
hereof is decreed by a court of competent jurisdiction. Notwithstanding any
such reletting without termination, Landlord may at any time thereafter elect
to terminate this lease for such previous breach, provided it has not been
cured.
Should Landlord at any time terminate this lease for any breach, in
addition to any other remedy it may have, it shall have the immediate right
of entry and may remove all persons and property from the Premises and shall
have all the rights and remedies of a landlord provided. by California Civil
Code Section 1951.2 or any successor code section. Upon such termination, in
addition to all its other rights and remedies, Landlord shall be entitled to
recover from Tenant all damages it may incur by reason of such breach,
including the cost of recovering the Premises and including (i) the worth at
the time of award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent 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; (iii) the worth at the time of the award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to
perform its obligations under this lease or which in the ordinary course of
events would be likely to result therefrom. The "worth at the time of award"
of the
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amounts referred to in (i) and (ii) above is computed by allowing interest at
the rate of twelve percent (12%) per annum. The "worth at the time of award"
of the amount referred to in (iii) above shall be computed by discounting
such amount at the discount rate of the federal reserve bank of San Francisco
at the time of award plus one percent (1%). Tenant waives the provisions of
Section 1179 of the California Code of Civil Procedure (which Section allows
Tenant to petition a court of competent jurisdiction for relief against
forfeiture of this lease). Property removed from the Premises may be stored
in a public or private warehouse or elsewhere at the sole cost and expense of
Tenant. In the event that Tenant shall not immediately pay the cost of
storage of such property after the same has been stored for a period of
thirty (30) days or more, Landlord may sell any or all thereof at a public or
private sale in such manner and at such times and places that Landlord, in
its sole discretion, may deem proper, without notice to or demand upon Tenant.
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. Landlord, at any time
after Tenant commits a default, may, but shall not be obligated to, cure the
default at Tenant's cost. If Landlord at any time, by reason of Tenant's
default, pays any sum or does any act that requires the payment of any sum,
the sum paid by Landlord shall be due immediately from Tenant to Landlord and
shall bear interest at the rate of twelve percent (12%) per annum or the
maximum rate permitted by law, whichever is less, from the date the sum is
paid by Landlord until Landlord is reimbursed by Tenant. Amounts due
Landlord hereunder shall be additional rent.
22. EMINENT DOMAIN. If all or any part of the Premises shall be taken by
any public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this lease shall terminate as to any portion of
the Premises so taken or conveyed on the date when title vests in the
condemnor, and Landlord shall be entitled to any and all payments, income,
rent, award or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance. Tenant shall have no claim
against Landlord or otherwise for the value of any unexpired term of this
lease. Notwithstanding the foregoing, Tenant shall be entitled to any
compensation for depreciation to and cost of removal of Tenant's equipment
and fixtures and any compensation for its relocation expenses necessitated by
such taking, but in each case only to the extent the condemning authority
makes a separate award there for or specifically identifies a portion of the
award as being therefor. Each party waives the provisions of Section
1265.130 of the California code of Civil Procedure (which section allows
either party to petition the Superior Court to terminate this lease in the
event of a partial taking of the Premises).
If any action or proceeding is commenced for such taking of the Premises
or any portion thereof or of any other space in the Project, or if Landlord
is advised in writing by any entity or body having the right or power of
condemnation of its intention to condemn the Premises or any portion thereof
or of any other space in the Project, and Landlord shall decide to
discontinue the use and operation of the Project or decide to demolish, alter
or rebuild the Project, then Landlord shall have the right to terminate this
lease by giving Tenant written notice thereof within sixty (60) days of the
earlier of the date of Landlord's receipt of such notice of intention to
condemn or the commencement of said action or proceeding. Such termination
shall be effective as of the last day of the calendar month next following
the month in which such notice is given or the date on which title shall vest
in the condemnor, whichever occurs first.
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In the event of a partial taking, or conveyance in lieu thereof, of the
Premises and fifty percent (50%) or more of tie number of square feet in the
Premises are taken then Tenant may terminate this lease. Any election by
Tenant to so terminate shall be by written notice given to Landlord within
sixty (60) days from the date of such taking or conveyance and shall be
effective on the last day of the calendar month next following the month in
which such notice is given or the date on which title shall vest in the
condemnor, whichever occurs first.
If a portion of the Premises is taken by power of eminent domain or
conveyance in lieu thereof and neither Landlord nor Tenant terminates this
lease as provided above, then this lease shall continue in full force and
effect as to the part of the Premises not so taken or conveyed and all
payments of rent shall be apportioned as of the date of such taking or
conveyance so that thereafter the amounts to be paid by Tenant shall be in
the ratio that the area of the portion of the Premises not so taken bears to
the total area of the Premises prior to such taking.
23. NOTICE AND COVENANT TO SURRENDER. On the last day of the term or on
the effective date of any earlier termination, Tenant shall surrender to
Landlord the Premises and all of Tenant's improvements and alterations in
their condition existing as of the commencement of the term (normal wear and
tear excepted) with all originally painted interior walls washed or repainted
if marked or damaged, interior vinyl covered walls cleaned and repaired or
replaced if marked or damaged, all carpets shampooed and cleaned, the air
conditioning and heating system serviced and repaired by a reputable and
licensed service firm (unless Landlord has elected to maintain such system
pursuant to paragraph 9) and all floors cleaned and waxed; all to the
reasonable satisfaction of Landlord. On or prior to the last day of the term
or the effective date of any other earlier termination, Tenant shall remove
all of Tenant's personal property and trade fixtures, together with the
improvements or alterations that Tenant is obligated to remove pursuant to
the provisions of paragraph 8 (unless, prior to installation of such
alterations, Landlord has agreed in writing with Tenant that removal of such
alterations is not required pursuant to paragraph 8), from the Premises,
repair any damage caused by such removal, and restore such areas to the
condition that existed prior to the installation of such trade fixtures or
alterations in accordance with all applicable laws, statutes, building codes
and regulations in effect as of the date of such restoration. Any personal
property not removed shall be deemed abandoned. In addition, on or prior to
the expiration or earlier termination of this lease, Tenant shall remove, at
Tenant's sole cost and expense, all telephone, other communication, computer
and any other cabling and wiring of any sort installed in the space above the
suspended ceiling of the Premises or anywhere else in the Premises and shall
promptly repair any damage to the suspended ceiling, lights, light fixtures,
walls and any other part of the Premises resulting from such removal.
If the Premises are not surrendered as required in this paragraph, Tenant
shall indemnify Landlord against all loss, liability and expense (including
but not limited to, attorney fees) resulting from the failure by Tenant in so
surrendering the Premises, including, without limitation, any claims made by
any succeeding tenants. It is agreed between Landlord and Tenant that the
provisions of this paragraph shall survive termination of this lease.
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24. TENANT'S QUITCLAIM. At the expiration or earlier termination of this
lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) days after written demand from Landlord to Tenant, any quitclaim deed or
other document required to remove the cloud or encumbrance created by this
lease from the real property of which the Premises are a part. This
obligation shall survive said expiration or termination.
25. HOLDING OVER. Any holding over after the expiration or termination of
this lease with the written consent of Landlord shall be construed to be a
tenancy from month to month at the monthly rent, as adjusted, in effect on
the date of such expiration or termination. All provisions of this lease,
except those pertaining to the term and any option to extend, shall apply to
the month to month tenancy. The provisions of this paragraph are in addition
to, and do not affect, Landlord's right of reentry or other rights hereunder
or provided by law.
If Tenant shall retain possession of the Premises or any part thereof
without Landlord's consent following the expiration or sooner termination of
this lease for any reason, then Tenant shall pay to Landlord for each day of
such retention one hundred twenty-five percent (125%) of the amount of the
daily rental in effect during the last month prior to the date of such
expiration or termination. Tenant shall also indemnify and hold Landlord
harmless from any loss, liability and expense (including, but not limited to,
attorneys fees) resulting from delay by Tenant in surrendering the Premises,
including without limitation any claims made by any succeeding tenant founded
on such delay. Acceptance of rent by Landlord following expiration or
termination shall not constitute a renewal of this lease, and nothing
contained in this paragraph shall waive Landlord's right of re-entry or any
other right. Tenant shall be only a tenant at sufferance, whether or not
Landlord accepts any rent from Tenant, while Tenant is holding over without
Landlord's written consent.
26. SUBORDINATION. In the event Landlord's title or leasehold interest is
now or hereafter encumbered in order to secure a loan to Landlord, Tenant
shall, at the request of Landlord or the lender, execute in writing an
agreement subordinating its rights under this lease to the lien of such
encumbrance, or, if so requested, agreeing that the lien of lender's
encumbrance shall be or remain subject and subordinate to the rights of
Tenant under this lease. Notwithstanding any such subordination, Tenant's
possession under this lease shall not be disturbed if Tenant is not in
default and so long as Tenant shall pay all amounts due hereunder and
otherwise observe and perform all provisions of this lease. In addition, if
in connection with any such loan the lender shall request reasonable
modifications of this lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereof, provided that such
modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
27. CERTIFICATE OF ESTOPPEL. Each party shall, within ten (10) calendar
days after request therefor, execute and deliver to the other party, in
recordable form, a certificate stating that the lease is unmodified and in
full force and effect, or in full force and effect as modified and stating
the modifications. The certificate shall also state the amount of the
monthly rent, the date to which monthly rent has been paid in advance, the
amount of the security deposit and/or prepaid monthly rent, and, if the
request is made by Landlord, shall include such other items as
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Landlord or Landlord's lender may reasonably request. Failure to deliver
such certificate within such time shall constitute a conclusive
acknowledgment by the party failing to deliver the certificate that the lease
is in full force and effect and has not been modified except as may be
represented by the party requesting the certificate. Any such certificate
requested by Landlord may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises or Project. Further, within ten
(10) calendar days following written request made from time to time by
Landlord, Tenant shall furnish to Landlord current financial statements of
Tenant.
28. SALE BY LANDLORD. In the event the original Landlord hereunder, or
any successor owner of the Project or Premises, shall sell or convey the
Project or Premises, all liabilities and obligations on the part of the
original Landlord, or such successor owner, under this lease accruing
thereafter shall terminate, and thereupon all such liabilities and
obligations shall be binding upon the new owner. Tenant agrees to attorn to
such new owner and to look solely to such new owner for performance of any
and all such liabilities and obligations.
29. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of
Landlord in the land and buildings in which the Premises are located (whether
such interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust and such interest is acquired by a lender or any
other third party through judicial foreclosure or by exercise of a power of
sale at private trustee's foreclosure sale, Tenant hereby agrees to release
Landlord of any obligation arising on or after any such foreclosure sale and
to attorn to the purchaser at any such foreclosure sale and to recognize such
purchaser as the Landlord under this lease.
30. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time,
but in no event earlier than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises specifying wherein Landlord has failed to perform such
obligations; provided, however, that if the nature of Landlord's obligations
is such that more than thirty (30) days are required for performance, then
Landlord shall not be in default if Landlord commences performance within
such thirty (30) day period and thereafter diligently prosecutes the same to
completion.
If Landlord is in default of this lease, Tenant's sole remedy shall be to
institute suit against Landlord in a court of competent jurisdiction, and
Tenant shall have no right to offset any sums expended by Tenant as a result
of Landlord's default against future rent and other sums due and payable
pursuant to this lease. If Landlord is in default of this lease, and as a
consequence Tenant recovers a money judgment against Landlord, the judgment
shall be satisfied only out of the proceeds of sale received on execution of
the judgment and levy against the right, title and interest of Landlord in
the Project of which the Premises are a part, and out of rent or other income
from such real property receivable by Landlord or out of the consideration
received by Landlord from the sale or other disposition of all or any part of
Landlord's right, title and interest in the Project of which the Premises are
a part. Neither Landlord nor any of the partners comprising the partnership
designated as Landlord shall be personally liable for any deficiency.
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31. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein
are subject to such changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises and/or the
improvements constructed or being constructed therein, and no such changes or
any changes in plans for any other portions of the Project, shall affect this
lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
32. MEASUREMENT OF PREMISES. Tenant understands and agrees that any
reference to square footage of the Premises is approximate only and includes
all interior partitions and columns, one-half of exterior walls, and one-half
of the partitions separating the Premises from the rest of the Project,
Tenant's proportionate share of the Common Area and, if applicable, covered
areas immediately outside the entry doors or loading docks. Tenant waives
any claim against Landlord regarding the accuracy of any such measurement and
agrees that there shall not be any adjustment in basic rent or common area
charges or other amounts payable hereunder by reason of inaccuracies in such
measurement.
33. ATTORNEY FEES. If either party commences an action against the other
party arising out of or in connection with this lease, the prevailing party
shall be entitled to have and recover from the losing party all expenses of
litigation, including, without limitation, travel expenses, attorney fees,
expert witness fees, trial and appellate court costs, and deposition and
transcript expenses. If either party becomes a party to any litigation
concerning this lease, or concerning the Premises or the Project, solely by
reason of any act or omission of the other party or its authorized
representatives, the party that causes the other party to become involved in
the litigation shall be liable to the other party for all expenses of
litigation, including, without limitation, travel expenses, attorney fees,
expert witness fees, trial and appellate court costs, and deposition and
transcript expenses.
34. SURRENDER. The voluntary or other surrender of this lease or the
Premises by Tenant, or a mutual cancellation of this lease, shall not work a
merger, and at the option of Landlord shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies.
35. WAIVER. No delay or omission in the exercise of any right or remedy
of Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the
balance of such payment due. No act or conduct of Landlord, including,
without limitation, the acceptance of keys to the Premises, shall constitute
an acceptance of the surrender of the Premises by Tenant before the
expiration of the term. Only a written notice from Landlord to Tenant shall
constitute acceptance of the surrender of the Premises and accomplish a
termination of this lease. Landlord's consent to or approval of any act by
Tenant requiring Landlord's consent or approval shall not be deemed to waive
or render unnecessary Landlord's consent to or approval of any subsequent act
by Tenant. Any waiver by Landlord of any default must be in writing and
shall not be a waiver of any other default concerning the same or any other
provision of this lease.
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36. EASEMENTS; AIRSPACE RIGHTS. Landlord reserves the right to alter the
boundaries of the Project and grant easements and dedicate for public use
portions of the Project without Tenant's consent, provided that no such grant
or dedication shall interfere with Tenant's use of the Premises or otherwise
cause Tenant to incur cost or expense. From time to time, and upon
Landlord's demand, Tenant shall execute, acknowledge and deliver to Landlord,
in accordance with Landlord's instructions, any and all documents,
instruments, maps or plats necessary to effectuate Tenant's covenants
hereunder.
This lease confers no rights either with regard to the subsurface of or
airspace above the land on which the Project is located or with regard to
airspace above the building of which the Premises are a part. Tenant agrees
that no diminution or shutting off of light or view by a structure which is
or may be erected (whether or not by Landlord) on property adjacent to the
building of which the Premises are a part or to property adjacent thereto,
shall in any way affect this lease, or entitle Tenant to any reduction of
rent, or result in any liability of Landlord to Tenant.
37. RULES AND REGULATIONS. Landlord shall have the right from time to
time to promulgate rules and regulations for the safety, care and cleanliness
of the Premises, the Project and the Common Area, or for the preservation of
good order. On delivery of a copy of such rules and regulations to Tenant,
Tenant shall comply with the rules and regulations, and a violation of any of
them shall constitute a default by Tenant under this lease. If there is a
conflict between the rules and regulations and any of the provisions of this
lease, the provisions of this lease shall prevail. Such rules and
regulations may be amended by Landlord from time to time with or without
advance notice.
38. NOTICES. All notices, demands, requests, consents and other
communications which may be given or are required to be given by either party
to the other shall be in writing and shall be sufficiently made and delivered
if personally served or if sent by United States first class mail, postage
prepaid. Prior to the commencement date, all such communications from
Landlord to Tenant shall be served or addressed to Tenant at 1023 Meridian
Avenue, San Jose, CA 95125 on or after the commencement date all such
communications from Landlord to Tenant shall be addressed to Tenant at the
Premises. All such communications by Tenant to Landlord shall be sent to
Landlord at its offices at 3945 Freedom Circle, Suite 640, Santa Clara,
California 95054. Either party may change its address by notifying the other
of such change. Each such communication shall be deemed received on the date
of the personal service or mailing thereof in the manner herein provided, as
the case may be.
39. NAME. Tenant shall not use the name of the Project for any purpose,
other than as the address of the business conducted by Tenant in the
Premises, without the prior written consent of Landlord.
40. GOVERNING LAW; SEVERABILITY. This lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this lease shall be held or rendered
invalid, unenforceable or ineffective for any reason whatsoever, all other
provisions hereof shall be and remain in full force and effect.
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41. DEFINITIONS. As used in this lease, the following words and phrases
shall have the following meanings:
AUTHORIZED REPRESENTATIVE: any officer, agent, employee or
independent contractor retained or employed by either party, acting within
authority given him by that party.
ENCUMBRANCE: any deed of trust, mortgage or other written security
device or agreement affecting the Premises or the Project that constitutes
security for the payment of a debt or performance of an obligation, and the
note or obligation secured by such deed of trust, mortgage or other written
security device or agreement.
LEASE MONTH: the period of time determined by reference to the day of
the month in which the term commences and continuing to one day short of the
same numbered day in the next succeeding month; e.g., the tenth day of one
month to and including the ninth day in the next succeeding month.
LENDER: the beneficiary, mortgagee or other holder of an encumbrance,
as defined above.
LIEN: a charge imposed on the Premises by someone other than
Landlord, by which the Premises are made security-for the performance of an
act. Most of the liens referred to in this lease are mechanic's liens.
MAINTENANCE: repairs, replacement, repainting and cleaning.
MONTHLY RENT: the sum of the monthly payments of basic rent and
common area charges.
PERSON: one or more human beings, or legal entities or other
artificial persons, including, without limitation, partnerships,
corporations, trusts, estates, associations and any combination of human
being and legal entities.
PROVISION: any term, agreement, covenant, condition, clause,
qualification, restriction, reservation or other stipulation in the lease
that defines or otherwise controls, establishes or limits the performance
required or permitted by either party.
RENT: basic rent, common area charges, additional rent, and all other
amounts payable by Tenant to Landlord required by this lease or arising by
subsequent actions of the parties made pursuant to this lease. Words used in
any gender include other genders. If there be more than one Tenant, the
obligations of Tenant hereunder are joint and several. All provisions
whether covenants or conditions, on the part of Tenant shall be deemed to be
both covenants and conditions. The paragraph headings are for convenience of
reference only and shall have no effect upon the construction or
interpretation of any provision hereof.
42. TIME. Time is of the essence of this lease and of each and all of its
provisions.
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43. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGES. Any amount due from
Tenant to Landlord hereunder which is not paid when due shall bear interest
at the rate of ten percent (10%) per annum from when due until paid, unless
otherwise specifically provided herein, but the payment of such interest
shall not excuse or cure any default by Tenant under this lease. In
addition, Tenant acknowledges that late payment by Tenant to Landlord of
basic rent or common area charges or of any other amount due Landlord from
Tenant, will cause Landlord to incur costs not contemplated by this lease,
the exact amount of such costs being extremely difficult and impractical to
fix. Such costs include, without limitation, processing and accounting
charges, and late charges that may be imposed on Landlord, e.g., by the terms
of any encumbrance and note secured by any encumbrance covering the Premises.
Therefore, if any such payment due from Tenant is not received by Landlord
when due, Tenant shall pay to Landlord an additional sum of five percent (5%)
of the overdue payment 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. 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 the other rights
and remedies available to Landlord. No notice to Tenant of failure to pay
shall be required prior to the imposition of such interest and/or late
charge, and any notice period provided for in paragraph 20 shall not affect
the imposition of such interest and/or late charge. Any interest and late
charge imposed pursuant to this paragraph shall be and constitute additional
rent payable by Tenant to Landlord.
44. ENTIRE AGREEMENT. This lease, including any exhibits and attachments,
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this lease and the exhibits and attachments may be altered,
amended or revoked only by an instrument in writing signed by both Landlord
and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves or their agents
or representatives relative to the leasing of the Premises are merged in or
revoked by this lease.
45. CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this lease on behalf of the corporation represents and warrants
that he is duly authorized to execute and deliver this lease on behalf of the
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation and that this lease is binding upon said
corporation in accordance with its terms. If Tenant is a corporation, Tenant
shall deliver to Landlord, within ten (10) days of the execution of this
lease, a copy of the resolution of the Board of Directors of Tenant
authorizing the execution of this lease and naming the officers that are
authorized to execute this lease on behalf of Tenant, which copy shall be
certified by Tenant's president or secretary as correct and in full force and
effect.
46. RECORDING. Neither Landlord nor Tenant shall record this lease or a
short form memorandum hereof without the consent of the other.
47. REAL ESTATE BROKERS. Each party represents and warrants to the other
party that it has not had dealings in any manner with any real estate broker,
finder or other person with respect to the Premises and the negotiation and
execution of this lease except Grubb & Ellis and CPS. Except as to
commissions and fees to be paid as provided in this paragraph, each party
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shall indemnify and hold harmless the other party from all damage, loss,
liability and expense (including attorneys' fees and related costs) arising
out of or resulting from any claims for commissions or fees that may or have
been asserted against the other party by any broker, finder or other person
with whom Tenant or Landlord has or purportedly has dealt with in connection
with the Premises and the negotiation and execution of this lease. To the
extent agreed to between Landlord and Grubb & Ellis and CPS, Landlord shall
pay all broker leasing commissions to Grubb & Ellis and CPS incurred in
connection with the Premises and the negotiation and execution of this lease;
Landlord and Tenant agree that Landlord shall not be obligated to pay any
broker leasing commissions, consulting fees, finder fees or any other fees or
commissions arising out of or relating to any extended term of this lease or
to any expansion or relocation of the Premises at any time.
48. EXHIBITS AND ATTACHMENTS. All exhibits and attachments to this lease
are a part hereof.
49. ENVIRONMENTAL MATTERS.
(a) TENANT'S COVENANTS REGARDING HAZARDOUS MATERIALS.
(i) HAZARDOUS MATERIALS HANDLING. Tenant, its agents, invitees,
employees, contractors, sublessees, assigns and/or successors shall not use,
store, dispose, release or otherwise cause to be present or permit the use,
storage, disposal, release or presence of Hazardous Materials (as defined
below) on or about the Premises or Project. Notwithstanding the foregoing,
Tenant may use reasonable quantities of in connection with Tenant's
operations in the Premises; provided, however, that such Hazardous Materials
shall be used, stored, disposed, and transported in strict compliance with
all applicable Hazardous Materials Laws (as defined below). As used herein
"Hazardous Materials" shall mean any petroleum or petroleum by-products,
flammable explosives, asbestos, urea formaldehyde, radioactive materials or
waste and any "hazardous substance," "hazardous waste," "hazardous
materials," "toxic substance" or "toxic waste" as those terms are defined
under the provisions of the California Health and Safety Code and/or the
provisions of the Comprehensive Environmental Response, compensation and
Liability Act (42 U.S.C. Section 9601 ET SEQ.) as amended by the Superfund
Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9601 ET SEQ.),
or any other hazardous or toxic substance, material or waste which is or
becomes regulated by any local governmental authority, the State of
California or any agency thereof, or the United States Government or any
agency thereof.
(ii) NOTICES. Tenant shall immediately notify Landlord in writing
of: (i) any enforcement, cleanup, removal or other governmental or regulatory
action instituted, completed or threatened pursuant to any law, regulation or
ordinance relating to the industrial hygiene, environmental protection or the
use, analysis, generation, manufacture, storage, presence, disposal or
transportation of any Hazardous Materials (collectively "Hazardous Materials
Laws"), (ii) any claim made or threatened by any person against Tenant, the
Premises, Project or buildings within the Project relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or
claimed to result from any Hazardous Materials;
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and (iii) any reports made to any environmental agency arising out of or in
connection with any Hazardous Materials in, on or removed from the Premises,
Project or buildings within the Project, including any complaints, notices,
warnings, reports or asserted violations in connection therewith. Tenant
shall also supply to Landlord as promptly as possible, and in any event
within five (5) business days after Tenant first receives or sends the same,
with copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the Premises, Project or buildings within
the Project or Tenant's use thereof. Tenant shall promptly deliver to
Landlord copies of hazardous waste manifests reflecting the legal and proper
disposal of all Hazardous Materials removed from the Premises.
(b) INDEMNIFICATION OF LANDLORD. Tenant shall indemnify, defend (by
counsel acceptable to Landlord), protect, and hold Landlord, and each of
Landlord's partners, employees, agents, attorneys, successors and assigns,
free and harmless from and against any and all claims, liabilities,
penalties, forfeitures, losses or expenses (including attorneys' fees) for
death of or injury to any person or damage to any property whatsoever
(including water tables and atmosphere) arising from or caused in whole or in
part, directly or indirectly, by (i) the presence in, on, under or about the
Premises, Project or buildings within the Project or discharge in or from the
Premises, Project or buildings within the Project of any Hazardous Materials
to the extent such presence is due to the acts or omissions of Tenant or
Tenant's use, analysis, storage, transportation, disposal, release,
threatened release, discharge or generation of Hazardous Materials to, in,
on, under, about or from the Premises, Project or buildings within the
Project, or (ii) Tenant's failure to comply with any Hazardous Materials Laws
whether knowingly, unknowingly, intentionally or unintentionally. Tenant's
obligations hereunder shall include, without limitation, and whether
foreseeable or unforeseeable, all costs of any required or necessary repair,
cleanup or detoxification or decontamination of the Premises, Project or
buildings within the Project of Hazardous Materials to the extent such
actions are necessary due to the acts or omissions of Tenant, and the
preparation and implementation of any closure, remedial action or other
required plans in connection therewith. In addition, Tenant shall reimburse
Landlord for (i) losses in or reductions to rental income resulting from
Tenant's use, storage or disposal of Hazardous Materials, (ii) all costs of
refitting or other alterations to the Premises, Project or buildings within
the Project required as a result of Tenant's use, storage, or disposal of
Hazardous Materials including, without limitation, alterations required to
accommodate an alternate use of the Premises, Project or buildings within the
Project, and (iii) any diminution in the fair market value of the Premises,
Project or buildings within the Project caused by Tenant's use, storage, or
disposal of Hazardous Materials. For purposes of this paragraph 49, any acts
or omissions of Tenant, or by employees, agents, assignees, contractors or
subcontractors of Tenant or others acting for or on behalf of Tenant (whether
or not they are negligent, intentional, willful or unlawful) shall be
strictly attributable to Tenant.
(c) SURVIVAL. The provisions of this paragraph 49 shall survive the
expiration or earlier termination of the term of this lease.
50. SIGNAGE. Tenant shall not, without obtaining the prior written
consent of Landlord, install or attach any sign or advertising material on
any part of the outside of the
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Premises, or on any part of the inside of the Premises which is visible from
the outside of the Premises, or in the halls, lobbies, windows or elevators
of the building in which the Premises are located or on or about any other
portion of the Common Area or Project. If Landlord consents to the
installation of any sign or other advertising material, the location, size,
design, color and other physical aspects thereof shall be subject to
Landlord's prior written approval and shall be in accordance with any sign
program applicable to the Project. In addition to any other requirements of
this paragraph 50, the installation of any sign or other advertising material
by or for Tenant must comply with all applicable laws, statutes,
requirements, rules, ordinances and any C.C. & R.'s or other similar
requirements. With respect to any permitted sign installed by or for Tenant,
Tenant shall maintain such sign or other advertising material in good
condition and repair and shall remove such sign or other advertising material
on the expiration or earlier termination of the term of this lease. The cost
of any permitted sign or advertising material and all costs associated with
the installation, maintenance and removal thereof shall be paid for solely by
Tenant. If Tenant fails to properly maintain or remove any permitted sign or
other advertising material, Landlord may do so at Tenant's expense. Any cost
incurred by Landlord in connection with such maintenance or removal shall be
deemed additional rent and shall be paid by Tenant to Landlord within ten
(10) days following notice from Landlord. Landlord may remove any
unpermitted sign or advertising material without notice to Tenant and the
cost of such removal shall be additional rent and shall be paid by Tenant
within ten (10) days following notice from Landlord. Landlord shall not be
liable to Tenant for any damage, loss or expense resulting from Landlord's
removal of any sign or advertising material in accordance with this paragraph
50. The provisions of this paragraph 50 shall survive the expiration or
earlier termination of this lease.
51. SUBMISSION OF LEASE. The submission of this lease to Tenant for
examination or signature by Tenant is not an offer to lease the Premises to
Tenant, nor an agreement by Landlord to reserve the Premises for Tenant.
Landlord will not be bound to Tenant until this lease has been duly executed
and delivered by both Landlord and Tenant.
52. TENANT IMPROVEMENTS. Improvements to the Premises shall be
constructed and installed in accordance with the plans and specifications,
and other terms and conditions, set forth in Exhibit C to this lease, the
contents of which is incorporated herein and made a part hereof by this
reference. The improvements shall be constructed and installed at the
expense of Landlord and/or Tenant as set forth in Exhibit C to this lease and
in each case, shall be performed in a diligent and workmanlike manner.
53. ADDITIONAL RENT. All costs, charges, fees, penalties, interest and
any other payments (including Tenant's reimbursement to Landlord of costs
incurred by Landlord) which Tenant is required to make to Landlord pursuant
to the terms and conditions of this lease and any amendments to this lease
shall be and constitute additional rent payable by Tenant to Landlord when
due as specified in this lease and any amendments hereto.
54. OPTION TO EXTEND TERM. Landlord grants to Tenant an option to extend
the term for a period of three (3) years (such extension is hereafter
referred to as the "Extended Term"). The Extended Term shall follow the
expiration of the initial term set forth in paragraph 2 (a) ("Initial Term").
All the provisions of this lease shall apply during the Extended Term except
for
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the amount of the basic rent. The basic rent for the Extended Term shall be
adjusted to ninety-five percent (95%) of the market rate; provided that in no
event shall the basic rent for the Extended Term be less than the basic rent
in effect at the expiration of the Initial Term. The option is further
subject to the following terms and conditions:
(a) Tenant must deliver its irrevocable written notice of Tenant's
exercise of the option to Landlord not less than six (6) lease months, nor
more than twelve (12) lease months, prior to the expiration of the Initial
Term. Time is of the essence with respect to the time period during which
Tenant must deliver to Landlord its written notice of exercise and,
therefore, if Tenant fails to give Landlord its irrevocable written notice of
its exercise of the option within the applicable time period provided above,
then the option shall expire and be of no further force or effect.
(b) The parties shall have thirty (30) days from the date Landlord
receives Tenant's notice of exercise in which to agree on the amount
constituting the market rate. If Landlord and Tenant agree on the amount of
the market rate, they shall immediately execute an amendment to this lease
setting forth the expiration date of the Extended Term and the amount of the
basic rent to be paid by Tenant during the Extended Term. If Landlord and
Tenant are unable to agree on the amount of the market rate within such time
period, then the option shall be of no further effect and this lease shall
expire at the end of the Initial Term.
(c) As used herein, the "market rate" shall be the monthly rent (triple
net) then obtained for five (5) year fixed rate leases of comparable terms
for premises in the Project and in buildings and/or projects within the same
geographical area of similar types and identity, quality and location as the
Project.
(d) Common area charges shall continue to be determined and payable as
provided in paragraph 16 of this lease.
(e) Neither party shall have the right to have any court or other third
party determine the market rate or the basic rent. Tenant shall not assign
or otherwise transfer this option or any interest therein and any attempt to
do so shall render this option null and void. Tenant shall have no right to
extend the term beyond the Extended Term. If Tenant is in default under this
lease at the date of delivery of Tenant's notice of exercise to Landlord,
then such notice shall be of no effect and this lease shall expire at the and
of the Initial Term. If Tenant is in default under this lease on the last
day of the Initial Term, then Landlord may in its sole discretion elect to
have Tenant's exercise of the option be of no effect, in which case the lease
shall expire at the end of the Initial Term.
55. RIGHT OF FIRST NEGOTIATION. At such time, if any, during the term of
this lease as the premises located in the Project commonly known as 621 River
Oaks Parkway consisting of approximately seventeen thousand four hundred
seventy (17,470) square feet becomes available for lease ("First Negotiation
Space"), Landlord shall give Tenant written notice of the terms and
conditions on which Landlord is willing to lease such space to Tenant
("Landlord's Notice"). Tenant shall have the right, within five (5) days
after the date of Landlord's Notice to give
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Landlord written notice whether or not Tenant desires to lease the First
Negotiation Space on the terms and conditions set forth in Landlord's Notice.
Tenant's failure to give written notice of its desire to lease the First
Negotiation Space within said five (5) day period shall be deemed Tenant's
waiver of its right of first negotiation to lease the First Negotiation Space
on the terms and conditions set forth in Landlord's Notice. If Tenant gives
written notice that it desires to lease the First Negotiation Space on the
terms and conditions set forth in Landlord's Notice, then Landlord and Tenant
shall, within fifteen (15) days after Tenant delivers said notice, thereafter
execute an amendment to this lease that incorporates the First Negotiation
Space into the Premises and subjects the First Negotiation Space to the terms
and conditions of this lease. If Landlord and Tenant do not execute an
amendment to this lease within said fifteen (15) day period, then Tenant's
right of first negotiation with respect to the First Negotiation Space shall
be deemed terminated and Landlord shall have the right to market the First
Negotiation Space free and clear of any rights of Tenant hereunder. Tenant's
right of first negotiation with respect to the First Negotiation Space set
forth herein shall be subject to any and all existing rights of first
refusal, rights of first negotiation or other similar rights of other tenants
in the Project that exist as of the date of this lease.
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IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
lease on the date first above written.
LANDLORD:
Dated: MONTAGUE OAKS ASSOCIATES PHASE III,
a California limited partnership
By: 745 PROPERTY INVESTMENTS, a
Massachusetts voluntary trust,
a general partner
By: /s/ ROBERT -------------
--------------------------------
Its: Property Manager
--------------------------------
By: McCANDLESS GROUP (MONTAGUE), a
California general partnership,
a general partner
By: /s/ BIRK S. McCANDLESS
--------------------------------
BIRK S. McCANDLESS as Trustee of the
Birk S. McCandless and Mary McCandless
Inter Vivos Trust Agreement dated
February 17, 1982, a general partner
TENANT:
INTEGRATED SENSOR SOLUTIONS, a
California corporation
By: /s/ DAVID SATTERFIELD
--------------------------------
Its: VP Finance & Admin
--------------------------------
By:
--------------------------------
Its:
--------------------------------
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EXHIBIT A
[Floor Plans]
Floor plans are representations only and may not be accurate in scale
625 River Oaks Parkway
San Jose, California
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EXHIBIT B
[Map]
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EXHIBIT C
WORK LETTER AGREEMENT
This Work Letter Agreement (hereinafter "Exhibit C") is attached to and
forms a part of that certain lease ("Lease") by and between Montague Oaks
Associates Phase III, a California limited partnership ("Landlord"), and
Integrated Sensor Solutions, Inc., a California corporation ("Tenant"),
pursuant to which Landlord leases to Tenant those certain premises located at
625 River Oaks Parkway, San Jose, California and consisting of approximately
seventeen thousand four hundred seventy (17,470) square feet ("Premises").
All capitalized terms used herein shall have the meaning ascribed to them in
the Lease unless otherwise defined below. The Premises shall be improved in
accordance with the following:
1. EXISTING IMPROVEMENTS. Tenant accepts the Premises in their existing
condition and the improvements constructed therewith, and Tenant hereby
approves the same as installed, subject only to such changes as may
subsequently be agreed upon by Landlord and Tenant. Such improvements are
hereafter called "Existing Improvements."
2. TENANT IMPROVEMENTS. As used herein, "Tenant Improvements" shall
include those items and specifications shown on the Final construction
Drawings prepared in accordance with paragraph 3 below, including those
specifications (as appropriate) set forth and described in Exhibit C-1,
attached hereto, exclusive of Existing Improvements. Landlord shall
construct Tenant Improvements in accordance with the Final Construction
Drawings, Exhibit C-1 and the provisions of this Exhibit C. Unless otherwise
specifically agreed to by Landlord in writing, the installation, wiring,
maintenance and removal of furniture partition systems, telephone and other
communication systems, data cabling, alarm and/or security systems and any
other systems not specifically set forth on the Final Construction Drawings,
and all cost and expense associated therewith shall be the sole
responsibility of Tenant. In connection with the construction and
installation of the Tenant Improvements, Landlord or Landlord's general
contractor shall have no obligation to move any of Tenant's property located
in or about the Premises including, but not limited to, furniture, inventory
and trade fixtures, at the time of such construction and installation. If at
the time of construction and installation of the Tenant Improvements Tenant
has property located in or about the Premises that inhibits or prevents in
any way the construction and installation of the Tenant Improvements, Tenant
shall immediately, upon receipt of notification therefore from Landlord or
Landlord's general contractor, at Tenant's sole cost and expense, move such
property to another location within the Premises or, upon receipt of
Landlord's prior approval, to another location within the Project designated
by Landlord in Landlord's sole discretion; Tenant's failure to immediately
move such property upon receipt of notification herefore from Landlord or
Landlord's general contractor shall be deemed a Tenant caused delay subject
to the provisions of paragraph 6 of this Exhibit C. If at the time of
construction and installation of the Tenant Improvements Tenant has property
located in or about the Premises, Landlord and Landlord's general contractor
shall incur no liability to Tenant or any other party in the event such
property is damaged, destroyed or stolen during the construction and
installation of the Tenant Improvements.
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3. TENANT IMPROVEMENT DESIGN SCHEDULE. The plans and specifications for
the Tenant Improvements and any other improvements shall be completed in
accordance with the following:
(a) Tenant shall approve preliminary floor plan layouts ("Preliminary
Floor Plans") prepared by Landlord by JUNE 8, 1994. The Preliminary Floor
Plans shall show all walls, doors, and other Tenant Improvements as desired
by Tenant in sufficient detail for Landlord's architect to prepare
architectural construction drawings and related documents ("Architectural
Construction Documents").
(b) Between JUNE 8, 1994 and JUNE 10, 1994, Landlord's architect and
Tenant's representative shall meet as needed to review and complete the final
details related to the Preliminary Floor Plans, so that on JUNE 10, 1994 the
Architectural Construction Documents are subject only to minor changes.
(c) No later than JUNE 10, 1994, Tenant shall have made the decisions
required and supplied to Landlord the information necessary for Landlord's
architect to complete the Architectural Construction Documents in enough
detail for Landlord's general contractor to bid the work, select
subcontractors and to proceed toward the design of electrical, mechanical and
any other requirements not included on the Architectural Construction
Documents. Upon Landlord's general contractor's selection of subcontractors,
Landlord's general contractor and subcontractors shall prepare design
specifications outlining in reasonable detail electrical, mechanical and any
other requirements not included on the Architectural Construction' Documents
("Electrical and Mechanical Drawings").
(d) Upon completion of the Architectural Construction Documents, Tenant
shall approve the same subject to changes, deletions or additions as provided
in paragraphs 4 and 5 of this Exhibit C.
(e) Tenant shall have decided upon carpet selection and all other color
and material specifications by JUNE 10, 1994.
(f) As used herein, "Final Construction Drawings" shall include the
City Ready Plans, as approved by the City, and any subsequent additions,
deletions or changes to the Tenant Improvements permitted or required
pursuant to paragraphs 4 and 5 of this Exhibit C.
4. TENANT IMPROVEMENT COST ESTIMATES. Within fourteen (14) days of
completion of the Electrical and Mechanical Drawings, Landlord shall prepare
and deliver to Tenant an improvement cost budget ("Improvement Cost Budget")
setting forth the Total Cost of Tenant's Improvements (as defined in
paragraph 5 (b) below). Within three (3) days after Tenant's receipt of the
Improvement Cost Budget, Tenant shall, in writing, approve or disapprove the
Improvement Cost Budget. If Tenant does not deliver to Landlord its written
approval or disapproval within the three (3) day period, Tenant will be
deemed to have approved the Improvement Cost Budget. If Tenant disapproves
of the Improvement Cost Budget and Landlord and Tenant are unable, within the
three (3) day period, to agree on mutually acceptable changes to the
Improvement Cost Budget, or if Tenant approves of the improvement Cost Budget
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but does not deliver to Landlord, within three (3) days of its approval,
signed copies of the Improvement Cost Budget and Architectural Construction
Documents, then Landlord may terminate the Lease upon written notice to
Tenant. Upon Tenant's written approval of the Improvement Cost Budget (or in
the event Tenant is deemed to have approved the Improvement Cost Budget as
provided hereinabove) , the Total Cost of Tenant's Improvements set forth
therein shall be deemed a fixed price for the Tenant Improvements (said fixed
price shall be referred to herein as the "Tenant Improvement Fixed Cost").
The Tenant Improvement Fixed Cost shall be subject to adjustment for
increases in costs resulting from changes to the Tenant Improvements
requested or required pursuant to paragraphs 6 and 7 below. Landlord shall
not be obligated to commence construction of the Tenant Improvements until
the following has occurred: the Architectural Construction Documents and
Tenant Improvement Fixed Cost have been agreed to by Landlord and Tenant;
Tenant has indicated its approval of the Architectural Construction Documents
and Improvement Cost Budget by signing copies thereof; and Landlord has
executed a written authorization to proceed with construction with Landlord's
general contractor based on the agreed Architectural Construction Documents
and Tenant Improvement Fixed Cost.
5. TENANT IMPROVEMENT ALLOWANCE.
(a) Landlord agrees to grant to Tenant a Tenant Improvement Allowance
("Allowance") of Twenty-six Thousand Two Hundred Five Dollars ($26,205)
($1.50/SF x 17,470 SF) to be applied toward the "Total Cost of Tenant's
Improvements" (as defined below) to be installed in accordance with this
Exhibit C.
(b) As used herein, "Total Cost of Tenant's Improvements" shall
include: (i) the cost of Tenant Improvements and increases therein pursuant
to paragraphs 6 and 7 below, if any, and all demolition costs incurred in
connection with preparing the Premises for the installation of the Tenant
Improvements; (ii) the cost of overtime or special expenditures required to
obtain and install the Tenant Improvements by the proposed commencement date;
(iii) all costs related to change orders; (iv) all costs related to changes
required or requested by governmental authority; (v) permit fees and other
fees not previously paid by Landlord as part of shell costs; (vi) the cost of
consultants and engineers; (vii) an amount equal to the actual cost of
supervision, administration and on-site facilities and equipment necessary to
perform the work; (viii) an amount equal to 9% of the sum of items (i)
through (vii) above as and for the general contractor's overhead and profit;
and (ix) the cost of architects hired by Landlord.
(c) In the event that the Tenant Improvement Fixed Cost exceeds the
Allowance (the amount by which the Tenant Improvement Fixed Cost exceeds the
Allowance shall be referred to herein as the "Excess Cost") , Tenant shall
pay fifty percent (50%) of such Excess Cost to Landlord within five (5) days
of Tenant's approval of the Improvement Cost Budget and the remaining fifty
percent (50%) of the Excess Cost within. five (5) days of when Landlord
notifies Tenant that the Tenant Improvements are fifty percent (50%)
completed. Tenant's failure to make any payment of the Excess Cost when due,
or to make any payment with respect to change orders as set forth in
paragraph 6 of this Exhibit C, shall be deemed a default under the Lease and
the amount so delinquent shall be deemed additional rent and
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Landlord may exercise all rights and remedies set forth in paragraph 20 of
the Lease; and in addition, Landlord may delay construction until such
payment is made and such delay shall be deemed a Tenant caused delay subject
to the provisions of paragraph 8 of this Exhibit C.
(d) In the event Tenant causes delays, or requests changes which cause
delays in construction of more then ninety (90) calendar days, then Landlord
shall not be obligated to grant to Tenant the Allowance, or any balance
remaining unused therein. In such case, Landlord shall thereafter have no
obligation to construct any Tenant Improvements for Tenant. Furthermore, the
cessation of Landlord's obligation to construct the Tenant Improvements as
permitted herein shall not affect Tenant's obligation to commence payments of
basic rent and common area charges or any other payments due Landlord under
the Lease. Tenant shall be entitled to no rent reduction or credit at any
time in the event that the Allowance or any portion thereof remains unused
for any reason whatsoever.
6. CHANGES BY TENANT. Tenant may request changes, deletions or additions
to the Tenant Improvements; provided, however, that the effectiveness of any
such requested change, deletion or addition shall be subject to written
approval by an authorized representative of Landlord and to obtaining any
required governmental permits or other approvals. If any such change,
deletion or addition increases the cost of construction and installation of
the Tenant improvements, Tenant shall immediately pay to Landlord the full
amount of such increase in the cost of construction and installation of the
Tenant Improvements. In no event shall work on any change, deletion or
addition requested pursuant to this paragraph 4 commence prior to (i)
Landlord and Tenant approving, in writing, such change, deletion or addition,
and (ii) Landlord's receipt from Tenant of payment of the full amount of the
increase in the cost of construction and installation of the Tenant
Improvements.
7. CHANGES BY AUTHORITY. Tenant agrees that if any change, deletion or
addition to any of the improvements proposed to be constructed or installed
is required by any governmental authority in connection with obtaining any
governmental permit or approval, or otherwise, then such change, deletion or
addition shall promptly be made at Tenant's expense and Tenant shall,
immediately upon receipt of Landlord's demand therefor, pay such expense to
Landlord. Failure to obtain any required governmental approval or permit for
the Tenant Improvements desired by Tenant shall in no way be cause for Tenant
to terminate the Lease.
8. DELAYS CAUSED BY TENANT. If the commencement of the term is delayed
due in any respect to Tenant's failure to meet the schedule set forth in
paragraph 3 above, or due to construction delays related to any changes
required by Tenant, or due to any other failures by Tenant to perform its
obligations under this Exhibit C or otherwise under the Lease, then any such
delays shall be deemed Tenant caused delays for purposes of determining the
commencement date and the term of the Lease.
9. PUNCH LIST. Within ten (10) business days after Tenant's occupancy of
the Premises, Landlord and Tenant shall conduct a walk-through inspection of
the Premises and shall jointly create a list of items ("Punch List") that
require completion or correction in order for the Premises to be acceptable.
Landlord shall commence to complete or correct the items as soon as
38
<PAGE>
possible. If the parties do not conduct the walk-through and create the
Punch List within the ten (10) day period, Tenant shall be deemed to have
accepted the Premises and approved the construction. Nothing in this
paragraph 9 shall delay the commencement of the term or Tenant's obligation
to pay rent or to make other payments due Landlord under the Lease.
39
<PAGE>
EXHIBIT D
HAZARDOUS LIQUIDS
Common Chem Amount Amount Where Disposal
Name Name Used in House Stored Procedure
- -------------------------------------------------------------------------------
Acetone (CH)CO 10 gal/year 2 to 3 gal Assembly/ Evaporation
3 2 Test Area
lsopropyl- C H OH 10 gal/year 2 to 3 gal Assembly/
alcohol 3 7 Test Area
Methylethyl- 1 gal/year 1 gal Assembly/
ketone Test Area
Naphthelone C H 1 gal/year 1 gal Assembly/
10 8 Test Area
Toluene C H CH 1 gal/year 1 gal Assembly/
6 5 3 Test Area
Motor oil 4 gal/year 0 gal Assembly/
Test Area
All liquids are stored in the containers they are shipped and received in.
All containers are stored away from heat and/or open flame.
40
<PAGE>
SUMMARY OF LEASE
1. DATE OF LEASE: June 2, 1994
2. LANDLORD: Montague Oaks Associates Phase III
3945 Freedom Circle, Suite 640
Santa Clara, California 95054
3. TENANT: Integrated Sensor Solutions, Inc.,
a California corporation
4. PREMISES: 625 River Oaks Parkway
San Jose, CA
5. SQUARE FEET: 17,470
6. PERMITTED USE: General office, research and
development and final assembly and
test of components
7. TERM: Five (5) years
(a) SCHEDULED COMMENCEMENT DATE: July 1, 1994
(b) SCHEDULED EXPIRATION DATE: June 30, 1999
8. RENT:
(a) BASIC RENT: Lease Months Basic Rent
------------ ----------
1 0
2 - 11 $8,385.60
12 0
13 - 24 $10,482.00
25 - 36 $11,704.90
37 - 48 $13,102.50
49 - 60 $13,626.60
(b) TENANT'S ESTIMATED SHARE OF COMMON AREA CHARGES: $2,550.62
9. SECURITY DEPOSIT: $11,181.00
10. PARKING SPACES PROVIDED: 69
11. OTHER IMPORTANT PROVISIONS: Advance Rent
Option to Extend
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE
ATTACHED LEASE. IN THE EVENT OF ANY CONFLICT OR
41
<PAGE>
INCONSISTENCY BETWEEN THE PROVISIONS OF THIS SUMMARY AND THE LEASE, THE
PROVISIONS OF THE LEASE SHALL GOVERN.
42
<PAGE>
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("First Amendment") is made and entered into
as of June 23, 1994, by and between MONTAGUE OAKS ASSOCIATES PHASE III, a
California limited partnership ("Landlord"), and INTEGRATED SENSOR SOLUTIONS,
INC., a California corporation ("Tenant").
RECITALS
A. Pursuant to that certain Lease dated June 2, 1994 ("Lease"), Tenant
leased from Landlord approximately seventeen thousand four hundred seventy
(17,470) square feet of space in that certain building commonly known as 625
River Oaks Parkway, San Jose, California, more particularly described in the
Lease (the "Premises").
B. Landlord and Tenant desire to amend the Lease to provide for early
occupancy of the Premises by Tenant prior to Landlord's completion of
construction of the Tenant Improvements in the Premises and to establish the
date of commencement of the term of the Lease. Capitalized terms used in this
First Amendment shall have the meanings ascribed to such terms in the Lease,
unless otherwise defined herein.
NOW, THEREFORE, the parties agree as follows:
1. EARLY OCCUPANCY. Tenant may occupy the Premises prior to the
scheduled commencement date of July 1, 1994 ("Scheduled Commencement Date");
provided, however, Tenant may not occupy the Premises any earlier than June 24,
1994 (any such early occupancy prior to the Scheduled Commencement Date shall
hereafter be referred to as the "Early Occupancy Period"). If Tenant occupies
the Premises during the Early Occupancy Period, the term of the Lease shall not
commence nor shall basic rent or other items of additional rent commence to be
due or payable by Tenant to Landlord, but such early occupancy shall otherwise
be subject to all of the terms and conditions of this Lease.
2. FIXED COMMENCEMENT DATE. Notwithstanding anything contained in
Paragraphs 2 and 3 of the Lease, possession of the Premises shall be deemed to
have been tendered and the term of the Lease shall commence on July 1, 1994,
regardless of whether Landlord has completed Landlord's work as specified in
Exhibit C.
3. PERFORMANCE OF TENANT IMPROVEMENT WORK. Tenant acknowledges that
Landlord will continue to perform Landlord's work as specified in Exhibit C
during the Early Occupancy Period and after the commencement date of the term
and that Tenant's business and occupancy of the Premises may be disrupted by the
performance of such work. Landlord shall have no liability to Tenant for
interruption of Tenant's business or occupancy due to Landlord's performance of
the work specified in Exhibit C during the Early Occupancy Period or after the
commencement date of the term. Tenant hereby waives any and all claims against
Landlord for any loss or damage arising out of interruption of Tenant's business
or occupancy during the Early Occupancy Period or after the commencement date of
the term as a result of such work. During the Early
<PAGE>
Occupancy Period and thereafter while Landlord is performing Landlord's work
pursuant to Exhibit C, Tenant shall conduct its operations in the Premises in
a manner that will not hinder or delay Landlord in completing its work.
4. INSURANCE CERTIFICATE. Prior to occupancy of the Premises during the
Early Occupancy Period, Tenant shall deliver to Landlord the certificate of
insurance required by Paragraph 11 of the Lease.
5. EFFECT OF AMENDMENT. Except as modified herein, the terms and
provisions of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and provisions of this
First Amendment and the terms and provisions of the Lease, the terms and
provisions of this First Amendment shall govern and control the intent and
agreement of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of the date first set forth above.
LANDLORD:
MONTAGUE OAKS ASSOCIATES PHASE III,
a California limited partnership
By: 745 PROPERTY INVESTMENTS,
a Massachusetts voluntary trust,
a general partner
By /s/ ROBERT -------------
-------------------------------------
Its
-----------------------------------
By: McCANDLESS GROUP (MONTAGUE),
a California general partnership,
a general partner
By /s/ BIRK S. McCANDLESS
-------------------------------------
BIRK S. McCANDLESS as
Trustee of the Birk S.
McCandless and Mary
McCandless Inter Vivos Trust
Agreement dated February 17,
1982, a general partner
-2-
<PAGE>
TENANT:
INTEGRATED SENSOR SOLUTIONS, INC.,
a California corporation
By /s/ DAVID SATTERFIELD
-----------------------------------------
Its
---------------------------------------
By
-----------------------------------------
Its
---------------------------------------
-3-
<PAGE>
CONTINUOUS SALES AND PURCHASE AGREEMENT
This Agreement, entered into this 1st day of December, 1996 by and
between Nagano Keiki Seisakusho, Ltd. a corporation duly organized and
existing under the laws of Japan and having its principal office of business
at 1-30-4 Higashimagome, Ohta-ku, Tokyo, Japan (hereinafter referred to is
"Seller"). and Integrated Sensor Solutions, Inc. a corporation duly organized
and existing under the laws of the State of California, U.S.A. and having its
principal office of business at 625 River Oaks Parkway, San Jose, CA 95134,
U.S.A. (hereinafter referred to as "Buyer").
WITNESSETH THAT:
WHEREAS, Seller has various types of superior pressure sensor products
and desires to establish a firm position and increase its share in the US
market, while Buyer desires import and sell such pressure sensor products in
US markets.
NOW, THEREFORE, it is agreed between the parties as follows:
ARTICLE 1
PRODUCTS
The object product covered by this Agreement refers to the various kinds
of Pressure Sensor related Products, Sub-Assembly and/or Parts manufactured
by Seller which Buyer has requested Seller to sell and which Buyer shall
purchase (hereinafter called "Products").
ARTICLE 2
CONTINUOUS SALES
Seller shall continuously sell Buyer Products manufactured by Seller
under the terms and conditions hereinafter stipulated, provided that each
model of products transacted from time shall be separately specified in
writing by the parties hereto.
ARTICLE 3
TERM AND TERMINATION
This Agreement shall be valid and in force for a period of Five(5) years
commencing from the date appearing at the first above written page upon the
singing of both parties. When either of
1
<PAGE>
two parties hereto intends to terminate this Agreement, a notice in writing
shall be given to the other party one hundred and twenty(120) days before the
date of expiration of this Agreement. If no notice is given, this Agreement
shall be automatically renewed for a further one(l) year. The same procedure
shall apply for subsequent renewals.
ARTICLE 4
PURCHASE ORDER
Each individual contract under this Agreement shall be subject to this
Agreement but such contract shall be, on the basis of Buyer's purchase order
release, concluded and carried out by Seller's confirmation of sale, the
current version of which is attached hereto as Exhibit 1, which shall set
forth the terms and conditions, and rights and obligations of the parties
hereto except those stipulated in this Agreement, or by such other conditions
as may be notified and added thereto or substituted therefore by Seller and
confirmed by Buyer in writing from time during the life of this Agreement.
ARTICLE 5
PRICE
Price of Products delivered from Seller to Buyer shall be decided upon
in each individual contract or at yearly basis mutually agreed.
ARTICLE 6
PAYMENT
Payment shall be made by Buyer by remitting the invoice amount to the
bank account designated by Seller, against Seller's Commercial Invoice in
Japanese Yen currency, unless otherwise agreed, in full within 60 days after
the date of each commercial invoice. Such contract shall permit partial
shipments and transshipments, and shall provide for any freight increase, war
risk premium, consular fee, etc., to be added in invoice, if necessary.
2
<PAGE>
ARTICLE 7
SHIPMENT
1. Seller shall manufacture, procure and supply Products to Buyer from
time to time. The delivery terms and conditions for the sale of Products
shall be F.O.B. Japan under the International Commercial Terms (Incoterms) of
the International Chamber of Commerce.
2. As soon as possible after shipment, Seller shall submit Buyer a
shipping advice and shipping documents so as to enable Buyer to be ready for
unloading Products.
ARTICLE 8
PACKING AND MARKING
Packing and marking of Products shall be made in accordance with
Seller's standard export packing procedures. The necessary instructions for
shipping mark shall be given by Buyer to Seller at the time of purchase order
release. The country of origin shall be clearly marked on Products and / or
packing.
ARTICLE 9
SPECIFICATIONS AND INSPECTION
All Products to be supplied by Seller to Buyer hereunder shall comply
with the relevant quality specifications established by Seller and approved
by Buyer. Seller shall inspect Products prior to shipment in accordance with
its established quality control procedures.
ARTICLE 10
WARRANTY
Seller warrants that Products are free from any defects of design,
material and workmanship and conform to its specifications. Liability under
this warranty is limited to, at Seller's option, repairing, replacing or
giving credit for the purchase price of portion or part which proves to be
defective, provided that Buyer has given reasonably prompt notice of the
defect and an opportunity of inspection for the defective Products.
ARTICLE 11
3
<PAGE>
CLAIM
Buyer is entitled to make a survey of quantity and quality of Products
at the port of discharge and to lodge first claim by fax or cable with Seller
as soon as possible, if Buyer finds any defect in Products. Within 90 days
after the arrival of Products at the said port Buyer shall make a formal
claim with supporting documents.
If failing to comply with the above, no claim of Buyer shall be
entertained by Seller. If complied with the above, then Buyer's claim must
be settled by the Seller at the latest within 60 days from the date of
acknowledgment of Buyer's claim.
ARTICLE 12
PATENT
Seller assumes no responsibility for any infringement or unauthorized
use with regard to patent, utility model, trademark, design, copyright or any
other industrial right of a third party. Nothing herein contained shall be
construed to be transfer of any patent, utility model, trademarks, design,
copyright or any other industrial property right contained in Products, and
all such rights are to be reserved to true and lawful owners thereof. In
case any dispute or claim arises in connection with the above right or
rights, Seller is entitled to cancel, and make null and avoid this contract
at its discretion and hold itself free from any liability for dispute or
claim except for the Products or part(s) furnished by the Seller.
The Seller is responsible for any infringement under a certain
reasonable financial limit when the infringement is held or constituted by
the Seller's Product or part(s). This exception does not apply to any
infringement resulting from Seller's compliance with detailed designs or
part(s) provided by Buyer or its customer(s).
ARTICLE 13
CONFIDENTIALITY
Buyer shall keep in confidence all information including technology
relating to Products furnished by Seller, and shall not at any time during
the life of this Agreement or any extension or renewal thereof or for a period
of three (3) years following the termination of this Agreement for any reason
whatsoever, divulge to any person, firm or corporation other than to its own
employees who may require such information in order to perform Buyer's
obligations under this Agreement, any such information without prior written
approval of Seller.
4
<PAGE>
ARTICLE 14
TERMINATION
Seller is entitled to terminate or cancel this Agreement upon the
occurrence of any of the following events:
(a) In the event Buyer shall fail to perform any of the terms or
conditions contained herein and such failure shall continue to exist for
thirty (30) days after the date of written notice of such failure;
(b) In the event of the insolvency of Buyer or in the event a voluntary
or involuntary petition in bankruptcy is field by, against or on behalf of
Buyer;
(c) In the event Buyer makes a general assignment for the benefit of
its creditors, or a receiver or trustee is appointed for its business or
property; or
(d) In the event Buyer shall fail to perform any of the terms or
conditions contained herein by reason of other than or similar to the above
a), b) and c).
ARTICLE 15
PENDING ORDER
Even after termination of this Agreement by any reason whatsoever, the
provisions of this Agreement shall be applicable to the order placed before
termination, but which is to be performed after such termination.
ARTICLE 16
NOTICES
All notices, summons and communications related to this Agreement shall
be addressed by telex or registered letter, with return receipt requested,
sent or mailed to the other party at its hereinabove set forth address(or any
new address that would be notified in the same way) and in English.
ARTICLE 17
DISPUTE RESOLUTION
5
<PAGE>
17.1 INFORMAL DISPUTE RESOLUTION. In the event that any dispute,
controversy, or claim between the parties arises out of the interpretation
of, or performance under this Agreement, the parties agree to refrain from
initiating any legal or other proceedings until all of the procedures set
forth in this Article 17 have been exhausted.
17.2 NEGOTIATION. The parties shall first attempt to resolve amicably,
and informally any dispute, controversy, or claim arising out of or relating
to this Agreement, including without limitation the interpretation,
performance, breach, termination or invalidity of this Agreement (the
"Dispute"). A party shall initiate informal negotiations to resolve the
Dispute by giving the other party notice ("Request for Informal Dispute
Resolution") of such intent. The Request for Informal Dispute resolution
shall (1) describe the Dispute and (2) propose the procedure for its amicable
resolution, including, if appropriate, the hiring of consultants. Within
thirty (30) days of the date of such Request for Informal Dispute Resolution,
the parties shall attempt to resolve the Dispute amicably, and no Party shall
resort to any other means of dispute resolution for at least thirty (30) days
after such Request for Informal Dispute Resolution has been delivered.
17.3 MANAGEMENT NEGOTIATION. If any Dispute is not resolved pursuant
to Paragraph 17.2 of this Agreement, each party shall designate one or more
executives (the "Executives") to act on behalf of such party to negotiate to
solve the matter. At the earliest practical time, and in any event, no later
than thirty (30) days after the conclusion of the process set forth in
Paragraph 17.2 of this Agreement, the Executives of both parties shall meet
in a mutually agreeable location to discuss the Dispute. The Executives
shall negotiate in good faith to resolve the Dispute, and any resolution
shall be set forth in writing and signed by both parties. Such resolution
shall be final and binding on the parties.
17.4 ARBITRATION. All disputes, controversies or differences not
settled or by informal negotiations in accordance with Paragraph 17.2 and
17.3 of this Agreement shall be finally settled by arbitration in Tokyo,
Japan in accordance with the UNCITRAL Arbitration Rules as at presence in
force. Any such arbitration shall be administered by the Japan Commercial
Arbitration and Procedural Rules for Arbitration under the UNICITRAL
Arbitration Rules. The appointing authority shall be the Japan Commercial
Arbitration Association. The language(s) to be used in the arbitral
proceedings shall be Japanese or/and English. The award rendered by
arbitrator(s) shall be final and binding upon both parties.
ARTICLE 18
FORCE MAJEURE
In the event of occurrence of an emergency or contingency of a nature
constituting a cause of force majeure to any or all of the parties hereto,
with the result that the performance of any of its or their obligations under
this Agreement is prevented thereby, neither party shall be liable in any way
because of any delay in its performance due to such cause. Under this
Agreement a force majeure is deemed to be any cause beyond the parties'
control, including, but not limited to, strike; lockout; riot; war; accident;
failure or breakdown of components necessary
6
<PAGE>
to order completion; subcontractor, supplier or customer caused delays;
inability to obtain or substantial rise in the price of labor, materials or
manufacturing facilities; fire; Act of God; curtailment of or failure to
obtain sufficient electrical or other energy; order, whether valid or
invalid, of any cognizant Governmental body or any instrumentality thereof,
whether now existing or hereafter created.
ARTICLE 19
ASSIGNMENT
This Agreement and any of the rights and obligations hereunder shall not
be assigned by either party without a prior written consent of the other
party. In the event an assignment is consented to by the other party, this
Agreement shall inure to the benefit of and be binding upon the successor or
the assignee.
ARTICLE 20
GOVERNING LAW
This Agreement shall be governed as to all matters, including validity,
construction and performance, by and under the laws of Japan.
ARTICLE 21
INVALID OR UNENFORCEABLE PROVISION
Should any provision of this Agreement be invalid or unenforceable, then
such provision shall be given no effect and shall be deemed not to be
included within the terms of this Agreement, but without invalidating any of
the remaining terms of Agreement. The parties hereto shall then endeavor to
replace the invalid or unenforceable provision by a clause which is closest
to the contents of the invalid or unenforceable provision.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officer or representative as of the date
first above written.
Buyer: /s/ M.D. NAIK Seller: /s/ SHIGERU MIYASHITA
----------------------- --------------------------
M. D. Naik Shigeru Miyashita
President & C.E.O. President
Integrated Sensor Solutions, Inc. Nagano Keiki Seisakusho, Ltd.
7
<PAGE>
CONTINUOUS SALES AND PURCHASE AGREEMENT
This Agreement, entered into this 1st day of June, 1997 by and between
Nagano Keiki Seisakusho, Ltd. a corporation duly organized and existing under
the laws of Japan and having its principal office of business at 1-30-4
Higashimagome, Ohta-ku, Tokyo, Japan.(hereinafter referred to as "Seller"),
and ISS-Nagano GmbH a corporation duly organized and existing under the laws
of Germany and having its principal office of business at Grenzstrabe 28,
Hirschmanngebaude 01109 Dresden, Germany (hereinafter referred to as "Buyer").
WITNESSETH THAT:
WHEREAS, Seller has various types of superior pressure sensor products
and desires to establish a firm position and increase its share in the
European market, while Buyer desires import and sell such pressure sensor
products in European market.
NOW, THEREFORE, it is agreed between the parties as follows:
ARTICLE 1
PRODUCTS
The object product covered by this Agreement refers to the various kinds
of Pressure Sensor related Products, Sub-Assembly and / or Parts manufactured
by Seller which Buyer has requested Seller to sell and which Buyer shall
purchase (hereinafter called "Products").
ARTICLE 2
CONTINUOUS SALES
Seller shall continuously sell Buyer Products manufactured by Seller
under the terms and conditions hereinafter stipulated, provided that each
model of products transacted from time shall be separately specified in
writing by the parties hereto.
ARTICLE 3
TERM AND TERMINATION
This Agreement shall be valid and in force for a period of Five(5) years
commencing from the date appearing at the first above written page upon the
singing of both parties. When either of two parties hereto intends to
terminate this Agreement, a notice in writing shall be given to the other
party one hundred and twenty(120) days before the date of expiration of this
Agreement. If no notice is given, this Agreement shall be automatically
renewed for a further one(l) year. The same procedure shall apply for
subsequent renewals.
1
<PAGE>
ARTICLE 4
PURCHASE ORDER
Each individual contract under this Agreement shall be subject to this
Agreement but such contract shall be, on the basis of Buyer's purchase order
release, concluded and carried out by Seller's confirmation of sale, the
current version of which is attached hereto as Exhibit 1, which shall set
forth the terms and conditions, and rights and obligations of the parties
hereto except those stipulated in this Agreement, or by such other conditions
as may be notified and added thereto or substituted therefore by Seller and
confirmed by Buyer in writing from time during the life of this Agreement.
ARTICLE 5
PRICE
Price of Products delivered from Seller to Buyer shall be decided upon
in each individual contract or at yearly basis mutually agreed.
ARTICLE 6
PAYMENT
Payment shall be made by Buyer by remitting the invoice amount to the
bank account designated by Seller, against Seller's Commercial Invoice in
Japanese Yen currency, unless otherwise agreed, in full within 60 days after
the date of each commercial invoice. Such contract shall permit partial
shipments and transshipments, and shall provide for any freight increase, war
risk premium, consular fee, etc., to be added in invoice, if necessary.
ARTICLE 7
SHIPMENT
7.1 Seller shall manufacture, procure and supply Products to Buyer from
time to time. The delivery terms and conditions for the sale of Products
shall be F.O.B. Japan under the International Commercial Terms (Incoterms) of
the International Chamber of Commerce.
7.2 As soon as possible after shipment, Seller shall submit Buyer a
shipping advice and shipping documents so as to enable Buyer to be ready for
unloading Products.
2
<PAGE>
ARTICLE 8
PACKING AND MARKING
Packing and marking of Products shall be made in accordance with
Seller's standard export packing procedures. The necessary instructions for
shipping mark shall be given by Buyer to Seller at the time of purchase order
release. The country of origin shall be clearly marked on Products and / or
packing.
ARTICLE 9
SPECIFICATIONS AND INSPECTION
All Products to be supplied by Seller to Buyer hereunder shall comply
with the relevant quality specifications established by Seller and approved
by Buyer. Seller shall inspect Products prior to shipment in accordance with
its established quality control procedures.
ARTICLE 10
WARRANTY
Seller warrants that Products are free from any defects of design,
material and workmanship and conform to its specifications. Liability under
this warranty is limited to, at Seller's option, repairing, replacing or
giving credit for the purchase price of portion or part which proves to be
defective, provided that Buyer has given reasonably prompt notice of the
defect and an opportunity of inspection for the defective Products.
ARTICLE 11
CLAIM
Buyer is entitled to make a survey of quantity and quality of Products
at the port of discharge and to lodge first claim by fax or cable with Seller
as soon as possible, if Buyer finds any defect in Products. Within 90 days
after the arrival of Products at the said port Buyer shall make a formal
claim with supporting documents.
If failing to comply with the above, no claim of Buyer shall be
entertained by Seller. If complied with the above, then Buyer's claim must
be settled by the Seller at the latest within 60 days from the date of
acknowledgment of Buyer's claim.
3
<PAGE>
ARTICLE 12
PATENT
Seller assumes no responsibility for any infringement or unauthorized
use with regard to patent, utility model, trademark, design, copyright or any
other industrial right of a third party. Nothing herein contained shall be
construed to be transfer of any patent, utility model, trademarks, design,
copyright or any other industrial property right contained in Products, and
all such rights are to be reserved to true and lawful owners thereof. In
case any dispute or claim arises in connection with the above right or
rights, Seller is entitled to cancel, and make null and avoid this contract
at its discretion and hold itself free from any liability for dispute or
claim except for the Products or part(s) furnished by the Seller.
The Seller is responsible for any infringement under a certain
reasonable financial limit when the infringement is held or constituted by
the Seller's Product or part(s). This exception does not apply to any
infringement resulting from Seller's compliance with detailed designs or
part(s) provided by Buyer or its customers.
ARTICLE 13
CONFIDENTIALITY
Buyer shall keep in confidence al information including technology
relating to Products furnished by Seller, and shall not at any time during
the life of this Agreement or any extension or renewal thereof or for a
period of three(3) years following the termination of this Agreement for any
reason whatsoever, divulge to any person, firm or corporation other than to
its own employees who may require such information in order to perform
Buyer's obligations under this Agreement, any such information without prior
written approval of Seller.
ARTICLE 14
TERMINATION
Seller is entitled to terminate or cancel this Agreement upon the
occurrence of any of the following events:
(a) In the event Buyer shall fail to perform any of the terms or
conditions contained herein and such failure shall continue to exist for
thirty(30) days after the date of written notice of such failure;
(b) In the event of the insolvency of Buyer or in the event a voluntary
or involuntary petition in bankruptcy is field by, against or on behalf of
Buyer;
(c) In the event Buyer makes a general assignment for the benefit of
its creditors, or a receiver or trustee is appointed for its business or
property; or
4
<PAGE>
(d) In the event Buyer shall fail to perform any of the terms or
conditions contained herein by reason of other than or similar to the above
a), b) and c).
ARTICLE 15
PENDING ORDER
Even after termination of this Agreement by any reason whatsoever, the
provisions of this Agreement shall be applicable to the order placed before
termination, but which is to be performed after such termination.
ARTICLE 16
NOTICES
All notices, summons and communications related to this Agreement shall
be addressed by telex or registered letter, with return receipt requested,
sent or mailed to the other party at its hereinabove set forth address(or any
new address that would be notified in the same way) and in English.
ARTICLE 17
DISPUTE RESOLUTION
17.1 INFORMAL DISPUTE RESOLUTION. In the event that any dispute,
controversy, or claim between the parties arises out of the interpretation
of, or performance under this Agreement, the parties agree to refrain from
initiating any legal or other proceedings until all of the procedures set
forth in this Article 17 have been exhausted.
17.2 NEGOTIATION. The parties shall first attempt to resolve amicably
and informally any dispute, controversy, or claim arising out of or relating
to this Agreement, including without limitation the interpretation,
performance, breach, termination or invalidity of this Agreement(the
"Dispute"). A party shall initiate informal negotiations to resolve the
Dispute by giving the other party notice("Request for Informal Dispute
Resolution") of such intent. The Request for Informal Dispute resolution
shall (1) describe the Dispute and (2) propose the procedure for its amicable
resolution, including, if appropriate, the hiring of consultants. Within
thirty(30) days of the date of such Request for Informal Dispute Resolution,
the parties shall attempt to resolve the Dispute amicably, and no Party shall
resort to any other means of dispute resolution for at least thirty(30) days
after such Request for Informal Dispute Resolution has been delivered.
17.3 MANAGEMENT NEGOTIATION. If any Dispute is not resolved pursuant
to paragraph 17.2 of this Agreement, each party shall designate one or more
executives(the "Executives") to act on behalf of such party to negotiate to
solve the matter. At the earliest practical time, and in any event, no later
than thirty(30) days after the conclusion of the process
5
<PAGE>
set forth in Paragraph 17.2 of this Agreement, the Executives of both parties
shall meet in a mutually agreeable location to discuss the Dispute. The
Executives shall negotiate in good faith to resolve the Dispute, and any
resolution shall be set forth in writing and signed by both parties. Such a
resolution shall be final and binding on the parties.
17.4 ARBITRATION. All disputes, controversies or differences not
settled or by informal negotiations in accordance with Paragraph 17.2 and
17.3 of this Agreement shall be finally settled by arbitration in Tokyo,
Japan in accordance with the UNCITRAL Arbitration Rules as at presence in
force. Any such arbitration shall be administered by the Japan Commercial
Arbitration and Procedural Rules for Arbitration under the UNICITRAL
Arbitration Rules. The appointing authority shall be the Japan Commercial
Arbitration Association. The languages to be used in the arbitral
proceedings shall be Japanese or/and English. The award rendered by
arbitrator(s) shall be final and binding upon both parties.
ARTICLE 18
FORCE MAJEURE
In the event of occurrence of an emergency or contingency of a nature
constituting a cause of force majeure to any or all of the parties hereto,
with the result that the performance of any of its or their obligations under
this Agreement is prevented thereby, neither party shall be liable in any way
because of any delay in its performance due to such cause. Under this
Agreement a force majeure is deemed to be any cause beyond the parties'
control, including, but not limited to, strike; lockout; riot; war; accident;
failure or breakdown of components necessary to order completion;
subcontractor, supplier or customer caused delays; inability to obtain or
substantial rise in the price of labor, materials or manufacturing
facilities; fire; Act of God; curtailment of or failure to obtain sufficient
electrical or other energy; order, whether valid or invalid, of any cognizant
Governmental body or any instrumentality thereof, whether now existing or
hereafter created.
ARTICLE 19
ASSIGNMENT
This Agreement and any of the rights and obligations hereunder shall not
be assigned by either party without a prior written consent of the other
party. In the event an assignment is consented to by the other party, this
Agreement shall inure to the benefit of and be binding upon the successor or
the assignee.
ARTICLE 20
GOVERNING LAW
This Agreement shall be governed as to all matters, including validity,
construction and performance, by and under the laws of Japan.
6
<PAGE>
ARTICLE 21
INVALID OR UNENFORCEABLE PROVISION
Should any provision of this Agreement be invalid or unenforceable, then
such provision shall be given no effect and shall be deemed not to be
included within the terms of this Agreement, but without invalidating any of
the remaining terms of Agreement. The parties hereto shall then endeavor to
replace the invalid or unenforceable provision by a clause which is closest
to the contents of the invalid or unenforceable provision.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officer or representative as of the date
first above written.
Buyer: /s/ WOLFRAM BEYER Seller: /s/ SHIGERU MIYASHITA
---------------------------- ----------------------------
Wolfram Beyer Shigeru Miyashita
Geschaftsfuhrer President
ISS-Nagano GmbH Nagano Keiki Seisakusho, Ltd.
7
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") is made and entered
into this 1st day of December, 1995 by and between INTEGRATED SENSOR
SOLUTIONS, INC., a California corporation (the "Debtor"), and SILICON
SYSTEMS, INC., a Delaware corporation (the "Secured Party").
RECITALS
A. Pursuant to a Credit Agreement dated December 1, 1995, between Debtor
and Secured Party (the "Credit Agreement"), Debtor has provided to Secured Party
that certain Secured Promissory Note of even date herewith in the principal
amount of $678,683.54 (the "Note"); and
B. As an inducement for the Secured party to accepting the Note, Debtor
has agreed to grant for the benefit of Secured Party a security interest as set
forth herein.
AGREEMENT
1. SECURITY INTEREST. Pursuant to the Uniform Commercial Code, Debtor
hereby grants to Secured Party a security interest in the personal property of
Debtor, whether now owned or hereinafter acquired (the "Collateral"). Such
Collateral, as more fully described at Paragraph 2 below, shall secure payment
and performance of the obligations of Debtor, as defined and described at
Paragraph 3 below.
2. COLLATERAL.
The Collateral of Debtor is described as follows:
(a) all inventory of Debtor, now owned or hereafter acquired, and all
raw materials, work in process, materials used or consumed in Debtor's business
and finished goods, together with all additions and accessions thereto and
replacements therefor, and products thereof;
(b) all equipment of Debtor, now owned or hereafter acquired,
including, without limitation, all machinery, tools, dies, blueprints,
catalogues, computer hardware and software, furniture, furnishings and fixtures;
(c) any "fixtures" as such term is defined in Division 9313(1)(a) of
the Uniform Commercial Code, now owned or hereafter acquired by Debtor; and
(d) all proceeds of the foregoing Collateral. For purposes of this
Agreement, the term "proceeds" includes whatever is receivable or received when
Collateral or proceeds is sold, collected, exchanged or otherwise disposed of,
whether such disposition is voluntary or
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<PAGE>
involuntary, and includes, without limitation, all rights to payment, including
return premiums, with respect to any insurance relating thereto.
3. OBLIGATIONS SECURED. The obligations ("Obligations") secured by this
Security Agreement shall include (a) the performance by Debtor of the
obligations set forth in the Note, the Credit Agreement and this Security
Agreement; (b) all payments made or expenses incurred by Secured Party,
including, but not limited to, reasonably attorneys' fees and legal expenses in
the exercise, preservation or enforcement of any of the rights, powers or
remedies of Secured Party or in the enforcement of the obligations of Debtor
under this Agreement, the Credit Agreement or the Note; and (c) any obligations
of Debtor to Secured Party arising from amendments, modifications, renewals or
extensions of any of the foregoing obligations.
4. COLLATERAL ENCUMBRANCES; COVENANTS OF DEBTOR.
(a) Except as set forth on Schedule 1 hereto (the "Permitted
Encumbrances") Debtor owns the Collateral free and clear of any lien except for
the lien created by this Security Agreement, and no effective financing
statement or other instrument similar in effect, which covers all or any part of
the Collateral, is on file in any recording office.
(b) appropriate financing statements having been filed in the offices
of the Secretary of State of California and the [County Recorder of Santa Clara
County], this Agreement is effect to create, in favor of Secured Party, a valid
and continuing lien on and perfected security interest in the Collateral with
respect to which a security interest may be perfected by filing pursuant to the
Uniform Commercial Code prior to all other liens and encumbrances on the
Collateral, except Permitted Encumbrances, and is enforceable as such as against
creditors of and purchasers from Debtor other than purchasers of Collateral to
the extent that sales of such Collateral to such purchasers are permitted by
this Agreement.
(c) As to the Collateral, Debtor covenants with Secured Party as
follows:
(i) Debtor will keep the Company free of all levies, liens,
encumbrances and other security interests, except as set forth on Schedule 1
hereto.
(ii) Debtor will comply with all laws, statutes and regulations
pertaining to the Collateral.
(iii) Debtor will pay when due all taxes, licenses, charges
and other impositions on or for the Collateral.
(iv) Debtor will execute, file and record such assignments,
statements, notices and agreement, take such action and obtain such certificates
and documents, in accordance with all applicable laws, statutes, and regulations
(whether state, federal or local), as necessary to perfect, evidence and
continue Secured Party's security interest in the Collateral.
(v) Debtor will deliver to Secured Party all instruments and
other items of Collateral for which possession is required for perfection.
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<PAGE>
(vi) Debtor will, upon demand, give Secured Party such
information as reasonably requested concerning the Collateral and Debtor's
business, and permit Secured Party to inspect and copy the records thereof.
(vii) Debtor will keep or require all property which is
security for or represented by the Collateral to be insured in amounts, on
terms and with carriers as is customary and appropriate for the business in
which Debtor is engaged, and shall provide to Secured Party certificates of
insurance with respect thereto.
(viii) Debtor will, as appropriate, properly care for, house,
store and maintain the Collateral and any goods represented by the Collateral
in good condition, free of misuse, abuse, waste and deterioration, and
prepare the Collateral for sale or market according to approved methods, and
promptly and duly observe and perform any contract or agreement pertaining to
or part of the Collateral.
(ix) Debtor will not, without Secured Party's written
consent, exchange, lease, lend, use, operate, demonstrate, sell or dispose of
the Collateral or Debtor's rights therein other than in the ordinary course
of business or permit the Collateral to be or become so affixed to realty as
to be part of or become a fixture thereof; except, until otherwise notified
by Secured Party, equipment goods may be used if they will only be subject to
reasonable wear and tear of intended use, inventory goods of raw materials
may be used in the regular course of Debtor's business, and inventory goods
held for sale may be sold in the regular course of Debtor's business.
(x) Debtor will not, without Secured Party's written
consent, remove the Collateral from or outside of Debtor's chief place of
business, except as may be required in the regular course of Debtor's
business.
(xi) Debtor will not, without Secured Party's written consent,
permit anything to be done that may impair, or fail to do anything necessary or
advisable to preserve, the Collateral's value and the security and insurance
coverage.
(xii) Debtor will not create, permit or suffer to exist, and
will defend the Collateral against and take such other action as is necessary to
remove, any lien or encumbrance on the Collateral except the Permitted
Encumbrances, and will defend the right, title and interest of Secured Party in
and to the Collateral and in and to the proceeds thereof against the claims and
demands of all persons whomsoever.
(xiii) Debtor will advise Secured Party promptly, in
reasonable detail, (A) against any material lien, security interest, encumbrance
or claim made or asserted against any of the Collateral, (B) of any material
change in the composition of the Collateral, and (C) of the occurrence of any
other event that would have a material adverse effect on the aggregate value of
the Collateral or on the security interests created hereunder.
(xiv) Upon reasonable notice to Debtor (unless an Event of
Default has occurred and is continuing, in which case no notice is necessary),
Secured Party and their
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representatives shall also have the right to enter into and upon any premises
where any of the Collateral is located for the purpose of inspecting the same,
observing its use or otherwise protecting their interests therein.
5. DEFAULT.
(a) The occurrence of any (i) default under the Note, or (ii) breach
of this Security Agreement or the Credit Agreement, shall be deemed a default
for purposes of this Security Agreement.
(b) Upon the occurrence of an event of default pursuant to this
Section 5, Secured Party, in addition to all other rights, powers and privileges
enumerated in Section 6 below, may (1) declare the unpaid balance, in whole or
in part, of Debtor's Obligations immediately due and payable without demand or
notice and proceed to collect same; (2) waive or remedy any default without
waiving such default or any prior or subsequent default; and (3) terminate any
agreement for financial accommodation.
6. REMEDIES.
(a) Upon the occurrence of an event of default pursuant to Section 5
hereof, Secured Party, in its own or Debtor's name, without notice and at
Debtor's expense, may, but is not obligated to:
(i) as appropriate take possession of the Collateral with or
without legal process, require Debtor to assemble the Collateral and make it
available to Secured Party at a reasonably convenient place, which shall be
designated by Secured Party, or, whether or not the Collateral is present at the
place of sale, sell the Collateral at a public sale in the county where such
Collateral is located or where this Agreement was made, or sell the Collateral
at a private sale and bid at such private sale;
(ii) notify any obligor or account debtor on Collateral to make
payment to Secured Party;
(iii) collect, by legal proceedings or otherwise, and
endorse, receive and receipt for all dividends, interest, payments, proceeds and
other sums and property now or hereafter payable on or on account of Collateral;
(iv) enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for, the Collateral;
(v) insure, process and preserve the Collateral;
(vi) transfer the Collateral to their own or their nominee's
name; and
(vii) make any compromise or settlement, and take any action
it deems advisable, and upon demand Debtor will pay the same to Secured Party
together with any
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<PAGE>
deficiency or balance on Debtor's Obligations remaining after any sale or other
disposition of the Collateral by Secured Party, with interest at the applicable
rate set forth in the Credit Agreement or as otherwise agreed.
(b) Notwithstanding subparagraph (a) above and upon the occurrence of
any event of default under Section 5 hereof, Secured Party may exercise any
other rights or remedies that it may have as a secured party under applicable
law.
(c) Debtor also agrees to pay all costs of Secured Party, including,
without limitation, reasonable attorneys' fees, incurred in connection with the
enforcement of its rights and remedies hereunder.
7. SECURED PARTY'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Debtor hereby irrevocably constitutes and appoints Secured
Party and any officer or agent thereof, with full power or substitution, as
its true and lawful attorney-in-fact with full irrevocable power and
authority in the place and stead of Debtor and in the name of Debtor or in
its own name, from time to time in Secured Party's discretion, for the
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute and deliver any and all documents and
instruments that may be necessary or desirable to accomplish the purposes of
this Agreement.
(b) Secured Party agrees that, except as upon the occurrence and
during the continuation of an Event of Default, it will forebear from exercising
the power of attorney or any rights granted to Secured Party pursuant to this
Section 7. Debtor hereby ratifies, to the extent permitted by law, all that
said attorneys shall lawfully do or cause to be done by virtue hereof. The
power of attorney granted pursuant to this Section 7 is a power coupled with any
interest and shall be irrevocable until the Obligations are indefeasibly paid in
full.
(c) The powers conferred on Secured Party hereunder are solely to
protect Secured Party's interests in the Collateral and shall not impose any
duty upon it to exercise any such powers. Secured Party shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers and neither it nor any of its officers, directors, employees or agents
shall be responsible to Debtor for any act or failure to act, except for its own
gross negligence or willful misconduct.
(d) Debtor also authorizes Secured Party, at any time and from time
to time upon the occurrence and during the continuation of any Event of Default,
(i) to communicate in its own name with any party to any contract or agreement
which is part of the collateral hereunder with regard to the assignment of the
right, title and interest of Debtor in and under such contracts and agreements
and other matters relating thereto and (ii) to execute, in connection with the
sale provided for in Section 5 hereof, any endorsements, assignments or other
instruments of conveyance or transfer with respect to the Collateral.
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<PAGE>
8. Termination.
(a) This Security Agreement and the security interest granted to
Secured Party by Debtor hereunder shall terminate upon satisfaction in full of
all of the Debtor's Obligations to Secured Party by payment or conversion or
otherwise.
(b) If applicable, and promptly upon termination of this Security
Agreement, Secured Party agrees to execute and file with the California
Secretary of State a termination statement on Form UCC-2 terminating Secured
Party's security interest in the Collateral. This subparagraph (b) is subject
to specific performance and injunctive relief for the benefit of Debtor in the
event of a failure by Secured Party to duly comply with a reasonable request for
such compliance.
9. GENERAL.
(a) Such care as Secured Party gives to the safekeeping of its own
property of like kinds shall constitute reasonable care of the Collateral when
in Secured Party's possession, but Secured Party is not required to make
presentment, demand or protest, or give notice and need not take action to
preserve any rights against prior parties in connection with any obligation or
evidence of indebtedness held as Collateral.
(b) Debtor shall give Secured Party prior written notice of (i) any
change of place of business and address thereof, (ii) any change in name of
Debtor, and (iii) any change in policies or certificates of insurance required
for Collateral. Debtor hereby assigns to Secured Party any return or unearned
premium that becomes dues on any insurance which covers the Collateral.
(c) This Security Agreement is a continuing agreement and shall apply
to all past, present and future Obligations of Debtor to Secured Party, whether
or not such Obligations continue, increase, decrease or create new indebtedness
after or before payment of any prior indebtedness, notwithstanding the
bankruptcy of, or other event or proceedings affecting the Debtor.
(d) Time is of the essence. Acceptance of partial or delinquent
payments or failure to exercise any right, power or remedy shall not waive any
Obligation of Debtor or modify this Security Agreement. Secured Party, and its
successors and assigns, have all rights, powers and remedies herein and as
provided by law, including the rights, powers and remedies of a secured party
under the Uniform Commercial Code, and may exercise the same and effect any
set-off and proceed against the Collateral or other security for Debtor's
Obligations at any time.
10. CUMULATIVE RIGHTS. The rights, powers and remedies of Secured Party
under this Security Agreement shall be in addition to all rights, powers and
remedies given to Secured Party by virtue of any statute or rule of law, or any
other agreement between Debtor and Secured Party or otherwise, all of which
rights, powers and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Secured Party's security interest
in the Collateral.
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<PAGE>
11. WAIVER. Any forbearance or failure or delay by Secured Party in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Secured Party shall continue in
full force and effect until such right, power or remedy is specifically waived
in a writing executed by Secured Party. Debtor waives any right to require
Secured Party to proceed against any person or to exhaust any of the Collateral
or to pursue any remedy in Secured Party's power.
12. BINDING UPON SUCCESSORS. All rights of Secured Party under this
Security Agreement shall inure to the benefit of their successors and assigns,
and all obligations of Debtor shall bind its successors and assigns.
13. ENTIRE AGREEMENT; SEVERABILITY. This Security Agreement contains the
entire agreement between Secured Party and Debtor with respect to the subject
matter hereof. If any of the provisions of this Security Agreement shall be
held invalid or unenforceable, this Security Agreement shall be construed as if
not containing those provisions and the rights and obligations of the parties
hereto shall be construed and enforced accordingly.
14. CHOICE OF LAW. This Security Agreement shall be construed in
accordance with and governed by the internal laws of the State of California,
and where applicable and except as otherwise defined herein, terms used herein
shall have the meanings given them in the California Uniform Commercial Code.
15. PLACE OF BUSINESS; TRADE NAME; COLLATERAL LOCATION; RECORDS. Debtor
represents that its principal offices are located in 625 River Oaks Parkway, San
Jose, California 95134 and that Integrated Sensor Solutions, Inc. is the only
trade name or style used by Debtor and that the Collateral described in
Paragraphs 2(a) through 2(d) hereof is located at the locations listed on
Schedule 2 hereto and that Debtor's records concerning the Collateral are kept
at Debtor's principal offices in San Jose, California.
16. NOTICE. Any written notice, consent or other communication provided
for in this Security Agreement shall be deemed given if delivered by hand, by
courier against receipt, by certified or registered mail, return receipt
requested, or by overnight delivery service providing evidence of receipt, at
the following addresses, or to such other address with respect to any party as
such party shall notify the other in writing:
Secured Party: Silicon Systems, Inc.
14351 Myford Road
Tustin, California 92680-7022
Attn: Corporate Counsel
Tel. No.: (714) 573-6725
Fax No.: (714) 573-6908
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<PAGE>
Debtor: Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, California 95134
Attn: President
Tel. No.: (408) 324-1044
Fax No.: (408) 324-1055
17. ATTORNEYS' FEES. In the event of any controversy, claim or dispute
between or among the Debtor and Secured Party arising out of or relating to this
Security Agreement, or the breach hereof, the prevailing party shall be entitled
to recover from the losing party reasonable attorneys' fees, expenses and costs.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
DEBTOR
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ M.D. NAIK
------------------------------------
SECURED PARTY
SILICON SYSTEMS, INC.
By: /s/ WILLIAM BENDISH
------------------------------------
Its: Sr VP/CFO
-----------------------------------
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Schedule 1
to
Security Agreement
PRIOR LIENS
Lien of Silicon Valley Bank pursuant to a Business Loan Agreement dated
June 7, 1995, between Silicon Valley Bank and ISS, as evidenced by the UCC-1
Financing Statement No. 95 17160725 filed with the California Secretary of State
on June 19, 1995.
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Schedule 2
to
Security Agreement
LOCATION OF COLLATERAL
Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, California 95134
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State of California
Uniform Commercial Code
Financial Statement
Form UCC-1
[COPY OF FORM PLACED HERE]
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<PAGE>
SECURED PROMISSORY NOTE
$678,683.54 December 1, 1995
San Jose, California
FOR VALUE RECEIVED, INTEGRATED SENSOR SOLUTIONS, INC., a California
corporation ("ISS"), hereby promises to pay to SILICON SYSTEMS, INC., a Delaware
corporation ("SSi"), at the registered office of SSi, the principal sum of Six
Hundred Seventy-Eight Thousand Six Hundred Eighty-Three Dollars and Fifty-Four
Cents ($678,683.54), in lawful money of the United States of America and in
immediately available funds, on or before the earlier of (i) December 1, 1996,
or (ii) the consummation of a public offering by ISS of its Common Stock, in
accordance with the terms and provisions of Credit Agreement dated December 1,
1995 between ISS and SSi (the "Credit Agreement"), and to pay interest on such
principal amount, at such office, until such amount shall be paid in full, at
the rates per annum and as provided for in the Credit Agreement.
Capitalized terms used in this Note have the respective meanings assigned
to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of this
Note upon the occurrence of certain events. The obligations of ISS under this
Note are secured pursuant to a Security Agreement dated December 1, 1995,
between ISS and SSi (the "Security Agreement"), and all terms and conditions of
the Credit Agreement and Security Agreement are incorporated herein.
ISS waives presentment, demand, and notice of dishonor, protest and
nonpayment.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
CALIFORNIA.
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ M.D. Naik
-----------------------------
Name: M.D. Naik
Title: President
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<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of December 1, 1995 (this "Agreement")
between Integrated Sensor Solutions, Inc., a California corporation ("ISS")
(formerly known as Integrated Semiconductor Solutions, Inc.), and Silicon
Systems, Inc., a Delaware corporation ("SSi").
WHEREAS, SSi has provided products to ISS, and as a result thereof, ISS is
indebted to SSi in the amount of $678,683.54; and
WHEREAS, SSi and ISS desire to evidence such obligation by a secured
promissory note from ISS;
NOW, THEREFORE, in consideration of the foregoing, the mutual agreements
and covenants set forth below and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1 - DEFINITIONS
The following definitions shall be applicable to both the singular and
plural forms of the defined terms:
1.1 "Affiliate" means any Person which directly or indirectly controls,
is controlled by, or is under common control with, another Person.
"Control," "controlled by" and "under common control with" means direct or
indirect possession of the power to direct or cause the direction of
management or policies (whether through ownership of voting securities, by
contract or otherwise); provided that control shall be conclusively presumed
when any Person or affiliated group directly or indirectly owns five percent
or more of the securities having ordinary voting power for the election of
directors of a corporation; and provided that ISS and SSi shall not be
considered Affiliates.
1.2 "Agreement" means this Agreement as it may be amended from time to
time.
1.3 "Credit Documents" means, individually and collectively, this
Agreement, the Secured Note, the Secured Agreement and all other contracts,
instruments, addenda and documents executed in connection with the extension of
credit which is the subject of this Agreement, including, without limitation,
any financing statements and other documents and instruments related to the
security interest granted to SSi pursuant to this Agreement.
1.4 "Event of Default" means by any event described in ARTICLE 8.
1.5 "GAAP" means generally accepted accounting principles and practices
consistency [SIC] applied.
<PAGE>
1.6 "Liens" means any voluntary or involuntary security interest, mortgage,
pledge, claim, charge, encumbrance, title retention agreement, or third party
interest, covering all or any part of the property of ISS or any other Person.
1.7 "May 1993 Agreement" means that certain Loan and Security Agreement
dated May 30, 1993 between SSi and ISS.
1.8 "Person" means any individual or entity.
1.9 "Related Person" means any Affiliate of ISS, or any officer, employee,
director or shareholder of ISS or any Affiliate, or a relative of any of them.
1.10 "Secured Note" means the promissory note to SSi, substantially in the
form attached hereto as EXHIBIT A, executed by ISS to evidence the Loans.
1.11 "Security Agreement" means the Security Agreement between SSi and ISS,
substantially in the form attached hereto as EXHIBIT B.
1.12 "Shares" means any shares of ISS Common Stock issued or issuable to
SSi pursuant to this Agreement.
1.13 "Silicon Valley Bank Credit Agreement" shall mean that Business Loan
Agreement dated June 7, 1995, between Silicon Valley Bank and ISS providing for
the loan of up to $1,000,000 to ISS, secured by substantially all the assets of
ISS.
ARTICLE 2 - SECURED NOTE
2.1 EVIDENCE OF INDEBTEDNESS. ISS and SSi hereby acknowledge and agree
that as of December ____, 1995, ISS was indebted to SSi in the amount of
$678,683.54 for SSi products purchased by ISS, as evidenced by SSi's invoices
to ISS listed on EXHIBIT C. In consideration of the postponement of the
payment and collection of such indebtedness, SSi agrees to take and ISS
agrees to execute and deliver to SSi a secured promissory note in the amount
of $678,683.54 to the order of SSi (the "Secured Note"), substantially in the
form attached hereto as EXHIBIT A, which amount together with any and all
interest accrued thereon from December 1, 1995 and any other amounts due and
payable with respect thereto shall be due and payable on the earlier of
December 1, 1996 or the closing of a public offering of ISS Common Stock.
2.2 INTEREST ON THE SECURED NOTE. The outstanding principal amount of
the Secured Note shall bear simple interest at the rate of nine percent (9%)
per annum, payable on the due date of the Secured Note. All interest
payments shall be made by delivery to SSi of that number of shares of Common
Stock of ISS equal to the amount of interest then due divided by $1.51
(subject to adjustment as set forth in Section 2.6).
2.3 ACCELERATION. If the obligations under the Secured Note are
accelerated pursuant to and in accordance with the terms of this Agreement,
ISS shall immediately pay to SSi on demand, all principal outstanding under
the Secured Note and all other sums due
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<PAGE>
and owing under any Credit Document including, without limitation, any costs
and expenses incurred by SSi in connection with such acceleration. SSi shall
provide to ISS a statement of the amount payable on account of any such
prepayment, which statement, absent obvious error, shall be conclusive
evidence thereof.
2.4 INTEREST ON OVERDUE PAYMENT. In the event that the obligations under
the Secured Note are not paid in full when due or after acceleration by SSi
pursuant to the terms hereof, any unpaid principal and interest under the
Secured Note shall bear interest from such date, at a fluctuating rate per
annum equal to the Prime Rate plus 5%, or the highest rate per annum
permitted by applicable law, whichever is less, until paid in full, whether
before or after judgment. For purposes of this Agreement, "Prime Rate" means
the rate publicly announced from time to time by First Interstate Bank as its
prime rate.
2.5 CALCULATION OF INTEREST. Interest shall be calculated on actual days
elapsed on the basis of a 360-day year. In the case of interest on any
overdue payments hereunder, each change in the rate of interest shall become
effective on the date each Prime Rate change is publicly announced by First
Interstate Bank. In no event shall ISS be obligated to pay interest at a
rate in excess of the highest rate permitted by applicable law from time to
time in effect.
2.6 ADJUSTMENT OF CONVERSION RATE FOR INTEREST PAYMENT. The price at
which Shares are used to pay interest as set forth in Section 2.2, shall be
adjusted from time to time as follows:
(a) On any recapitalization of ISS through the subdivision or
combination of ISS's outstanding shares of Common Stock into a greater or
smaller number of shares, such prices shall be reduced or increased,
respectively, in the same proportion.
(b) If ISS takes a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend or other distribution
payable in Common Stock, or in securities convertible or exchangeable for
Common Stock, the maximum number of shares of Common Stock issuable in
payment of such dividend or distribution, or on conversion of or in exchange
for the securities convertible into or exchangeable for Common Stock, shall
be deemed to have been issued and to be outstanding as of such record date,
and such prices shall be decreased in proportion to the increase in the
number of outstanding shares of Common Stock resulting therefrom.
Upon the occurrence of each adjustment or readjustment of the
prices pursuant to this Section 2.6, ISS, at its expense, shall promptly
compute such adjustment or readjustment and furnish to SSi a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. ISS shall, upon written
request at any time by SSi, furnish or cause to be furnished a like
certificate setting forth (i) such adjustments and readjustments, (ii)
respective prices in effect at the time, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the
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exercise of rights hereunder.
ARTICLE 3 - REGISTRATION RIGHTS
3.1 Any shares issued by ISS to SSi under Section 2.2, shall be
considered as "Shares" under the May 1993 Agreement and SSi shall be entitled
to registration rights as set forth therein with respect to such shares.
ARTICLE 4 - SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. As security for the payment when due of
the principal of and all other amounts due and owing to SSi under the Secured
Note, and any other amounts due to SSi from ISS with respect thereto, ISS
shall enter into a Security Agreement in the form attached as EXHIBIT B.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
5.1 DUE ORGANIZATION. ISS is duly organized and validly existing in good
standing under the laws of the jurisdiction of its organization, and is duly
qualified to conduct business in each jurisdiction in which its business is
conducted;
5.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The execution, delivery
and performance of all Credit Documents executed by ISS are within ISS's
powers, have been duly authorized and all such Credit Documents constitute
valid and binding obligations of ISS, enforceable against ISS in accordance
with their respective terms;
5.3 COMPLIANCE WITH APPLICABLE LAWS. ISS has complied with all
licensing, permit and fictitious name requirements, if any, necessary to
lawfully conduct the business in which it is engaged and with all laws and
regulations applicable to any sales, leases or the furnishing of services by
ISS, including without limitation those requiring consumer or other
disclosures;
5.4 LICENSES, TRADEMARKS. ISS has all patents, licenses, trademarks,
trademark rights, trade names, trade name rights, copyrights, permits and
franchises required in order for ISS to conduct its business ad operate its
properties as now or proposed to be conducted without conflict with the
rights of others.
5.5 NO CONFLICT. The execution, delivery, and performance by borrower
of all Credit Documents are not in conflict with the articles of
incorporation or bylaws of ISS or any law, rule, regulation, order or
directive, or any indenture agreement, or other agreement, document,
instrument or undertaking to which ISS is a party or by which ISS or its
properties may be bound or affected;
5.6 NO LITIGATION, CLAIMS, OR PROCEEDINGS. There is no litigation, tax
claim, proceeding or dispute pending, or, to the knowledge of ISS, threatened
against or affecting ISS or its property, except as disclosed in writing to
SSi prior to the date of this Agreement.
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<PAGE>
5.7 NO LIENS. Except for the Lien of Silicon Valley Bank pursuant to
the Silicon Valley Bank Credit Agreement, ISS has good and marketable title
to the Collateral (as defined in the Security Agreement) and such Collateral
is free and clear of all Liens.
5.8 CORRECTNESS OF FINANCIAL STATEMENTS ISS's financial statements
which have been delivered to SSi fairly and accurately reflect ISS's
financial condition as of December 31, 1994 and September 30, 1995; and,
since each such date, there has been no material adverse change in ISS's
financial condition or business.
5.9 NO SUBSIDIARIES. ISS has no subsidiaries and does not control any
other business entity.
5.10 NO EVENT OF DEFAULT. No Event of Default has occurred and is
continuing.
5.11 CAPITALIZATION. The authorized capital stock of ISS consists solely
of 13,500,000 shares of Common Stock, no par value, of which 8,082,968 shares
are outstanding, and 7,000,000 shares of Preferred Stock of which 2,000,000
shares are designated Series A Preferred Stock, no par value, of which
2,000,000 shares are outstanding, 678,664 shares are designated Series B
Preferred Stock, no par value, of which 678,664 shares are outstanding,
1,340,000 shares are designated Series C Preferred Stock, no par value, of
which 1,340,000 shares are outstanding and 1,325,096 are designated Series D
preferred Stock, no par value, of which 1,325,096 are outstanding. All of
the issued and outstanding shares of ISS are validly issued and outstanding,
fully paid and nonassessable, and were not issued in violation or
contravention of any applicable federal or state securities laws or
regulations or the preemptive rights of any shareholders or any agreement to
which ISS is or was a party. ISS has not granted, sold or issued, nor is a
party to any agreements, commitments or understandings providing for the
grant, sale or issuance of any of its capital stock or other securities, nor
are there outstanding any subscriptions, options, warrants, or other rights
to purchase or receive, and ISS is not obligated to issue, sell or otherwise
transfer any of its shares of capital stock or other securities. There are no
outstanding obligations, commitments, understanding or plans of ISS to
repurchase, redeem, or otherwise acquire any of its shares of capital stock
or other securities.
5.12 THE SHARES. Upon the issuance of Shares on payment of interest
hereunder, all of such Shares shall be validly issued and outstanding, fully
paid and nonassessable and free and clear of all liens, encumbrances,
security interests, equities, options, claims, charges, restrictions and
defects in title of any nature whatsoever and shall not have been issued in
violation of contravention of any applicable federal or state laws or
regulations or the preemptive rights of any shareholders or any agreement to
which ISS is or will be a party.
ARTICLE 6 - AFFIRMATIVE COVENANTS
Until the repayment in full of the Secured Note, and all accrued interest
thereon, and the payment of any other monetary obligations to SSi hereunder,
ISS will, unless SSi
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otherwise consents in writing:
6.1 NOTICE TO SSi. Promptly give written notice to SSi of:
(a) Any litigation or administrative or regulatory proceeding
affecting ISS where the amount claimed against ISS is $20,000 or more, or
where the granting of the relief requested would have a material adverse
effect on ISS' financial condition or business;
(b) Any substantial dispute which may exists between ISS and any
governmental or regulatory authority;
(c) Any Event of Default;
(d) Any change in the location of any of ISS's places of business
or of the establishment of any new, or the discontinuance of any existing,
place of business;
(e) Any other matter which has resulted or might result
in a material adverse change in ISS's financial condition or business.
6.2 TAXES AND OTHER LIABILITIES. Pay all ISS's obligations when due;
pay all taxes and other governmental or regulatory assessments before
delinquency or before any penalty attaches thereto, except as may be
contested in good faith by the appropriate procedures and for which ISS shall
maintain appropriate reserves; and timely file all required tax returns.
6.3 RESERVATION OF STOCK. At all times reserve and keep available out
of its authorized by unissued shares of Common Stock sufficient shares of its
Common Stock solely for the purpose of effecting the payment of accrued
interest on the Secured Note; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient, ISS will take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock so such number of shares as shall be sufficient for
such purposes.
6.4 PAYMENT TERMS. Notwithstanding Section 4.1 of the May 1993
Agreement, pay for all SSi products and services on a net 30 days basis.
ARTICLE 7 - NEGATIVE COVENANTS
Until repayment in full of the Secured Note, and all accrued interest
thereon, and the payment of any other monetary obligations to SSi hereunder,
ISS will not, without SSi's prior written consent:
7.1 INDEBTEDNESS. By indebted for borrowed money, the deferred purchase
price of property, or leases which would be capitalized in accordance with
GAAP; or become liable as surety, guarantor, accommodation party or otherwise
for or upon the obligation of any other Person, except:
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(a) The acquisition of supplies or inventory on normal trade
credit;
(b) The endorsement of negotiable instruments for deposit or
collection in the ordinary course of ISS's business;
(c) The indebtedness of ISS under this Agreement; and
(d) Indebtedness to Silicon Valley Bank pursuant to the Silicon
Valley Bank Credit Agreement.
7.2 LIENS. Create, incur, assume or permit to exist any Lien, or grant
any other Person a negative pledge, on any of ISS's property, except:
(a) Involuntary Liens which, in the aggregate, would not have a
material adverse effect on ISS's financial condition or business;
(b) Liens for current taxes or other governmental or regulatory
assessments which are not delinquent, or which are contested in good faith by
the appropriate procedures and for which appropriate reserves are maintained:
(c) Liens in favor of SSi; and
(d) Lien in favor of Silicon Valley Bank pursuant to the Silicon
Valley Bank Credit Agreement.
7.3 DIVIDENDS. Pay any dividends except those payable solely in ISS's
capital stock; or purchase, redeem or otherwise acquire for value or make any
other distribution with respect to any of ISS's capital stock.
7.4 LIMITATION ON CAPITAL EXPENDITURES. Except with the written consent
of SSi, expend or be committed to expend $80,000.00 or more in the aggregate
for the acquisition of gross fixed or capital assets during the period
commencing on the date hereof through the payment in full of all obligations
of ISS to SSi.
7.5 TRANSACTIONS WITH RELATED PERSONS. Directly or indirectly enter
into any transaction with or for the benefit of a Related Person on terms
more favorable than would have been obtained in an "arms' length" dealing.
ARTICLE 8 - EVENTS OF DEFAULT
8.1 EVENTS OF DEFAULT. The occurrence of any of the following shall, at
SSi's option, constitute an "Event of Default" by ISS hereunder:
(a) ISS shall fail to make any payment of principal or interest
when due under this Agreement or to pay any fees or other charges when due,
or ISS or any other Person shall fail to provide SSi with, or to perform any
obligation under, any Credit Document;
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<PAGE>
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by ISS shall prove to have been false
or misleading;
(c) ISS shall fail to pay its debts generally as they become due
or shall file any petition or action for relief under any bankruptcy,
insolvency, reorganization, moratorium, creditor composition law, or any
other law for the relief of or relating to debtors; an involuntary petition
shall be filed under any bankruptcy law against ISS, or a custodian,
receiver, trustee, assignee for the benefit of creditors, or other similar
official, shall be appointed to take possession, custody or control of the
property of ISS; or the dissolution or termination of business of ISS;
(d) ISS shall fail to perform under this Agreement, any other
Credit Document, the May 1993 Agreement, or any agreement related thereto or
any other agreement involving the borrowing of money, the purchase or
property, the advance of credit or any other monetary liability of any kind
to any Person;
(e) Any governmental or regulatory authority shall take any
action, any defined benefit pension plan maintained by ISS shall have any
unfunded liabilities, or any other event shall occur, any of which, in the
judgment of SSi, might have a material adverse effect on the financial
condition or business of ISS;
(f) SSi shall not have a perfected security interest in
(subordinate only to Silicon Valley Bank's Lien under the Silicon Valley Bank
Credit Agreement), or shall deem itself insecure with respect to the value
of, any collateral being held for obligations evidenced by the Credit
Documents;
(g) Any judgment(s) shall be entered against ISS or any
involuntary Lien(s) of any kind or character shall attach to any assets or
property of ISS any of which, in the judgment of SSi, might have a material
adverse effect on the financial condition or business of ISS;
(h) Without SSi's prior written consent, ISS's shareholders of
record as of the date hereof shall cease to own a majority of the voting
interest in ISS; or any change shall occur in the executive management of ISS
or any change shall occur in the corporate or legal structure of ISS; or
(i) ISS shall fail to perform any of its duties or obligations
under any Credit Document not specifically referenced in this ARTICLE 8.
If such default shall continue unremedied for a period of five (5)
days after notice thereof to ISS from SSi, THEREUPON, SSi may do any one or
more of the following:
(a) declare, without presentment, demand, protest or notice of
nonpayment or dishonor or any other notices or demands of any kind, all of
which ISS hereby expressly waives, all amounts of principal and any and all
other amounts due and
-8-
<PAGE>
owing under any Credit Documents to be immediately due and payable, whereupon
all of such amounts and other amounts declared due and payable shall be and
become immediately due and payable;
(b) exercise any and all of the rights and remedies conferred
upon SSi under this Agreement, the Security Agreement or any other Credit
Document either concurrently or in such order as SSi may determine;
(c) exercise in respect of the Collateral, in addition to all
other rights and remedies provided for herein, in the Security Agreement or
otherwise available to it, all rights and remedies of a secured party after
default under the Uniform Commercial Code in force and effect in the State of
California at that time;
(d) exercise any other right or remedy provided by contract or
applicable law;
PROVIDED, that if such default cannot be cured with the payment of money,
then ISS shall have an additional two (2) days to remedy any such default so
long as ISS shall be diligently and in good faith seeking to remedy such
default.
8.2 SPECIAL REMEDIES UPON DEFAULT. In addition to the remedies set forth
in this Article 8, upon the occurrence and continuance of an Event of
Default, ISS shall and hereby does grant to SSi a perpetually royalty-free,
non-exclusive license to commercially exploit any and all ISS patents and
other technology of ISS, including, without limitation, its circuit design
cell libraries and circuit macros, which ISS now or at the time of default
possesses, and a perpetually royalty-free, non-exclusive license to
manufacture, use and sell ISS Application Specific Integrated Circuit (ASIC)
products which are non-proprietary to any third party. ISS shall take all
actions reasonably requested by SSi to permit SSi to exploit such licenses.
ARTICLE 9 - GENERAL PROVISIONS
9.1 NOTICES. Any notice given by any party under any Loan Document
shall be in writing and personally delivered, sent by United States mail,
postage prepaid, or sent by telex or other authenticated message, charges
prepaid and addressed as follows:
TO ISS: TO SSI:
Integrated Sensor Solutions, Inc. Silicon Systems, Inc.
625 River Oaks Parkway 14351 Myford Road
San Jose, California 95134 Tustin, California 92680-7022
Attn: President Attn: Corporate Counsel
Tel. No.: (408) 324-1044 Tel. No.: (714)-573-6725
Fax No.: (408) 324-1055 Fax No.: (714) 573-6908
Each party may change the address to which notices, requests and other
communications
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are to be sent by giving written notice of such change to each other party.
9.2 DISPUTE RESOLUTION.
(a) MANDATORY ARBITRATION. Any controversy or claim between or
among the parties including but not limited to those arising out of or
relating to this Agreement or any Credit Document, including any claim based
on or arising from an alleged tort, shall be determined by arbitration in
accordance with Title 9 of the U.S. Code and the Commercial Arbitration Rules
of the American Arbitration Association ("AAA") in Orange County, California.
All statutes of limitations which would otherwise be applicable shall apply
to any arbitration proceeding under this subparagraph (a). Judgment upon the
award rendered may be entered in any court having jurisdiction.
(b) PROVISIONAL REMEDIES, SELF HELP, AND FORECLOSURE. No
provision of, or the exercise of any rights under, subparagraph (a), shall
limit the right of any party to exercise self help remedies such as setoff,
to foreclose against any collateral, or to obtain provisional or ancillary
remedies such as injunctive relief or the appointment of a receiver from a
court having jurisdiction before, during or after the pendency of any
arbitration. The institution and maintenance of an action for judicial
relief or pursuant of provisional or ancillary remedies or exercise of self
help remedies shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to arbitration.
9.3 BINDING EFFECT. The Credit Documents shall be binding upon and
inure to the benefit of ISS and SSi and their successors and assign's
provided, however, that ISS may not assign or transfer ISS's rights or
obligations under any Loan Document without SSi's prior written consent.
9.4 NO WAIVER. Any waiver, consent or approval by SSi of any Event of
Default or breach of any provision, condition, or covenant of any Credit
Document must be in writing and shall be effective only to the extent set
forth in writing. No waiver of any breach of default shall be deemed a
waiver of any later breach or default of the same or any other provision of
any Credit Document. No failure or delay on the part of SSi in exercising
any power, right, or privilege under any Credit Document shall operate as a
waiver thereof, and no single or partial exercise of as [SIC] such power,
right, or privilege shall preclude any further exercise thereof or the
exercise of any other power, right or privilege.
9.5 RIGHTS CUMULATIVE. All rights and remedies existing under the
Credit Documents are cumulative to, and not exclusive of, any other rights or
remedies available under contract of applicable law.
9.6 UNENFORCEABLE PROVISIONS. Any provision of any Credit Document
executed by ISS which is prohibited or unenforceable in any jurisdiction,
shall be so only as to such jurisdiction and only to the extent of such
prohibition or unenforceability, but all the remaining provisions of any such
Credit Document shall remain valid and enforceable.
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9.7 GOVERNING LAW. Except as may be otherwise expressly stated therein,
the Credit Documents shall be governed by, and construed in accordance with,
the laws of the State of California.
9.8 ACCOUNTING TERMS. Except as otherwise provided in this Agreement,
accounting terms and financial covenants and information shall be determined
and prepared in accordance with GAAP as in effect on the date of this
Agreement.
9.9 INDEMNIFICATION. ISS shall indemnify SSi against, and hold SSi
harmless from, all claims, actions, losses, and expenses, including
attorneys' fees and costs incurred by SSi, arising from any contention that
ISS has failed to comply with any law, rule, regulation, order or directive
applicable to ISS in connection herewith except for any such contention which
is due to SSi's willful misconduct or gross negligence as finally determined
by a court of competent jurisdiction. This indemnification shall survive the
repayment of all principal and other amounts payable in connection with this
Agreement, the Secured Note and any other Credit Documents.
9.10 REIMBURSEMENT. Except as may otherwise be provided for in a written
agreement between ISS and SSi entered into subsequent to the date hereof, ISS
shall reimburse SSi for all costs and expenses, including, without
limitation, reasonable attorneys' fees, expended or incurred by SSi in any
arbitration, judicial reference, legal action or otherwise in connection with
(a) the enforcement of the Credit Documents, including, without limitation,
during a workout, attempted workout, and/or in connection with the rendering
of legal advice as to SSi's rights, remedies and obligations under the Credit
Documents in connection therewith, (b) collecting any sum which becomes due
and owing to SSi under any Credit Document, (c) any proceeding for
declaratory relief, any counterclaim to any proceeding, or any appeal, or (d)
the protection, preservation or enforcement of any rights of SSi hereunder or
under any Credit Document.
9.11 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts which, when taken together, shall constitute but one
original agreement.
9.12 ENTIRE AGREEMENT. The Credit Documents are intended by the parties
as the final expression of their agreement and therefore contain the entire
agreement between the parties and supersede all prior understandings or
agreements concerning the subject matter hereof. This Agreement may be
amended only in a writing signed by ISS and SSi.
9.13 CAPTIONS. The captions, headings and arrangements used in this
Agreement are for convenience only and do not and shall not be deemed to
effect, limit, amplify or modify the terms and provisions hereof.
IN WITNESS WHEREOF, ISS and SSi have executed this Agreement as of the
date set forth in the preamble.
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INTEGRATED SENSOR
SOLUTIONS, INC. SILICON SYSTEMS, INC.
By: /s/ M.D. NAIK By: /s/ WILLIAM E. BENDISH
---------------------- -----------------------
Name Name
--------------------- ----------------------
Title: President Title: Sr VP/CFO
------------------- --------------------
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EXHIBIT A
[Form of Secured Note]
SECURED PROMISSORY NOTE
$678,683.54 December 1, 1995
San Jose, California
FOR VALUE RECEIVED, INTEGRATED SENSOR SOLUTIONS, INC., a California
corporation ("ISS"), hereby promises to pay to SILICON SYSTEMS, INC., a Delaware
corporation ("SSi"), at the registered office of SSi, the principal sum of Six
Hundred Seventy-Eight Thousand Six Hundred Eighty-Three Dollars and Fifty-Four
Cents ($678,683.54), in lawful money of the United States of America and in
immediately available funds, on or before the earlier of (i) December 1, 1996,
or (ii) the consummation of a public offering by ISS of its Common Stock, in
accordance with the terms and provisions of Credit Agreement dated December 1,
1995 between ISS and SSi (the "Credit Agreement"), and to pay interest on such
principal amount, at such office, until such amount shall be paid in full, at
the rates per annum and as provided for in the Credit Agreement.
Capitalized terms used in this Note have the respective meanings assigned
to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of this
Note upon the occurrence of certain events. The obligations of ISS under this
Note are secured pursuant to a Security Agreement dated December 1, 1995,
between ISS and SSi (the "Security Agreement"), and all terms and conditions of
the Credit Agreement and Security Agreement are incorporated herein.
ISS waives presentment, demand, and notice of dishonor, protest and
nonpayment.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
CALIFORNIA.
INTEGRATED SENSOR SOLUTIONS, INC.
By:
------------------------------
Name:
Title:
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SCHEDULE 1
TO
SECURITY AGREEMENT
PRIOR LIENS
Lien of Silicon Valley Bank pursuant to a Business Loan Agreement dated
June 7, 1995, between Silicon Valley Bank and ISS, as evidenced by the UCC-1
Financing Statement No. 95 17160725 filed with the California Secretary of State
on June 19, 1995.
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SCHEDULE 2
TO
SECURITY AGREEMENT
LOCATION OF COLLATERAL
Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, California 95134
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EXHIBIT C
INVOICE # INVOICE DATE TOTAL
--------- ------------ -----
102429 04/17/95 $ 36,626.70
102429 04/17/95 6,626.70
102487 04/18/95 619.18
102499 04/19/95 700.00
102550 04/21/95 39,620.28
102548 04/21/95 14,704.22
102547 04/21/95 6,993.69
102531 04/21/95 16,126.05
102746 04/28/95 25,000.00
102747 05/02/95 371.54
102854 05/02/95 289.00
103047 05/09/95 3,094.83
103048 05/09/95 12,558.48
103034 05/09/95 2,259.99
103061 05/10/95 333.75
103082 05/11/95 53,043.19
103071 05/11/95 20,301.96
103232 05/16/95 1,080.00
103231 05/16/95 148.00
103330 05/18/95 11,984.10
103338 05/19/95 7,388.80
103337 05/19/95 29,098.70
103342 05/19/95 14,904.42
103341 05/19/95 980.34
A-202 05/18/95 7,753.00
103449 05/23/95 1,125.00
103448 05/23/95 1,125.00
103450 05/23/95 111.50
103451 05/23/95 731.70
103479 05/24/95 9,019.25
103478 05/24/95 4,375.25
103524 05/26/95 27,347.20
103515 05/26/95 20,976.13
103609 05/27/95 14,704.22
103734 06/02/95 3,471.45
103736 06/02/95 4,663.54
103772 06/05/95 11,654.22
103818 06/06/95 2,250.00
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INVOICE # INVOICE DATE TOTAL
--------- ------------ -----
103819 06/06/95 81.20
103888 06/08/95 2,333.69
103887 06/08/95 4,663.69
103892 06/08/95 2,144.45
103893 06/08/95 10,619.60
103894 06/08/95 1,370.75
104014 06/16/95 27,038.75
104204 06/16/95 11,200.00
104025 06/16/95 4,900.00
102429 04/17/95 6,626.70
104084 06/19/95 18,178.00
104172 06/23/95 9,423.30
104339 06/23/95 2,250.00
104471 06/30/95 123.90
104703 07/12/95 251.72
104780 07/17/95 8,492.58
104937 07/21/95 1,400.00
105083 07/26/95 114,258.55
105220 07/31/95 3,649.19
105315 08/07/95 365.85
105336 08/08/95 126.08
105579 08/18/95 1,506.13
105813 08/21/95 2.89
105912 08/29/95 757.18
105980 08/31/95 10,321.87
6384701 09/06/95 1,973.87
6384901 09/07/95 3,507.49
6333502 09/12/95 8,471.12
4882822 09/15/95 53,737.00
TOTAL $678,683.64
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INTEGRATED SENSOR SOLUTIONS, INC.
LOAN AND SECURITY AGREEMENT
1
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . 2
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . 7
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . 7
2.1 Revolving Credit Facility. . . . . . . . . . . . . . . . . . 7
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Interest Rates, Payments, and Calculations . . . . . . . . . 8
2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . 9
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.6 Additional Costs . . . . . . . . . . . . . . . . . . . . . . 9
2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Conditions Precedent to Initial Credit Extension . . . . . . 10
3.2 Conditions Precedent to all Credit Extensions. . . . . . . . 10
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . 10
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . 11
4.2 Delivery of Additional Documentation Required. . . . . . . . 11
4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . 11
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . 11
5.1 Due Organization and Qualification . . . . . . . . . . . . . 11
5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . 11
5.3 No Prior Encumbrances. . . . . . . . . . . . . . . . . . . . 11
5.4 Bona Fide Eligible Accounts. . . . . . . . . . . . . . . . . 11
5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . 11
5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.8 No Material Adverse Change in Financial Statements . . . . . 12
5.9 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.10 Regulatory Compliance. . . . . . . . . . . . . . . . . . . . 12
5.11 Environmental Condition. . . . . . . . . . . . . . . . . . . 12
5.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.13 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 12
5.14 Government Consents. . . . . . . . . . . . . . . . . . . . . 12
5.15 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . 12
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Good Standing. . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Government Compliance. . . . . . . . . . . . . . . . . . . . 13
6.3 Financial Statements, Reports, Certificates. . . . . . . . . 13
6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . 13
6.5 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.6 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . 14
6.8 Quick Ratio. . . . . . . . . . . . . . . . . . . . . . . . . 14
6.9 Quick Ratio (Consolidated) . . . . . . . . . . . . . . . . . 14
6.10 Debt-Net Worth Ratio . . . . . . . . . . . . . . . . . . . . 14
6.11 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . 14
6.12 Profitability. . . . . . . . . . . . . . . . . . . . . . . . 14
6.13 Equity Infusion. . . . . . . . . . . . . . . . . . . . . . . 14
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TABLE OF CONTENTS
(continued)
Page
----
6.14 Zero Balance . . . . . . . . . . . . . . . . . . . . . . . . 15
6.15 Further Assurances . . . . . . . . . . . . . . . . . . . . . 15
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2 Change in Business . . . . . . . . . . . . . . . . . . . . . 15
7.3 Mergers or Acquisitions. . . . . . . . . . . . . . . . . . . 15
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 15
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . 15
7.6 Distributions. . . . . . . . . . . . . . . . . . . . . . . . 15
7.7 Investments. . . . . . . . . . . . . . . . . . . . . . . . . 15
7.8 Transactions with Affiliates/Subsidiaries. . . . . . . . . . 15
7.9 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . 15
7.10 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.11 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 16
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.1 Payment Default. . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . 16
8.3 Material Adverse Change. . . . . . . . . . . . . . . . . . . 16
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . 17
8.7 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . 17
8.8 Judgments. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.9 Misrepresentations . . . . . . . . . . . . . . . . . . . . . 17
9. BANK'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . 17
9.1 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . 17
9.2 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . 18
9.3 Accounts Collection. . . . . . . . . . . . . . . . . . . . . 18
9.4 Bank Expenses. . . . . . . . . . . . . . . . . . . . . . . . 18
9.5 Bank's Liability for Collateral. . . . . . . . . . . . . . . 19
9.6 Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . 19
9.7 Demand; Protest. . . . . . . . . . . . . . . . . . . . . . . 19
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . . . . . . 19
12. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . 20
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . 20
12.2 Indemnification. . . . . . . . . . . . . . . . . . . . . . . 20
12.3 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . 20
12.4 Severability of Provisions . . . . . . . . . . . . . . . . . 20
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . 20
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 20
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of July 10, 1996, by
and between SILICON VALLEY BANK ("Bank") and INTEGRATED SENSOR SOLUTIONS, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower 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
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 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 Borrower and Borrower's Books
relating to any of the foregoing.
"Advance" or "Advances" means an Advance under the Revolving
Facility.
"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.
"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 (including fees and expenses
of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning 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 2.1.1
hereof.
"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.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Line" means One Million Dollars ($1,000,000).
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"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.
"Credit Extension" means an Advance or Letter of Credit.
"Consolidated 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 Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Credit Extensions 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 Borrower or any Subsidiary to a date more than one year from the date
of determination, but excluding Subordinated Debt.
"Consolidated 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
Borrower determined in accordance with GAAP.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the non-consolidated balance sheet of Borrower, as at such date, plus, to the
extent not already included therein, all outstanding Credit Extensions 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 Borrower to a date more than one
year from the date of determination, but excluding Subordinated Debt.
"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 Borrower's business that comply with all of Borrower's
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 notification thereof to Borrower 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;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
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<PAGE>
(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 does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage, except (i) Accounts with respect to BLD
Products, Inc., Breed Technologies, Inc. and IC Sensors, Inc., for which the
applicable percentage shall be thirty-five percent (35%), and (ii) as
approved in writing by Bank;
(j) Accounts with respect to which the account debtor 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 is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the
United States and (i) that Bank approves on a case-by-case basis, or (ii) that
are Accounts with respect to which the account debtor is Stanley Electric Co.
(Honda), Omron Corporation, Nagano Keiki Seisakusho, Matsuda Micronics Corp. or
Nippon Precision Device Corporation.
"Equity Infusion" means the receipt by Borrower of cash proceeds
from the sale of its capital stock or Subordinated Debt, other than in a
nonfinancing transaction to employees, officers, directors or consultants of the
Borrower, in an aggregate amount of no less than Two Million Five Hundred
Thousand Dollars ($2,500,000).
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which 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 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
4
<PAGE>
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
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 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.
"Letter of Credit" has the meaning set forth in Section 2.1.2
hereof.
"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 Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means the date immediately preceding the first
anniversary date of this Agreement.
"Negotiable Collateral" means all of 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 Borrower 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 and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that 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 Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of 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;
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<PAGE>
(c) Subordinated Debt; and
(d) Indebtedness to trade creditors incurred in the ordinary
course of business.
"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, PROVIDED the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely 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; and
(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.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the non-consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.1.1 hereof.
"Schedule" means the schedule of exceptions, if any, attached
hereto.
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<PAGE>
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by 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 Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the non-consolidated total assets of Borrower
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 non-consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
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 CREDIT FACILITY.
2.1.1 ADVANCES. Subject to and upon the terms and conditions
of this Agreement, Bank agrees to make Advances to Borrower in an aggregate
amount not to exceed the lesser of (i) the Committed Line MINUS the face amount
of all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit) or (ii) the Borrowing Base MINUS the face amount of all outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit). For
purposes of this Agreement, "Borrowing Base" shall mean an amount equal to
seventy-five percent (75%) of Eligible Accounts. Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1
may be repaid and reborrowed at any time prior to the Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. 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 B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower 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 Advances made under this Section 2.1.1 to Borrower's
deposit account.
The Revolving Facility shall terminate on the Maturity Date, at which time
all Advances under this Section 2.1.1 and all other obligations under this
Agreement shall be immediately due and payable.
2.1.2 LETTERS OF CREDIT.
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(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower (the "Letters of Credit") in an aggregate face amount not to
exceed the lesser of (i) the Committed Line MINUS the then outstanding principal
balance of the Advances , or (ii) the Borrowing Base MINUS the then outstanding
principal balance of the Advances; PROVIDED that the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of Credit) shall not
in any case exceed Five Hundred Thousand Dollars ($500,000). Each such Letter
of Credit shall have an expiry date no later than the Maturity Date. All such
Letters of Credit shall be, in form and substance, acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank's form
of application and letter of credit agreement. All amounts actually paid by
Bank in respect of a Letter of Credit shall, when paid, constitute an Advance
under the Committed Line.
(b) The Obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any Letters of Credit.
(c) (i) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand for
payment is made under any Letter of Credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(ii) Upon the issuance of any Letter of Credit payable
in a currency other than United States Dollars, Bank shall create a reserve
under the Committed Line for letters of credit against fluctuations in currency
exchange rates, in an amount equal to twenty percent (20%) of the face amount of
such Letter of Credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Committed Line shall be reduced by the amount of such reserve
for so long as such Letter of Credit remains outstanding.
(d) Borrower shall execute all standard form applications
and agreements of Bank in connection with the Letters of Credit and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Letters of Credit.
2.2 OVERADVANCES. If, at any time or for any reason, the amount of
Advances PLUS the face amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit) owed by Borrower to Bank, is greater
than the lessor of the Committed Line or the Borrowing Base, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average Daily Balance, at a rate equal
to one and three quarters (1.75) percentage points above the Prime Rate;
provided, that on the date immediately following the Equity Infusion, any
Advances shall bear interest, on the average Daily Balance, at a rate equal to
one and one quarter (1.25) percentage points above the Prime Rate.
(b) DEFAULT RATE. All Obligations shall bear interest,
from and after the occurrence 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.
(c) PAYMENTS. Interest hereunder shall be due and payable
on the ninth calendar day of each month during the term hereof. Bank shall, at
its option, charge such interest, all Bank Expenses, and all Periodic Payments
against any of Borrower's deposit accounts or against the Committed Line, in
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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.
(d) 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.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence 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.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Five Thousand
Dollars ($5,000), which fee shall be due on the Closing Date and shall be fully
earned and nonrefundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(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.
2.6 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 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,
and the result of any of the foregoing is to increase the cost to Bank,
reduce the income receivable by Bank or impose any expense upon Bank with
respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to
pay to Bank
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the amount of such 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.
2.7 TERM. This Agreement shall become effective on the
Closing Date and, subject to Section 12.7, 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 Credit Extensions 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.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The
obligation of Bank to make the initial Credit Extension 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 the Secretary of Borrower
with respect to incumbency and resolutions authorizing the execution
and delivery of this Agreement;
(c) subordination agreements and affirmations of
subordination by certain Persons;
(d) warrant to purchase stock and related
documents as Bank shall request (including, but not limited to, an
amended investor rights agreement providing for registration rights
for shares issued upon exercise of the warrant);
(e) financing statements (Forms UCC-1, UCC-3);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then
due specified in Section 2.5 hereof; and
(h) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The
obligation of Bank to make each Credit Extension, including the
initial Credit Extension, 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 Credit Extension 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 Credit Extension. The making of each Credit
Extension shall be deemed to be a representation and warranty by
Borrower on the date of such Credit Extension as to the accuracy of
the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
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4.1 GRANT OF SECURITY INTEREST. 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 Borrower of each of its covenants and
duties under the Loan Documents. Except as set forth in the Schedule,
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.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED.
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 Borrower's usual business hours, to
inspect Borrower's Books and to make copies thereof and to check,
test, and appraise the Collateral in order to verify Borrower's
financial condition or the amount, condition of, or any other matter
relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. 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.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution,
delivery, and performance of the Loan Documents are within Borrower's
powers, have been duly authorized, and are not in conflict with nor
constitute a breach of any provision contained in Borrower's Articles
of Incorporation or Bylaws, nor will they constitute an event of
default under any material agreement to which Borrower is a party or
by which Borrower is bound. Borrower is not in default under any
agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and
indefeasible title to the Collateral, free and clear of Liens, except
for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are
bona fide existing obligations. 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. Borrower has not 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. All Inventory is in all
material respects of good and marketable quality, free from all
material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as
disclosed in the Schedule, Borrower has not done business under any
name other than that specified on the signature page hereof. The
chief executive office of Borrower is located at the address indicated
in Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there
are no actions or proceedings pending by or against Borrower or any
Subsidiary before any court or administrative agency in which an
adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security
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interest in the Collateral. Borrower does not have knowledge of any such
pending or threatened actions or proceedings.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements related to Borrower and any
Subsidiary that have been delivered by Borrower to Bank fairly present
in all material respects Borrower's consolidated and consolidating
financial condition as of the date thereof and Borrower's consolidated
and consolidating results of operations for the period then ended.
There has not been a material adverse change in the consolidated and
consolidating financial condition of Borrower since the date of the
most recent of such financial statements submitted to Bank.
5.9 SOLVENCY. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. 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
Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not 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). Borrower has complied
with all the provisions of the Federal Fair Labor Standards Act. Borrower
has not violated any statutes, laws, ordinances or rules applicable to it,
violation of which could have a Material Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of 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 Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified 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 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 Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.12 TAXES. 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.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments (including the ownership of stock in ISS-Nagano GmbH).
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.15 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished
to Bank 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
certificates or statements not misleading.
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. 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 have a Material Adverse Effect. 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 have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. 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. 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 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. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty
(30) days after the end of each month, a company prepared balance sheet and
income statement covering Borrower's United States operations during such
period, certified by a Responsible Officer; (b) as soon as available, but in
any event within forty-five (45) days after the end of each of Borrower's
fiscal quarters, consolidated and consolidating financial statements of
Borrower prepared in accordance with GAAP, consistently applied; (c) as soon
as available, but in any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated and consolidating financial
statements of Borrower 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; (d) within five (5) days upon becoming available, copies of all
statements, reports and notices sent or made available generally by 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; (e) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000) 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, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer
in substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable and accounts payable of the Borrower's United States
operations.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted
no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on
the same basis and in accordance with the usual customary practices of
Borrower, as they exist at the time of the execution and delivery of this
Agreement. 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 Fifty Thousand Dollars ($50,000).
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6.5 TAXES. 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 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 Borrower or a Subsidiary has
made such payments or deposits; provided that 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.
6.6 INSURANCE.
(a) 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. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to
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, 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. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. Borrower 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. Beginning September 30, 1996, Borrower shall maintain,
as of the last day of each calendar month, a ratio of Quick Assets to Current
Liabilities of at least 1.25 to 1.00. Beginning December 31, 1996, Borrower
shall maintain, as of the last day of each calendar month, a ratio of Quick
Assets to Current Liabilities of at least 1.50 to 1.00.
6.9 QUICK RATIO (CONSOLIDATED). Beginning September 30, 1996,
Borrower shall maintain, as of the last day of each of Borrower's fiscal
quarters, a ratio of Consolidated Quick Assets to Consolidated Current
Liabilities of at least 1.00 to 1.00.
6.10 DEBT-NET WORTH RATIO. Borrower shall maintain, as of the last
day of each calendar month, a ratio of Total Liabilities to Tangible Net
Worth plus Subordinated Debt of not more than 1.25 to 1.00.
6.11 TANGIBLE NET WORTH. Borrower shall maintain, as of the last
day of each calendar month, a Tangible Net Worth plus Subordinated Debt of
not less than Two Million Six Hundred Thousand Dollars ($2,600,000).
6.12 PROFITABILITY. Borrower shall, as of the end of each of
Borrower's fiscal quarters, have a net profit of at least One Dollar ($1.00).
6.13 EQUITY INFUSION. The Equity Infusion shall occur on or before
September 30, 1996.
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6.14 ZERO BALANCE. During the term of the Agreement, and prior to
the Maturity Date, Borrower shall maintain a balance of no more than zero
($0.00) of Advances for a period of sixty (60) consecutive days.
6.15 FURTHER ASSURANCES. At any time and from time to time 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
Borrower covenants and agrees 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 Credit Extensions,
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 Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete
Equipment.
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 Borrower and any business substantially similar or
related thereto (or incidental thereto), or suffer a material change in
Borrower's ownership. 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.
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.
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/SUBSIDIARIES. Directly or
indirectly enter into or permit to exist any material transaction with any
Affiliate of Borrower except for transactions that are in the ordinary course
of Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person; or transfer funds to any Subsidiary other than
transfers made in the ordinary course of Borrower's business without prior
written consent of the Bank.
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.
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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 Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section
10 hereof and such other locations of which Borrower gives Bank prior written
notice and as to which 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.
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 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.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or
any interest on, any Credit Extension 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 Borrower of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13 or 6.14 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 Borrower
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 ten (10) days after Borrower receives notice thereof or any officer of
Borrower becomes aware thereof; provided, however, that if the default cannot
by its nature be cured within the ten (10) day period or cannot after
diligent attempts by Borrower be cured within such ten (10) day period, and
such default is likely to be cured within a reasonable time, then 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 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;
8.4 ATTACHMENT. If any material portion of 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 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 Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of 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 ten (10) days after Borrower receives 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
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good faith contest by Borrower (provided that no Credit Extensions will be
required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Credit Extensions will be made prior to the dismissal
of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If 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 Fifty Thousand
Dollars ($50,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no
Credit Extensions 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 warranty or
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.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, 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 Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, 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 Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such
Letters of Credit, and Borrower shall forthwith deposit and pay such amounts,
and (ii) pay in advance all Letters of Credit fees scheduled to be paid or
payable over the remaining term of the Letters of Credit;
(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 Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. 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
17
<PAGE>
incurred in connection therewith. With respect to any of Borrower's owned
premises, 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 Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
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, 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 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) Bank may credit bid and purchase at any public sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
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 Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign 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 (e)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in Section 4.2 regardless
of whether an Event of Default has occurred. The appointment of Bank as
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 Borrower of Bank's
security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to 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 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 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 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
18
<PAGE>
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 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
Borrower.
9.6 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.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or 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 Borrower may
in any way be liable.
10. 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 Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: Integrated Sensor Solutions, Inc.
625 River Oaks Pkwy.
San Jose, CA 95134
Attn: Mr. David Satterfield
FAX: (408) 324-1054
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Mr. Michael J. Rose
FAX: (408) 748-9478
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.
11. 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 of 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. 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
19
<PAGE>
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.
12. GENERAL PROVISIONS
12.1 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 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 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.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless 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 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 Borrower whether under this
Agreement, or otherwise (including without limitation reasonable attorneys
fees and expenses), except for losses caused by Bank's gross negligence or
willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 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.
12.5 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 merged into this
Agreement and the Loan Documents.
12.6 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.
12.7 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 Borrower to indemnify
Bank with respect to the expenses, damages, losses, costs and liabilities
described in Section 12.2 shall survive until all applicable statute of
limitations periods with respect to actions that may be brought against Bank
have run.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the date first above written.
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ M.D. NAIK
------------------------------
Title: Chairman, President & CEO
---------------------------
By: /s/ DAVID SATTERFIELD
------------------------------
Title: VP Finance/Secretary
---------------------------
SILICON VALLEY BANK
By: /s/ MICHAEL ROSE
------------------------------
Title: Vice President
---------------------------
21
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), 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 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
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by 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 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.
22
<PAGE>
EXHIBIT B
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) 2426 TIME:_________
- --------------------------------------------------------------------------
FROM: INTEGRATED SENSOR SOLUTIONS, INC.
----------------------------------------------------------------
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)
- --------------------------------------------------------------------------
23
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
- -------------------------------------------------------------------------------
Borrower: INTEGRATED SENSOR SOLUTIONS, INC. Lender: Silicon Valley Bank
Commitment Amount: $1,000,000
- -------------------------------------------------------------------------------
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 $_______
5. Balance of 50% over 90 day accounts $_______
6. Excess 25% concentration* $_______
7. Credit Balance over 90 days $_______
8. Foreign Accounts** $_______
9. Governmental Accounts $_______
10. Contra Accounts $_______
11. Promotion or Demo Accounts $_______
12. Intercompany/Employee Accounts $_______
13. Other (please explain on reverse) $_______
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______
15. Eligible Accounts (#3 minus #14) $_______
16. LOAN VALUE OF ACCOUNTS (75% of #15) $_______
17. TOTAL AVAILABLE BASE $_______
BALANCES
1. Maximum Loan Amount $_______
2. Total Funds Available [Lesser of #18 or #16] $_______
3. Present balance owing on Line of Credit $_______
4. Outstanding under Sublimits
(Cash Management and L/C Sublimits) $_______
5. RESERVE POSITION (#19 minus #20 and #21) $_______
* 35% concentration limit for BLD Products, Inc., Breed Technologies,
Inc. and IC Sensors, Inc.
** Stanley Electric Co. (Honda), Omron Corporation, Nagano Keiki
Seisakusho, Matsuda Micronics Corp. and Nippon Precision Device
Corporation shall be deemed Eligible Foreign Accounts.
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 SILICON VALLEY BANK.
-------------------------
COMMENTS: BANK USE ONLY
Rec'd By:
-----------
INTEGRATED SENSOR SOLUTIONS, INC. Auth. Signer
Date:
---------------
By: /s/ DAVID SATTERFIELD Verified:
------------------------------------ -----------
Authorized Signer Auth. Signer
Date:
---------------
--------------------
-------------------------
24
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: INTEGRATED SENSOR SOLUTIONS, INC.
The undersigned authorized officer of Integrated Sensor
Solutions, Inc. hereby certifies that in accordance with the terms and
conditions of the Loan and Security Agreement between Borrower and
Bank (the "Agreement"), (i) Borrower is in complete compliance for the
period ending ________ with all required covenants except as noted below and
(ii) all representations and warranties of Borrower 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>
Monthly financial statements Monthly within 30 days Yes No
Quarterly financial statements (consolidated) Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio .70:1.00* _____:1.00 Yes No
Minimum Tangible Net Worth $2,600,000 $_______ Yes No
Maximum Debt/Tangible Net Worth 1.25:1.00 _____:1.00 Yes No
Maintain on a Quarterly Basis:
Minimum Quick Ratio (Consolidated) 1.00:1.00 _____:1.00 Yes No
Profitability: Quarterly $1.00 $________ Yes No
</TABLE>
* As of 9/30/96: 1.25:100; as of 12/31/96: 1.50:1.00.
COMMENTS REGARDING EXCEPTIONS: See Attached.
------------------------------------
BANK USE ONLY
Sincerely,
Rec'd By:
/s/ DAVID SATTERFIELD ----------------------
- -------------------------------- Authorized Signer
SIGNATURE Date:
--------------------------
- -------------------------------- Verified:
TITLE ----------------------
Authorized Signer
- -------------------------------- Date:
DATE --------------------------
Compliance Status: Yes No
------------------------------------
25
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
- -------------------------------------------------------------------------------
Borrower: INTEGRATED SENSOR SOLUTIONS, INC. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a
principal amount up to $1,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for
business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Support
Working Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands 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:
Revolving Line
--------------
Amount paid to Borrower directly: $_________
Undisbursed Funds $_________
Principal $_________
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed
the following charges:
Prepaid Finance Charges Paid in Cash: $_________
$5,000 Loan Fee
$______ Accounts Receivables Audit
Other Charges Paid in Cash: $_________
$______ UCC Search Fees
$______ UCC Filing Fees
$______ Patent Filing Fees
$______ Trademark Filing Fees
$______ Copyright Filing Fees
$______ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $_________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to
deduct from Borrower's account numbered _______________ 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, BORROWER
REPRESENTS AND WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS
TRUE AND CORRECT AND THAT THERE HAS BEEN NO ADVERSE CHANGE IN
BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT
FINANCIAL STATEMENT TO BANK. THIS AUTHORIZATION IS DATED AS OF JULY
10, 1996.
BORROWER:
INTEGRATED SENSOR SOLUTIONS, INC.
/s/ DAVID SATTERFIELD
- ---------------------------------------
Authorized Officer
- -------------------------------------------------------------------------------
26
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: INTEGRATED SENSOR SOLUTIONS, INC. BANK: Silicon Valley Bank
- -------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Integrated Silicon Solutions, Inc.
("Grantor") understands that insurance coverage is required in
connection with the extending of a loan or the providing of other
financial accommodations to Grantor 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. Grantor may obtain insurance from any
insurance company Grantor may choose that is reasonably acceptable to
Bank. Grantor understands that credit may not be denied solely
because insurance was not purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank,
on or before closing, evidence of the required insurance as provided
above, with an effective date of July 10, 1996, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required
insurance or fails to continue such insurance in force, Bank may do so
at Grantor's 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. GRANTOR ACKNOWLEDGES 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, GRANTOR'S 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. For purposes of insurance coverage on the
Collateral, Grantor authorizes 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.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS
AGREEMENT IS DATED JULY 10, 1996.
GRANTOR:
INTEGRATED SENSOR SOLUTIONS, INC.
/s/ DAVID SATTERFIELD
-------------------------------------
Authorized Officer
- -------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME: ______________ _______________
INSURANCE COMPANY: ____________________________________________
POLICY NUMBER: ___________________________________________________
EFFECTIVE DATES: _________________________________________________
COMMENTS: ________________________________________________________
- -------------------------------------------------------------------------------
27
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- -------------------------------------------------------------------------------
Borrower: INTEGRATED SENSOR SOLUTIONS, INC.
- -------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Integrated
Sensor Solutions, 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 Articles 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, duly called and held, at which a quorum was present and voting
(or by other duly authorized corporate action in lieu of a meeting), 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 Silicon Valley
Bank ("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 July 10, 1996 (the "Loan Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory
note or notes of the Corporation, on Lender'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 Lender 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.
LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of
credit applications, foreign exchange agreements and other related
documents pertaining to Bank's issuance of letters of credit and
foreign exchange contracts.
ISSUE WARRANTS. To issue warrants to purchase the Corporation's
capital stock, for such series and number, and on such terms, as an
officer of the Corporation shall deem appropriate.
28
<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 July 10, 1996
and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
/s/ DAVID SATTERFIELD
--------------------------------------
29
<PAGE>
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of
August 22, 1997, by and between SILICON VALLEY BANK ("Bank") and INTEGRATED
SENSOR SOLUTIONS, INC. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of July 10, 1996, as amended, (the "Agreement"). Borrower
failed to comply with the profitability covenant contained in the Agreement.
Borrower has asked Bank to waive compliance with that section as of December
31, 1996 and to amend certain provisions of the Agreement. Bank has agreed
to waive such compliance with that section and to amend the Agreement, all in
accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Bank waives Borrower's obligation to comply with section 6.12 of the
Agreement as of the fiscal quarter ending December 31, 1996. Such waiver
does not constitute a waiver (i) of compliance with those sections as of any
other date, (ii) of any other failure by Borrower to comply with the
Agreement or any other Events of Default, now existing or hereafter arising,
or (iii) Bank's right to require compliance at all times with the terms and
conditions of the Agreement. Bank reserves all rights under the Agreement
and under applicable law.
2. The following definitions in Section 1.1 are amended to read
as follows:
"Committed Line" means Two Million Dollars ($2,000,000).
"Maturity Date" means August 21, 2001, provided Advances may be
requested under Section 2.1 only through August 21, 1998, on which date all
Advances under Section 2.1 shall be due and payable.
3. The last paragraph of Section 2.1.1 is amended to read as follows:
The Revolving Facility shall terminate on August 21, 1998, at which
time all Advances under this Section 2.1.1 shall be immediately due and
payable.
4. The second sentence of Section 2.1.2(a) is amended to read as
follows:
Each such Letter of Credit shall have an expiry date no later than
August 21, 1998.
5. The reference in Section 2.1.2 to "Five Hundred Thousand Dollars
($500,000) is amended to read "Two Million Dollars ($2,000,000)".
1
<PAGE>
6. Section 2.1.3 is added to the Agreement, as follows:
2.1.3 EQUIPMENT ADVANCES.
(a) Borrower may request one or more advances at any time prior to
August 21, 1998 (each, an "Equipment Advance" and, collectively, the
"Equipment Advances") from Bank in an aggregate principal amount not to
exceed Two Hundred Fifty Thousand Dollars ($250,000) prior to Borrower's
achieving three consecutive quarters of Debt Service Coverage greater than or
equal to 1.75 to 1.00, and Five Hundred Thousand Dollars ($500,000)
thereafter. The Equipment Advances shall be used only to purchase Equipment
approved from time to time by Bank and shall not exceed one hundred percent
(100%) of the invoice amount of such Equipment, excluding taxes, shipping,
warranty charges, freight discounts and installation expense.
(b) Interest shall accrue from the date of each Equipment Advance at a
floating rate equal to the Prime Rate plus One and One-Half Percent (1.50%)
per annum, and shall be payable monthly on the twenty-first day of each month
after the date of an Equipment Advance through August 21, 1998. The
Equipment Advance or Equipment Advances outstanding on August 21, 1998 will
be payable in thirty-six (36) equal monthly installments of principal, plus
accrued interest, on the twenty-first day of each month beginning September
21, 1998. The entire principal balance and all accrued but unpaid interest
shall be due and payable on the Maturity Date.
(c) When Borrower desires to obtain an Equipment Advance, Borrower
shall notify Bank (which notice shall be irrevocable) by facsimile
transmission received no later than 3:00 p.m. California time one (1)
Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be in substantially the form of EXHIBIT B. The notice
shall be signed by a Responsible Officer and include a copy of the invoices
for the Equipment to be purchased.
7. Section 2.3(a) is amended to read as follows:
(a) INTEREST RATE. Except as set forth in Section 2.3(b), any Advances
shall bear interest, on the average Daily Balance, at a rate equal to
three-quarters of one percent (0.75%) above the Prime Rate.
8. Sections 6.8, 6.11 and 6.12 are amended, and Section 6.16 is added,
as follows:
6.8 QUICK RATIO. Beginning July 31, 1997, Borrower shall maintain,
as of the last day of each calendar month, a ratio of Quick Assets to
Current Liabilities of at least 1.25 to 1.00.
6.11 TANGIBLE NET WORTH. Beginning July 31, 1997, Borrower shall
maintain, as of the last day of each calendar month, a Tangible Net Worth
plus Subordinated Debt of not less than Five Million Dollars ($5,000,000).
6.12 PROFITABILITY. Beginning July 31, 1997, Borrower shall be
profitable for each fiscal quarter and each fiscal year.
6.16 DEBT SERVICE COVERAGE. Beginning July 31, 1997, Borrower shall
maintain, as of the last day of each fiscal quarter, Debt Service Coverage
of at least 1.75 to 1.00. "Debt Service Coverage" means net income plus
depreciation and amortization plus interest expense for the preceding
fiscal quarter, divided by the current portion of total long term debt
plus interest expense.
2
<PAGE>
9. The Compliance Certificate to be delivered after the date of this
Amendment shall be in substantially the form of EXHIBIT D hereto.
10. 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.
11. Borrower represents and warrants that the Representations
and Warranties contained in the Agreement are true and correct as of
the date of this Amendment, and that no Event of Default has occurred
and is continuing.
12. 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.
13. As a condition to the effectiveness of this Amendment,
Borrower shall pay a Facility Fee in an amount equal to Four Thousand
Dollars ($4,000), payable upon the date hereof, plus all Bank Expenses
incurred in connection with the preparation of this Amendment,
together with Warrants to Purchase Stock, a Negative Pledge Agreement,
and an Affirmation of Subordination, all in form reasonably
satisfactory to Bank.
IN WITNESS WHEREOF, the undersigned have executed this Amendment
as of the first date above written.
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ DAVID SATTERFIELD
-------------------------------
Title: VP Finance & Admin
----------------------------
SILICON VALLEY BANK
By: /s/ MICHAEL ROSE
-------------------------------
Title:
----------------------------
3
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: INTEGRATED SENSOR SOLUTIONS, INC.
The undersigned authorized officer of Integrated Sensor Solutions, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i)
Borrower is in complete compliance for the period ending __________ with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower 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>
Monthly financial statements Monthly within 30 days Yes No
Quarterly financial statements (consolidated) Quarterly within 45 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.25-1.00 __ :__:1.00 Yes No
Minimum Tangible Net Worth $5,000,000 $_________ Yes No
Maximum Debt/Tangible Net Worth 1.25:1.00 __ :__:1.00 Yes No
Maintain on a Quarterly Basis:
Minimum Quick Ratio (Consolidated) 1.00:1.00 __ :__:1.00 Yes No
Minimum Debt Service Coverage 1.75:1.00 __ :__:1.00 Yes No
Profitability: Quarterly $1.00 $__________ Yes No
Annual $1.00 $__________ Yes No
</TABLE>
Comments Regarding Exceptions: See Attached.
-----------------------------------------
Sincerely, BANK USE ONLY
Received by:
/s/ DAVID SATTERFIELD -------------------------
- ----------------------------- AUTHORIZED SIGNER
SIGNATURE
Date:
- ----------------------------- --------------------------------
TITLE
Verified:
----------------------------
AUTHORIZED SIGNER
- -----------------------------
DATE Date:
--------------------------------
Compliance Status: Yes No
-----------------------------------------
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of August 22, 1997, by
and between INTEGRATED SENSOR SOLUTIONS, INC. ("Borrower") and SILICON VALLEY
BANK ("Bank").
In connection with the Loan Documents begin concurrently executed
between Borrower and Bank, Borrower agrees as follows:
1. Borrower shall not sell, transfer, assign, mortgage, pledge,
lease, grant a security interest in, or encumber any of Borrower's
intellectual property, including, without limitation, the following:
a. Any and all copyright rights, copyright applications,
copyright registrations and like protection in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not
the same also constitutes a trade secret now or hereafter existing, created,
acquired or held (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
c. Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections,
including, without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same,
including, without limitation, the patents and patent applications
(collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks (collectively, the "Trademarks");
f. Any and all claims for damages by way of past, present and
future infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks and all license fees and royalties arising from such
use to the extent permitted by such license or rights;
h. All amendments, extensions, renewals and extensions of any
of the Copyrights, Patents or Trademarks; and
i. All proceeds and products of the foregoing, including,
without limitation, all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
2. It shall be an Event of Default under the Loan Documents between
Borrower and Bank if there is a breach of any term of this Negative Pledge
Agreement.
3. Capitalized items used herein without definition shall have the
same meanings as set forth in the Loan and Security Agreement of even date
herewith.
INTEGRATED SENSOR SOLUTIONS, INC. SILICON VALLEY BANK
By: /s/ DAVID SATTERFIELD By: /s/ MICHAEL ROSE
------------------------------ ---------------------------
Title: Title:
--------------------------- ------------------------
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- -------------------------------------------------------------------------------
Borrower: INTEGRATED SENSOR SOLUTIONS, INC.
- -------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of INTEGRATED
SENSOR SOLUTIONS, INC. (the "Corporation"), HEREBY CERTIFY that the
Corporation is organized and existing under and by virtue of the laws of the
state of its incorporation.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation duly called and held, at which a quorum was present and voting,
(or by other duly authorized corporate action in lieu of a meeting), 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 Silicon Valley Bank
("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 the Amendment to Loan and Security Agreement dated as of August 22, 1997,
as amended from time to time by Bank and Corporation.
Execute Notes. To execute and deliver to Bank the 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.
<PAGE>
Letters of Credit. To execute letters of credit applications and
other related documents pertaining to Bank's issuance of letters of credit.
Foreign Exchange Contracts. To request Bank to enter into foreign
exchange contracts on its behalf.
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.
I FURTHER CERTIFY that attached hereto are true and correct copies
of the Certificate of Incorporation and Bylaws of the Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand on August ____,
1997 and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
/s/ DAVID SATTERFIELD
---------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
COPY 1
Copy 1: Tenant
Copy 2: ZS
Copy 3: HV-L
CASE W 85
BUSINESS PREMISES LEASE
BETWEEN
INDUSTRIEVERWALTUNGSGESELLSCHAFT AKTIENGESELLSCHAFT
ZANDERSTRABE 5, 53177 BONN
hereinafter referred to as the "Landlord"
and
ISS - INTEGRATED SENSOR SOLUTIONS GMBH
GEB. 335, KONIGSBRUCKER LANDSTRABE 159, 01109 DRESDEN
hereinafter referred to as the "Tenant".
CLAUSE 1 SUBJECT
(1) The Landlord leases to the Tenant, in the area of the property known as
Dresden-Klotsche
a) in Building No. 335 (part)
a leased area of approx. 387 m2 (marked in blue)
as per enclosed building plan (Annex 1).
The blue hatched area is in joint use.
(2) The Landlord undertakes to have the following works carried out on the
leased properties at its own expense:
- Fitting of 2 walls including doors in the corridor area to close off the
leased unit
- Fitting of a wall including door in Room 36
- Installation of a water/drainage connection for Room 35
- Making of an opening and fitting of a door between Rooms 10 and 11
<PAGE>
- Removal of the radiators in Rooms 35 and 36
- Demolition of the partition between Rooms 5 and 6
- Laying of PVC floor covering instead of needled felt in Rooms 5 and 6
Subject to this proviso, the Tenant accepts the leased properties as they stand
at the commencement of the lease, and states that it has inspected them
thoroughly. Complaints of defects, claims for reductions and other claims
relating to the nature, condition and size of the leased properties shall be
excluded.
(3) A record of the state of the leased properties and their fixtures and
fittings has been prepared by the contracting parties (Annex 3).
CLAUSE 2 PURPOSE, SUBLETTING
(1) The leased properties may be used only for the following purposes:
Development, production and marketing of sensor systems
(2) The Landlord takes no responsibility for the suitability of the leased
properties for the Tenant's purposes and offers no guarantee of protection of
fair competition. The Tenant shall itself obtain the consents and the like
necessary for its business and its operations, at its own expense, and shall
maintain the leased properties and the operations in a state that complies with
all official requirements. It shall report any modifications requiring a
structural survey or inspection by the fire brigade or industrial inspectorate.
Obligatory conditions, where imposed as a result of the Tenant's operations,
shall be met by the Tenant at its own expense, even if they should be addressed
to the Landlord. The refusal or limitation of consents and the like shall have
no effect on the substance and content of this lease.
(3) The subleasing or subletting of the leased properties or parts thereof
shall be permitted only with the written consent of the Landlord.
(4) The Tenant shall not be entitled to assign to third parties its rights
under this lease or to make them the subject of partnership agreements.
CLAUSE 3 TERM OF THE LEASE
(1) The tenancy shall begin with the handing-over of the renovated leased areas
and shall be subject to 6 months' notice of termination as of 30 June and 31
December each year, but not before 31 December 1995. The Tenant shall be
entitled to extend the lease by unilateral notice by one period of 3 years, that
is to say until 31 December 1998. All the provisions of this lease shall remain
in force unaltered during the period of extension. The exercise of this right
by the Tenant
<PAGE>
shall be notified to the Landlord by registered letter by 30 November 1995.
The punctuality of the notification shall be determined by delivery, not date
of posting.
(2) The Landlord shall be entitled to cancel the tenancy without notice in the
cases provided for by law, and in particular if the Tenant
a) fails to pay all or part of the agreed rent and ancillary payments
due, despite a formal warning, or
b) is in breach of the terms of Clauses 2, 7 (subclauses 1, 3 and 5), 8,
9 and 10 (subclauses 1 to 3) of the present lease.
(3) In the cases referred to in subclause (2) the Tenant shall be liable for
the damage caused to the Landlord as a result of failure by the Tenant or a
subtenant or sublessee to vacate or hand back the leased properties punctually.
The same shall apply if the leased properties are left empty or can only be
leased more cheaply or on less favourable terms after being vacated or handed
back by the Tenant, until the end of the initially agreed term of the lease but
no longer than a period of one year after the premises are vacated or handed
back.
(4) Notice of termination shall in all cases be given in writing. The
punctuality of the notice shall be determined by delivery of the letter of
notice, not date of posting.
CLAUSE 4 RENT AND ANCILLARY COSTS
(1) The rent as detailed in Annex 7 shall be as follows, exclusive of value
added tax:
Monthly Yearly
DM DM
a) Leased areas of buildings
318 m2 at DM/m2/month 15.00 4,770.00 57,240.00
69 m2 at DM/m2/month 8.00 552.00 6,624.00
b) Ancillary costs as per Annex 5, Clause 2 (1) 775.00 9,300.00
c) Ancillary costs as per Annex 5, Clause 2 (2) 967.50 11,610.00
7,064.50 84,774.00
The monthly rent shall be paid in advance to the recipient designated by the
Landlord in sufficient time for the Landlord to dispose thereof no later than
the 5th day of the month in question.
In the event of late receipt, the Landlord may charge the Tenant interest at 3%
over the prevailing Bundesbank discount rate, and in any event not less than 8%.
<PAGE>
(2) Any additional cost burden on the leased properties which arises out of
building works by the Tenant shall be borne by the Tenant itself or repaid to
the Landlord if demanded from and paid by the latter, if and to the extent that
the increase in value resulting from such building works has not been paid to
the Tenant and the rent raised accordingly.
(3) In the event of the introduction of new local authority charges or a
surcharge on or increase in existing charges associated with the leased
properties, the Tenant undertakes, from the time at which the additional charge
becomes effective, at the Landlord's discretion, either to pay an appropriately
increased rent or to reimburse the additional charges levied on the leased
properties.
(4) In the event of additional charges on the site resulting from public works
(especially development works) the Tenant shall additionally pay each year 11%
of the contributions attributable, pro rata, to the leased properties.
(5) Ancillary costs and settlement thereof are regulated in Annex 5.
(6) The rents and ancillary costs shown in this lease shall be net payments
within the meaning of the Value Added Tax Act applicable at the time. Value
added tax at the applicable statutory rate shall be charged separately on these
sums.
(7) The payments to be made pursuant to subclauses (2) to (6) are to be paid
simultaneously with the rent pursuant to subclause (1). If a separate account
is issued, the account shall be settled in full within 2 weeks.
CLAUSE 5 ADJUSTMENT OF RENT
(1) Tenant and Landlord may, during or after the term of the lease, request a
new agreement as to the rent and the payments for the ancillary services
pursuant to Clause 4 (5), unless special agreements have been concluded
regarding the latter. Such a request may first be made in respect of a period
beginning at least 2 years after the last rent agreement took effect.
When the new rent is agreed, due note shall be taken of any changes in the price
indices published by the German Federal Office of Statistics
- for the cost of living for 4-person households with average income from
employment and
- for buildings (business premises in general)
and of the locally customary rent payable for a new lease on an equivalent
leased property.
<PAGE>
The new rent and the payments for the ancillary services shall take effect from
the first day of the month in which the request was made by either contracting
party, but not before the expiry of 2 years since the last rent agreement became
effective.
(2) Should no agreement be reached regarding the new rent and the payments
for the ancillary services, the parties shall jointly nominate a competent
arbitrator. If no agreement is reached either regarding the new rent and the
payments for the ancillary services or regarding the arbitrator to be
nominated jointly within a period of 3 months following the request for
adjustment, the party requesting it may unilaterally request the locally
responsible Chamber of Industry and Commerce to nominate a competent
arbitrator. If the Chamber of Industry and Commerce nominates more than one
arbitrator, the party requesting adjustment shall nominate one of those named.
The arbitrator's findings shall be binding upon the contracting parties. The
costs of the arbitrator's opinion shall be borne by the unsuccessful party, or
divided pro rata if both parties are partially unsuccessful.
CLAUSE 6 ENERGY, WATER, DRAINAGE, HEATING
(1) Supply and disposal to and from the leased property shall be via the mains
networks and the Landlord's facilities. As soon as the technical requirements
are in place for direct purchase in individual supply areas via public
utilities, the Tenant shall conclude appropriate supply agreements therewith.
(2) The Landlord shall allow the Tenant to use the supply and disposal
facilities existing at the leased properties at its own risk. In the event of
faults or damage the Tenant shall arrange for immediate disconnection, and
undertakes to notify the Landlord or its representative immediately.
(3) If the supply of electricity, space heating or water or the drainage system
is interrupted by circumstances outside the Landlord's control, or in the event
of floods and other disasters, the Tenant shall have no entitlement to a
reduction and no claim for compensation against the Landlord.
For damage associated with parts of the supply lines owned by the Landlord, the
Landlord shall be liable only in the event of intent or gross negligence. It
shall be incumbent upon the Landlord to prove that no culpable conduct has
occurred.
(4) The connected load required by the Tenant at the commencement of the
tenancy is agreed to be 60 kVA. If the Tenant's connected load increases during
the term of the lease, the Tenant shall reimburse the Landlord for the resulting
costs of modifying the power supply installation. A change in the energy supply
by the
<PAGE>
responsible energy supply company, especially a variation or interruption of
the voltage, shall not entitle the Tenant to claim compensation from the
Landlord.
(5) Water may be taken from the water mains only for personal requirements. In
the event of water consumption for industrial purposes, the Tenant shall install
an intermediate water meter at its own expense and bear the water and drainage
costs pursuant to Annex 5, unless the Tenant obtains the water directly from the
water supply works.
CLAUSE 7 INSURANCE, LIABILITY
(1) The Landlord shall keep the leased properties insured, inter alia, against
fire damage at the replacement value. The basic premium for the unused leased
properties shall form part of the non-consumption-related ancillary costs
pursuant to Annex 5, Clause 1 (11). In addition, the Tenant shall bear the
premium surcharges caused by its business for the leased properties or for the
buildings in which the leased properties are located, and for any neighbouring
properties if appropriate.
The Tenant undertakes to inform the Landlord fully and promptly of the
occurrence of any circumstances that increase the risk.
(2) The Tenant shall be liable for all damage culpably caused to the leased
properties or to any other property of the Landlord by it, its dependants, its
staff or visitors. It shall be incumbent upon the Tenant to prove that no
culpable conduct occurred. In respect of actions by persons for whom the Tenant
is liable, it waives the right of defensive proof pursuant to Article 831 BGB
[German Civil Code].
(3) The Tenant shall indemnify the Landlord against all claims made during the
term of the lease by private or public third parties against the Landlord, as
the owner of the leased properties, on account of the Tenant's business or the
effects thereof. This shall also include liability situations under the Water
Resources Act and other environmental protection legislation, especially on
account of land, water or groundwater contamination caused by the Tenant's
business, including such contamination affecting neighbouring or surrounding
land.
(4) The Tenant shall at all times provide the Landlord with comprehensive
information, in writing if requested, on the nature, extent and use (including
disposal) of materials or substances that might be deemed an environmental
hazard. To this end, the Tenant shall permit access to the leased properties by
the Landlord's environment officer or his representative.
(5) The Tenant undertakes to keep itself adequately insured against its
liability arising from the obligations contractually entered into, and to
furnish evidence to the Landlord that the policies have been arranged.
<PAGE>
CLAUSE 8 MAINTENANCE, REPLACEMENT
(1) The Tenant undertakes to treat, maintain and attend to the leased
properties with all due care and not to omit anything necessary under official
regulations and general principles of law to ensure their safety, including
traffic safety.
(2) Maintenance of and repairs to the fabric shall be the responsibility of the
Landlord. All routine maintenance of and repairs to the leased properties shall
be arranged by the Tenant at its expense, and carried out correctly and
promptly. By maintenance and repair the parties understand all works necessary
to maintain the condition described in Annex 3. At the request of the Landlord
or Tenant, building inventories shall be taken to ascertain the works to be
carried out and their timing.
If the Tenant fails to comply completely and promptly with its obligation to
carry out routine maintenance and repairs the Landlord shall be entitled,
following a formal warning, to carry out the necessary works and require the
Tenant to reimburse the costs incurred thereby.
(3) The Tenant shall compensate the Landlord for depreciation caused by the
Tenant's business, in the course of use according to this lease, which goes
beyond normal depreciation.
(4) Damage to the leased properties shall be notified to the Landlord (locally
responsible office) immediately, orally and in writing.
(5) The Landlord shall have the right to care for and use existing trees and
green areas.
CLAUSE 9 STRUCTURAL AND OTHER MODIFICATIONS
(1) The Tenant shall require the prior written consent of the Landlord for
structural modifications, and other modifications that cannot be readily
reversed, to the leased properties. A written agreement shall be concluded
before the works begin regarding the costs of such structural and other
modifications, their reimbursement where relevant and any obligation upon the
Tenant to restore the leased properties to their former state at its expense on
relinquishing possession (Annex 4). The obtaining of any necessary official
approvals shall be the responsibility of the Tenant.
The Tenant shall not be entitled to reimbursement of costs incurred by it as a
result of modifications to the leased properties carried out without the prior
written consent of the Landlord, or to payments of any other kind so incurred,
even if the value of the leased properties has been lastingly improved thereby.
The Landlord shall in such cases be entitled to require the restoration of the
former condition at the Tenant's expense and security for the costs of such
restoration before the leased properties are handed back.
<PAGE>
(2) The Tenant undertakes to tolerate all works carried out by the Landlord to
extend, modify and maintain its property. Structural works which may have a
lasting effect on the Tenant's business activities shall be agreed with the
Tenant ahead of time, but at least 14 days in advance. In the event of
relatively long term loss of production in this connection the Tenant shall be
offered equivalent rented premises. Claims for compensation by the Tenant in
connection with works by the Landlord to maintain his property which have a
direct or indirect effect on the leased properties shall be excluded.
(3) The Tenant shall have the right to reduce or withhold the rent or claim
compensation only if the works take an unreasonable length of time to carry out.
CLAUSE 10 LIEN, INSPECTION, ASSIGNMENT, SETOFF
(1) For the purpose of exercising its lien, the Landlord or its agent shall be
entitled to visit and inspect the leased properties at any time, with or without
witnesses. The Tenant shall notify the Landlord immediately of the impending
realization of objects brought in that are subject to a pledge or chattel
mortgage.
(2) The Tenant shall notify the Landlord immediately of any execution levied on
leased properties.
(3) The Landlord or its agents shall be entitled to visit and inspect the
leased properties during normal business hours or after prior notification. If
the Landlord wishes to sell leased properties or if this tenancy is terminated,
the Landlord or its agents may visit the leased properties together with
potential purchasers or new applicants for leases; in such cases the Tenant
shall ensure that the leased properties can be visited and inspected even in its
absence. The customary confidentiality shall be ensured.
(4) The Tenant hereby assigns to the Landlord, as security for all claims by
the Landlord under this lease, all present and future claims against third
parties for the payment of rent on the basis of subleasing or subletting
agreements.
(5) The Tenant waives, in respect of any claims by the Landlord under this
lease, the right of setoff and retention, where such waiver is not excluded by
law.
CLAUSE 11 RETURN OF THE LEASED PROPERTIES
(1) After the end of the tenancy the Tenant shall hand back the leased
properties to the Landlord in a renovated state and in the state described in
Annex 3, together
<PAGE>
with the keys supplied by the Landlord and keys additionally procured by the
Tenant itself, in accordance with the contractual agreements.
(2) The Tenant undertakes, with regard to installations brought in (such as
gas, water, cooling, heating and electrical installations), at the Landlord's
discretion,
a) either to remove them and restore the original condition at its
expense, the Landlord being entitled to require security for the
restoration of the original condition;
b) or to leave them in situ for payment of a reasonable price. If no
agreement on a reasonable price is reached within, at the most, one
month before the ending of the tenancy, the arrangements as per
subclause (a) above shall apply.
(3) The Tenant undertakes to make good all damage in excess of contractual wear
and tear before the ending of the tenancy. Should the Tenant fail to comply
with this obligation, the Landlord shall be entitled to have such damage made
good at the Tenant's expense.
(4) The Landlord may dispose at its discretion and as it wishes of any property
of the Tenant remaining on or in the leased properties after their return,
unless the Tenant has removed them within two weeks of being so requested. The
Landlord shall be released in this respect from the provisions of Article 181
BGB.
(5) The provisions of Article 568 BGB shall not apply.
CLAUSE 12 SECURITY FOR THE LEASE
(1) The Tenant undertakes to provide security for the lease.
(2) To this end the Tenant shall provide the Landlord, before the commencement
of the lease and as security for all claims by the Landlord arising out of and
in connection with this lease, with a directly enforceable bank/corporation
guarantee certificate, payable at first demand, waiving the defences of
voidability, setoff and failure to pursue remedies, in the sum of three months'
rent plus value added tax pursuant to Clause 4 (1) and (6), that is to say DM
24,400.00.
(3) The Landlord may satisfy its due claims under this guarantee even before
the end of the tenancy. In this case the Tenant undertakes to furnish the
Landlord immediately with a certificate of guarantee in the same terms made out
in the original sum.
<PAGE>
(4) The guarantee shall expire on the return of the guarantee certificate to
the guarantor, but not later than 1 month after the leased properties have been
duly handed back.
CLAUSE 13 ADDITIONAL AGREEMENTS
(1) In so far as the Tenant uses the existing locks to the leased premises, the
Landlord cannot guarantee the security of these locks. The Landlord therefore
recommends the Tenant to install its own lock cylinders.
(2) The Tenant states that 16 employees are permanently working in the leased
property.
(3) A separate agreement shall be concluded regarding the renting of parking
spaces.
(4) The conclusion of a contract for telecommunications facilities with
Deutsche Bundespost Telekom shall be the responsibility of the Tenant.
CLAUSE 14 WRITTEN FORM, AMENDMENTS, VENUE
(1) No agreements other than those concluded in this lease exist. Amendments
and additions to this lease shall be in writing.
(2) The agreed venue for all legal disputes shall be Dresden.
Three identical copies of this lease and the annexes listed below shall be
prepared, the Landlord receiving 2 copies and the Tenant 1.
Dresden, 12 September 1994 Dresden, 7 September 1994
Industrieverwaltungsgesellschaft ISS GmbH
Aktiengesellschaft Konigsbrucker Landstr. 159
Dresden Branch Building 338
01109 Dresden
[illegible signature] [illegible signature]
(Landlord) (Tenant)
Annex 1 Plan of site/buildings
Annex 3 State of the leased properties
Annex 5 Ancillary costs
Annex 7 Rent calculation
<PAGE>
Copy 1: Tenant
Copy 2: ZS
Copy 3: HV-IB
CASE 85
ANNEX 1 Plan of site/buildings
to the Business Premises Lease of 7 September 1994 and 12 September 1994
BETWEEN
INDUSTRIEVERWALTUNGSGESELLSCHAFT AKTIENGESELLSCHAFT
ZANDERSTRABE 5, 53177 BONN
and
the company
ISS - INTEGRATED SENSOR SOLUTIONS GMBH
GEB. 335, KONIGSBRUCKER LANDSTRABE 159, 01109 DRESDEN
This annex comprises this cover sheet and plans 1-2
1 - Plan of the property
2 - Plan of leased areas
Dresden, 12 September 1994 Dresden, 7 September 1994
Industrieverwaltungsgesellschaft ISS GmbH
Aktiengesellschaft Konigsbrucker Landstr. 159
Dresden Branch Building 338
01109 Dresden
[illegible signature] [illegible signature]
(Landlord) (Tenant)
<PAGE>
[Text at bottom right of site plan:]
W 85 DRESDEN
PLAN OF PROPERTY
PLAN NUMBER: 1200
DATE: 23 JULY 1992
[Text at top right of premises plan:]
Ground plan
[Text at bottom right of premises plan:]
W 85 Dresden
(two lines illegible)
Date: July (illegible)
<PAGE>
COPY 1
Copy 1: Tenant
Copy 2: ZS
Copy 3: HV-IB
CASE 85
ANNEX 4 Supplementary agreement on Tenant's buildings
to the Business Premises Lease of 7 September 1994 and 12 September 1994
BETWEEN
INDUSTRIEVERWALTUNGSGESELLSCHAFT AKTIENGESELLSCHAFT
ZANDERSTRABE 5, 53177 BONN
and
ISS - INTEGRATED SENSOR SOLUTIONS GMBH
GEB. 335, KONIGSBRUCKER LANDSTRABE 159, 01109 DRESDEN
SUPPLEMENTARY AGREEMENT
on works by the Tenant who waives any reimbursement of costs or payment
(1) The Tenant shall have the right to make the following modifications to the
leased property at its expense:
(1.1) Conversion of Rooms 35 and 36 to air-conditioned production
premises
(1.2) Construction of a transport and storage area (at least 3 m x 2.4
m) immediately outside Rooms 5/6 for the delivery, storage and
on-site filling of transportable and/or fixed liquid nitrogen
tanks
(2) The Landlord gives its consent thereto on the following conditions:
(2.1) The tenant shall undertake the modifications to the leased
property by agreement with the Landlord's local office in
accordance with the recognized rules of the art and observe all
relevant regulations in so doing.
<PAGE>
In the event of the refusal or limitation of official approvals
or their granting subject to conditions or other administrative
acts involving a burden the Tenant shall have no claim on the
Landlord. Any official conditions shall be complied with by the
Tenant at its expense, even if they should be imposed upon the
Landlord.
(2.2) All costs which the Tenant has incurred or will incur for the
modifications shall be borne by it, with no right of
reimbursement from the Landlord. This shall apply even if the
buildings and facilities pass into the ownership of the Landlord
and result in a lasting increase in the value of the leased
property. The time of and reason for the ending of the tenancy
shall be immaterial for this purpose.
(2.3) The Tenant undertakes, after the ending of the tenancy - for
whatever reason - to restore the original condition that existed
before the modifications made by the Tenant. This undertaking
shall lapse if the Tenant and Landlord agree to leave the
modification or parts thereof. The Landlord shall be entitled,
before the Tenant vacates the leased property, to require
security for the costs of restoring the original condition.
There shall be no obligation to restore the storage and transport
area referred to in subclause (1.2).
(2.4) In so far as the Tenant's structural works result in increases in
rates or other public levies or the fire insurance, it undertakes
to reimburse the Landlord for additional charges arising
therefrom.
Dresden, 12 September 1994 Dresden, 7 September 1994
Industrieverwaltungsgesellschaft ISS GmbH
Aktiengesellschaft Konigsbrucker Landstr. 159
Dresden Branch Building 338
01109 Dresden
[illegible signature] [illegible signature]
(Landlord) (Tenant)
<PAGE>
Copy 1: Tenant
Copy 2: ZS
Copy 3: HV-IB
CASE W 85
ANNEX 5 Ancillary costs
to the Business Premises Lease of 7 September 1994 and 12 September 1994
BETWEEN
INDUSTRIEVERWALTUNGSGESELLSCHAFT AKTIENGESELLSCHAFT
ZANDERSTRABE 5, 53177 BONN
and
the company
ISS - INTEGRATED SENSOR SOLUTIONS GMBH
GEB. 335, KONIGSBRUCKER LANDSTRABE 159, 01109 DRESDEN
CLAUSE 1 THE FOLLOWING ARE AGREED TO BE ANCILLARY COSTS WITHIN THE MEANING OF
CLAUSE 4 (1) (B) AND (C) OF THE LEASE:
Operating costs shall mean the costs routinely incurred by the Landlord as
a result of its ownership of the land and the use according to regulations
of the leased properties pursuant to Clause 1 of the lease. They include,
specifically, the following charges and payments:
CONSUMPTION-DEPENDENT COSTS
1. WATER SUPPLY
This shall include the cost of water consumed, the standing charges and the
meter rentals, the costs of intermediate meters, the calibration costs, the
costs of operating a water supply installation owned by the Landlord and a
water treatment plant, including treatment products. The local water
supply company's rates and the Regulation on General Conditions for the
Supply of Water (AVB Wasser V) shall apply. Should it be impossible as
yet to charge for consumption via subsidiary measuring devices, this shall
be based on total consumption/usable floor space.
<PAGE>
2. DRAINAGE
This shall include the charges for use of a public drainage system, the
costs of operating a corresponding non-public system including the sewer
network and the costs of operating a drainage pump. The local disposal
utility's rates and the General Conditions for Drainage (ABE) shall apply.
3. HEATING
This shall include the costs referred to in the "Regulation on the
consumption-dependent charging of heating and hot water costs" (Heating
Costs Charging Regulation - Heizkosten V). The breakdown of the costs
shall be 70% based on recorded hot water consumption and 30% based on
heatable leased area. The rates and General Terms and Conditions of the
local heating supply company shall apply. Should it be impossible as yet
to charge for consumption via subsidiary measuring devices, this shall be
based on total consumption/usable floor space.
4. ELECTRICITY SUPPLY
This shall include the costs of supplying electricity, where not already
recorded separately. The General Terms and Conditions of Supply (AVB Elt)
of the local energy supply utility shall apply. Should it be impossible as
yet to charge for consumption via subsidiary measuring devices, this shall
be based on total consumption/usable floor space.
5. WASTE DISPOSAL
This shall include the charges and costs payable for public and private
waste disposal.
NON-CONSUMPTION-DEPENDENT COSTS
6. REGULAR PUBLIC CHARGES ON THE SITE
These shall include the rates, in particular.
7. STREET CLEANING
This shall include the charges and costs payable for public and private
street cleaning.
8. CLEANING OF BUILDING AND PEST CONTROL
<PAGE>
This shall include the costs of cleaning the parts of buildings used
jointly by tenants/users, such as entrances, corridors, WCs and kitchen,
and of pest control.
9. OPEN SPACES, FOOTPATHS AND ROADWAYS
These shall include the costs of maintaining areas laid to garden and
surface water, including the replacement of plants and timber and the
maintenance of spaces, entrances, vehicular accesses and footpaths not used
for public traffic.
10. LIGHTING
This shall include the costs of electricity for outside lighting and the
lighting of the parts of buildings used jointly by the tenants, such as
entrances, corridors, WCs, kitchen and other service areas.
11. PROPERTY AND LIABILITY INSURANCE
This shall include, in particular, the costs of insuring the buildings in
the unused state against damage from fire, storm and hail, the liability
insurance for the site and buildings and the costs of environmental
liability insurance.
12. SECURITY OFFICER
This shall include the remuneration, social security contributions and all
benefits in money's worth paid by the Landlord for the services of an
indoor or outdoor security officer. If work is done by the security
officer it may not be estimated again under one of the other headings in
this annex.
13. OTHER OPERATING COSTS
These are the operating costs not mentioned in sections 1 to 20 above,
specifically the operating costs for outbuildings, equipment and fittings.
CLAUSE 2 OF THE COSTS LISTED IN CLAUSE 1, THE TENANT SHALL PAY:
1. THE CONSUMPTION-DEPENDENT COSTS BY THE ADVANCE PAYMENT METHOD:
DM/monthly DM/yearly
1 Water 25.00 300.00
2 Drainage 25.00 300.00
3 Heating 500.00 6,000.00
4 Electricity 200.00 2,400.00
5 Refuse 25.00 300.00
----- ------
Total DM 775.00 DM 9,300.00
The Landlord may change the amount of the monthly advance payments by
written notification in order to bring them into line with the latest
situation.
<PAGE>
Retrospective changes may date back only a maximum of 3 months, the
month in which the change is notified being reckoned as the first
month.
2. THE NON-CONSUMPTION-DEPENDENT COSTS AS PRO RATA FIXED PAYMENTS BASED
ON LEASED AREA:
DM/monthly DM/yearly
Headings 6-13
387 m2 @ DM 2.50 967.50 11,610.00
Fixed payments for non-consumption-dependent costs shall form part of the
rent and be subject to rent adjustment (Clause 5 of the lease).
Dresden, 12 September 1994 Dresden, 7 September 1994
Industrieverwaltungsgesellschaft ISS GmbH
Aktiengesellschaft Konigsbrucker Landstr. 159
Dresden Branch Building 338
01109 Dresden
[illegible signature] [illegible signature]
(Landlord) (Tenant)
<PAGE>
Copy 1: Tenant
Copy 2: ZS
Copy 3: HV-IB
CASE 85
ANNEX 7 Rent calculation
to the Business Premises Lease of 7 September 1994 and 12 September 1994
BETWEEN
INDUSTRIEVERWALTUNGSGESELLSCHAFT AKTIENGESELLSCHAFT
ZANDERSTRABE 5, 53177 BONN
and
the company
ISS - INTEGRATED SENSOR SOLUTIONS GMBH
GEB. 335, KONIGSBRUCKER LANDSTRABE 159, 01109 DRESDEN
Leased property: Building 335, Konigsbrucker Landstrabe 159, 01109 Dresden
DM/MONTH
Leased premises Office
Rooms 2-12, 27
incl. common areas 318 m2 @ DM/m2 15.00 4,770.00
Stores
Rooms 35, 36 69 m2 @ DM/m2 8.00 552.00
------------ ----- ----- ---- ------
TOTAL 387 M2 5,322.00
Dresden, 12 September 1994 Dresden, 7 September 1994
Industrieverwaltungsgesellschaft ISS GmbH
Aktiengesellschaft Konigsbrucker Landstr. 159
Dresden Branch Building 338
01109 Dresden
[illegible signature] [illegible signature]
(Landlord) (Tenant)
<PAGE>
EXHIBIT 11.1
INTEGRATED SENSOR SOLUTIONS, INC.
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Historical:
Net income (loss)............................................. $ (1,116) $ (751) $ (2,629) $ (1,318) $ 104
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Computation of shares outstanding:
Weighted average common shares outstanding.................. 828 1,075 1,171 1,113 1,281
Common equivalent shares from dilutive preferred stock...... -- -- -- -- 2,131
Common equivalent shares from dilutive common stock options
and warrants.............................................. -- -- -- -- 287
Shares related to SAB No. 55, 64 and 83..................... 1,356 1,356 1,356 1,356 1,356
--------- --------- --------- --------- ---------
Shares used in historical per share calculations.............. 2,184 2,431 2,527 2,469 5,055
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Historical net income (loss) per share........................ $ (0.51) $ (0.31) $ (1.04) $ (0.53) $ 0.02
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro Forma:
Computation of shares outstanding:
Shares used in historical per share calculations.............. 2,527 2,469 5,055
Conversion of preferred stock not included in shares relates
to SAB No. 55, 64 and 83.................................. 2,131 2,131 --
--------- --------- --------- --------- ---------
Shares used in pro forma net income (loss) per
share....................................................... 4,658 4,600 5,055
--------- --------- ---------
--------- --------- ---------
Pro forma net income (loss) per share......................... $ (0.56) $ (0.29) $ 0.02
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
1. ISS-Nagano GmbH (Germany)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1998
<PERIOD-END> MAR-31-1997 SEP-30-1998
<CASH> 2,059,050 378,147
<SECURITIES> 0 0
<RECEIVABLES> 3,109,843 712,698
<ALLOWANCES> 0 0
<INVENTORY> 1,679,107 2,570,967
<CURRENT-ASSETS> 6,911,730 6,866,275
<PP&E> 4,120,165 4,468,656
<DEPRECIATION> 2,323,196 2,742,392
<TOTAL-ASSETS> 8,708,699 8,743,300
<CURRENT-LIABILITIES> 4,772,365 4,015,360
<BONDS> 0 0
0 0
3,066 3,138
<COMMON> 1,391 1,437
<OTHER-SE> 3,678,700 4,461,971
<TOTAL-LIABILITY-AND-EQUITY> 8,708,699 8,743,300
<SALES> 10,304,079 7,011,054
<TOTAL-REVENUES> 10,304,079 7,011,054
<CGS> 10,023,554 5,033,067
<TOTAL-COSTS> 1,759,774 934,004
<OTHER-EXPENSES> (27,525) (65,435)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 259,735 105,587
<INCOME-PRETAX> (2,628,845) 103,712
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,628,845) 103,712
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,628,845) 103,712
<EPS-PRIMARY> (0.56) 0.02
<EPS-DILUTED> (0.56) 0.02
</TABLE>
