<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-41351
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
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>
GREGORY M. GALLO, ESQ. LAURA B. HUNTER, ESQ.
SCOTT M. STANTON, ESQ. MARTIN C. NICHOLS, ESQ.
PAMELA B. BURKE, ESQ. LANCE S. KURATA, ESQ.
GRAY CARY WARE & FREIDENRICH LLP BROBECK PHLEGER & HARRISON LLP
400 HAMILTON AVENUE 4675 MACARTHUR COURT
PALO ALTO, CA 94301 SUITE 1000
(650) 328-6561 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 PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per share....... 2,587,500(1) $8.50(2) $21,993,750(2) $6,489
Representatives' Warrants...................... 225,000 $.01 $2,250 $1
Total..................................................................................................... $6,490*
</TABLE>
* $5,900 of this amount has been previously paid.
(1) Includes 337,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(a) 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.
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- --------------------------------------------------------------------------------
<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 FEBRUARY 5, 1998
PROSPECTUS
2,250,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,250,000 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 $7.50 and $8.50 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
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC 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 Representatives a five-year
warrant to purchase 225,000 shares of Common Stock (the "Representatives
Warrants") and to pay the Representatives 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 Representatives' non-accountable expense allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
337,500 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
, , on or about , 1998.
The activities of the Representatives are being jointly coordinated.
------------------------------
<TABLE>
<S> <C>
CRUTTENDEN ROTH DOUGHERTY SUMMIT
INCORPORATION SECURITIES LLC
</TABLE>
, 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. 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 REPRESENTATIVES' WARRANTS, (III) THE CONVERSION OF
ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF COMMON STOCK UPON THE
CLOSING OF THIS OFFERING. INFORMATION IN THIS PROSPECTUS ALSO GIVES EFFECT TO
THE OCTOBER 1997 ONE-FOR-TWO AND ONE-HALF REVERSE STOCK SPLIT. SEE "DESCRIPTION
OF CAPITAL STOCK" AND "UNDERWRITING."
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......... 2,250,000 shares
Common Stock to be outstanding after the
offering.................................. 6,953,525 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>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues............................................... $ 4,976 $ 8,330 $ 10,304 $ 6,715 $ 11,013
Income (loss) from operations................................ (1,644) (1,202) (2,917) (3,039) 381
Net income (loss)............................................ (1,116) (751) (2,629) (2,615) 95
Pro forma diluted net income (loss) per share(2)............. $ (0.55) $ (0.55) $ 0.02
Shares used in calculation of pro forma diluted net income
(loss) per share(2)........................................ 4,809 4,793 5,117
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 675 $ 15,918
Working capital........................................................................... 3,039 19,029
Total assets.............................................................................. 10,422 25,665
Long-term debt and capital lease obligations, less current portion........................ 98 98
Stockholders' equity...................................................................... 4,935 20,925
</TABLE>
- ------------------------
(1) Based on 4,703,525 shares outstanding at December 31, 1997, and excluding
(i) 454,860 shares reserved as of such date for issuance upon the exercise
of outstanding stock options at a weighted average exercise price at $1.62
per share, (ii) 623,108 shares reserved for future grant under the Company's
stock plans and (iii) 58,566 shares for issuance upon the exercise of
outstanding warrants at a weighted average exercise price of $6.24 per
share.
(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 $15,990,000 from the sale of 2,250,000 shares of Common Stock offered
hereby by the Company at an assumed initial public offering price of $8.00
per share, and the repayment to a related party of approximately $679,000 of
short-term debt and approximately $80,000 of interest accrued as of the date
of this Prospectus.
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 four most recent fiscal quarters,
the Company sustained net losses of $1.3 million in the quarter ended December
31, 1996, $14,000 in the quarter ended March 31, 1997 and $9,000 in the quarter
ended December 31, 1997 and $2.6 million in the fiscal year ended March 31,
1997. There can be no assurance that the Company will be profitable in the
future on a quarterly basis or that it will achieve profitability on an annual
basis. As of December 31, 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 nine months ended December 31, 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 nine months ended
December 31, 1997, three customers accounted for 67% 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 has experienced declining average selling prices on
certain of its products in the past when shipments have reached specified volume
levels, and the Company anticipates that all of its products will eventually
experience declining average selling prices over their life cycles. Declining
average selling prices may have a material adverse effect 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--Overview."
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
7
<PAGE>
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 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. The Company
increased its number of employees by 15 in calendar year 1997 and anticipates
that it may hire as many as 15 additional employees in calendar year 1998. 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
8
<PAGE>
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 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 packaged by one of two
independent contractors, one in Hong Kong, and the other in the Philippines. In
addition, the Company relies on an independent contractor in Thailand for PC
board level assembly of the electronic portion of the Company's ISDs. The
Company selects its contractors on the basis of a number of factors, including
technical capabilities, size and capacity, end-markets served, customer
references, quality certification status and economic competitiveness. The
Company negotiates prices for assembly services based on unit volumes and does
business on a purchase order basis. The Company currently has no supply
contracts with any of its assembly contractors.
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 alternative 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."
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
9
<PAGE>
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 is engaged in an ongoing and continuous
program to reduce its product costs by increasing the number of functional die
per wafer by utilizing smaller geometry processes and improving designs. As a
result of this program, the Company believes that it will be required to shift
the fabrication of its wafers to new semiconductor processes or potentially to
new foundries, both of which are highly complex undertakings requiring
substantial commitments 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.
10
<PAGE>
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, 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
54.2% of the Company's total revenues in fiscal 1995, 1996 and 1997 and the nine
months ended December 31, 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.
Several Asian countries including South Korea, Japan and Thailand, have
recently experienced significant economic downturns and significant declines in
the value of their currencies relative to the U.S. dollar. Due to these
conditions, it is possible that certain of the Company's customers will delay,
reschedule or cancel significant current or future orders for the Company's
products. If any such orders are delayed, rescheduled or cancelled, the
Company's business, financial condition and results of operations would be
adversely affected.
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 Company
11
<PAGE>
has invested significant financial and other resources to obtain such
certifications, but there can be no assurance that the Company will be
successful in obtaining such certifications in a timely manner, or at all.
Although the Company has not lost any sales to date as a result of its lack of
ISO 9001 or QS-9000 certification, 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. See "Business--Manufacturing."
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 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
12
<PAGE>
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 2,250,000 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 4,703,525 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"). Cruttendon Roth Incorporated and Dougherty Summit Securities LLC, as
Representatives of the Underwriters may, in their 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
305,348 shares will be vested and exercisable, and 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 1,328,000 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."
The holders of approximately 2,230,000 shares of Common Stock are entitled
to certain demand and piggyback registration rights with respect to such shares
which rights may be exercised beginning 180 days after the date of this
Prospectus. 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 35.7% of the Company's outstanding
Common Stock after this offering (34.2% 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, designations, preferences and rights, 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
13
<PAGE>
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 of approximately $4.99 per
share in the net tangible book value of the Common Stock from the initial public
offering price. To the extent vested options or warrants to purchase the
Company's Common Stock are exercised, there will be dilution to the purchasers
of the Common Stock in the initial public offering of approximately $5.02 per
share. See "Dilution."
14
<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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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.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $15,990,000 ($18,690,000 if the Underwriters' over-allotment
option is exercised in full) based on an assumed initial public offering price
of $8.00 per share after deducting estimated underwriting discounts and
commissions, the Representative's non-accountable expense allowance and other
estimated offering expenses. The Company expects that the net proceeds of this
offering will be utilized approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT PERCENTAGE OF
APPLICATION OF NET PROCEEDS NET PROCEEDS
- -------------------------------------------------------------------- ------------------- ---------------
<S> <C> <C>
Repayment of indebtedness........................................... $ 760,000 4.8%
Expansion of manufacturing facilities............................... 9,500,000 59.4
Research and development............................................ 3,500,000 21.9
Working capital..................................................... 2,230,000 13.9
------------------- -----
Total........................................................... $ 15,990,000 100.0%
------------------- -----
------------------- -----
</TABLE>
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the offering during the next 18 to 24 months. This estimate
is based on certain assumptions, including that no events occur which would
cause the Company to abandon any particular efforts, that competitive conditions
remain stable, that the Company's manufacturing facility expansion will occur as
projected and that the Company does not enter into collaborations to fund
facility expansion separately. The amounts actually expended for each purpose
may vary significantly in the event any of these assumptions prove inaccurate.
The Company reserves the right to change its use of proceeds as unanticipated
events may cause the Company to redirect its priorities and reallocate the
proceeds accordingly.
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.
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.
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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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the sale by the Company of
2,250,000 shares of Common Stock pursuant to this offering at an assumed initial
public offering price of $8.00 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 to a related party
of approximately $679,000 of short-term debt and approximately $80,000 of
interest accrued as of the date of this Prospectus. 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>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations(1)........................................... $ 159 $ 159
Short-term debt........................................................................... 1,579 900
--------- -----------
$ 1,738 $ 1,059
--------- -----------
--------- -----------
Long-term debt and capital lease obligations, less current portion(1)..................... $ 98 $ 98
Stockholders' equity
Preferred Stock, $.001 par value per share:
Authorized: 7,000,000 actual (7,000,000 as adjusted)
Issued and outstanding: 3,219,020 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: 1,484,505 actual (6,953,525 as adjusted)(2)................... 2 7
Additional paid in capital.............................................................. 13,394 29,382
Accumulated deficit..................................................................... (8,075) (8,075)
Cumulative translation adjustment....................................................... 16 16
Deferred compensation................................................................... (405) (405)
--------- -----------
Total stockholders' equity.............................................................. 4,935 20,925
--------- -----------
Total capitalization...................................................................... $ 5,033 $ 21,023
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) As adjusted outstanding excludes 454,860 shares of Common Stock issuable
upon exercise of outstanding options as of December 31, 1997 at a weighted
average exercise price of $1.62 per share and 623,108 shares of Common Stock
reserved for future grant under the Company's stock plans. Also excludes
58,566 shares of Common Stock issuable upon exercise of outstanding warrants
as of December 31, 1997 at a weighted average exercise price of $6.24 per
share. See "Management-- Benefit Plans" and Note 7 of Notes to Consolidated
Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of December 31,
1997 was $4,934,658, or $1.05 per share based on 4,703,525 shares outstanding
after conversion of Preferred Stock. 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 2,250,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $8.00 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 December 31, 1997 would have been
$20,924,658 or $3.01 per share. This represents an immediate increase in net
tangible book value of $1.96 per share to existing stockholders and an immediate
substantial dilution in net tangible book value of 62.4% or $4.99 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....................... $ 8.00
Net tangible book value as of December 31, 1997..................... $ 1.05
Increase per share attributable to the offering..................... $ 1.96
---------
Net tangible book value after the offering............................ 3.01
---------
Dilution per share to new investors $ 4.99
---------
---------
</TABLE>
The following table sets forth, as of December 31, 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 $8.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 4,703,525 67.6% $ 13,435,352 42.7% $ 2.86
New investors............................. 2,250,000 32.4 18,000,000 57.3 8.00
---------- ----- ------------- -----
Total..................................... 6,953,525 100.0% $ 31,435,352 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing computations exclude 454,860 shares of Common Stock issuable
upon exercise of outstanding options as of December 31, 1997 at a weighted
average exercise price of $1.62 per share and 623,108 shares of Common Stock
reserved for future grant under the Company's stock plans. The foregoing
computations also exclude 58,566 shares of Common Stock issuable upon exercise
of outstanding warrants as of December 31, 1997. See "Management--Benefit
Plans," "Description of Capital Stock" and Note 7 of Notes to Consolidated
Financial Statements.
The following table illustrates the per share dilution assuming all
currently exercisable options and warrants were exercised at December 31, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $ 8.00
Net tangible book value as of December 31, 1997..................... $ 1.12
Increase per share attributable to the offering..................... $ 1.86
---------
Net tangible book value after the offering............................ 2.98
---------
Dilution per share to new investors $ 5.02
---------
---------
</TABLE>
The foregoing table includes 222,642 shares of Common Stock issuable upon
the exercise of vested options as of December 31, 1997 at a weighted average
exercise price of $1.23 per share. It also includes 58,566 shares of Common
Stock issuable upon the exercise of outstanding warrants at December 31, 1997 at
an exercise price of $6.42. The table excludes the impact of 400,466 options
which are currently not vested.
19
<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 consolidated balance sheet 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 December 31, 1997
and for the nine months ended December 31, 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>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
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 $ 5,174 $ 7,873
Contract revenues........................................... 1,307 2,993 2,255 1,541 3,140
--------- --------- --------- --------- ---------
Total revenues................................................ 4,976 8,330 10,304 6,715 11,013
Cost of revenues:
Cost of product revenues.................................... 3,624 5,250 7,292 5,433 5,328
Cost of contract revenues................................... 996 2,150 2,731 2,024 2,572
--------- --------- --------- --------- ---------
Total cost of revenues........................................ 4,620 7,400 10,023 7,457 7,900
--------- --------- --------- --------- ---------
Gross profit.................................................. 356 930 281 (742) 3,113
Operating expenses:
Research and development.................................... 701 742 1,438 1,034 1,265
Sales, general and administrative........................... 1,299 1,390 1,760 1,263 1,467
--------- --------- --------- --------- ---------
Total operating expenses...................................... 2,000 2,132 3,198 2,297 2,732
--------- --------- --------- --------- ---------
Income (loss) from operations................................. (1,644) (1,202) (2,917) (3,039) 381
Interest expense.............................................. (96) (226) (260) (199) (159)
Other income.................................................. 587 366 27 92 (11)
Minority interest in net (income) loss of
ISS-Nagano GmbH............................................. 37 311 521 531 (116)
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ (1,116) $ (751) $ (2,629) $ (2,615) $ 95
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma basic net income (loss) per share................... $ (0.55) $ (0.55) $ 0.02
--------- --------- ---------
--------- --------- ---------
Pro forma diluted net income (loss) per share................. $ (0.55) $ (0.55) $ 0.02
Shares used in calculation of pro forma basic net income
(loss) per share............................................ 4,809 4,793 4,860
Shares used in calculation of pro forma diluted net income
(loss) per share............................................ 4,809 4,793 5,117
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------- DECEMBER 31,
1995 1996 1997 1997
--------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 847 $ 521 $ 2,059 $ 675
Working capital.................................................. 1,056 150 2,139 3,039
Total assets..................................................... 5,625 5,687 8,709 10,422
Long-term obligations............................................ 24 22 197 98
Total stockholders' equity....................................... 1,849 1,141 3,683 4,935
</TABLE>
20
<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 $11.0 million in the first nine months of fiscal 1998.
The Company has experienced operating losses in each year since its inception
and had an accumulated deficit of $8.1 million as of December 31, 1997. Although
the Company had a net loss in the quarters ended March 31, 1997 and December 31,
1997, it achieved income from operations in each of the past four quarters.
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 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 manner to
maintain or increase its current product gross margin levels. Any failure to
maintain such gross margins could have a material
21
<PAGE>
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 nine months ended December 31, 1997 accounted for 69%,
71%, 75% and 67% 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>
NINE MONTHS
YEAR ENDED MARCH ENDED
31, DECEMBER 31,
------------------- ------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues.................................................... 73.7% 64.1% 78.1% 77.1% 71.5%
Contract revenues................................................... 26.3 35.9 21.9 22.9 28.5
----- ----- ----- ----- -----
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 80.9 48.4
Cost of contract revenues........................................... 20.0 25.8 26.5 30.2 23.3
----- ----- ----- ----- -----
Total cost of revenues................................................ 92.8 88.8 97.3 111.1 71.7
----- ----- ----- ----- -----
Gross margin.......................................................... 7.2 11.2 2.7 (11.1) 28.3
Operating expenses:
Research and development............................................ 14.1 8.9 13.9 15.4 11.5
Sales, general and administrative................................... 26.1 16.7 17.1 18.8 13.3
----- ----- ----- ----- -----
Total operating expenses.............................................. 40.2 25.6 31.0 34.2 24.8
----- ----- ----- ----- -----
Income (loss) from operations......................................... (33.0) (14.4) (28.3) (45.3) 3.5
Interest expense...................................................... (1.9) (2.7) (2.5) (2.9) (1.5)
Other income (expense)................................................ 11.8 4.4 0.3 1.4 --
Minority interest in net (income) loss of
ISS-Nagano GmbH..................................................... 0.7 3.7 5.0 7.9 (1.1)
----- ----- ----- ----- -----
Net income (loss)..................................................... (22.4)% (9.0)% (25.5)% (38.9)% 0.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
22
<PAGE>
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 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 52.2% from $5.2 million in
the nine months ended December 31, 1996 to $7.9 million in the nine months ended
December 31, 1997. This increase resulted primarily from an increase in
shipments of MAP ISDs and media compatible ISDs. 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
103.8% from $1.5 million in the nine months ended December 31, 1996 to $3.1
million in the nine months ended December 31, 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 $2.9 million and $6.0 million in the nine months ended
December 31, 1996 and 1997, respectively, representing 43.5% and 54.2% 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 nine months ended December 31,
1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER
31,
--------------
1996 1997
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Product revenues.......................................................................... $5,174 $7,873
Cost of product revenues.................................................................. 5,433 5,328
------ ------
Product gross profit...................................................................... $ (259) $2,545
------ ------
------ ------
Product gross margin...................................................................... (5.0)% 32.3%
------ ------
------ ------
</TABLE>
23
<PAGE>
The Company's product gross margin improved from (5.0%) in the nine months
ended December 31, 1996 to 32.3% in the nine months ended December 31, 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 volume shipments of media compatible ISDs to North American customers
in late calendar 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 $2.0 million in the nine months ended December 31, 1996 to $2.6
million in the nine months ended December 31, 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 $1.0 million in the
nine months ended December 31, 1996 to $1.3 million in the nine months ended
December 31, 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 $1.3 million in the nine months ended December 31, 1996 to $1.5 million in
the nine months ended December 31, 1997. 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.
24
<PAGE>
INTEREST EXPENSE
Interest expense decreased from $200,000 in the nine months ended December
31, 1996 to $159,000 in the nine months ended December 31, 1997 due to lower
borrowings in the first nine months of fiscal 1997.
OTHER INCOME
Other income in the nine months ended December 31, 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 $80,000 on
trade payables and notes to related parties denominated in foreign currencies.
Other expense for the nine months ended December 31, 1997 was immaterial. 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 nine months ended
December 31, 1996 was $531,000, which resulted in a corresponding $531,000
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 nine
months ended December 31, 1997 was $116,000, which resulted in a corresponding
$116,000 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 stockholders' 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 128.9% 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
25
<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 (EXPENSE)
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
26
<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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to 00. This issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. Management
is in the process of working with its software vendors to assure that the
Company is prepared for the year 2000. Management does not anticipate that the
Company will incur material operating expenses or be required to make any
material investment in computer systems improvements to be year 2000 compliant.
However, uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance. The Company is currently implementing
an upgrade to its management information system that the Company believes is
year 2000 compliant. Any year 2000 compliance problem of either the Company or
its customers or vendors could materially adversely affect the Company's
business, financial condition or operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130), and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal year 1999.
27
<PAGE>
The Company does not believe that the adoption of either FAS No. 130 or FAS No.
131 will have material impact on the Company's business, financial condition or
operating results.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected consolidated statements of
operations data for each of the seven quarters in the period ended December 31,
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.
28
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1997 1997 1997 1997
----------- --------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......................... $ 1,753 $ 2,052 $ 1,369 $ 2,875 $ 2,553 $ 2,415 $ 2,905
Contract revenues......................... 710 435 396 714 948 1,095 1,097
----------- --------- --------- ----------- ----------- --------- -----------
Total revenues.............................. 2,463 2,487 1,765 3,589 3,501 3,510 4,002
Cost of revenues:
Cost of product revenues.................. 1,837 1,673 1,923 1,859 1,848 1,607 1,873
Cost of contract revenues................. 640 768 616 707 689 889 994
----------- --------- --------- ----------- ----------- --------- -----------
Total cost of revenues...................... 2,477 2,441 2,539 2,566 2,537 2,496 2,867
Operating expenses:
Research and development.................. 324 391 319 404 355 484 426
Sales, general and administrative......... 422 424 417 497 438 496 533
----------- --------- --------- ----------- ----------- --------- -----------
Total operating expenses.................... 746 815 736 901 793 980 959
----------- --------- --------- ----------- ----------- --------- -----------
Income (loss) from operations............... (760) (769) (1,510) 122 171 34 176
Interest expense............................ (83) (69) (47) (61) (54) (51) (54)
Other income (expense)...................... 72 (6) 26 (65) 4 61 (76)
Minority interest in net (income) loss of
ISS-Nagano GmbH........................... 125 171 235 (10) (30) (31) (55)
----------- --------- --------- ----------- ----------- --------- -----------
Net income (loss)........................... $ (646) $ (673) $ (1,296) $ (14) $ 91 $ 13 $ (9)
----------- --------- --------- ----------- ----------- --------- -----------
----------- --------- --------- ----------- ----------- --------- -----------
</TABLE>
AS A PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1996 1996 1996 1997 1997 1997 1997
----------- --------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues.......................... 71.2% 82.5% 77.6% 80.1% 72.9% 68.8% 72.6%
Contract revenues......................... 28.8 17.5 22.4 19.9 27.1 31.2 27.4
----------- --------- --------- ----------- ----------- --------- -----------
Total revenues.............................. 100 100 100 100 100 100 100
Cost of revenues:
Cost of product revenues.................. 74.6 67.3 109.0 51.8 52.8 45.8 46.8
Cost of contract revenues................. 26.0 30.9 34.9 19.7 19.7 25.3 24.8
----------- --------- --------- ----------- ----------- --------- -----------
Total cost of revenues...................... 100.6 98.2 143.9 71.5 72.5 71.1 71.6
Operating expenses:
Research and development.................. 13.2 15.7 18.1 11.3 10.1 13.8 10.7
Sales, general and administrative......... 17.1 17.0 23.6 13.8 12.5 14.1 13.3
----------- --------- --------- ----------- ----------- --------- -----------
Total operating expenses.................... 30.3 32.7 41.7 25.1 22.6 27.9 24.0
----------- --------- --------- ----------- ----------- --------- -----------
Income (loss) from operations............... (30.9) (30.9) (85.6) 3.4 4.9 1.0 4.4
Interest expense............................ (3.3) (2.8) (2.7) (1.6) (1.5) (1.4) (1.3)
Other income (expense)...................... 2.9 (0.3) 1.4 (1.8) 0.1 1.7 (1.9)
Minority interest in net (income) loss of
ISS-Nagano GmbH........................... 5.1 6.9 13.4 (0.3) (0.9) (0.9) (1.4)
----------- --------- --------- ----------- ----------- --------- -----------
Net income (loss)........................... (26.2)% (27.1)% (73.5)% (0.3)% 2.6% 0.4% (0.2)%
----------- --------- --------- ----------- ----------- --------- -----------
----------- --------- --------- ----------- ----------- --------- -----------
</TABLE>
29
<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 revenues increased by 20.3% for the quarter ended December
31, 1997 as compared to the quarter ended September 30, 1997 as the Company
addressed certain of its production constraints and increased shipments of its
media compatible ISDs. 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% 33.5%
<CAPTION>
DEC. 31,
1997
--------
<S> <C>
Product revenues............................................ $ 2,905
Cost of product revenues.................................... 1,873
--------
Product gross profit........................................ 1,032
Product gross margin........................................ 35.5%
</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
30
<PAGE>
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, 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 December
31, 1997, the Company had cash and cash equivalents of $675,000 and working
capital of $3.0 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 December 31, 1997, the Company had outstanding borrowings of $900,000
under the line of credit agreement, $257,000 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 $1.5 million, $1.7 million, $2.7
million and $939,000 in fiscal 1995, 1996 and 1997 and the nine months ended
December 31, 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 nine months ended December 31,
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. The Company increased its inventory levels to accomodate
expected increases in product sales.
Net cash used in investing activities was $899,000, $974,000, $1.1 million
and $675,000 in fiscal 1995, 1996, 1997 and the nine months ended December 31,
1997, respectively. Cash used in investing activities was primarily for the
purchase of equipment.
Net cash provided by financing activities was $2.3 million, $2.3 million,
$5.4 million and $230,000 in fiscal 1995, 1996, 1997 and the nine months ended
December 31, 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 nine months ended December
31, 1997, the Company raised cash from financing activities of approximately
$500,000 through stock sales which was partially offset by 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.
31
<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
32
<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.
33
<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.
34
<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]
35
<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.
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<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
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<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.
38
<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.
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<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
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<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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<PAGE>
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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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 December 31, 1997, the Company's research and development organization
consisted of 37 full-time employees. During 1995, 1996 and 1997 and the nine
months ended December 31, 1997, research and development expenses were
approximately $701,000, $742,000, $1.4 million and $1.3 million, respectively.
In addition, during 1995, 1996 and 1997 and the nine months ended December 31,
1997, the Company had $996,000, $2.1 million, $2.7 million and $2.6 million 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
44
<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 December 31, 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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<PAGE>
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 1999, and that, should it be needed,
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
EMPLOYEES
As of December 31, 1997, the Company had 98 full-time employees, including
36 employees in Germany. Of its total work force, 37 are engaged in research and
development activities, 31 are engaged in manufacturing operations, 12 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 December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Manher D. Naik..................... 55 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 and has served as
Executive Vice President, Marketing and Sales since September 1994. 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 in April 1994 and has served as Vice
President, Finance and Administration and Secretary since 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.
47
<PAGE>
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.
48
<PAGE>
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.
49
<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 December 31, 1997, there were outstanding options to
purchase 168,160 shares of Common Stock under the 1997 Plan of which 30,004
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
50
<PAGE>
identical to the 1997 Plan. As of December 31, 1997, there were outstanding
options to purchase 286,700 shares of Common Stock under the Prior Plan of which
192,638 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.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 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 11.3% 7.6%
Stuart A. Boyd
5300 Old Tampa Highway
P.O. Box 33050
Lakewood, FL 33807-3050
WK Technology Fund(3) ........................................................ 502,039 10.7 7.2
Y.S. Fu
10th Floor, 115, Sec. 3
Ming Sheng E. Road
Taipei, Taiwan, R.O.C.
TDK Semiconductor Corporation(4) ............................................. 445,524 9.5 6.4
Yutaka Mori
14351 Myford Road
Tustin, CA 92780-7068
Nagano Keiki Co., Ltd.(5) .................................................... 291,007 6.2 4.2
Shigeru Miyashita
1-30-4 Higashimagome
Ohta-ku
Tokyo 162
JAPAN
Vinod K. Sood(6) ............................................................. 180,621 3.8 2.5
Manher D. Naik(7) ............................................................ 245,444 5.2 3.4
Donald E. Paulus(8) .......................................................... 149,083 3.2 2.1
Ramesh Sirsi(9) .............................................................. 68,083 1.4 1.0
All directors and executive officers as a group (9 persons)(10) .............. 2,443,507 50.5 34.5
</TABLE>
- ------------------------
* Denotes less than 1%
(1) Percent ownership is based on: (i) before this offering, 4,703,525 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
December 31, 1997; and (ii) after this offering, 6,953,525 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 December 31,
1997.
52
<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 502,039 shares held by WK Technology Fund and affiliated 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 291,007 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 1,917 shares
subject to options which are exercisable within 60 days of December 31,
1997.
(7) Includes 193,360 shares held by the Naik, Manher & Gita M. Family Trust and
52,084 shares subject to options which are exercisable within 60 days of
December 31, 1997.
(8) Includes 9,083 shares subject to options which are exercisable within 60
days of December 31, 1997.
(9) Includes 42,083 shares subject to options which are exercisable within 60
days of December 31, 1997.
(10) Includes 138,834 shares subject to options which are exercisable within 60
days of December 31, 1997.
53
<PAGE>
CERTAIN TRANSACTIONS
Since December 31, 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 F 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
54
<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. As of February
1, 1998, the Company and TDK have amended and restated the December 15, 1995
promissory note to capitalize all interest due to date and to specify a new
maturity date. The principal amount of the amended and restated promissory note
is $760,000, which bears interest at 10% per year, and all amounts thereunder
are due and payable on the earlier of (i) June 30, 1998 or (ii) the date of the
Company's initial public offering. 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 $376,000 and $630,000. 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.
55
<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 December 31, 1997, there were 4,703,525 shares of Common Stock
outstanding held of record by 108 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.
REPRESENTATIVES' WARRANTS
The Company has issued to the Representatives the Representatives' Warrants
to purchase up to 225,000 shares of Common Stock at an exercise price per share
equal to 120% of the price to public in this offering. The Representatives'
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
Representatives' 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 the shares of Common Stock
underlying the Representatives'
56
<PAGE>
Warrants. In addition, holders of the Representatives' Warrants may include the
shares of Common Stock underlying the Representatives' 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 2,230,000 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.
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
57
<PAGE>
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.
58
<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 6,953,525 shares of Common Stock. Of these shares, the 2,250,000
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 4,703,525 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 2,443,507 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. Cruttenden Roth Incorporated and Dougherty
Summit Securities LLC may, in their 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 2,250,000 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
4,703,525 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 69,000 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
59
<PAGE>
options at December 31, 1997 and reserved for future issuance under all such
plans, such registration statement would cover approximately, 1,328,000 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.
60
<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
Cruttenden Roth Incorporated and Dougherty Summit Securities LLC are acting as
co-managers and representatives (the "Representatives"), have severally agreed
to purchase from the Company an aggregate of 2,250,000 shares of Common Stock.
The number of shares of Common Stock that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated.....................................................
Dougherty Summit Securities LLC..................................................
----------
Total.......................................................................... 2,250,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of Common Stock (other than the shares
of Common Stock covered by the 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
distribution of the shares offered hereby, the offering price and other selling
terms may be changed by the Representatives. The Representatives have 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 337,500
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 Representatives a non-accountable expense
allowance of $150,000 to cover certain underwriting costs and due diligence
expenses related to this offering and to sell
61
<PAGE>
to the Representatives for nominal consideration the Representatives' Warrants
to purchase from the Company up to 225,000 shares of Common Stock (subject to
certain antidilution adjustments) at an exercise price 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 Representatives' 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 Representatives' Warrants may not be sold,
transferred, assigned, pledged or hypothecated by the Representatives for a
period of one year from the date of issuance except to officers and partners of
the Representatives, 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 Representatives' Warrants, which
enable them to register resale of the Common Stock underlying the
Representatives' 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 Representatives, 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, the Representatives, 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 Representatives.
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.
62
<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 LLP, 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.
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).
Upon completion of this offering, the Company will subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, Seven World Trade Center, New York, New York 10048, and Chicago
Regional Office, 500 West Madison Street, Chicago, Illinois 606761. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the
prescribed fees. The Company has filed an application to have its Common Stock
approved for quotation on the Nasdaq National Market. Reports, proxy statements
and other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Web site 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.
63
<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 consolidated 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 12,
as to which the date is
October 14, 1997
F-2
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1996 1997
---------- ---------- DECEMBER 31, PRO FORMA
1997 STOCKHOLDERS'
------------- EQUITY
DECEMBER 31, 1997
(UNAUDITED) ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 520,508 $2,059,050 $ 675,031
Accounts receivable--trade, net of allowance for
doubtful accounts of $0, $164,000, and $0 at
March 31, 1996, March 31, 1997, and December 31,
1997, respectively............................... 1,134,846 2,225,548 4,056,094
Accounts receivable from related parties........... 834,888 884,295 780,593
Inventories........................................ 1,607,524 1,679,107 2,601,268
Prepaid expenses................................... 156,858 63,730 143,050
---------- ---------- -------------
Total current assets................................. 4,254,624 6,911,730 8,256,036
Property and equipment, at cost:
Machinery and equipment............................ 2,331,752 3,535,424 4,124,526
Furniture and fixtures............................. 192,921 219,387 245,347
Leasehold improvements............................. 49,437 131,009 191,618
Software........................................... 155,445 234,345 274,638
---------- ---------- -------------
2,729,555 4,120,165 4,836,129
Less accumulated depreciation and amortization....... 1,297,304 2,323,196 2,956,461
---------- ---------- -------------
1,432,251 1,796,969 1,879,668
Other assets......................................... -- -- 286,092
---------- ---------- -------------
Total assets......................................... $5,686,875 $8,708,699 $10,421,796
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit..................................... $ 600,000 $ 600,000 900,000
Notes payable to related parties................... 1,526,504 1,515,365 678,684
Accounts payable--trade............................ 780,328 1,245,521 1,667,880
Accounts payable to related parties................ 698,707 684,634 722,474
Accrued payroll and related expenses............... 134,438 131,421 179,155
Other accrued liabilities.......................... 355,880 436,652 909,547
Current portion of capital lease obligations....... 8,697 158,772 159,357
---------- ---------- -------------
Total current liabilities............................ 4,104,554 4,772,365 5,217,097
Long-term portion of capital lease obligations....... 22,075 197,149 97,889
Minority interest in subsidiary...................... 419,525 56,028 172,152
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 $12,117,148 December 31, 1997,
respectively)
Authorized shares - 3,400,000 at December 31,
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,
3,219,020 at December 31, 1997, and none pro
forma.......................................... 2,122 3,066 3,219 $ --
Common stock, $0.001 par value:
Authorized shares--6,200,000 at March 31, 1997
and 50,000,000 at December 31, 1997
Issued and outstanding shares 1,280,913 at
March 31, 1996, 1,390,680 at March 31, 1997,
1,484,505 at December 31, 1997, and 4,703,525
pro forma...................................... 1,281 1,391 1,485 4,704
Additional paid-in capital......................... 6,652,311 12,199,411 13,394,491 13,394,491
Accumulated deficit................................ (5,541,998) (8,170,843) (8,075,373) (8,075,373)
Cumulative translation adjustment.................. 27,005 (68,758) 16,451 16,451
Deferred compensation.............................. -- (281,110) (405,615) (405,615)
---------- ---------- ------------- ------------------
Total stockholders' equity........................... 1,140,721 3,683,157 4,934,658 $ 4,934,658
---------- ---------- ------------- ------------------
------------------
Total liabilities and stockholders' equity........... $5,686,875 $8,708,699 $10,421,796
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------- ---------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................... $ 3,668,851 $ 5,336,771 $ 8,049,359 $ 5,174,000 $ 7,873,467
Contract revenue.............................. 1,307,593 2,993,319 2,254,720 1,541,014 3,140,027
------------- ------------- ------------- ------------- ------------
Total revenues (related party revenues of
$1,300,000, $2,404,000, $1,506,000, $777,000
and $1,365,000 for 1995, 1996, 1997 and
December 31, 1996 and 1997.................... 4,976,444 8,330,090 10,304,079 6,715,014 11,013,494
Cost of revenues:
Cost of product revenue (Note 9).............. 3,624,128 5,250,504 7,292,491 5,432,924 5,327,747
Cost of contract revenue...................... 996,454 2,149,917 2,731,063 2,024,126 2,571,655
------------- ------------- ------------- ------------- ------------
Total cost of revenues.......................... 4,620,582 7,400,421 10,023,554 7,457,050 7,899,402
------------- ------------- ------------- ------------- ------------
Gross profit (loss)............................. 355,862 929,669 280,525 (742,036) 3,114,092
Operating expenses:
Research and development...................... 700,674 741,577 1,438,212 1,034,040 1,265,460
Sales, general, and administrative............ 1,298,919 1,389,894 1,759,774 1,262,478 1,467,639
------------- ------------- ------------- ------------- ------------
Total operating expenses........................ 1,999,593 2,131,471 3,197,986 2,296,518 2,733,099
------------- ------------- ------------- ------------- ------------
Income (loss) from operations................... (1,643,731) (1,201,802) (2,917,461) (3,038,554) 380,993
Interest expense................................ (96,318) (225,957) (259,735) (199,641) (159,297)
Other income (expense).......................... 586,913 366,129 27,525 91,756 (7,641)
Minority interest in net (income) loss of joint
venture....................................... 37,201 311,000 520,826 531,174 (118,585)
------------- ------------- ------------- ------------- ------------
Net income (loss)............................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Pro forma basic net income (loss) per share..... $ (0.55) $ (0.55) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Pro forma diluted net income (loss) per share... $ (0.55) $ (0.55) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma basic net
income (loss) per share....................... 4,809,329 4,793,431 4,859,554
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma diluted net
income (loss) per share....................... 4,809,329 4,793,431 5,116,823
------------- ------------- ------------
------------- ------------- ------------
</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)................................. -- -- 93,825 94 71,568
Issuance of preferred stock for notes payable and
accrued interest (unaudited)........................ 83,725 84 -- -- 482,265
Issuance of Series F preferred stock upon conversion
of warrants, net of $10,000 of issuance costs
(unaudited)......................................... 68,978 69 -- -- 429,672
Deferred compensation (unaudited)..................... -- -- -- -- 211,575
Amortization of deferred compensation (unaudited)..... -- -- -- -- --
Translation adjustment (unaudited).................... -- -- -- -- --
Net income (unaudited)................................ -- -- -- -- --
--------- ----------- --------- ----------- --------------
Balance at December 31, 1997 (unaudited)................ 3,219,020 $ 3,219 1,484,505 $ 1,485 $ 13,394,491
--------- ----------- --------- ----------- --------------
--------- ----------- --------- ----------- --------------
<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)................................. -- -- -- 71,662
Issuance of preferred stock for notes payable and
accrued interest (unaudited)........................ -- -- -- 482,349
Issuance of Series F preferred stock upon conversion
of warrants, net of $10,000 of issuance costs
(unaudited)......................................... -- -- -- 429,741
Deferred compensation (unaudited)..................... -- -- (211,575) --
Amortization of deferred compensation (unaudited)..... -- -- 87,070 87,070
Translation adjustment (unaudited).................... -- 85,209 -- 85,209
Net income (unaudited)................................ 95,470 -- -- 95,470
------------ ----------- ------------- ------------
Balance at December 31, 1997 (unaudited)................ $(8,075,373) $ 16,451 $ (405,615) $4,934,658
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------------------- ----------------------
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) $(2,615,265) $ 95,470
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization.............................. 409,997 769,743 1,025,892 597,317 633,265
Amortization of deferred compensation...................... -- -- -- -- 87,070
Issuance of common stock for services...................... 3,375 -- -- -- --
Minority interest in net income (loss) of joint venture.... (37,201) (311,000) (520,826) (531,174) 116,124
Gain on sale of interest in joint venture.................. (166,032) (235,472) (171,618) (171,618) --
Foreign currency (gains) losses............................ -- (165,000) 143,921 79,862 (14,391)
Changes in operating assets and liabilities:
Accounts receivable...................................... (704,071) (79,700) (1,358,435) 145,373 (1,676,990)
Inventories.............................................. (957,619) (163,988) (95,289) 253,802 (900,552)
Prepaid expenses and other assets........................ (50,214) (70,522) 92,228 130,349 (361,847)
Accounts payable......................................... 1,483,917 (862,773) 577,743 (195,842) 480,056
Accrued payroll and related expenses..................... 15,705 18,518 (3,017) 51,559 47,734
Deferred revenue......................................... (182,209) (53,732) (3,568) 17,333 --
Other accrued liabilities................................ (240,445) 210,254 219,480 79,342 555,243
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities.......................... (1,540,732) (1,694,302) (2,722,334) (2,158,962) (938,818)
INVESTING ACTIVITIES
Purchase of property and equipment............................. (748,563) (1,124,317) (1,092,413) (716,476) (721,168)
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) (716,476) (674,963)
FINANCING ACTIVITIES
Borrowings under line of credit................................ -- 600,000 600,000 600,000 300,000
Proceeds from notes payable.................................... 250,000 1,757,377 1,086,681 1,086,681 --
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) (56,619) (139,676)
Issuance of convertible preferred stock, net of issuance
costs........................................................ 1,985,802 -- 3,988,043 2,999,940 429,741
Net proceeds from issuance of common stock..................... 40,769 29,112 76,540 17,962 71,662
Net proceeds from investment in joint venture.................. 322,830 715,199 328,947 328,947 --
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities...................... 2,324,872 2,341,798 5,353,289 4,376,911 229,762
---------- ---------- ---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............... (114,423) (326,821) 1,538,542 1,501,473 (1,384,019)
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 $2,021,981 $ 675,031
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid.................................................. $ 27,082 $ 164,255 $ 118,135 $ 43,636 $ 99,707
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 $1,067,321 $ 400,000
Issuance of preferred stock for payment of interest on notes
payable...................................................... $ -- $ 103,973 $ 135,140 $ 135,140 $ 82,349
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of December 31, 1997
and for the nine months ended
December 31, 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
subsidiary (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 December 31, 1997
and for the nine months ended
December 31, 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 December 31, 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, DECEMBER 31,
-------------------------- ------------
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Raw materials...................................... $ 1,269,494 $ 1,422,396 $1,630,481
Work-in-process.................................... 120,941 123,813 638,875
Finished goods..................................... 217,089 132,898 331,912
------------ ------------ ------------
$ 1,607,524 $ 1,679,107 $2,601,268
------------ ------------ ------------
------------ ------------ ------------
</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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to
F-8
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the previously reported fully diluted earnings per share. Earnings per share
amounts for all periods have been presented and where appropriate, restated to
conform to the Statement No. 128 requirements. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
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).
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 3,219,020 shares
of common stock, based on the shares of convertible preferred stock outstanding
at December 31, 1997. Unaudited pro forma stockholders' equity at December 31,
1997, as adjusted for the conversion of preferred stock, is disclosed on the
balance sheet.
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.
Significant customers accounted for the following percentages of net
revenues:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------------------- ------------------------------------
1995 1996 1997 1996 1997
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Customer A.................... 53% 31% 22% 24% 25%
Customer B.................... 16% 13% < 10% < 10% --
Customer C.................... < 10% < 10% 11% < 10% 12%
Customer D.................... < 10% 17% 22% 22% 30%
Customer E.................... < 10% 10% 20% 23% < 10%
Customer F.................... -- -- < 10% < 10% < 10%
</TABLE>
F-9
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
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 December 31, 1997 and for the nine
months ended December 31, 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 nine months ended December 31, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME (FAS No. 130) and Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (FAS No.
131). FAS No. 130 establishes rules for reporting and displaying comprehensive
income. FAS No. 131 will require the Company to use the "management approach" in
disclosing segment information. Both statements are effective for the Company
during fiscal 1999. The
F-10
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does not believe that the adoption of either FAS No. 130 or FAS No. 131
will have a material impact on the Company's results of operations, cash flows,
or financial position.
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 nine months ended
December 31, 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 $144,000 and $0 for the
nine months ended December 31, 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 December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
3. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- DECEMBER 31,
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 and interest due and payable
upon the earlier of an initial public offering by the
Company or June 30, 1998.............................. $ 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 December 31, 1997
and for the nine months ended
December 31, 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 December 31, 1997 and obtained waivers. As
of March 31, 1996 and 1997 and December 31, 1997, the Company had borrowings
totaling $600,000, $600,000 and $900,000, respectively, 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. The Company was not in compliance with
one of the covenants at December 31, 1997 and obtained a waiver.
5. CAPITAL LEASES
At March 31, 1996 and 1997 and December 31, 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 December 31, 1997 was $10,675, $104,357, and
$230,514, respectively. The majority of these assets are financed under the
Company's $750,000 capital lease line. At March 31, 1997 and December 31, 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, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
1998 (three months for December 31)................................ $ 214,177 $ 49,483
1999............................................................... 177,751 191,799
2000............................................................... 65,150 77,408
2001............................................................... -- 5,416
2002............................................................... -- 1,690
---------- ------------
Total minimum lease payments....................................... 457,078 325,796
Amount representing interest....................................... 101,157 68,550
---------- ------------
355,921 257,246
Less current portion............................................... 158,772 159,357
---------- ------------
$ 197,149 $ 97,889
---------- ------------
---------- ------------
</TABLE>
F-13
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 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, DECEMBER 31,
1997 1997
---------- -------------
<S> <C> <C>
1998(three months for December 31)................................. $ 328,787 $ 82,615
1999............................................................... 333,143 336,329
2000............................................................... 151,238 151,496
2001............................................................... 41,800 41,800
---------- -------------
$ 854,968 $ 612,240
---------- -------------
---------- -------------
</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 nine month periods ended December 31, 1996 and 1997 was approximately
$195,082 and $209,949, respectively.
As of March 31, 1997 and December 31, 1997, the Company had outstanding
noncancelable purchase orders of approximately $1,500,000 and $3,969,000,
primarily relating to inventory purchases.
7. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at March 31, 1996 and 1997 and December 31, 1997
is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-------------------------------------
AUTHORIZED MARCH 31, DECEMBER 31,
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 -- 249,616 261,727
F....................................... 960,732 -- 695,204 835,796
Undesignated............................ 640,036 -- -- --
---------- ---------- ---------- -------------
Total Preferred Stock................... 4,000,000 2,121,497 3,066,317 3,219,020
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</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 December 31, 1997
and for the nine months ended
December 31, 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 December 31, 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.
During November 1997, these warrants were exercised. 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 December 31, 1997
and for the nine months ended
December 31, 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 December 31, 1997
and for the nine months ended
December 31, 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........................ (84,640) 84,640 $ 3.25
Options exercised...................... -- (93,825) $ 0.76
Options canceled....................... 8,266 (10,372) $ 4.01
---------- -----------
Balance at December 31, 1997............. 623,108 454,860 $ 1.62
---------- -----------
---------- -----------
</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 half 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 December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED
Common Stock reserved for future issuance was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1997
---------- -------------
<S> <C> <C>
Stock option plans:
Outstanding..................................................... 474,417 454,860
Reserved for future grants...................................... 699,482 623,108
---------- -------------
1,173,899 1,077,968
Series C Preferred Stock warrants................................. 16,326 16,326
Series F Preferred Stock warrants................................. 98,978 42,240
Conversion of Preferred Stock..................................... 3,066,325 3,219,020
---------- -------------
4,355,528 4,355,554
---------- -------------
---------- -------------
</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 nine months ended December 31, 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 December 31, 1997
and for the nine months ended
December 31, 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 nine months
ended December 31, 1996 and 1997, the Company made sales of approximately
$800,000, $1,233,000, $181,000, $181,000, 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 December 31, 1997,
respectively.
In addition, at March 31, 1996, and 1997 and December 31, 1997, the accounts
payable balance includes approximately $396,000, $304,000, and $13,000 due a
related party on purchases of $2,005,000, $2,323,000, $1,857,000, and $237,000
during the years ended March 31, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997, respectively. Included in the notes payable balance
at March 31, 1996, and 1997 and December 31, 1997 is approximately $679,000, due
the related party.
During the years ended March 31, 1995, 1996, and 1997 and the nine months
ended December 31, 1996 and 1997, the Company made sales of approximately
$500,000, $692,000, $1,119,000, $569,000, and $1,264,000, respectively, to
another related party of which approximately $136,000, $709,000, and $691,000 is
included in the accounts receivable balance at March 31, 1996, 1997 and December
31, 1997, respectively. Included in the accounts payable balance at March 31,
1996, 1997 and December 31, 1997, is approximately $303,000, $381,000, and
$709,000, respectively, due the related party. The Company purchased $213,000,
$376,000, $630,000, $318,000 and $976,000 of materials from the related party in
fiscal 1995, 1996, 1997 and the nine months ended December 31, 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 nine months ended
December 31, 1996 and 1997, the Company made sales of approximately $479,000,
$206,000, $27,000 and $101,000, respectively, to another related party of which
approximately $389,000, $175,000 and $90,000 is included in the accounts
receivable balance at March 31, 1996 and 1997 and December 31, 1997,
respectively. Included in the notes payable balance at March 31, 1996 is
approximately $382,000, due the related party.
F-19
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 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 December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
10. GEOGRAPHIC AND SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 4,993,092 $ 1,721,922 $ -- $ 6,715,014
Transfers between geographic areas.................... 1,334,834 354,120 (1,688,954) --
------------- ------------- ------------- -------------
Total net sales....................................... $ 6,327,926 $ 2,076,042 $ (1,688,954) $ 6,715,014
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating loss........................................ $ (2,019,514) $ (1,031,591) $ 12,551 $ (3,038,554)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Identifiable assets................................... $ 7,145,644 $ 1,672,045 $ (2,095,306) $ 6,722,383
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------
ADJUSTMENTS/
UNITED STATES GERMANY ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... $ 7,129,706 $ 3,883,788 $ -- $ 11,013,494
Transfers between geographic areas.................... 1,061,222 531,143 (1,592,365) --
------------- ------------ ------------- -------------
Total net sales....................................... $ 8,190,928 $ 4,414,931 $ (1,592,365) $ 11,013,494
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Operating income (loss)............................... $ 142,250 $ 249,487 $ (10,744) $ 380,993
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Identifiable assets................................... $ 9,158,128 $ 4,063,945 $ (2,800,277) $ 10,421,796
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
Export revenues consisting of sales from the Company's U.S. operating
subsidiary to nonaffiliated customers were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEARS ENDED MARCH 31, 31,
-------------------------------------- --------------------------
1995 1996 1997 1996 1997
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Canada....................................... $ 307,000 $ 299,000 $ 188,000 $ 157,000 $ 289,000
Japan and Korea.............................. 531,000 1,509,000 1,936,000 1,044,000 1,800,000
---------- ------------ ------------ ------------ ------------
Total........................................ $ 838,000 $ 1,808,000 $ 2,124,000 $ 1,201,000 $ 2,089,000
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
F-21
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
31,
---------------------------
1997 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
Numerator:
Net income (loss)..................................................... $ (2,628,845) $ (2,615,265) $ 95,470
Numerator for basic and diluted net income (loss) per share........... $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------- ------------
------------- ------------- ------------
Denominator:
Denominator for basic earnings per share--weighted average shares..... 1,267,987 1,252,089 1,318,212
Shares related to SEC Staff Accounting Bulletins No. 55, 64 and 83.... 1,419,838 1,419,838 1,419,838
Conversion of preferred stock not included in shares related to SEC
Staff Accounting Bulletins No. 55, 64 and 83........................ 2,121,504 2,121,504 2,121,504
------------- ------------- ------------
Denominator for basic earnings per share.............................. 4,809,329 4,793,431 4,859,554
Effect of dilutive securities not included above:
Employee stock options.............................................. -- -- 241,609
Warrants............................................................ -- -- 15,660
------------- ------------- ------------
Dilutive potential common shares...................................... -- -- 257,269
Denominator for diluted earnings per share............................ 4,809,329 4,793,431 5,116,823
------------- ------------- ------------
Basic earnings per share.............................................. $ (0.55) $ (0.55) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Diluted earnings per share............................................ $ (0.55) $ (0.55) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
12. SUBSEQUENT EVENTS
In October 1997, the Board of Directors and stockholders approved 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
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.
F-22
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Information as of December 31, 1997
and for the nine months ended
December 31, 1996 and 1997 is unaudited)
12. SUBSEQUENT EVENTS (CONTINUED)
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-23
<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................................................................. 15
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 21
Business................................................................. 31
Management............................................................... 46
Principal Stockholders................................................... 51
Certain Transactions..................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
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.
2,250,000 SHARES
[LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
CRUTTENDEN ROTH INCORPORATION
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.............................................................. $ 6,490
NASD filing fee................................................................... $ 2,500
Nasdaq listing fee................................................................ $ 34,884
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
Representatives' Non-Accountable Expense Allowance................................ $ 150,000
Miscellaneous expenses............................................................ $ 106,126
----------
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 purchase an aggregate of
16,326 shares of Series C Preferred Stock at an exercise price of $6.25 per
share to an accredited investor in connection with a commercial lending
transaction.
3. In May 1996, the Registrant issued warrants to purchase an aggregate of
30,000 shares of Common Stock at an exercise price of $6.25 per share to an
accredited investor in connection with a commercial lending transaction.
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 to accredited investors. Such warrants
were exercised in November 1997.
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 purchase an aggregate of
12,240 shares of Series F Preferred Stock at an exercise price of $6.375 per
share to an accredited investor in connection with a commercial lending
transaction.
7. In October 1997, the Registrant issued 12,111 shares of Series E Preferred
Stock to an accredited corporate investor in exchange for cancellation of
indebtedness equal to $45,719.78.
8. From March 1994 to December 31, 1997, the Registrant issued options to
purchase an aggregate of 515,960 shares of Common Stock under the 1989 and
1997 Option Plans, of which options to purchase 28,346 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 Representatives' 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 LLP.
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.
10.15 Agreement relating to change in equity ownership of ISS-Nagano GmbH dated July
30, 1997.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share (see Note 11 to
Consolidated Financial Statements).
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 LLP (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.
** Filed as an exhibit to Registration Statement on Form SB-2 (File No.
333-41351) on December 2, 1997.
+ 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 Securities Act
of 1933 (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 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.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
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 Amendment to 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 5th day of February, 1998.
<TABLE>
<S> <C> <C>
INTEGRATED SENSOR SOLUTIONS, INC.
By: /s/ MANHER D. NAIK
-----------------------------------------
Manher D. Naik
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO 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 February 5, 1998
- ------------------------------ Chief Executive Officer
Manher D. Naik (Principal Executive
Officer)
/s/ DAVID SATTERFIELD* Vice President, Finance February 5, 1998
- ------------------------------ and Administration
David Satterfield (Principal Financial and
Principal Accounting
Officer)
/s/ YUTAKA MORI* Director February 5, 1998
- ------------------------------
Yutaka Mori
/s/ VINOD K. SOOD* Director February 5, 1998
- ------------------------------
Vinod K. Sood
/s/ STUART D. BOYD* Director February 5, 1998
- ------------------------------
Stuart D. Boyd
/s/ Y.S. FU* Director February 5, 1998
- ------------------------------
Y.S. Fu
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ SHIGERU MIYASHITA* Director February 5, 1998
- ------------------------------
Shigeru Miyashita
</TABLE>
<TABLE>
<S> <C> <C>
/s/ MANHER D. NAIK
----------------------------------------
*By: Manher D. Naik, Attorney-in-Fact
</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 Note 12, as to which the date is October 14, 1997), in
Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-41351) and
related Prospectus of Integrated Sensor Solutions, Inc. for the registration of
2,587,500 shares of its common stock and a representatives' warrant to purchase
225,000 shares of common stock.
/s/ ERNST & YOUNG LLP
San Jose, CA
February 5, 1998
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- --------------------------------------------------------------------------------------- -------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
1.2* Form of Representatives' 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 LLP.
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.
10.15 Agreement relating to change in equity ownership of ISS-Nagano GmbH dated July 30,
1997.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share (see Note 11 to
Consolidated Fianancial Statements).
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 LLP (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.
** Filed as an exhibit to Registration Statement on Form SB-2 (File No.
333-41351) on December 2, 1997.
+ 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>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered
into as of October 6, 1997 by and between Integrated Sensor Solutions, Inc.,
a California corporation ("ISS California"), and Integrated Sensor Solutions
Delaware Corporation, a Delaware corporation ("ISS Delaware").
WITNESSETH:
WHEREAS, ISS Delaware is a corporation duly organized and existing under
the laws of the State of Delaware;
WHEREAS, ISS California is a corporation duly organized and existing
under the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, ISS Delaware has
authority to issue 1,000,000 shares of Common Stock, par value $0.001 per
share (the "ISS Delaware Common Stock"), of which 100 shares are issued and
outstanding and owned by ISS California;
WHEREAS, on the date of this Merger Agreement, ISS California has
authority to issue 15,500,000 shares of Common Stock (the "ISS California
Common Stock"), of which 3,588,949 shares are issued and outstanding, and
8,500,000 shares of Preferred Stock (the "ISS California Preferred Stock"),
of which 7,875,137 shares are issued and outstanding;
WHEREAS, the respective Boards of Directors for ISS Delaware and ISS
California have determined that, for the purpose of effecting the
reincorporation of ISS California in the State of Delaware, it is advisable
and to the advantage of said two corporations and their shareholders that ISS
California merge with and into ISS Delaware upon the terms and conditions
herein provided; and
WHEREAS, the respective Boards of Directors of ISS Delaware and ISS
California, the shareholders of ISS California, and the sole stockholder of
ISS Delaware have adopted and approved this Merger Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and covenants
set forth herein, ISS California and ISS Delaware hereby agree to merge as
follows:
1. MERGER. ISS California shall be merged with and into ISS Delaware,
and ISS Delaware shall survive the merger ("Merger"), effective upon the date
when this Merger Agreement is made effective in accordance with applicable
law (the "Effective Date").
2. GOVERNING DOCUMENTS. The Certificate of Incorporation of ISS
Delaware shall be amended to read in full as follows:
1
<PAGE>
FIRST: The name of the Corporation is Integrated Sensor Solutions, Inc.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Incorporating Services, Ltd., 15 East North
Street, in the City of Dover, County of Kent. The name of the
registered agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the
General Corporation Law of Delaware.
FOURTH:
This corporation is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock". The total number of shares which this
corporation is authorized to issue is 57,000,000 shares. The number of
shares of Common Stock which this corporation is authorized to issue is
50,000,000 shares, $0.001 par value per share. The number of shares of
Preferred Stock which this corporation is authorized to issue is 7,000,000
shares. The Preferred Stock may be issued from time to time in one of more
series, $0.001 par value per share. Of the Preferred Stock, 800,000 shares
shall be designated Series A Preferred Stock, 271,465 shares shall be
designated Series B Preferred Stock, 536,000 shares shall be designated
Series C Preferred Stock, 530,038 shares shall be designated Series D
Preferred Stock, 261,729 shares shall be designated Series E Preferred Stock
and 960,732 shares shall be designated Series F Preferred Stock. The Board
of Directors of this corporation is authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock, and within the limitations or
restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of any such series
then outstanding) the number of shares of any such series subsequent to the
issue of shares of that series, to determine the designation of any series,
and to fix the number of shares of any series.
The Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock shall have the rights, preferences, privileges and
restrictions set forth below.
1. GENERAL DEFINITIONS. For purposes of this Article FOURTH the
following definitions shall apply:
(a) "SERIES A PREFERRED" shall refer to Series A Preferred Stock.
(b) "SERIES B PREFERRED" shall refer to Series B Preferred Stock.
(c) "SERIES C PREFERRED" shall refer to Series C Preferred Stock.
2
<PAGE>
(d) "SERIES D PREFERRED" shall refer to Series D Preferred Stock.
(e) "SERIES E PREFERRED" shall refer to Series E Preferred Stock.
(f) "SERIES F PREFERRED" shall refer to Series F Preferred Stock.
(g) "JUNIOR SHARES" shall mean all Common and any other shares of
this corporation other than the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F
Preferred and any additional series of Preferred Stock which may be
designated by the Board from time to time.
(h) "PREFERRED" shall refer to the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and
Series F Preferred.
(i) "SUBSIDIARY" shall mean any corporation at least 50% of whose
outstanding voting shares shall at the time be owned by this corporation or
by one or more of such subsidiaries.
(j) "BOARD" shall mean the Board of Directors of Integrated Sensor
Solutions, Inc.
2. DIVIDEND RIGHTS OF PREFERRED. Subject to the rights of additional
series of Preferred Stock which may be designated by the Board from time to
time, the holder of each share of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred shall be entitled to receive, prior and in preference to any
declaration and payment of any dividend (payable other than in stock of the
corporation) or other distributions (as defined below) on the Junior Shares,
noncumulative dividends at an annual rate equal to $0.03125 per share of
Series A Preferred, $0.1875 per share of Series B Preferred, $0.625 per share
of Series C Preferred, $0.3775 per share of Series D Preferred, $0.3775 per
share of Series E Preferred, and $0.6125 per share of Series F Preferred when
and as declared by the Board. The Series A Preferred, the Series B
Preferred, the Series C Preferred, the Series D Preferred, the Series E
Preferred and Series F Preferred shall be PARI PASSU with respect to their
right to receive dividends. If there are insufficient funds legally available
to pay the full amount of dividends on the Preferred Stock, the amount of
dividends shall be reduced proportionately so that dividends payable on each
share of Series B Preferred shall be 6.0 times the dividend payable on each
share of Series A Preferred, the dividend payable on each share of Series C
Preferred shall be 20 times the dividend payable on each share of Series A
Preferred, the dividend payable on each share of Series D Preferred or Series
E Preferred shall be 12.08 times the dividend payable on each share of Series
A Preferred and the dividend payable on each share of Series F Preferred
shall be 19.6 times the dividend payable on each share of Series A Preferred.
For purposes of this Section 2, unless the context requires otherwise,
"distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock or other securities of the corporation, or the purchase or
redemption of shares of the corporation (other than repurchases of Common
Stock
3
<PAGE>
held by employees or directors of, or consultants to, the corporation upon
termination of their employment or services pursuant to agreements providing
for such repurchase at a price equal to the original issue price of such
shares and other than redemptions in liquidation or dissolution of the
corporation) for cash or property, including any such transfer, purchase or
redemption by a subsidiary of this corporation.
3. LIQUIDATION PREFERENCE.
(a) Subject to the rights of additional series of Preferred Stock
which may be designated by the Board from time to time subject to Section 6
hereof, in the event of any liquidation, dissolution or winding up of the
corporation, either voluntarily or involuntarily, the holders of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred and Series F Preferred shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the corporation to the
holders of the Junior Shares by reason of their ownership thereof, an amount
per share equal to $0.3125 (the "Original Series A Issue Price") plus any
declared but unpaid dividends for each share of Series A Preferred then held
by them, $1.875 (the "Original Series B Issue Price") plus any declared but
unpaid dividends for each share of Series B Preferred then held by them,
$6.25 (the "Original Series C Issue Price") plus any declared but unpaid
dividends for each share of Series C Preferred then held by them, $3.775 (the
"Original Series D Issue Price") plus any declared but unpaid dividends for
each share of Series D Preferred then held by them, $3.775 (the "Original
Series E Issue Price") plus any declared but unpaid dividends for each share
of Series E Preferred then held by them, and $6.125 (the "Original Series F
Issue Price") plus any declared but unpaid dividends for each share of Series
F Preferred then held by them. After payment to the holders of the Preferred
of the amounts set forth in this Section 3, the entire remaining assets and
funds of the corporation legally available for distribution, if any, shall be
distributed among the holders of the Junior Shares in proportion to the
shares of Common Stock then held by them and the shares of Common Stock which
they then have the right to acquire upon conversion of any other Junior
Shares then held by them. If, upon the occurrence of such event, the assets
thus distributed among the holders of the Preferred shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the corporation legally available for
distribution shall be distributed among the holders of the Preferred in
proportion to the Original Series A Issue Price, the Original Series B Issue
Price, the Original Series C Issue Price, the Original Series D Issue Price,
the Original Series E Issue Price and the Original Series F Issue Price of,
plus any declared but unpaid dividends on, the shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred then held by them.
(b) (i) For purposes of this Section 3, a liquidation,
dissolution or winding up of the corporation shall be deemed to be occasioned
by and to include (A) the corporation's sale of all or substantially all of
its assets or (B) any transaction or series of related transactions
(including, without limitation any reorganization, merger or consolidation)
which will result in the holders of the outstanding voting equity securities
of the corporation immediately prior to such transaction or series of related
transactions holding securities
4
<PAGE>
representing less than 50% of the voting power of the surviving entity
immediately following such transaction or series of related transactions.
(ii) In any such event, if the consideration received by the
corporation is other than cash or indebtedness, its value will be deemed to
be its fair market value. In the case of publicly traded securities, fair
market value shall mean the closing market price of such securities on the
date such consolidation, merger or sale is consummated. If a consideration
is in a form other than publicly traded securities, its value shall be
determined by the Board.
4. CONVERSION. The holders of the Preferred shall have conversion
rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and
Series F Preferred shall be convertible at any time, at the option of the
holder thereof, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Issue Price (as set
forth in Section 3 hereof) for such share by the applicable Conversion Price
thereof, determined as hereinafter provided, in effect at the time of
conversion. The price at which shares of Common Stock shall be deliverable
upon conversion (individually the "Series A Conversion Price," the "Series B
Conversion Price," the "Series C Conversion Price," the "Series D Conversion
Price," the "Series E Conversion Price" and the "Series F Conversion Price"
and collectively the "Conversion Prices") shall initially be $0.3125 per
share of Common Stock for conversion of Series A Preferred, $1.875 per share
of Common Stock for conversion of Series B Preferred, $6.25 per share of
Common Stock for conversion of Series C Preferred, $3.775 per share of Common
Stock for conversion of Series D Preferred, $3.775 per share of Common Stock
for conversion of Series E Preferred and $6.125 per share of Common Stock for
conversion of Series F Preferred. Such initial Conversion Prices shall be
subject to adjustment as hereinafter provided.
Each share of Preferred Stock shall automatically be converted into
shares of Common Stock at its then effective Conversion Price, upon the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
corporation to the public at a price of not less than $10.00 per share and an
aggregate offering price to the public of not less than $15,000,000.
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Preferred Stock. In lieu of any
fractional share to which a holder would otherwise be entitled, the
corporation shall pay cash equal to such fraction multiplied by the fair
market value of Common Stock as determined in good faith by the Board. Any
holder of Preferred Stock shall be entitled to convert the same into full
shares of Common Stock only if such holder surrenders the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of
any transfer agent for Preferred Stock, and gives written notice to the
corporation at such office that such holder elects to convert the same on or
prior to the date specified for such conversion. The corporation shall
thereafter issue and deliver at such office to
5
<PAGE>
such holder of Preferred Stock a certificate or certificates registered in
the name of the holder or such other name as the holder may direct for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid and a check payable to the holder in the amount of any cash amounts
payable as the result of a conversion into a fractional share of Common Stock
and any declared but unpaid dividends on the converted Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on such date. The corporation shall pay any
issue taxes payable upon the issuance of such certificates in the name of the
holder. If the holder of any certificate representing shares of Preferred
requests the corporation to issue the certificates representing the shares of
Common Stock issuable upon conversion thereof in a name other than the name
of the holder, the holder shall pay to the corporation, or the transfer agent
of the corporation if the corporation so designates, any transfer or other
taxes required by reason of the issuance of a certificate for shares of
Common Stock in any name other than the name of the holder.
If the conversion is in connection with an underwritten public offering
of securities registered pursuant to the Securities Act of 1933, as amended,
the conversion shall be conditioned upon the closing of such public offering,
in which event the person(s) entitled to receive Common Stock issuable upon
such conversion of Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to such closing.
(c) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(1) SPECIAL DEFINITIONS. For purposes of this Section 4, the
following definitions shall apply:
a. "OPTIONS" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
b. "CONVERTIBLE SECURITIES" shall mean any evidences of
indebtedness, shares (other than the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F
Preferred and warrants to purchase Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred or Series F
Preferred) or other securities convertible into or exchangeable for Common
Stock.
c. "SERIES D ORIGINAL ISSUE DATE" shall mean the date
on which a share of Series D Preferred was first used.
d. "SERIES F ORIGINAL ISSUE DATE" shall mean the date
on which a share of Series F Preferred was first issued.
e. "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to Section 4(c)(3), deemed to be
issued) by the
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corporation after the Series D Original Date or Series F Original Issue Date,
as the case may be, other than shares of Common Stock issued or issuable:
i) upon conversion of shares of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred or Series F Preferred authorized herein;
ii) to directors, officers or employees of, or
consultants to, the corporation pursuant to a stock grant, option plan or
purchase plan or other stock incentive program or issuance (collectively, the
"Plans") unanimously approved by the Board of Directors;
iii) upon exercise or conversion of warrants to
purchase shares of the capital stock of the corporation issued in connection
with equipment lease financing transactions and bank financing transactions
unanimously approved by the Board, where the issuance of such warrants is not
principally for the purpose of raising additional equity capital for the
corporation;
iv) pursuant to the acquisition of another
corporation by this corporation or any subsidiary of this corporation by
merger, purchase of substantially all of the assets or other reorganization
unanimously approved by the Board whereby this corporation owns more than
fifty percent (50%) of the voting power of such other corporation following
such acquisition; and
v) as a dividend or distribution on the Series D
Preferred or Series F Preferred.
(2) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Series C Conversion Price, the Series D Conversion Price or the Series F
Conversion Price shall be made in respect of the issuance of Additional
Shares of Common Stock unless the consideration per share for an Additional
Share of Common Stock issued or deemed to be issued by the corporation is
less than the Series C Conversion Price, the Series D Conversion Price or the
Series F Conversion Price, as applicable, in effect on the date of, and
immediately prior to such issue. No adjustment in the Series A Conversion
Price, Series B Conversion Price or Series E Conversion Price shall be made
in respect of any issuance of Additional Shares of Common Stock except
pursuant to Section 4(d) below.
(3) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In
the event the corporation at any time or from time to time after the Series D
Original Issue Date or Series F Original Issue Date, as the case may be,
shall issue any Options or Convertible Securities or shall fix a record date
for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to
any provisions contained therein for a subsequent adjustment of such number)
of Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record
date shall have
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been fixed, as of the close of business on such record date; provided that
Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to Section 4(c)(5)
hereof) of such Additional Shares of Common Stock would be less than the
Series C Conversion Price, the Series D Conversion Price or Series F
Conversion Price, as applicable, as in effect on the date of and immediately
prior to such issue, or such record date, as the case may be; and provided
further that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
a. no further adjustment in the Series C Conversion
Price, the Series D Conversion Price or Series F Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
b. if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, such Series C Conversion Price, Series D
Conversion Price or Series F Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase
or decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
c. In the event of any change in the number of shares
of Common Stock issuable upon the exercise, conversion or exchange of any
Option or Convertible Security, including, but not limited to, a change
resulting from the anti-dilution provisions thereof, the Series C Conversion
Price, the Series D Conversion Price or Series F Conversion Price as
applicable, then in effect shall forthwith be readjusted to such Series C
Conversion Price, Series D Conversion Price or Series F Conversion Price as
would have obtained had the adjustment which was made upon the issuance of
such Option or Convertible Security not exercised or converted prior to such
change been made upon the basis of such change; and
d. no readjustment pursuant to clause (b) above shall
have the effect of increasing such Series C Conversion Price, Securities D
Conversion Price or Series F Conversion Price to an amount which exceeds the
lower of (i) the Series C Conversion Price, Series D Conversion Price or
Series F Conversion Price on the original adjustment date, or (ii) the Series
C Conversion Price, the Series D Conversion Price or Series F Conversion
Price that would have resulted from any issuance of Additional Shares of
Common Stock between the original adjustment date and such readjustment date.
(4) ADJUSTMENT OF SERIES C CONVERSION PRICE, SERIES D
CONVERSION PRICE OR SERIES F CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event this corporation shall, at any time
after the Series F Original Issue Date, as applicable, issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed to
be issued pursuant to Section 4(c)(3)) for a consideration per share less
than the
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Series C Conversion Price, the Series D Conversion Price or Series F
Conversion Price, as applicable, in effect on the date of and immediately
prior to such issuance, then in any such event such Series C Conversion
Price, Series D Conversion Price or Series F Conversion Price, as applicable,
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series C Conversion Price,
Series D Conversion Price or Series F Conversion Price by a fraction, (A) the
numerator of which shall be (i) the number of shares of Common Stock
outstanding immediately prior to such issue plus (ii) the number of shares of
Common Stock which the aggregate consideration received by the corporation
for the total number of Additional Shares of Common Stock so issued would
purchase at such Series C Conversion Price, Series D Conversion Price or
Series F Conversion Price, as applicable; and (B) the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such issue plus the number of such Additional Shares of Common Stock so
issued, PROVIDED THAT, (i) for the purpose of this subsection (4), all shares
of Common Stock issuable upon exercise or conversion of Options, Convertible
Securities or shares of Preferred outstanding immediately prior to such issue
shall be deemed to be outstanding, and (ii) the number of shares of Common
Stock deemed issuable upon conversion of such outstanding Options,
Convertible Securities or shares of Preferred shall not give effect to any
adjustments to the conversion price or conversion rate of such Options,
Convertible Securities or shares of Preferred resulting from the issuance of
Additional Shares of Common Stock that is the subject of this calculation.
Notwithstanding the foregoing, no adjustment in any Conversion Price
shall be made under this Section 4(c)(4) as a result of any stock dividend,
subdivision, combination or consolidation which results in a proportionate
adjustment of the Series C Conversion Price, the Series D Conversion Price
and Series F Conversion Price pursuant to Section 4(d) below.
(5) DETERMINATION OF CONSIDERATION. For purposes of this
Section 4(c), the consideration received by the corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
a. CASH AND PROPERTY: Such consideration shall:
i) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the corporation excluding amounts
paid or payable for accrued interest or accrued dividends;
ii) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined by the Board in the good faith exercise of its reasonable business
judgment; and
iii) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (i) and (ii)
above, as determined in good faith by the Board.
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b. OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(c)(3), relating
to Options and Convertible Securities, shall be determined by dividing:
(x) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regard to any provision contained therein for a subsequent adjustment of such
consideration) payable to the corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case
of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by:
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
(d) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the
event the corporation at any time, or from time to time after the Series F
Original Issue Date, shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in additional shares of Common Stock, then and in
each such event the Series A Conversion Price, the Series B Conversion Price,
the Series C Conversion Price, the Series D Conversion Price, the Series E
Conversion Price and the Series F Conversion Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying each such Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the number
of shares of Common Stock issuable in payment of such dividend or
distribution;
provided, however, if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, each such Conversion Price shall be recomputed
accordingly as of the close of business on such record date and thereafter
each such Conversion Price shall be adjusted pursuant to this paragraph as of
the time of actual payment of such dividends or distributions; and provided
further, however, that no such adjustment in the Conversion Price for any
series of Preferred shall be made if the holders of such series of Preferred
simultaneously receive a dividend or other distribution of shares of Common
Stock in a number equal to the number of shares of Common Stock as they would
have
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received if all outstanding shares of such series of Preferred had been
converted into Common Stock on the date of such event.
(e) NO IMPAIRMENT. Except for taking the actions contemplated by
Section 6 below upon obtaining the vote or consent set forth therein, the
corporation will not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the corporation, but it will at all times
in good faith assist in the carrying out of all of the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred against impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section
4, the corporation, at its expense, shall promptly compute such adjustment or
readjustment and furnish to each holder of Preferred a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The corporation shall, upon
the written request at any time of any holder of Preferred, furnish or cause
to be furnished to each holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price 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 conversion of
the Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
corporation of the record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the corporation
shall mail to each holder of Preferred, at least twenty (20) days prior to
the date specified herein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution.
(h) RESERVATION OF STOCK. The corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock solely for the purpose of effecting the conversion of the shares
of the Preferred such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all outstanding shares of
Preferred; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all the then
outstanding shares of the Preferred, the corporation will take such corporate
action as may, in the opinion of its counsel be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(i) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Preferred shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed
to each holder of record at his or her address appearing on the books of the
corporation.
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(j) RECAPITALIZATION. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision or
combination provided for elsewhere in this Section 4 or a merger or sale of
assets transaction treated as a liquidation pursuant to Section 3) provisions
shall be made so that the holders of shares of each series of Preferred shall
thereafter be entitled to receive upon conversion of such Preferred, the
number of shares of stock or other securities or property of the corporation
or otherwise, to which a holder of Common Stock deliverable upon conversion
of shares of such series of Preferred would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 4 with respect to the
rights of the holders of Preferred after such recapitalization to the end
that the provisions of this Section 4 (including adjustment of the Conversion
Prices then in effect and the number of shares purchasable upon conversion of
the Preferred) shall be applicable after such event as nearly equivalent as
may be practicable.
(k) EFFECT OF CONVERSION. In the event that all outstanding
shares of Preferred shall have been converted into Common Stock in accordance
with Section 4(a), (i) the converted shares of Preferred shall resume the
status of authorized but unissued shares of Preferred, undesignated as to
series, (ii) any outstanding rights to acquire unissued shares of Preferred
shall become rights to acquire shares of Common Stock, as adjusted in
accordance with this Section 4, and (iii) the provisions of this Certificate
of Incorporation relating to the Series A Preferred, the Series B Preferred,
the Series C Preferred, the Series D Preferred, the Series E Preferred and
the Series F Preferred shall be of no further force or effect.
5. VOTING RIGHTS.
(a) Except as otherwise required by law, each share of Common
issued and outstanding shall have one vote. Each share of Preferred issued
and outstanding shall have the number of votes equal to the number of Common
shares into which the Preferred is convertible as adjusted from time to time
pursuant to Section 4 hereof.
The holder of each share of Preferred shall be entitled to notice of any
stockholders' meeting in accordance with the by-laws of the corporation and,
except as contemplated by Section 5(b) below, shall vote with the holders of
the Common Stock upon the election of directors and upon any other matter
submitted to a vote of shareholders, except those matters required by law to
be submitted to a class vote.
(b) One member of the Board shall be subject to election and
removal by the holders of Series D Preferred, voting as a separate series.
One member of the Board shall be subject to election and removal by the
holders of Series C Preferred, voting as a separate series. One member of
the Board shall be subject to election and removal by holders of Series F
Preferred, voting as a separate series. One member of the Board shall be
subject to election and removal by the holders of Series A Preferred, Series
B Preferred, Series E Preferred and Common Stock, voting together as a
separate class on an as converted basis. All remaining members of the Board
shall be subject to election and removal by the holders of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred, Series F
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Preferred and Common Stock voting together as a class in the manner set forth
in Section 5(a) above. If at any time there are fewer than 270,000 shares of
Series D Preferred outstanding (as adjusted for any stock split, reverse
stock split, stock dividend, recapitalization or similar action with respect
to the outstanding shares of Series D Preferred), the right of the holders of
the Series D Preferred to elect and remove one member of the Board shall
terminate, and thereafter the holders of the Series D Preferred shall be
entitled to vote with the holders of the Series A Preferred, Series B
Preferred, Series E Preferred and Common Stock in the election and removal of
the director to be elected and/or removed by such holders. If at any time
there are fewer than 270,000 shares of Series C Preferred outstanding (as
adjusted for any stock split, reverse stock split, stock dividend,
recapitalization or similar action with respect to the outstanding shares of
Series C Preferred), the right of the holders of the Series C Preferred to
elect and remove one member of the Board shall terminate and thereafter the
holders of the Series C Preferred shall vote with the holders of the Series A
Preferred, Series B Preferred, Series E Preferred and Common Stock in the
election and removal of the director to be elected and/or removed by such
holders. If at any time there are fewer than 270,000 shares of Series F
Preferred outstanding (as adjusted for any stock split, reverse stock split,
stock dividend, recapitalization or similar action with respect to the
outstanding shares of Series F Preferred), the right of the holders of the
Series F Preferred to elect and remove one member of the Board shall
terminate and thereafter the holders of the Series F Preferred shall vote
with the holders of the Series A Preferred, Series B Preferred, Series E
Preferred and Common Stock in the election and removal of the director to be
elected and/or removed by such holders. In the event that the rights of the
holders of the Series D Preferred, the Series C Preferred and the Series F
Preferred to elect and remove one director are all terminated as set forth
above, then thereafter all directors shall be elected and/or removed by the
holders of Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred, Series E Preferred, Series F Preferred and Common Stock voting
together as a class in the manner set forth in Section 5(a) above.
6. COVENANTS.
(a) In addition to any other rights provided by law, so long as
any Preferred shall be outstanding, this corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of such outstanding shares of Preferred voting together as a
single class on an as-converted basis:
(1) amend or repeal any provision of, or add any provision
to, this corporation's certificate of incorporation or bylaws if such action
would alter or change the preferences, rights, privileges or powers of, or
the restrictions provided for the benefit of, any Preferred;
(2) authorize or issue shares of any class of stock having
any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of the Preferred or authorize or
issue shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights to
purchase, any shares of stock of this corporation having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of the
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Preferred; provided, however, that this paragraph (ii) shall not be construed
to require any such affirmative vote or written consent for the corporation
to issue shares of any additional series of Preferred Stock designated by the
Board and having rights, preferences, privileges and restrictions that are
pari passu with those of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred as
set forth in a Certificate of Designation with respect to any such series
duly filed with the Secretary of State of Delaware pursuant to the Delaware
General Corporation Law.
(3) authorize any additional shares of Common Stock;
(4) reclassify any Junior Shares into shares having any
preference or priority as to dividends or assets superior to or on a parity
with any such preference or priority of the Preferred;
(5) pay or declare any dividend on any Junior Shares (except
dividends payable solely in shares of Common Stock) while the Preferred
remains outstanding, or apply any of its assets to the redemption,
retirement, purchase of acquisition directly or indirectly, through
subsidiaries or otherwise, of any Junior Shares, except from employees of
this corporation upon termination of employment pursuant to the terms of
restrictive stock agreements providing for the repurchase of such Junior
Shares at cost entered into with such employees; or
(6) agree to merge or consolidate this corporation or any
subsidiary of this corporation with or into any corporation, or sell,
transfer or lease all or substantially all of this corporation's assets, or
agree to do any of the foregoing; provided, that no such vote or consent
shall be required with respect to a merger or consolidation of this
corporation or any subsidiary of this corporation, in which this corporation
or any subsidiary of this corporation is the surviving corporation and the
valuation of the acquired corporation represents 20% or less of the valuation
(reasonably determined by the Board) of this corporation and its subsidiaries
immediately prior to such transaction.
(b) In addition to any other rights provided by law, so long as
any Series C Preferred shall be outstanding, this corporation shall not,
without first obtaining the affirmative vote or written consent of the
holders of not less than a majority of such outstanding shares of Series C
Preferred, authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to any such
preference or priority of the Series C Preferred, or authorize or issue
shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having option rights to
purchase, any shares of stock of this corporation having any preference or
priority as to dividends or assets superior to any such preference or
priority of the Series C Preferred; provided, however, that this paragraph
(b) shall not be construed to require any such vote or written consent for
the corporation to issue shares of any additional series of Preferred Stock
designated by the Board and having rights, preferences, privileges and
restrictions that are pari passu with those of the Series C Preferred as set
forth in a Certificate of Designation with respect to any such series duly
filed with the Secretary of State of Delaware pursuant to the Delaware
General Corporation Law.
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(c) In addition to the other rights provided by law, so long as
any Series D Preferred or Series F Preferred shall be outstanding, this
corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than two-thirds of such
outstanding shares of Series D Preferred and Series F Preferred, or, with
respect to an action affecting only the Series D Preferred or Series F
Preferred, the Series D Preferred or Series F Preferred, as applicable, take
any of the following actions:
(1) Authorize or issue any other class or series of stock, or
any security convertible into any such other class or series, in addition to
Common Stock, Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred;
(2) amend or repeal any provision of, or add any provision
to, this corporation's certificate of incorporation if such action would
alter or change the preferences, rights, privileges or power of, or the
restrictions provide for the benefit of, the Series D Preferred or Series F
Preferred, as the case may be;
(3) Declare or pay any dividends on Common Stock, other than
dividends payable solely in common stock;
(4) Increase the authorized number of directors of the
Corporation;
(5) Repurchase or redeem any securities except for
repurchases under restricted stock agreements with employees previously
approved by the Board;
(6) (a) Merge with or into or consolidate with any other
corporation, (b) sell, lease or otherwise dispose of all or substantially all
its properties or assets or (c) acquire all or substantially all of the
properties or assets of any other corporation or entity; provided, however,
that no such vote or consent shall be required with respect to a merger,
consolidation or acquisition in which this corporation or any subsidiary of
this corporation is the surviving corporation and the valuation of the
acquired corporation represents 20% or less of the valuation (reasonably
determined by the Board) of this corporation and its subsidiaries immediately
prior to such transaction.
7. RESIDUAL RIGHTS. Subject to the rights of additional series of
Preferred Stock which may be designated by the Board from time to time, all
rights accruing to the outstanding shares of this corporation not expressly
provided for to the contrary herein shall be vested in the Common Stock.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to
the powers and
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authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation,
the directors are hereby empowered to exercise all such powers
and do all such acts and things as may be exercised or done by
the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten
registered public offering (the "IPO"), any action required or
permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders. Prior to such sale,
unless otherwise provided by law, any action which may
otherwise be taken at any meeting of the stockholders may be
taken without a meeting and without prior notice, if a written
consent describing such actions is signed by the holders of
outstanding shares having not less than the minimum number of
votes which would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote
thereon were present and voted.
D. Special meetings of stockholders of the Corporation may be
called only (1) 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) or (2) by
the holders of not less than ten percent (10%) of all of the
shares entitled to cast votes at the meeting.
SIXTH:
A. The number of directors shall initially be set at 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
IPO, the directors shall be divided into three classes with
the term of office of the first class (Class I) to expire at
the first annual meeting of the stockholders following the
IPO; the term of office of the second class (Class II) to
expire at the second annual meeting of stockholders held
following the IPO; the term of office of the third class
(Class III) to expire at the third annual meeting of
stockholders; and thereafter for each such term to expire at
each third succeeding annual meeting of stockholders after
such election. Subject to the rights of the holders of any
series of Preferred
16
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Stock then outstanding, a vacancy resulting from the removal
of a director by the stockholders as provided in Article
SIXTH, Section C below may be filled at a 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.
B. 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 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
at which the term of office of the class to which they have
been elected expires, and until their respective successors
are elected, except in the case of the death, resignation, or
removal of any director. No decrease in the number of
directors constituting the Board of Directors shall shorten
the term of any incumbent director.
C. Subject to the rights of the 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 provided in
Article SIXTH, Section A above. Directors so chosen shall
hold office for a term expiring at the next annual meeting of
stockholders at which the term of office of the class to which
they have been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director.
SEVENTH: 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 Bylaws of
the Corporation by the stockholders shall require, in addition
to any vote of the holders of any class or series of
17
<PAGE>
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.
EIGHTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper
personal benefit.
If the Delaware General Corporation Law is hereafter amended
to authorize the further elimination or limitation of the
liability of a director, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as
so amended.
Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or
modification.
NINTH: The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in
the manner prescribed by the laws of the State of Delaware and
all rights conferred upon stockholders are granted subject to
this reservation; PROVIDED, HOWEVER, that, notwithstanding any
other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or
no vote, but in addition to any vote of the holders of any
class or series of the stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative
vote of the holders of at least 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, shall be
required to amend or repeal this Article NINTH, Article FIFTH,
Article SIXTH, Article SEVENTH or Article EIGHTH.
The Certificate of Incorporation of ISS Delaware, as amended herein,
shall continue to be the Certificate of Incorporation of ISS Delaware as the
surviving Corporation without change or amendment until further amended in
accordance with the provisions thereof and applicable laws. The Bylaws of
ISS Delaware, in effect on the Effective Date, shall continue to be the
Bylaws of
18
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ISS Delaware as the surviving Corporation without change or amendment until
further amended in accordance with the provisions thereof and applicable laws.
3. DIRECTORS AND OFFICERS. The directors and officers of ISS
California shall become the directors and officers of ISS Delaware upon the
Effective Date and any committee of the Board of Directors of ISS California
shall become the members of such committees for ISS Delaware.
4. SUCCESSION. On the Effective Date, ISS Delaware shall succeed to
ISS California in the manner of and as more fully set forth in Section 259 of
the General Corporation Law of the State of Delaware.
5. FURTHER ASSURANCES. From time to time, as and when required by ISS
Delaware or by its successors and assigns, there shall be executed and
delivered on behalf of ISS California such deeds and other instruments, and
there shall be taken or caused to be taken by it such further and other
action, as shall be appropriate or necessary in order to vest, perfect or
confirm, of record or otherwise, in ISS Delaware the title to and possession
of all the property, interests, assets, rights, privileges, immunities,
powers, franchises and authority of ISS California, and otherwise to carry
out the purposes of this Merger Agreement and the officers and directors of
ISS Delaware are fully authorized in the name and on behalf of ISS California
or otherwise to take any and all such action and to execute and deliver any
and all such deeds and other instruments.
6. STOCK OF ISS CALIFORNIA.
a. COMMON STOCK. Upon the Effective Date, by virtue of the
Merger and without any action on the part of the holder thereof, each 2.5
shares of ISS California Common Stock outstanding immediately prior thereto
shall be changed and converted into one fully paid and nonassessable share of
ISS Delaware Common Stock.
b. PREFERRED STOCK. Upon the Effective Date, by virtue of the
Merger and without any action on the part of the holder thereof, each 2.5
shares of each series of ISS California Preferred Stock outstanding
immediately prior thereto shall be changed and converted into one fully paid
and nonassessable share of ISS Delaware Preferred Stock of an equivalent
series.
c. FRACTIONAL SHARES. No fractional shares which a ISS Delaware
stockholder would otherwise be entitled to receive by reason of the exchange
of ISS California stock for ISS Delaware stock shall be issued. In lieu of
any fractional shares to which a holder would otherwise be entitled, ISS
Delaware shall pay cash equal to such fraction multiplied by the fair market
value of the Common Stock on the Effective Date as determined by the Board of
Directors of ISS Delaware and for the Preferred Stock, such fraction
multiplied by the Conversion Prices as defined in Article FOURTH,
subparagraph 4(a) of this Certificate of Incorporation.
19
<PAGE>
7. STOCK CERTIFICATES. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of ISS
California stock shall be deemed for all purposes to evidence ownership of
and to represent the shares of ISS Delaware stock into which the shares of
ISS California stock represented by such certificates have been converted as
herein provided. The registered owner on the books and records of ISS
Delaware or its transfer agent of any such outstanding stock certificate
shall, until such certificate shall have been surrendered for transfer or
otherwise accounted for to ISS Delaware or its transfer agent, have and be
entitled to exercise any voting and other rights with respect to and to
receive any dividend and other distributions upon the shares of ISS Delaware
stock evidenced by such outstanding certificate as above provided.
8. OPTIONS AND WARRANTS. Upon the Effective Date, each outstanding
option, warrant or other right to purchase shares of ISS California stock,
including those options granted under the 1997 Stock Option Plan (the "Option
Plan") of ISS California, shall be converted into and become an option,
warrant, or right to purchase the number of shares of ISS Delaware stock
determined by dividing the number of shares of ISS California subject to the
option, warrant or right to purchase by 2.5, rounded down to the nearest
whole number, at a price per share equal to the exercise price of the option,
warrant or right to purchase ISS California stock multiplied by 2.5, rounded
up to the nearest whole cent, and upon the same terms and subject to the same
conditions as set forth in the Option Plan and other agreements entered into
by ISS California pertaining to such options, warrants, or rights. A number
of shares of ISS Delaware stock shall be reserved for purposes of such
options, warrants, and rights equal to the number of shares of ISS California
stock so reserved as of the Effective Date divided by 2.5. As of the
Effective Date, ISS Delaware shall assume all obligations of ISS California
under agreements pertaining to such options, warrants, and rights, including
the Option Plan, and the outstanding options, warrants, or other rights, or
portions thereof, granted pursuant thereto.
9. OTHER EMPLOYEE BENEFIT PLANS. As of the Effective Date, ISS
Delaware hereby assumes all obligations of ISS California under any and all
employee benefit plans in effect as of said date or with respect to which
employee rights or accrued benefits are outstanding as of said date.
10. OUTSTANDING COMMON STOCK OF ISS DELAWARE. Forthwith upon the
Effective Date, the One Hundred (100) shares of ISS Delaware Common Stock
presently issued and outstanding in the name of ISS California shall be
canceled and retired and resume the status of authorized and unissued shares
of ISS Delaware Common Stock, and no shares of ISS Delaware Common Stock or
other securities of ISS Delaware shall be issued in respect thereof.
11. COVENANTS OF ISS DELAWARE. ISS Delaware covenants and agrees that
it will, on or before the Effective Date:
a. Qualify to do business as a foreign corporation in the State
of California, and in all other states in which ISS California is so
qualified and in which the failure so to qualify would have a material
adverse impact on the business or financial condition of ISS Delaware. In
connection therewith, ISS Delaware shall irrevocably appoint an agent for
service
20
<PAGE>
of process as required under the provisions of Section 2105 of the California
Corporations Code and under applicable provisions of state law in other
states in which qualification is required hereunder.
21
<PAGE>
b. File any and all documents with the California Franchise Tax
Board necessary to the assumption by ISS Delaware of all of the franchise tax
liabilities of ISS California.
12. AMENDMENT. At any time before or after approval and adoption by
the stockholders of ISS California, this Merger Agreement may be amended in
any manner as may be determined in the judgment of the respective Boards of
Directors of ISS Delaware and ISS California to be necessary, desirable or
expedient in order to clarify the intention of the parties hereto or to
effect or facilitate the purposes and intent of this Merger Agreement.
13. ABANDONMENT. At any time before the Effective Date, this Merger
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either ISS California or ISS Delaware or both, notwithstanding
approval of this Merger Agreement by the sole stockholder of ISS Delaware and
the shareholders of ISS California.
14. COUNTERPARTS. In order to facilitate the filing and recording of
this Merger Agreement, the same may be executed in any number of
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the Board of Directors of ISS California and ISS Delaware, is
hereby executed on behalf of each of said two corporations by their respective
officers thereunto duly authorized.
INTEGRATED SENSOR SOLUTIONS
DELAWARE CORPORATION, a Delaware
corporation
By:
------------------------------------
Donald E. Paulus, Vice President
INTEGRATED SENSOR SOLUTIONS, INC.,
a California corporation
By:
------------------------------------
Donald E. Paulus, Vice President
22
<PAGE>
RESTATED REGISTRATION RIGHTS AGREEMENT
This Restated Registration Rights Agreement dated as of December 31, 1996 is
entered into by and among Integrated Sensor Solutions, Inc., a California
corporation (the "COMPANY"), the persons and entities listed on Annex 1 hereto
(the "SERIES A SHAREHOLDERS"), the persons and entities listed on Annex 2 hereto
(the "SERIES B SHAREHOLDERS"), the persons and entities listed on Annex 3 hereto
(the "Series C Shareholders"), the persons and entities listed on Annex 4 hereto
the Series D Shareholders"), the persons and entities listed on Annex 5 hereto
(the "SERIES E Shareholders") and the persons and entities listed in Annex 6
hereto, (the "SERIES F SHAREHOLDERS") (The Series A Shareholders, the Series B
Shareholders, the Series C Shareholders, the Series D Shareholders the Series E
Shareholders and the Series F Shareholders are collectively referred to as the
"Shareholders").
WHEREAS, the Company and the Series A Shareholders, the Series B
Shareholders, the Series C Shareholders and the Series D Shareholders have
entered into a Series A Preferred Stock Purchase Agreement, dated April 3, 1989,
a Series B Preferred Stock Purchase Agreement, dated April 5, 1991, a Series C
Preferred Stock Purchase Agreement, dated September 3, 1991, a Series D
Preferred Stock Purchase Agreement, dated August 25, 1994, respectively
(collectively, the ORIGINAL PURCHASE AGREEMENTS");
WHEREAS, the Series A Shareholders, the Series B Shareholders the Series C
Shareholders and the Series D Shareholders possess certain registration rights
granted under a certain Restated Registration Rights Agreement dated August 25,
1994 (the "ORIGINAL AGREEMENT");
WHEREAS, the Company has converted principal and interest on outstanding
promissory notes into shares of Series E Preferred Stock;
WHEREAS, the Company and the Series F Shareholders have entered into a
Series F Preferred Stock and Warrant Purchase Agreement of even date herewith
(the "SERIES F AGREEMENT") pursuant to which the Company sold Series F Preferred
Stock and Warrants to purchase Series F Preferred Stock (the "Warrants");
WHEREAS, the obligations of the Company and the Series F Shareholders under
the Series F Agreement are conditioned, among other things, upon the grant of
registration rights by execution and delivery by the Series A Shareholders, the
Series B Shareholders, the Series C Shareholders, the Series D Shareholders and
the Company of this Agreement; and
WHEREAS, the Series A Shareholders, the Series B Shareholders, the Series C
Shareholders and the Series D Shareholders desire to terminate their
registration rights under the Original Agreement and to accept the rights
created herein in lieu of said rights;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained
in Agreement. The parties hereto agree as follows:
1. Certain DEFINITIONS: As used in this Agreement, the following terms
shall have the following respective meanings:
"COMMISSION," means the Securities and Exchange Commission, or any
other Federal
<PAGE>
agency at the time administering the Securities Act.
"COMMON STOCK" means the common stock, no par value per share, of the
Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be
in effect.
"REGISTRATION STATEMENT" means a registration statement filed by the
Company with the Commission for a public offering and sale of Common Stock
(other than a registration statement Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any
registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).
"REGISTRATION EXPENSES" means the expenses described in Section 5.
"REGISTRABLE SHARES" means (i) the shares of Common Stock issued or
issuable upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock or the Series B Preferred Stock
issuable upon exercise of the Warrants (ii) any shares of Common Stock, and
Any shares of Common Stock issued or issuable upon the conversion or exercise of
any other securities, acquired by the Shareholders pursuant to the Original
Purchase Agreement and (iii) any other shares of Common Stock issued in respect
of such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); PROVIDED. HOWEVER, that shares of
Common Stock which are Registrable Shares shall cease to be Registrable Shares
(i) upon any sale pursuant to a Registration Statement or Rule 144 under the
Securities Act or (ii) upon any sale in any manner to a person or entity which,
by virtue of Section 14 of this Agreement, is not entitled to the rights
provided by this Agreement. Wherever reference is made in this Agreement request
or consent of holders of a certain percentage of Registrable Shares, the
determination such percentage shall include shares of Common Stock issuable upon
conversion of the Shares s defined below) even if such conversion has not yet
been effected.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
"SHARES," means the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock issuable
pursuant to the Original Purchase Agreements, Series E Preferred Stock issued
upon conversion of outstanding promissory notes and Series F Preferred Stock
sold pursuant to the Series F Agreement or issuable upon exercise of the
Warrants.
"SHAREHOLDERS" shall also include any persons or entities to whom the
rights granted under this Agreement are transferred by any Shareholders, their
successors or assigns pursuant to Section 14 hereof.
2. REQUIRED REGISTRATIONS.
<PAGE>
(a) At any time after the earlier of November 30, 1998 and the closing
of the Company's first underwritten public offering of shares of Common Stock
pursuant to a Registration Statement, a Shareholder or Shareholders holding in
the aggregate at least 500,000 of the Registrable Shares, as adjusted for stock
splits, stock dividends, recapitalizations or similar events. may request, in
writing, that the Company effect the registration on Form S-1 or Form S-2 (or
any successor form) of Registrable Shares owned by such Shareholder or
Shareholders. If the holders initiating the registration intend to distribute
the Registrable Shares by means of an underwriting, they shall so advise the
Company in their request. In the event such registration is underwritten, the
right of other Shareholders to participate shall be conditioned on such
Shareholders, participation in such underwriting. Upon receipt of any such
request, the Company shall promptly give written notice of such proposed
registration to all Shareholders. Such Shareholders shall have the right, by
giving written notice to the Company within 30 days after the Company provides
its notice, to elect to have included in such registration such of their
Registrable Shares as such Shareholders may request in such notice of election;
provided that if the underwriter (if any) managing the offering determines that,
because of marketing factors, all of the Registrable Shares requested to be
registered by all Shareholders may not be included in the offering, then all
Shareholders who have requested registration shall participate in the
registration pro rata based upon the number of Registrable Shares which they
have requested to be so registered Thereupon, the Company shall, as
expeditiously as possible, use its best efforts to effect the registration on
Form S- I or Form S-2 (or any successor form) of all Registrable Shares
which the Company has been requested to so register.
(b) At any time after the Company becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), a Shareholder or Shareholders holding in the aggregate at least
200,000 of the Registrable Shares may request the Company, in writing, to effect
the registration on Form S-3 (or such successor form), of Registrable Shares.
Such Shareholders shall have the right, by giving written notice to the Company
within 30 days after the Company provides its notice, to elect to have included
in such registration such of their Registrable Shares as such Shareholders may
request in such notice of election, provided that if the underwriter (if any)
managing the offering determines that, because of marketing factors, all of the
Registrable Shares requested to be registered by all Shareholders may not be
included in the offering, then all Shareholders who have requested registration
shall participate in the registration pro rata based upon the number of
Registrable Shares which they have requested to be so registered. Thereupon, the
Company shall, as expeditiously as possible, use it's best efforts to effect the
registration on Form S-3 (or such successor form) of all Registrable Shares
which the Company has been requested to so register.
(c) The Company shall not be required to effect more than two
registrations pursuant to paragraph (a) or (b) above. In addition, the Company
shall not be required to effect any registration (other than on Form S-3 or any
successor form relating to secondary offerings) within six months after the
effective date of any other Registration Statement of the Company.
(d) If at the time of any request to register Registrable Shares
pursuant to this Section 2, the Company is engaged or has fixed plans to engage
within 30 days of the time of the request in a registered public offering as to
which the Shareholders may include Registrable Shares pursuant to Section 3 or
is engaged in any other activity which, in the good faith
<PAGE>
determination of the Company's Board of Directors, would be adversely
affected by the requested registration to the material detriment of the
Company, then the Company may at its option direct that such request be
delayed for a period not in excess of six months from the effective date of
such offering or the date of commencement of such other material activity, as
the case may be, such right to delay a request to be exercised by the Company
not more than once in any two-year period.
3. Incidental Registration.
(a) Whenever the Company proposes to file a Registration Statement
(other than pursuant to Section 2) at any time and from time to time, it
will, prior to such filing, give written notice to all Shareholders of its
intention to do so and, upon the written request of a Shareholder or
Shareholders given within 15 days after the Company provides such notice
(which request shall state the intended method of disposition of such
Registrable Shares), the Company shall use its best efforts to cause all
Registrable Shares which the Company has been requested by such Shareholder
or Shareholders to register to be registered under the Securities Act to the
extent necessary to permit their sale or other disposition in accordance with
the intended methods of distribution specified in the request of such
Shareholder or Shareholders; provided that the Company shall have the right
to postpone or withdraw any registration effected pursuant to this Section 3
without obligation to any Shareholder.
(b) In connection with any registration under this Section 3
involving an underwriting, the Company shall not be required to include any
Registrable Shares in such registration unless the holders thereof accept the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it (provided that such terms must be consistent with
this Agreement). If in the opinion of the managing underwriter it is
appropriate because of marketing factors to limit the number of Registrable
Shares to be included in the offering, then the Company shall be required to
include in the registration only that number of Registrable Shares, if any,
which the managing underwriter believes should be included therein; provided
that (i) in no event shall the number of Registrable Shares included in any
registration other than the Company's initial Registration Statement be
reduced below 30% of the total number of shares of Common Stock (giving
effect to the conversion into Common Stock of all securities convertible
thereinto) included in the offering, and (ii) no persons or entities other
than the Company, the Shareholders and persons or entities holding
registration rights granted in accordance with Section 10 hereof shall be
permitted to include securities in the offering. If the number of Registrable
Shares to be included in the offering in accordance with the foregoing is
less than the total number of shares which the holders of Registrable Shares
have requested to be included. then the holders of Registrable Shares who
have requested registration and other holders of securities entitled to
include them in such registration shall participate in the registration pro
rata based upon their total ownership of shares of Common Stock (giving
effect to the conversion into Common Stock of all securities convertible
thereinto). If any holder would thus be entitled to include more securities
than such holder requested to be registered, the excess shall be allocated
among other requesting holders pro rata in the manner described in the
preceding sentence.
4. REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Company shall:
<PAGE>
(a) file with the Commission a Registration Statement with respect
to such Registrable Shares and use its best efforts to cause that
Registration Statement to become and remain effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and
the prospectus included in the Registration Statement as may be necessary to
keep the Registration Statement effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or 120 days after the effective date thereof;
(c) as expeditiously as possible furnish to each selling
Shareholder such reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as the selling Shareholder may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable shares owned by the selling Shareholder; and
(d) as expeditiously as possible use its best efforts to register
or qualify the Registrable Shares covered by the Registration Statement under
the securities or Blue Sky laws of which states as the selling Shareholders
shall reasonably request, and do any and all other acts and things that may
be necessary or desirable to enable the selling Shareholders to consummate
the public sale or other disposition in such states of the Registrable Shares
owned by the selling Shareholder; PROVIDED, HOWEVER, that the Company shall
not be required in connection with this paragraph (d) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction
If the Company has delivered preliminary or final prospectuses to the
selling Shareholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify the selling Shareholders and, if requested, the selling Shareholders
shall immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the selling
Shareholders with revised prospectuses and, following receipt of the revised
prospectuses, the selling Shareholders shall be free to resume making offers of
the Registrable Shares.
5. ALLOCATION OF EXPENSES. The Company will pay all Registration
Expenses of all registrations under this Agreement. For purposes of this
Section 5, the term "Registration Expenses shall mean all expenses incurred
by the Company in complying with this Agreement, including. without
limitation, all registration and filing fees, exchange listing fees, printing
expenses fees and expenses of counsel for the Company and the fees and
expenses of one counsel selected by the selling Shareholders to represent the
selling Shareholders, state Blue Sky fees and expenses and the expense of any
special audits incident to or required by any such registration, but
excluding underwriting discounts, selling commissions and the fees and
expenses of selling Shareholders' own counsel (other than the counsel
selected to represent all selling Shareholders).
6 INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the
<PAGE>
Seller of such Registrable Shares, each underwriter of such Registrable
Shares, and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to
which such Seller, underwriter or controlling person may become subject under
the Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to such
Registration Statement, or arise out of or are based upon the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Company will
reimburse such seller, underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by such seller, underwriter
or controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action; PROVIDED, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or omission
made in such Registration Statement, preliminary prospectus or final
prospectus, or any such amendment or supplement, in reliance upon and in
conformity with information furnished to the Company, in writing, by or on
behalf of such seller, underwriter or controlling person specifically for use
in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each seller of
Registrable Shares, severally and not jointly. will indemnify and hold
harmless the Company, each of its directors and officers and each underwriter
(if any) and each person, if any, who controls the Company or any such
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to
which the Company, such directors and officers, underwriter or controlling
person may become subject under the Securities Act, Exchange Act, state
securities or Blue Sky laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement under which such Registrable
Shares were registered under the Securities Act, any preliminary prospectus
or final prospectus contained in the Registration Statement, or any amendment
or supplement to the Registration Statement, or arise out of or are based
upon any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, if
the statement or omission was made in reliance upon and in conformity with
information relating to such seller furnished in writing to the Company by or
on behalf of such seller specifically for use in connection with the
preparation of such Registration Statement, prospectus, amendment or
supplement; PROVIDED, that the obligations of such Shareholders hereunder
shall be limited to an amount equal to the proceeds to each Shareholder of
Registrable Shares sold in connection with suchh registration.
(c) Each party entitled to indemnification under this Section 6 (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom; PROVIDED, that counsel for the Indemnifying
Party,
<PAGE>
who shall conduct the defense of such claim or litigation, shall be approved
by the Indemnified Party (whose approval shall not be unreasonably withheld);
and, PROVIDED, FURTHER, that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 6. The Indemnified Party may participate in
such defense at such party's expense; PROVIDED, that the Indemnifying Party
shall pay expense if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party,
in the defense of any such claim or litigation shall, except with the consent
of each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) any
holder of Registrable Shares exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 6 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that this Section 6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
selling Shareholder or any such controlling person in circumstances for which
indemnification is provided under this Section 6; then, in each such case,
the Company and such Shareholder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportions so that such holder is
responsible for the portion represented by the percentage that the public
offering price of its Registrable Shares offered by the Registration
Statement bears to the public offering price of all securities offered by
such Registration Statement, and the Company is responsible for the.
remaining portion; PROVIDED, that, in any such case (A) no such holder will
be required to contribute any amount in excess ofthe proceeds to it of all
Registrable Shares sold by it pursuant to such Registration Statement, and
(B) no person or entity guilty of fraudulent misrepresentation, within the
meaning of Section I I (f) of the Securities Act, shall be entitled to
contribution from any person or entity who is not guilty of such fraudulent
misrepresentation.
7. Indemnification with Respect to Underwritten Offering. In the
event that Registrable Shares are sold pursuant to a Registration Statement
in an underwritten offering pursuant to Section 2), the Company agrees to
enter into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including without limitation customary provisions
with respect to indemnification by the Company of the underwriters of such
offering.
8. INFORMATION BY HOLDER. Each Shareholder including Registrable
Shares in any registration shall furnish to the Company such information
regarding such Shareholder and the distribution proposed by such Shareholder
as the Company may reasonably request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Agreement.
<PAGE>
9 "STAND-OFF" AGREEMENT. Each Shareholder, if requested by the
Company and the managing underwriter of an offering by the Company of Common
Stock or other securities of the Company pursuant to a Registration
Statement, shall agree not to sell publicly or otherwise transfer or dispose
of any Registrable Shares or other securities of the Company held by such
Shareholder for a specified period of time (not to exceed 180 days) following
the effective date of such Registration Statement; PROVIDED, that:
(a) such agreement shall only apply to the first Registration
Statement covering Common Stock to be sold on its behalf to the public in an
underwritten offering; and
(b) all Shareholders holding not less than the number of shares
of Common Stock held by such Shareholder (including shares of Common Stock
issuable upon the conversion of Shares, or other convertible securities, or
upon the exercise of options, warrants or rights) and all officers and
directors of the Company enter into similar agreements.
10. Limitations on Subsequent Recistration Rights. The Company
shall not, without the prior written consent of Shareholders holding at
least 51% of the Registrable Shares, enter into any agreement (other than
this Agreement) with any holder or prospective holder of any securities of
the Company which would allow such holder or prospective holder (a) to
include securities of the Company in any Registration Statement, unless under
the terms of such agreement, such holder or prospective holder may include
such securities in any such registration only on terms substantially similar
to the terms on which holders of Registrable Shares may include shares in
such registration, or (b) to make a demand registration which could result in
such registration statement being declared effective prior to November 30,
1998.
11. Rule 144 Requirements. After the earliest of (i) the closing of
the sale of securities of the Company pursuant to a Registration Statement,
(ii) the registration by the Company of a class of securities under Section
12 of the Exchange Act, or (iii) the issuance by the Company of an offering
circular pursuant to Regulation A under the Securities Act, the Company
agrees to:
(a) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the
Company;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request
(i) a written statement by the Company as to its compliance with the
requirements of said Rule 144(c), and the reporting requirements of the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), (ii) a copy of the most recent
annual or quarterly report of the Company, and (iii) such other reports
and documents of the Company as such holder may reasonably request to
avail itself of any similar rule or regulation of the Commission
allowing it to sell any such securities without registration.
<PAGE>
12. MERGERS. ETC. The Company shall not, directly or indirectly,
enter into any merger, consolidation or reorganization in which the Company
shall not be the surviving corporation unless the proposed surviving
corporation shall, prior to such merger, consolidation or reorganization,
agree in writing to assume the obligations of the Company under this
Agreement, and for that purpose references hereunder to "Registrable Shares"
shall be deemed to be references to the securities which the Shareholders
would be entitled to receive in exchange for Registrable Shares under any
such merger, consolidation or reorganization; PROVIDED, that the provisions
of this Section 12 shall not apply in the event of any merger, consolidation
or reorganization in which the Company is not the surviving corporation if
all Shareholders are entitled to receive in exchange for their Registrable
Shares consideration consisting solely of (i) cash. (ii) securities of the
acquiring corporation which may be immediately sold to the public without
registration under the Securities Act, or (iii) securities of the acquiring
corporation which the acquiring corporation has agreed to register within 90
days of completion of the transaction for resale to the public pursuant to
the Securities Act.
13. TERMINATION. All of the Company's obligations to register
Registrable Shares under this Agreement shall terminate on the eighth
anniversary of this Agreement.
14. TRANSFERS OF RIGHTS. This Agreement, and the rights and
obligations of each Shareholder hereunder, may be assigned by such
Shareholder to any person or entity to which Shares are transferred by such
Shareholder, and such transferee shall be deemed a "Shareholder" for purposes
of this Agreement; provided that the transferee provides written notice of
such assignment to the Company.
15. GENERAL.
(a) NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be
delivered by hand or mailed by first class certified , or registered mail,
return receipt requested, postage prepaid:
If to the Company, at 625 River Oaks Parkway, San Jose, California
95134, Attention: President, or at such other address or addresses as may
have been furnished in writing by the Company to the Shareholders, with a
copy to Wilson Sonsini Goodrich and Rosati, 650 Page Mill Road Palo Alto,
California 94304-1050, Attention: Kenneth M. Siegel, Esq.
If to a Series A Shareholder, at the address as set forth on Annex 1, if
to a Series B Shareholder, at the address as set forth on Annex 2, if to a
Series C Shareholder, at the address forth on Annex 3, if to a Series D
Shareholder, at the address as set forth on Annex 4, if to a ' 'Series E
Shareholder, at the address as set forth on Annex 5, and if to a Series F
Shareholder, at The address as set forth on Annex 6, or at such other address
as such party shall have furnished to Company in writing.
If to any other holder of any Shares, at such address as such holder
shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such Shares who has so furnished an address to the Company.
Notices provided in accordance with this Section 1 5(a) shall be deemed
delivered upon personal delivery or five business days after deposit in the
mail.
<PAGE>
(b) ENTIRE ACREEMENT. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
(c) AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of a
majority of the Registrable Shares; PROVIDED, that this Agreement may be
amended with the consent of the holders of less than all Registrable Shares
only in a manner which affects all Registrable Shares in the same fashion. No
waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such term, condition or provision.
(d) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
(f) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
<PAGE>
February 5, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Integrated Sensor Solutions, Inc. Form SB-2
File No. 333-41351
Ladies and Gentlemen:
As counsel to Integrated Sensor Solutions, Inc. (the "Company"), we are
rendering this opinion in connection with a proposed sale of those certain
shares of the Company's newly-issued Common Stock as set forth in the
Registration Statement on Form SB-2 to which this opinion is being filed as
Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and
records which we deemed relevant and necessary for the basis of our opinion
hereinafter expressed. In such examination, we have assumed the genuineness
of all signatures and the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to
us as copies.
Based on such examination, we are of the opinion that the Shares
identified in the above referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever
it appears in said Registration Statement, including the Prospectus
constituting a part thereof, as originally filed or as subsequently amended.
Very truly yours,
/s/ Gray Cary Ware & Freidenrich LLP
<PAGE>
EXHIBIT 10.1
INTEGRATED SENSOR SOLUTIONS, INC.
1989 INCENTIVE STOCK OPTION PLAN
(AS AMENDED ON JUNE 28, 1991,
AUGUST 28, 1992 AND AUGUST 6, 1993)
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are
to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees,
Consultants and Directors of the Company and to promote the success of the
Company's business.
Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected
in the terms of the written option agreement.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Committee, if one has been appointed,
or the Board of Directors of the Company, if no Committee is appointed.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one
is appointed.
(d) "COMMON STOCK" shall mean the Common Stock of the Company.
(e) "COMPANY" shall mean Integrated Sensor Solutions, Inc., a
California corporation.
(f) "CONSULTANT" shall mean any person who is engaged by the
Company or any Parent or Subsidiary to render consulting services and is
compensated for such consulting services; the term Consultant shall not
include directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, CONSULTANT OR DIRECTOR"
shall mean the absence of any interruption or termination of service as an
Employee, Consultant or Director. Continuous Status as an Employee,
Consultant or Director shall not be considered interrupted in the case of
sick leave, military leave, or any other leave of absence approved by the
Board; provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
(h) "DIRECTOR" shall mean a member of the Board of Directors of
the Company.
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<PAGE>
(i) "EMPLOYEE" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company shall not be
sufficient to constitute "employment" by the Company.
(j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
(k) "INCENTIVE STOCK OPTION" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422A of
the Code.
(l) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended
to qualify as an Incentive Stock Option.
(m) "OPTION" shall mean a stock option granted pursuant to the Plan.
(n) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(o) "OPTIONEE" shall mean an Employee, Consultant or Director who
receives an Option.
(p) "PARENT" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(q) "PLAN" shall mean this 1989 Incentive Stock Option Plan.
(r) "SHARE" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(s) "SUBSIDIARY" shall mean a subsidiary corporation, whether now
or hereafter existing, as defined in Section 425 (f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11
of the Plan, the maximum aggregate number of shares which may be optioned and
sold under the Plan is 3,405,250 shares of Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan. Notwithstanding any other
provision of the Plan, shares issued under the Plan and later repurchased by
the Company shall not become available for future grant or sale under the
Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE. The Plan shall be administered by the Board of
Directors of the Company, or by a committee appointed by the Board of
Directors consisting of two (2) or more Directors in accordance with the
following provisions:
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<PAGE>
(i) Members of the Board who are either eligible for options
or have been granted Options may vote on any matters affecting administration
of the Plan or the grant of options pursuant to the Plan; provided, however,
no member of the Board shall act upon the granting of an Option to himself or
herself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board during which action is taken with respect
to the granting of options to him or her.
(ii) The Committee shall administer the Plan on behalf of the
Board of Directors, subject to such terms and conditions as the Board of
Directors may prescribe. Once appointed, a Committee shall continue to serve
until otherwise directed by the Board of Directors. Subject to the
foregoing, from time to time the Board of Directors may increase the size of
the Committee and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
(b) POWERS OF THE BOARD. Subject to the provisions of the Plan,
the Board shall have the authority, in its discretion: (i) to grant
IncentiveStock Options or Nonstatutory Stock Options; (ii) to determine, upon
review of relevant information and in accordance with Section 8(b) of the
Plan, the fair market value of the Common Stock; (iii) to determine the
exercise price per share of options to be granted, which exercise price shall
be determined in accordance with Section 8 (a) of the Plan; (iv) to determine
the Employees, Consultants and Directors to whom, and the time or times at
which, options shall be granted and the number of shares to the represented
by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and
rescind rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be identical)
and, with the consent of the holder thereof, modify or amend each Option
(including the exercise price thereof); (viii) to accelerate or defer (with
the consent of the Optionee) the exercise date of any Option, consistent with
the provisions of Section 5 of the Plan; (ix) to authorize any person to
execute on behalf of the Company any instrument required to effectuate the
grant of an option previously granted by the Board; and (x) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
(c) EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Employees,
Consultants and Directors. Incentive Stock Options may be granted only to
Employees. An Employee, Consultant or Director who has been granted an
Option may, if he is otherwise eligible, be granted an additional Option or
Options.
(b) No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options granted to such
Employee by the Company or any Parent or Subsidiary, would result in Shares
having an aggregate fair market value (determined for each Share as of the
date of grant of the incentive stock option covering such
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<PAGE>
Share) in excess of $100,000 becoming first available for purchase upon
exercise of one or more incentive stock options during any calendar year.
(c) Section 5 (b) of the Plan shall apply only to an Incentive
Stock Option evidenced by an "Incentive Stock Option Agreement" which sets
forth the intention of the Company and the Optionee that such Option shall
qualify as an Incentive Stock Option. Section 5(b) of the Plan shall not
apply to any Option evidenced by a "Nonstatutory Stock Option Agreement"
which sets forth the intention of the Company and the Optionee that such
Option shall be a Nonstatutory Stock Option.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment with, consulting relationship with, or
membership on the Board of Directors of, the Company, nor shall it interfere
in any way with his or her right or the Company's right to terminate such
employment, consulting relationship or membership on the Board of Directors
at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. TERM OF OPTION. The term of each Option shall be ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
Stock Option Agreement. However, in the case of an Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided
in the Stock Option Agreement.
8. EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110%
of the fair market value per Share on the date of grant or, if the Incentive
Stock Option is amended to reduce the per Share exercise price, less than
110% of the fair market value per Share on the date the Board approves such
amendment.
(B) granted to any Employee, the per Share exercise
price shall be no less than 100% of the fair market value per Share on the
date of grant or, if the Incentive Stock Option is amended to reduce the per
Share exercise price, 100% of the fair market value per Share on the date the
Board approves such amendment.
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<PAGE>
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
fair market value per Share on the date of the grant or, if the Nonstatutory
Stock Option is amended to reduce the per Share exercise price, 110% of the
fair market value per Share on the date the Board approves the amendment.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the fair market value per Share on the date of
grant or, if the Nonstatutory Stock Option is amended to reduce the per Share
exercise price, 85% of the fair market value per Share on the date the Board
approves the amendment.
(b) The fair market value per Share shall be determined by the
Board in its discretion; provided, however, that where there is a public
market for the Common Stock, the fair market value per Share shall be the
mean of the bid and asked prices (or the closing price per share if the
Common Stock is listed on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System) of the Common Stock
for the day prior to the date of grant (or date of approval of an amendment
to reduce the exercise price per Share, as the case may be), as reported in
THE WALL STREET JOURNAL (or, if not so reported, as otherwise reported by the
NASDAQ System) or, in the event the Common Stock is listed on a stock
exchange, the fair market value per Share shall be the closing price on such
exchange on the date prior to the date of grant, as reported in THE WALL
STREET JOURNAL.
(c) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Board and may consist entirely of (i) cash, (ii) check, (iii) other
Shares, which either have been owned by the Optionee for more than six (6)
months on the date of surrender or were not acquired, directly or indirectly,
from the Company having a fair market value on the date of surrender equal to
the aggregate exercise price of the Shares as to which said Option shall be
exercised, (iv) promissory note, (v) any combination of such methods of
payment or (vi) such other consideration and method of payment for the
issuance of Shares to the extent permitted under Sections 408 and 409 of the
California General Corporation Law.
9. EXERCISE OF OPTION.
(a) (i) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as may determined by the Board, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
(ii) An Option may not be exercised for a fraction of a Share.
(iii) An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option and full
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<PAGE>
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section
8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 11 of the Plan.
(iv) Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares
as to which the Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee,
Consultant or Director (as the case may be), such Optionee may exercise his
or her Option to the extent that he or she was entitled to exercise it at the
date of such termination (or to such greater extent as the Board may
determine). Any such exercise must occur within the period set forth in the
written option agreement which, in the case of an Incentive Stock Option,
shall be no more than three (3) months after the date of termination. The
Option shall terminate on the date of such termination of Continuous Status
as an Employee, Consultant or Director to the extent of the number of shares
of Optioned Stock as to which the Option was not exercisable on the date of
such termination, as set forth in the written option agreement or as the
Board may otherwise determine. To the extent the Optionee fails, within the
time period specified in the written option agreement, to exercise the Option
for those shares of Optioned Stock as to which he or she is entitled to
exercise, the Option shall terminate upon the expiration of such time period.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant or Director as a result of his total and
permanent disability (as defined in Section 22 (e) (3) of the Code), he or
she may exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such termination (or to such greater extent as the
Board may determine). Any such exercise must occur within the period set
forth in the written option agreement which, in the case of an Incentive
Stock Option, shall be no more taan twelve (12) months after the date of such
termination (and in any event such exercise must be on or before the
expiration date of the Option as set forth in the written option agreement).
The Option shall terminate on the date of such termination of Continuous
Status as an Employee, Consultant or Director to the extent of the number of
shares of Optioned Stock as to which the Option was not exercisable on the
date of such termination, as set forth in the written option agreement or as
the Board may otherwise determine. To the extent the Optionee fails, within
the time period specified in the written option agreement, to exercise the
Option for those shares of Optioned Stock as to which he or she is entitled
to exercise, the Option shall terminate upon the expiration of such time
period.
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<PAGE>
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his
death an Employee, Consultant or Director of the Company and who shall have
been in Continuous Status as an Employee, Consultant or Director since the
date of grant of the Option, the Option may be exercised by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent, and within the time period,
set forth in the Option Agreement (or such greater extent or time period as
the Board may determine) subject to the limitation set forth in Section 5(b).
(ii) within three (3) months after the termination of
Continuous Status as an Employee or Consultant, the Option may be exercised
by the Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent, and within the
time period, set forth in the Option Agreement (or such greater extent or
time period as the Board may determine).
10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the shareholders of the Company, the number of shares
of Common Stock covered by each outstanding Option, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options have yet been granted or which have been returned to the
Plan upon cancellation or expiration of an Option, as well as the price per
share of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Board. The Board may,
in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise his Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
7
<PAGE>
In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event that such successor corporation refuses
to assume the Option or to substitute an equivalent option, the Board shall,
in lieu of such assumption or substitution, provide for the Optionee to have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. The Option
shall be deemed to be assumed if, following the sale of assets or merger, the
Option confers the right to purchase, for each share of Optioned Stock
subject to the Option immediately prior to the sale of assets or merger, the
consideration (whether stock, cash or other securities or property) received
in the sale of assets or merger by holders of Common Stock for each share of
Common Stock held on the effective date of the transaction (and if such
holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding shares of Common
Stock); provided, however, that if such consideration received in the sale
of assets or merger was not solely common stock of the successor corporation
or its Parent, the Board of Directors may, with the consent of the successor
corporation and the Optionee, provide for the consideration to be received
upon exercise of the Option to be solely Common Stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the sale of assets or
merger. If the Board makes an Option fully exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Board shall
notify the Optionee that the Option shall be fully exercisable for a period
of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Board makes the determination
granting such Option. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable
time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company in the manner described in Section 17 of
the Plan:
(i) any increase in the number of Shares subject to the
Plan, other than in connection with an adjustment under Section 11 of the
Plan; or
(ii) any change in the designation of the class of persons
eligible to be granted Options.
(iii) if the Company has a class of equity security registered
under Section 12 of the Exchange Act at the time of such revision or
amendment, any material increase in the benefits accruing to participants
under the Plan.
8
<PAGE>
(b) SHAREHOLDER APPROVAL. If any amendment requiring shareholder
approval under Section 13(a) of the Plan is made subsequent to the first
registration of any class of equity security by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as
described in Section 17 (a) of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval
of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required by any of the aforementioned relevant provisions of law.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, 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.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before
or after the date the Plan is adopted. If such shareholder approval is
obtained at a duly held shareholders, meeting, it must be obtained by the
affirmative vote of the holders of a majority of the outstanding shares of
the Company present or represented and entitled to vote thereon. If and in
the event that the Company has registered any class of any equity security
pursuant to Section 12 of the Exchange Act, the approval of such shareholders
of the Company shall be:
9
<PAGE>
(a) (1) solicited substantially in accordance with Section 14 (a)
of the Exchange Act and the rules and regulations promulgated thereunder, or
(2) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the Plan as
that which would be required by the rules and regulations in effect under
Section 14 (a) of the Exchange Act at the time such information is furnished;
and
(b) obtained at or prior to the first annual meeting of
shareholders held subsequent to the first registration of any class of equity
securities of the Company under Section 12 of the Exchange Act.
If such shareholder approval is obtained by written consent, it
must be obtained by written consent of the shareholders of the Company as
required by applicable state law.
18. INFORMATION TO OPTIONEE. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company. The Company shall not be
required to provide such information if the issuance of Options under the
Plan is limited to key employees whose duties in connection with the Company
assure their access to equivalent information.
10
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
Name of Optionee:
-------------------------------------
Date of Grant:
-------------------------------------
Vesting Start Date:
-------------------------------------
Number of Option Shares:
-------------------------------------
Exercise Price:
-------------------------------------
Expiration Date:
-------------------------------------
Integrated Sensor Solutions, Inc.
a California corporation
By:
----------------------------------
Title:
----------------------------------
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all of the terms and
provisions thereof. Optionee has reviewed the Plan, this option and the
Investment Representation Statement in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option, fully understands
all provisions of the Option and the Investment Representation Statement, and
specifically acknowledges that the vesting of shares hereunder is earned only by
continuing employment at the will of the Company (and not through the act of
being hired, being granted this Option or acquiring shares pursuant to this
Option). Optionee acknowledges and agrees that nothing in this Agreement nor in
the Plan shall confer upon Optionee any right with respect to continuation of
employment by the Company nor shall it interfere with his or her right or the
Company's right to terminate his or her employment at any time, with or without
cause. Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Board upon any questions arising under the
Plan.
-----------------------------------------
Date:_______________, 19___ Optionee
<PAGE>
Integrated Sensor Solutions, Inc., a California corporation (the
"Company"), has granted to the person whose name is written on the first page
hereof (the "Optionee"), an option to purchase the number of shares of Common
Stock stated on the first page hereof, at the price determined as provided
herein, and in all respects subject to the terms, definitions and provisions or
the 1989 Incentive Stock Option Plan (the "Plan") adopted by the Company which
is incorporated herein by reference. The terms defined in the Plan shall have
the same defined meanings herein.
1 NATURE OF THE OPTION. This Option is intended to qualify as an Incentive
Stock Option as defined in Section 422A of the Internal-Revenue Code of 1986
(the "Code").
2. EXERCISE PRICE. The exercise price for each share of Common Stock is as
stated on the first page hereof.
3. EXERCISE OF OPTION. This Option shall be exercisable during its term in
accordance with the provisions of Section 9 of the Plan as follows:
(a) RIGHT TO EXERCISE.
(i) Subject to subsections 3(i)(b), (c), (d) and (e) below, this
Option shall be exercisable cumulatively, to the extent of 1/8 of the Shares
subject to the Option six months after the vesting Start Date written on the
first page of this Incentive Stock Option Agreement and an additional 1/48 of
the Shares subject to the Option for each month which has expired thereafter.
(ii) This Option may not be exercised for a fraction of a share.
(iii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 7, 8 and 9 below, subject to the limitations contained in subsections
3(I) (d) and (e).
(iv) In no event may this Option be exercised after the date of
expiration of this Option as set forth on the first page of this Incentive Stock
Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice in
the form of Exhibit A attached hereto which shall state the election to exercise
the Option, the number of Shares in respect of which the Option is being
exercised, and such other representations and agreements as to the holder's
investment intent with respect to such shares of Common Stock as may be required
by the Company pursuant to the provisions of the Plan. Such written notice shall
be signed by the Optionee and shall be delivered in person or by certified mail
to the Secretary of the Company. The written notice shall be accompanied by
payment of the exercise price. This Option shall be deemed to be exercised upon
receipt by the Company of such written notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
<PAGE>
4. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant
to the exercise of this Option have not been registered under the Securities Act
of 1933, as amended, at the time this Option is exercised, Optionee shall,
concurrently with the exercise of all or any portion of this Option, deliver to
the Company his Investment Representation Statement in the form attached hereto
as Exhibit B, and shall read the applicable rules of the Commissioner of
Corporations attached to such Investment Representation Statement.
5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(i) cash;
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company
which (A) either have been owned by the Optionee for more than six (6) months on
the date of surrender or were not acquired, directly or indirectly, from the
Company and (B) have a fair market value on the date of surrender equal to the
exercise price of the Shares as to which the Option is being exercised.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
7. TERMINATION OF STATUS AS AN EMPLOYEE. In the event of termination of
Optionee's Continuous Status as an Employee, Optionee may, but only within three
(3) months after the date of such termination (but in no event later than the
expiration date of this Option as set forth on the first page of this Incentive
Stock Option Agreement), exercise this Option to the extent that he or she was
entitled to exercise it at the date of such termination. To the extent that
Optionee is not entitled to exercise this Option at the date of such
termination, this Option shall terminate as of the date of such termination. To
the extent Optionee does not exercise the balance of this Option within the time
period specified herein, the Option shall terminate as of the expiration of such
time period.
8. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 7
above, in the event of termination of Optionee's Continuous Status as an
Employee as a result of his total and permanent disability (as defined in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of termination of employment (but in no event later than the expiration
date of this Option as set forth on the first page of this Incentive Stock
Option Agreement) exercise this Option to the extent he or she was entitled to
exercise it at the date of such termination. To the extent that Optionee was not
entitled to exercise this Option at the date of termination this Option shall
terminate as of the date of such termination. To the extent Optionee does not
exercise the balance of this Option within the time specified herein, the Option
shall terminate as of the expiration of such time period.
9. DEATH OF OPTIONEE. In the event of the death of Optionee:
<PAGE>
(a) during the term of this Option and while an Employee of the
Company and having been in Continuous Status as an employee since the date of
grant of the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death (but in no event later than the expiration
date of this Option as set forth on the first page of this Incentive Stock
Option Agreement), by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise it at the date of death. To the extent this
Option is not exercisable at the date of death, this Option shall terminate on
the date of death. To the extent the balance of this Option is not exercised
within the time period specified herein, the Option shall terminate as of the
expiration of such time period; or
(b) within three (3) months after the termination of Optionee's
Continuous Status as an Employee, the Option may be exercised, at any time
within twelve (12) months following the date of death (but in no event later
than the expiration date of this Option as set forth on the first page of this
Incentive Stock Option Agreement), by Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
To the extent the balance of this Option is not exercised within such time
period, the Option shall terminate as of the expiration of such time period.
10. COMPANY'S REPURCHASE OPTION. The Company shall have the option to
repurchase all or a portion of the Shares on the terms and conditions set forth
in this Section 10 (the "Repurchase Option") if Optionee should cease to be
employed by the Company for any reason, or no reason, including without
limitation Optionee's death, disability, voluntary resignation or termination by
the Company with or without cause.
(a) RIGHT OF TERMINATION UNAFFECTED. Nothing in this Agreement shall
be construed to limit or otherwise affect in any manner whatsoever the right or
power of the Company to terminate Optionee's employment at any time, for any
reason or no reason, with or without cause. For purposes of this Agreement,
Optionee shall be considered to be employed by the Company if Optionee is an
officer, director or full-time employee of the Company or any Parent, Subsidiary
or affiliate of the Company or if the Board of Directors determines that
Optionee is rendering substantial services as a part-time employee, consultant,
contractor or advisor to the Company or any Parent, Subsidiary or affiliate of
the Company and the effective date on which such employment terminated (the
"Termination Date").
(b) EXERCISE OF REPURCHASE OPTION. At any time within sixty (60) days
after the expiration of the period following the Termination Date during which
the Optionee was permitted to exercise all or part of the Option (the
"Expiration Date"), the Company may elect to repurchase any or all of the Shares
by giving Optionee written notice of exercise of the Repurchase Option.
(c) CALCULATION OF REPURCHASE PRICE. The Company or its assignee shall
have the option to repurchase from Optionee (or from Optionee's personal
representative as the case may be) any or all of the Shares at the fair market
value of such Shares on the Expiration Date, as determined by the Board of
Directors.
(d) PAYMENT OF REPURCHASE PRICE. The repurchase price shall be
payable, at the option of the Company or its assignee, by check or by
cancellation of all or a portion of any outstanding indebtedness of Optionee to
the Company or such assignee, or by any combination thereof. The repurchase
price shall be paid without interest within sixty (60) days after the Expiration
Date.
<PAGE>
(e) TERMINATION OF REPURCHASE OPTION. The Repurchase Option shall
terminate as to any Shares upon the closing of the first sale of the Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
(other than a registration statement solely covering an employee benefit plan or
corporate reorganization).
11. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or
any transferee (either being sometimes referred to the this Section 11 as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company shall have an assignable right of first refusal
to purchase the Shares on the terms and conditions set forth in this Section 11
(the "Right of First Refusal").
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"); and the Holder shall offer to sell
the Shares at the Offered Price to the Company.
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At-any time within thirty (30)
days after receipt of the Notice, the Company or its assignee may, by giving
written notice to the Holder, elect to purchase all (but not less than all) of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) PURCHASE PRICE. The purchase price for the Shares purchased under
this Section shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(d) PAYMENT. Payment of the purchase price shall be made, at the
option o' the Company or its assignee, either (i) in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company or such assignee, or by any combination thereof within sixty (60)
days after receipt of the Notice or (ii) in the manner and at the time(s) set
forth in the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company shall again be offered the Right of First
Refusal, before any Shares held by the Holder may be sold or otherwise
transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary
contained in this Section notwithstanding, the transfer of any or all or the
Shares during the Optionee's lifetime or on Optionee's death by will or
intestacy to Optionee's immediate family or a trust for the benefit of Optionee
or Optionee's immediate family shall be exempt from the provisions of this
Section; provided that, as a condition to receiving the Shares, the transferee
or other recipient shall agree in writing to receive and hold the Shares so
transferred subject to the provisions of this Agreement, and to transfer such
Shares no further except in
<PAGE>
accordance with the terms of this Agreement. As used herein, "immediate family"
shall mean spouse, lineal descendant or antecedent, father, mother, brother or
sister.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal
shall terminate as to any Shares upon the closing of first sale of common stock
of the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission (other
than a registration statement solely covering an employee benefit plan or
corporate reorganization).
12. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
13. EARLY DISPOSITION OF STOCK. Optionee understands that if he disposes of
any Shares received under this Option within two (2) years after the date of
grant of this Option or within one (1) year after such Shares were transferred
to him, he will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount generally measured
by the difference between the price paid for the Shares and the lower of the
fair market value of the Shares at the date of the exercise or the fair market
value of the Shares at the date of disposition. The amount of such ordinary
income may be measured differently if Optionee is an officer, director or 10%
shareholder of the Company, or if the Shares were subject to a-substantial risk
of forfeiture at the time they were transferred to Optionee. OPTIONEE HEREBY
AGREES TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY
SUCH DISPOSITION. Optionee understands that if he disposes of such Shares at any
time after the expiration of such two-year and one-year holding periods,- any
gain on such sale will be taxed as long-term capital gain .
14. LOCK-UP AGREEMENT. Optionee agrees that, in connection with any public
offering of the Company's equity securities, and upon request of the Company or
the underwriters managing such offering, not to sell, make any short sale of,
loan, grant any option for the purchase of or otherwise dispose of any shares of
Common Stock issuable upon the exercise of this Option (other than those shares
included in the registration, if any) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days) from the effective date of such
registration as may be requested by the Company or the underwriters; provided,
that the officers and directors of the Company who own, or hold options to
purchase, Common Stock of the Company also agree to such restrictions.
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE OF STOCK OPTION
Integrated Sensor Solutions, Inc.
- ---------------------------
- ---------------------------
Ladies and Gentlemen:
The undersigned hereby elects to exercise the option indicated below with
respect to the number of shares of Common Stock of Integrated Sensor Solutions,
Inc. (the "Company") set forth:
Option Grant Date:
-------------------------------
Type of Option:
/ / Incentive Stock Option
/ / Nonstatutory Option .
Number of Shares Being Exercised: ____________shares
Exercise Price Per Shares: $
-----------------------
Total Exercise Price: $
--------------------------
Method of Payment: / / Cash
/ / Check
/ / Surrender of previously issued Shares
Enclosed herewith is payment in full of the total exercise price, a copy of
the Option Agreement and an executed copy of an Investment Representation
Statement (Exhibit B to the Option Agreement).
The undersigned hereby acknowledges the Company's Repurchase Option and
Right of First Refusal as set forth in the Option Agreement.
My exact name, address and social security number for purposes of the stock
certificates to be issued and the shareholder list of the Company are:
Name
----------------------------------------------------------
Address:
------------------------------------------------------
Social Security Number:
---------------------------------------
Dated:_______________ Sincerely,
---------------------------------
(Optionee's Signature)
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER :
COMPANY : INTEGRATED SENSOR SOLUTIONS, INC.
SECURITY : COMMON STOCK
AMOUNT :
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am sufficiently aware of the Company's business affairs and
financial condition to reach an informed and knowledgeable decision to acquire
the Securities. I am purchasing these Securities for my own account for
investment purposes only and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes of the Securities Act of 1933, as
amended (the '"Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as exercised herein. In this correction, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available (such as Rule 144 or the resale
provisions of Rule 701 under the Securities Act). Moreover, I understand that
the Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
The availability of certain public information about the Company; (2) the resale
occurring not less than two years after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold, and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than three years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker, as said
term is defined under the Securities Exchange Act of 1934 (the "Exchange Act")
and the amount of securities being sold during any three month period not
exceeding the specified limitations stated therein, if applicable. The Purchaser
further understands that the resale provisions of Rule 701 will not apply until
90 days after the
<PAGE>
Company becomes subject to the reporting obligations under the Exchange Act
(typically upon the effective date of a company's initial public offerings).
There can be no assurances that the requirements of Rule 144 or Rule 701 will be
met, or that the Securities will ever be saleable.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Securities under Rule 144 even
if the two year minimum holding period had been satisfied.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, or that the resale provisions of
Rule 701 are not available, registration under the Securities Act, compliance
with Regulation A, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by me and the furnishing
to the Company of (i) detailed information regarding the disposition, and (ii)
and opinion of my counsel to the effect that such disposition will not require
registration (I understand such counsel's opinion shall concur with the opinion
by counsel for the Company and I shall have been informed of such compliance)
will be required and that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
(g) I understand that the certificate evidencing the Securities will
be imprinted with a legend which prohibits the transfer of the Securities
without the consent of the Commissioner of Corporations of California. I have
read the applicable Commissioner's Rules with respect to such restriction, a
copy of which is attached.
Signature of Purchaser:
------------------------------------
Date:_______________ , 19_____
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan in accordance with Section 4 hereof.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any other country or jurisdiction where Options or Stock Purchase Rights
are granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a comntittee of Directors appointed by the
Board in accordance with Section 4 hereof.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Integrated Sensor Solutions, Inc., a
California corporation.
(h) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "DIRECTOR" means a member of the Board of Directors of the
Company.
(j) "DISABILITY" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent,
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any Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held by
the Optionee shall cease to be treated as an Incentive Stock Option and shall
be treated for tax purposes as a Nonstatutory Stock Option. Neither service
as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith
by the Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written or electronic agreement
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
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(t) "OPTIONED STOCK" means the Common Stock subject to an Option
or a Stock Purchase Right.
(u) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(w) "PLAN" means this 1997 Stock Plan.
(x) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(y) "SECTION 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(z) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(aa) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(bb) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 11 below.
(cc) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares which may be subject to
option and sold under the Plan is 2,000,000 Shares. The Shares may be
authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered
pursuant to an Option Exchange Program, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the
Plan (unless the Plan has terminated). However, Shares that have actually
been issued under the Plan, upon exercise of either an Option or Stock
Purchase Right, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) ADMINISTRATOR. The Plan shall be administered by the Board or
a Committee appointed by the Board, which Committee shall be constituted to
comply with Applicable Laws.
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<PAGE>
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by
each such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include,
but are not limited to, the exercise price, the time or times when Options or
Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or Stock Purchase Right or
the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
Optionees to have Shares withheld for this purpose shall be made in such form
and under such conditions as the Administrator may deem necessary or
advisable; and
(xi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
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<PAGE>
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere
in any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of 10 years unless sooner
terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement; provided, however, that the term shall be no more than 10
years from the date of grant thereof. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the voting power of all classes of stock
of the Company or any Parent or Subsidiary, the term of the Option shall be 5
years from the date of grant or such shorter term as may be provided in the
Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the exercise
price shall be no less than 110% of the Fair Market Value per Share on the
date of grant.
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<PAGE>
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of the grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price other than as required above pursuant
to a merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1)
cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case
of Shares acquired upon exercise of an Option, have been owned by the
Optionee for more than six months on the date of surrender, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which such Option shall be exercised, (5)
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan, or (6) any
combination of the foregoing methods of payment. In making its determination
as to the type of consideration to accept, the Administrator shall consider
if acceptance of such consideration may be reasonably expected to benefit the
Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Except in the case of Options granted to
Officers, Directors and Consultants, Options shall become exercisable at a
rate of no less than 20% per year over 5 years from the date the Options are
granted. Unless the Administrator provides otherwise, vesting of Options
granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon
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<PAGE>
exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company),
no right to vote or receive dividends or any other rights as a shareholder
shall exist with respect to the Shares, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and
for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, such Optionee may exercise his or
her Option within such period of time as is specified in the Option Agreement
(of at least 30 days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for 3
months following the Optionee's termination. If, on the date of termination,
the Optionee is not vested as to his or her entire Option, the Shares covered
by the unvested portion of the Option shall revert to the Plan. If, after
termination, the Optionee does not exercise his or her Option within the time
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise
his or her Option within such period of time as is specified in the Option
Agreement (of at least 6 months) to the extent the Option is vested on the
date of termination (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for 12 months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (of at least 6 months) to the extent that
the Option is vested on the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement)
by the Optionee's estate or by a person who acquires the right to exercise
the Option by bequest or inheritance. In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for 12 months
following the Optionee's termination. If, at the time of death, the Optionee
is not vested as to the entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. If the Option is
not so exercised within the time
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<PAGE>
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws
of descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Stock Purchase Rights under the
Plan, it shall advise the offeree in writing or electronically of the terms,
conditions and restrictions related to the offer, including the number of
Shares that such person shall be entitled to purchase, the price to be paid,
and the time within which such person must accept such offer. The terms of
the offer shall comply in all respects with Section 260.140.42 of Title 10 of
the California Code of Regulations. The offer shall be accepted by execution
of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as
the Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five years from the date of
purchase.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a
shareholder and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment shall be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 12 of the Plan.
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12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options or Stock Purchase Rights have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option
or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company. The conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock
subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the fight to exercise his or her Option until fifteen (15)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option and Stock Purchase Right shall
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully exercisable for a period of 15 days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of
such period. For the purposes of this paragraph, the Option or Stock
Purchase Right shall be considered assumed if,
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following the merger or sale of assets, the option or right confers the right
to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by
the holders of a majority of the outstanding Shares); provided, however, that
if such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation
or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the
date on which the Administrator makes the determination granting such Option
or Stock Purchase Right, or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee or
Consultant to whom an Option or Stock Purchase Right is so granted within a
reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to
Options granted under the Plan prior to the date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be
further subject to the approval of counsel for the Companv with respect to
such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without
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any present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, 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.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within 12 months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide
to each Optionee and to each individual who acquires Shares pursuant to the
Plan, not less frequently than annually during the period such Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding, and,
in the case of an individual who acquires Shares pursuant to the Plan, during
the period such individual owns such Shares, copies of annual financial
statements. The Company shall not be required to provide such statements to
key employees whose duties in connection with the Company assure their access
to equivalent information.
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INTEGRATED SENSOR SOLUTIONS, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
VESTING SCHEDULE:
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
1/8 of the Shares subject to the Option shall vest six months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be a Service
Provider on such dates.
<PAGE>
TERMINATION PERIOD:
This Option shall be exercisable for three months after Optionee ceases to
be a Service Provider. Upon Optionee's death or disability, this Option may be
exercised for such longer period as provided in the Plan. In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by delivery
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver
<PAGE>
to the Company his or her Investment Representation Statement in the form
attached hereto as Exhibit B.
4. LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the
Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the
Optionee for more than six months on the date of surrender, and
(ii) have a Fair Market Value on the date of surrender equal to
the aggregate Exercise Price of the Exercised Shares.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised (a) until
such time as the Plan has been approved by the shareholders of the Company, or
(b) if the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any Applicable
Law.
7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only
in accordance with the Plan and the terms of this Option.
9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of
this Option and disposition of
<PAGE>
the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS
AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A
TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(b) EXERCISE OF ISO FOLLOWING DISABILITY. If the Optionee ceases to
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(c) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular
federal income tax liability upon the exercise of a Nonstatutory Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an Employee or a former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount in cash equal to a percentage of this compensation
income at the time of exercise, and may refuse to honor the exercise and refuse
to deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(d) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and of at least two years after the Date of Grant, any
gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (i) the Fair Market Value of the
Shares on the date of exercise, or (ii) the sale price of the Shares. Any
additional gain will be taxed as capital gain, short-term or long-term depending
on the period that the ISO Shares were held.
(e) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
<PAGE>
11. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
12. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE: INTEGRATED SENSOR SOLUTIONS, INC.
- ------------------------------------ ---------------------------------------
Signature Manher D. Naik
- ------------------------------------ ---------------------------------------
Print Name President and CEO
- ------------------------------------
- ------------------------------------
Residence Address
<PAGE>
EXHIBIT A
INTEGRATED SENSOR SOLUTIONS, INC.
1997 STOCK PLAN
EXERCISE NOTICE
Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, CA 95134
Attention: David Satterfield
1. EXERCISE OF OPTION. Effective as of today, ___________, 19__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Integrated Sensor
Solutions, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the
"Plan") and the Stock Option Agreement dated ________, 19__ (the "Option
Agreement").
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option
Agreement.
3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and
agrees to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance of the Shares (as evidenced
by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the
Option. The Shares shall be issued to the Optionee as soon as
practicable after the Option is exercised. No adjustment shall be made
for a dividend or other right for which the record date is prior to
the date of issuance except as provided in Section 12 of the Plan.
5. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee
or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by
gift or operation of law), the Company or its assignee(s) shall have a
right of first refusal to purchase the Shares on the terms and
conditions set forth in this Section (the "Right of First Refusal").
<PAGE>
(a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice")
stating: (i) the Holder's bona fide intention to sell or
otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("Proposed
Transferee"); (iii) the number of Shares to be transferred
to each Proposed Transferee; and (iv) the bona fide cash
price or other consideration for which the Holder proposes
to transfer the Shares (the "Offered Price"), and the Holder
shall offer the Shares at the Offered Price to the Company
or its assignee(s).
(b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30
days after receipt of the Notice, the Company and/or its
assignee(s) may, by giving written notice to the Holder,
elect to purchase all, but not less than all, of the Shares
proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in
accordance with subsection (c) below.
(c) PURCHASE PRICE. The purchase price ("Purchase Price") for
the Shares purchased by the Company or its assignee(s) under
this Section shall be the Offered Price. If the Offered
Price includes consideration other than cash, the cash
equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good
faith.
(d) PAYMENT. Payment of the Purchase Price shall be made, at
the option of the Company or its assignee(s), in cash (by
check), by cancellation of all or a portion of any
outstanding indebtedness of the Holder to the Company (or,
in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt
of the Notice or in the manner and at the times set forth in
the Notice.
(e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed
in the Notice to be transferred to a given Proposed
Transferee are not purchased by the Company and/or its
assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed
Transferee at the Offered Price or at a higher price,
provided that such sale or other transfer is consummated
within 120 days after the date of the Notice, that any such
sale or other transfer is effected in accordance with any
applicable securities laws and that the Proposed Transferee
agrees in writing that the provisions of this Section shall
continue to apply to the Shares in the hands of such
Proposed Transferee. If the Shares described in the Notice
are not transferred to the Proposed Transferee within such
period, a new Notice shall be given to the Company, and the
Company and/or its assignees shall again be offered the
Right of First Refusal before any Shares held by the Holder
may be sold or otherwise transferred.
(f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the
contrary contained in
<PAGE>
this Section notwithstanding, the transfer of any or all of
the Shares during the Optionee's lifetime or on the
Optionee's death by will or intestacy to the Optionee's
immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the
provisions of this Section. "Immediate Family" as used
herein shall mean spouse, lineal descendant or antecedent,
father, mother, brother or sister. In such case, the
transferee or other recipient shall receive and hold the
Shares so transferred subject to the provisions of this
Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal shall terminate as to any Shares upon the first sale
of Common Stock of the Company to the general public
pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
6. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or
disposition of the Shares. Optionee represents that Optionee has
consulted with any tax consultants Optionee deems advisable in
connection with the purchase or disposition of the Shares and
that Optionee is not relying on the Company for any tax advice.
7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends
substantially equivalent thereto, to be placed upon any
certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company
or by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY
COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
<PAGE>
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(b) STOP-TRANSFER NOTICES. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
10. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
11. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
12. GOVERNING LAW; SEVERABILITY. This Agreement is governed by the
internal substantive laws but not the choice of law rules, of California.
13. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a written agreement signed by the Company
and Optionee.
Submitted by: Accepted by:
OPTIONEE: INTEGRATED SENSOR SOLUTIONS, INC.
- ---------------------------------- -------------------------------------
Signature Manher D. Naik
- ---------------------------------- -------------------------------------
Print Name President and CEO
ADDRESS: ADDRESS:
<PAGE>
625 River Oaks Parkway
- --------------------------------- -------------------------------------
San Jose, CA 95134
- --------------------------------- -------------------------------------
-------------------------------------
Date Received
<PAGE>
EXHIBIT B
INTEGRATED SENSOR SOLUTIONS, INC.
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: INTEGRATED SENSOR SOLUTIONS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
1. Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
2. Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, a legend prohibiting their
transfer without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
<PAGE>
a) Optionee is familiar with the provisions of Rule 701 and
Rule 144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, 90 days thereafter (or such longer
period as any market stand-off agreement may require) the Securities exempt
under Rule 701 may be resold, subject to the satisfaction of certain of the
conditions specified by Rule 144, including: (1) the resale being made through
a broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934); and, in the case of an affiliate, (2) the availability of certain
public information about the Company, (3) the amount of Securities being sold
during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the
time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than two years after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than three years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
b) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
-----------------------------------
Date:________________________, 19__
<PAGE>
[SEAL OF PETER JAENSCH]
URNr. 1862/1997 - L
- -------------------
Hearing held on 30.07.1997
Before me, the signing notary public
DR. JUR. OSWALD VAN DE LOO
NOTARY PUBLIC DOMICILED IN DRESDEN
having appeared
1. The lawyer Mr. Ralf Stolzel
identified through identification card
and not acting for himself but rather, as a notarially authorized
representative on the basis of the power of attorney from 12.06.1997 that was
presented in original and has been enclosed as a verified copy of the
document, for
a. Integrated Sensor Solutions Inc., domiciled in San Jose,
California, 625 River Oaks Parkway, San Jose, Ca. 95134
- hereinafter referred to as "the person appearing to l"-
and
as a notarially authorized representative on the basis of the power of attorney
from 12.06.1997 that was presented in original and has been enclosed as a
verified copy of the document, for
b. Nagano Keiki Seisakusho Ltd., business address: 1-30-4
Higashimagome, Otha-Ku, Tokyo, Japan
- hereinafter referred to as "the person appearing to 2"-
<PAGE>
2. Dr. Wolfram Beyer, grad. physicist, Boltenhagener Str. 20,01109
Dresden
identified through identification card
a. acting on his own behalf
- hereinafter referred to as "the person appearing to 3"-
for the
b. ISS-NAGANO-Mitarbeiterbeteiligungsgesellschaft GbR,
Dresden, business address: Grenzstrasse 28,01109 Dresden, comprised of
- -ISS GmbH corporation for the development, production and distribution of
microelectronic components and systems domiciled in Dresden, business
address: Grenzstrasse 28,01109 Dresden
- - Mr. Hubert Dannfald, Rethelstr.19,01193 Dresden
- - Dr. Stefan Woschech, engineer, G.-Palitzsch-Str.109,01239 Dresden
- - Mr. Wolfram Kern, physicist, Dorfstr.3,01872 Birkwitz
- - Dr. Stefan Zacharias, engineer, Elsterwerdaer Str.5,01239 Dresden
- GbR agreement has been enclosed with this document-
- hereinafter referred to as "the person appearing to 4"-
and for the
c. ISS-NAGANO GmbH, corporation for the development,
production and distribution of microelectronic components and systems
domiciled in 01109 Dresden, Grenzstrasse 28
- hereinafter referred to as "the person appearing to 5" or
"ISS-NAGANO GmbH" or "Corporation"-
<PAGE>
3. Mr. Karsten Schmidt, auditor, Ringstr. 11,01445 Radebeul
identified through identification card
not active for himself but rather as an unauthorized representative-with
reservation as to authorization which when having been received by the acting
notary public shall be considered as having been effectively received by all
partners-for
Mr. Dietmar Arndt, grad. engineer, Alexander-Herzen-Str.4,01109
Dresden
- hereinafter referred to as "the person appearing to 6"-
The persons appearing do herewith declare:
We are or represent the sole partners of ISS-NAGANO GmbH, corporation for the
development, production and distribution of microelectronic components and
systems domiciled in 01109 Dresden, Grenzstrasse 28-hereinafter referred to as
"ISS-NAGANO GmbH" or "Corporation"-, registered with the Commercial Register
Dresden under HRB 8991. According to the list of partners that has been
enclosed with this document as ENCLOSURE 1, we are shareholders of the fully
paid-up nominal capital of the Corporation in hundreds of DM 2,050,000.00.
Enclosure 1 constitutes a part of this document. The complete nominal capital
is thus represented.
I.
Under relinquishment of the compliance with all forms and periods of
convocation and announcement stipulated by the law or by the articles of
partnership, we herewith convene a corporate meeting of the ISS GmbH whereby
we unanimously resolve the following:
1. The nominal capital of the Corporation is to be increased from DM
2,050,000.00 by DM 1,750,000.00 to DM 3,800,000,00.
2. The increase of share capital is to be effected by the issue of new
shares. The new capital contribution is to be issued at face value. The newly
issued shares are to be yielded through the contribution of debt claims. The
debt claims of the partners against ISS-NAGANO taking on the newly issued
shares are to be contributed to the Corporation.
<PAGE>
3. (1) The person appearing to 1 has claims against the Corporation
totalling DM 1,750,129.19. The claims are listed in ENCLOSURE 2 of this
agreement and numbered consecutively from 1 to 121. With the notarial
agreement from 30.07.1997,UR-No.1861/1997 of the notary public Dr. jur. Oswald
van de Loo, the person appearing to 1 has completely assigned the claims with
the consecutive numbers 1 to 8 and the claim No.9 to the amount of DM
4,318.35 to the person appearing to 2. The person appearing to 1 has
completely assigned the claims No.s 10 to 11 and the claim No. 12 to the
amount of DM 27,839.76 to the person appearing to 3. The person appearing to
1 has completely assigned claims No.s 13 to 17 and the claim No. 18 to the
amount of DM 24,958.57 to the person appearing to 4. The person appearing to
1 has completely assigned the claims No.s 19 to 21 and the claim No. 22 to
the amount of DM 41,253.37 to the person appearing to 6.
(2) The person appearing to 1 is the holder of claims totalling DM
1,291,500.00. The person appearing to 2 is holder of claims totalling DM
322,000.00. The person appearing to 3 is holder of claims totalling DM
45,500.00. The person appearing to 4 is holder of claims totalling DM
45,500.00. The person appearing to 6 is holder of claims totalling DM
45,500.00.
4. The transfer of the claims to the Corporation in exchange for shares
is effected by the assignment of the claims to the Corporation whereby the
claims expire through the coincidence of debtor and creditor by way of the
confusion of rights. Through the confusion of rights the assigned claims
against the Corporation are transformed into equity capital.
5. The non-cash capital contribution is yielded as follows:
(1) The person appearing to 1 assigns the in Enclosure 2 of this
agreement listed claims No. 9 totalling DM 186,836.65, No. 12 totalling DM
7,639.74, No. 18 totalling DM 34,401.343, No. 22 totalling DM 18,466.63, No.s
23 to 120 completely and the claim No. 121 totalling DM 14,176.67, i.e.
claims amounting to a total of DM 1,291,500.00 to the Corporation.
The person appearing to 5 accepts the assigned claims.
(2) The person appearing to 2 assigns the in Enclosure 2 of this
agreement listed claims No.s 1 to 8 completely and the claim No. 9 to the
amount of DM 4,318.35, i.e. claims amounting to a total of DM 322,000.00 to
the Corporation.
The person appearing to 5 accepts the assigned claims.
<PAGE>
(3) The person appearing to 3 assigns the in Enclosure 2 of this
agreement listed claims No.s 10 to 11 completely and the claim No. 12 to the
amount of DM 27,839.76, i.e. claims amounting to a total of DM 45,500.00 to
the Corporation.
The person appearing to 5 accepts the assigned claims.
(4) The person appearing to 4 assigns the in Enclosure 2 of this
agreement listed claims No.s 13 to 17 completely and the claim No. 18 to the
amount of DM 24,958.57, i.e. claims amounting to a total of DM 45,500.00 to
the Corporation.
The person appearing to 5 accepts the assigned claims.
(5) The person appearing to 6 assigns the in Enclosure 2 of this
agreement listed claims No.s 19 to 21 completely and the claim No.22 to the
amount of DM 41,253.37, i.e. claims amounting to a total of DM 45,500.00 to
the Corporation.
The person appearing to 5 accepts the assigned claims.
The value of the claims are shown in the audit report of the auditor Mr.
Karsten Schmidt, whose business address is at the Dr. Rodl & Partner GmbH
auditing and tax consulting company, Kellereistr.1,01455 Radebeul. The
valuation is enclosed with the registration with the Commercial Register.
6. Authorized to take over the new capital contribution in hundreds of
DM 1,750,000.00 are:
a. Integrated Sensor Solutions Inc.
with a capital contribution of DM 1,291,500.00
b. Nagano Keiki Seisakusho Ltd.
with a capital contribution of DM 322,000.00
c. Dr. Wolfram Beyer
with a capital contribution of DM 45,500.00
d. Mr. Dietmar Arndt
with a capital contribution of DM 45,500.00
<PAGE>
e. ISS-NAGANO Mitarbeiterbeteiligungsgesellschaft
GbR with a capital contribution of DM 45,500.00
7. Section 3 of the partnership agreement is altered as follows:
SECTIONS
CAPITAL CONTRIBUTION
The capital contribution of the Corporation equals DM 3,800,000.00
- -in words: three million eight hundred thousand-.
8. The new shares are to participate in the profits of the Corporation
as from 01.01.1997.
With that the corporate meeting is ended.
II.
1. The costs of this document are borne by the person appearing to 5.
The Corporation does not own any real property.
2. The following are to receive copies of this document: the persons
having appeared, the Corporation, the registration court, the law firm Dr.
Rodl & Partner GbR to the attention of the lawyer Mr. Ralf Stolzel,
Kellereistr.1,01445 Radebeul.
The notary public pointed out to the persons appearing that
- - the partners are liable for the unpaid capital contribution that has
been taken over by the company,
- - the increase in capital takes effect after it has been registered
with the Commercial Register.
The notary public Dr. Oswald van de Loo as well as Mrs. Ulrike Piosetzny and
Mrs. Astrid Nagel-all domiciled at Hohe Str. 12,01069 Dresden-are herewith
authorized to make all declarations required or expedient for registering the
facts contained in this document and the enclosures included with it and if
required, to alter the partnership agreement. This authorization can be
revoked at any time.
<PAGE>
Each authorized person is entitled to act alone as well as for the other
partners together. This authorization is unlimited with regard to the
Commercial Register.
Read out by the notary public and approved and personally signed by the
partners.
(FOUR SIGNATURES)
I, THE UNDERSIGNED, AS A TRANSLATOR FOR THE ENGLISH LANGUAGE, OFFICIALLY
CERTIFIED BY AND SWORN BEFORE THE PRESIDENT OF THE DRESDEN LANDGERICHT
[REGIONAL COURT], DO HEREBY CONFIRM THE ABOVE AND FOREGOING TO BE A TRUE AND
COMPLETE TRANSLATION OF THE GERMAN ORIGINAL PRESENTED TO ME ON THIS DAY.
DRESDEN, NOVEMBER 5 1997
Peter Jaensch, Translator and interpreter for the English language
Augsburger Strasse 87,01277 Dresden, Phone (03 51) 3 11 77 19,
Cell Ph 0161-430 83 72
[SEAL OF PETER JAENSCH]
/s/ Peter Jaensch
----------------------
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<INCOME-PRETAX> (2,628,845) 95,470
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