<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-41351
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 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. / /
------------------------
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 27, 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's Common Stock has been 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 five-year
warrants 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 INCORPORATED DOUGHERTY SUMMIT 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 15. 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 (including Dataquest, Intechno AG, Prognosis
and Selantek), 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)............. $ (0.72) $ (0.77) $ 0.02
Shares used in calculation of pro forma diluted net income
(loss) per share(2)........................................ 3,632 3,394 5,003
</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 accrued interest.
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 approximately 84% of its total revenues from
products sold for applications 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 in the future, it has not committed a
material amount of resources to such effort to date, and there can be no
assurance that the Company will commit significant resources to this effort, or
if committed, 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
6
<PAGE>
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 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. Although declining average selling prices have not materially
adversely affected gross margins to date, declining average selling prices may
have a material adverse effect on gross margins in the future 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,
7
<PAGE>
Kavlico and Denso Corporation ("Denso"). These companies all have substantially
greater financial, technical, manufacturing, marketing, distribution, personnel
and other resources than the Company. In addition, in the industrial market, the
Company competes with many small companies that have developed 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
8
<PAGE>
over the price, timely delivery, reliability and quality of the components. Any
inability of the Company to obtain timely deliveries of components of acceptable
quality or any significant increase in the prices of components for which the
Company does not have alternative sources could result in delays, cancellations
or reductions in product shipments which would have a material adverse effect on
the Company's business, financial condition or operating results. Although the
Company has not to date experienced any significant 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
9
<PAGE>
its foundry partners, the Company obtains all of its wafers on a purchase order
basis, and, as a result, there can be no assurance that wafer foundries will
allocate sufficient capacity or any capacity to the Company to meet its
processed wafer supply needs. In the event that the Company's foundry partners
are unable or unwilling to continue supplying wafers to the Company, there can
be no assurance that the Company will be able to identify and qualify additional
manufacturing sources in a timely manner, that any such additional manufacturing
sources would be able to produce wafers with acceptable manufacturing yields or
that the Company would not experience delays in product availability, quality
problems, increased costs or disruption in product development activities. The
Company 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. The Company
expects that the shift to new fabrication processes and foundries will occur on
a product by product basis in response to customer requests and that the cost of
such shift may be borne wholly or in part by the Company. Shifting the
manufacture of its wafers to new processes or to new foundries is a highly
complex undertaking 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
10
<PAGE>
products or intellectual property rights to the same extent as the laws of the
United States and thus make the possibility of piracy of the Company's
technology and products more likely. There can be no assurance that the steps
taken by the Company to protect its proprietary information will be adequate to
prevent misappropriation of its technology or that the Company's competitors
will not independently develop technologies that are substantially equivalent or
superior to the Company's technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions which have resulted in
significant and often protracted and expensive litigation. Although there is
currently no pending intellectual property litigation against the Company, the
Company may from time to time be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any licenses will
be acceptable to the Company. A failure to obtain a license from a third party
for technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products requiring the technology.
Furthermore, 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
11
<PAGE>
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 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,
12
<PAGE>
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the securities of technology
companies. These broad market fluctuations, as well as general economic, market
and political conditions, may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's common stock, securities class action litigation has often
occurred against such companies. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
business, financial condition or operating results. There can be no assurance
that the trading price of the Common Stock will not decline below the initial
public offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Immediately upon the
effectiveness of this offering, the 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
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<PAGE>
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 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."
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<PAGE>
GLOSSARY
ANALOG: Pertaining to data that consist of continuously variable physical
quantities.
APPLICATION SPECIFIC INTEGRATED CIRCUIT ("ASIC"): An integrated circuit
designed, developed and intended for use by the manufacturer in a particular
application.
BEHAVIORAL SIMULATION SOFTWARE: Proprietary software of the Company used in the
development of ASICs and ISDs. This software aids designers in assessing
alternative ASIC architectures based on sensing element specifications and
product functional requirements, and in optimizing the design tradeoffs among
the sensing element, the electronics and the system.
BIPOLAR: A type of integrated circuit fabrication process developed for
precision analog products which typically require higher operating currents and
are thus limited in terms of integrating many functions into a single chip.
CALIBRATION SOFTWARE: Proprietary software of the Company used to adjust the
parameters in the ASIC to correct variances in sensing elements and system
environments in ISDs.
CHIP-ON-BOARD ("COB"): Method of attaching electronic components in unpackaged
die form to a printed circuit board, eliminating the need for separate ASIC
packaging.
COMPLEMENTARY METAL OXIDE SEMICONDUCTOR ("CMOS"): A type of integrated circuit
fabrication process that is characterized by low power consumption,
compatibility with non-volatile memory and logic, low noise and immunity to
electromagnetic interference.
DESIGN WIN: A product has achieved a design win when a manufacturer has (i)
purchased the Company's ASICs or ISDs and (ii) commenced development of a
product incorporating the purchased type of ISD or ASIC. Design wins do not
necessarily result in released products by the manufacturers.
DIGITAL: Pertaining to representation of information by encoded bits of 1's and
0's that indicate on and off states.
ELECTRONIC SENSOR: A sensor based on an electronic design (as opposed to a
mechanical or electro-mechanical device) that converts a physical parameter into
an electrical signal.
HYBRID CIRCUIT: A method of building an electronic circuit in which discrete
components are placed on the surface of a ceramic substrate that contains the
electrical interconnections. In addition to the electronic components, thick
film resistors can be screen printed onto the ceramic.
INTEGRATED CIRCUIT ("IC"): A single component that combines multiple electronic
circuit elements into a single chip.
INTELLIGENT SENSING ARCHITECTURE ("ISA"): An approach to designing and building
integrated circuits for sensing applications that allows customized solutions to
be produced at costs comparable to standardized products. All signal processing
functions as well as decision making intelligence, system level functions, and
communications circuitry can be integrated into a single chip to save cost and
space.
INTEGRATED SENSOR DEVICES ("ISDS"): Sensor products that consist of a sensing
element and an ASIC in one package.
LASER TRIMMING: Use of a laser to adjust the value of a screen-printed thick
film resistor or a deposited thin film resistor by removing part of the resistor
material in order to adjust its electrical resistance.
MACROCELL: A proven circuit block which implements a significant function such
as an amplifier, filter or data converter, in order to reduce development time
and risk.
MEDIA COMPATIBLE ISD: An ISD product in which the pressure sensing element
comes in direct contact with harsh media such as gasoline, diesel fuel, brake
fluids or other chemical compounds.
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<PAGE>
MIXED SIGNAL: Pertaining to an ASIC design that includes both analog and
digital circuits.
NONVOLATILE MEMORY: A storage medium that retains its data in the absence of
power.
PRINTED CIRCUIT BOARD ("PC BOARD"): A substrate for interconnecting electronic
components that consists of screen-printed conductive traces on a low cost,
non-conductive substrate.
SURFACE MOUNT TECHNOLOGY: The process of attaching electronic components to a
printed circuit board in which the electrical pins on the package are soldered
to the surface of the printed circuit board as opposed to the "through hole"
method in which the pins are placed through holes in the printed circuit board
and soldered on the back side.
THICK FILM NETWORKS: Electrical circuits made from individual thick film
resistors. These networks are used to correct, via laser trimming, errors
associated with sensing element variances and errors due to changes in the
system environment.
WAFER: A substrate of single crystal silicon that is used to batch manufacture
hundreds or thousands of identical integrated circuits.
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<PAGE>
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 Representatives' 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 to a related party........................ $ 760,000 4.8%
Expansion of manufacturing facilities............................... 9,500,000 59.4
Research and development............................................ 3,500,000 21.9
Working capital(1).................................................. 2,230,000 13.9
------------------- -----
Total........................................................... $ 15,990,000 100.0%
------------------- -----
------------------- -----
</TABLE>
- ------------------------
(1) Includes approximately $1,300,000 for purchases of inventories,
approximately $500,000 for purchases of software and capital equipment not
related to manufacturing or research and development and approximately
$400,000 for the reduction of accounts payable.
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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<PAGE>
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 Representatives' non-accountable expense
allowance and estimated offering expenses, and the repayment to a related party
of approximately $679,000 of short-term debt and accrued interest 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 $6.24. 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 and diluted net income (loss) per share....... $ (0.72) $ (0.77) $ 0.02
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of pro forma basic net income
(loss) per share............................................ 3,632 3,394 4,584
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of pro forma diluted net income
(loss) per share............................................ 3,632 3,394 5,003
--------- --------- ---------
--------- --------- ---------
</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 $27,000 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 increase in accounts receivable at December 31, 1997 was
due, in part, to an increase in product shipments and, in part, to the
achievement of significant milestones under product development contracts in the
month of December. Inventory levels increased at December 31, 1997 in order to
meet expected customer demands.
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 (including Dataquest, Intechno AG, Prognosis
and Selantek), 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 is
a picture of the common rail diesel fuel injection system which incorporates the
Company's ISD.
[LOGO]
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.
39
<PAGE>
The Company's customers include the following companies:
Allied Signal Freightliner MascoTech
Bosch GFI Control Systems Michelin
Daimler/Benz Honda Nagano
John Deere Hydraulic Ring Omron
Eaton Corporation Johnson Controls Sumitomo
Echlin Knorr-Bremse White
EG&G/IC Sensors Lucas Diesel Industries
Systems
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.
40
<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
41
<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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<PAGE>
The Company has been a qualified supplier to various automotive
manufacturers for a number of years and has commenced the process to obtain ISO
9001 and QS-9000 certification. ISO 9001 is a quality assurance model that is
used by companies in the course of the design, production, inspection, test,
installation and service processes. The ISO quality specifications are
comprehensive and internationally supported. QS-9000 is the Quality Management
System that automakers are increasingly requiring of their suppliers. QS-9000 is
an ISO 9001-based system that incorporates industry specific features agreed
upon by Chrysler, Ford and GM. These quality systems are designed to reduce
errors and cost while improving design control and productivity. The Company has
targeted completion of the ISO and QS accreditation processes in calendar 1998.
See "Risk Factors--Dependence on Sole Source Suppliers," "--Dependence on
Independent Wafer Suppliers," and "--Need for ISO 9001 and QS-9000
Certification."
RESEARCH AND DEVELOPMENT
As of 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.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company 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.
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 Manher & Gita M. Naik 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) 453,057(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 approximately 110 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
Upon completion of the offering contemplated by this Prospectus, the Company
will issue 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
56
<PAGE>
the shares of Common Stock underlying the Representatives' 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.
57
<PAGE>
The Company's Certificate of Incorporation provides that all stockholder
action must be effected at a duly called meeting of stockholders and not by a
consent in writing. In addition, the Company's Certificate of Incorporation and
Bylaws provide that only the Company's Chief Executive Officer, a majority of
the members of the Company's Board of Directors or holders of at least 10% of
the outstanding voting power may call a special meeting of stockholders. These
provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions also may have the effect of preventing changes
in the management of the Company.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation has been appointed as the transfer agent and
registrar for the Company.
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. All other stockholders have entered into
written agreements with the Company imposing similar restrictions on transfers,
and the Company has agreed with Cruttenden Roth Incorporated and Dougherty
Summit Securities LLC that it will not release any stockholders from such
agreements. 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.
59
<PAGE>
Shortly after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's option plans or reserved for issuance
under the Purchase Plan. Based upon the number of shares subject to outstanding
options at 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 (10,102)
Minority interest in net (income) loss of joint
venture....................................... 37,201 311,000 520,826 531,174 (116,124)
------------- ------------- ------------- ------------- ------------
Net income (loss)............................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Pro forma basic and diluted net income (loss)
per share..................................... $ (0.72) $ (0.77) $ 0.02
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma basic net
income (loss) per share....................... 3,631,727 3,393,738 4,584,024
------------- ------------- ------------
------------- ------------- ------------
Shares used in computing pro forma diluted net
income (loss) per share....................... 3,631,727 3,393,738 5,003,407
------------- ------------- ------------
------------- ------------- ------------
</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.
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>
RECLASSIFICATION
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
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)
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 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.
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)
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. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEARS ENDED MARCH 31, 31,
------------------------------------------ ---------------------------
1995 1996 1997 1996 1997
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Numerator for basic, diluted and pro
forma:
Net income (loss)......................... $ (1,115,935) $ (750,630) $ (2,628,845) $ (2,615,265) $ 95,470
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Denominator:
Denominator for basic income (loss) per
share--weighted average common shares
outstanding............................. 827,220 1,074,984 1,275,535 1,252,783 1,426,479
Conversion of preferred stock............. -- -- -- -- 3,157,545
Effect of dilutive securities:
Employee stock options.................. -- -- -- -- 399,943
Warrants................................ -- -- -- -- 19,440
------------- ------------ ------------- ------------- ------------
Dilutive potential common shares.......... -- -- -- -- 419,383
------------- ------------ ------------- ------------- ------------
Denominator for diluted income (loss) per
share................................... 827,220 1,074,984 1,275,535 1,252,783 5,003,407
------------- ------------ ------------- ------------- ------------
Conversion of preferred stock not included
above (pro forma)....................... 2,356,192 2,140,955 --
------------- ------------- ------------
Denominator for pro forma diluted income
(loss) per share........................ 3,631,727 3,393,738 5,003,407
------------- ------------- ------------
Less effect of dilutive securities (from
above).................................. -- -- 419,383
------------- ------------- ------------
Denominator for pro forma basic income
(loss) per share........................ 3,631,727 3,393,738 4,584,024
------------- ------------- ------------
------------- ------------- ------------
Basic income (loss) per share............. $ (1.35) $ (0.70) $ (2.06) $ (2.09) $ 0.05
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Diluted income (loss) per share........... $ (1.35) $ (0.70) $ (2.06) $ (2.09) $ 0.02
------------- ------------ ------------- ------------- ------------
------------- ------------ ------------- ------------- ------------
Pro forma basic and diluted income (loss)
per share............................... $ (0.72) $ (0.77) $ 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
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)
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.
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................................................................. 32
Management............................................................... 47
Principal Stockholders................................................... 52
Certain Transactions..................................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
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 INCORPORATED
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 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................................................................ $ 66,875
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............................................................ $ 74,135
----------
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 766,816
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 68,978 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>
- ------------------------
* Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
SB-2 (File No. 333-41351) on February 5, 1998.
** 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 27th 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 27, 1998
- ------------------------------ Chief Executive Officer
Manher D. Naik (Principal Executive
Officer)
/s/ DAVID SATTERFIELD* Vice President, Finance February 27, 1998
- ------------------------------ and Administration
David Satterfield (Principal Financial and
Principal Accounting
Officer)
/s/ YUTAKA MORI* Director February 27, 1998
- ------------------------------
Yutaka Mori
/s/ VINOD K. SOOD* Director February 27, 1998
- ------------------------------
Vinod K. Sood
/s/ STUART D. BOYD* Director February 27, 1998
- ------------------------------
Stuart D. Boyd
/s/ Y.S. FU* Director February 27, 1998
- ------------------------------
Y.S. Fu
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ SHIGERU MIYASHITA* Director February 27, 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. 2 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 27, 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>
- ------------------------
* Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
SB-2 (File No. 333-41351) on February 5, 1998.
** 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>
2,250,000 SHARES (1)
INTEGRATED SENSOR SOLUTIONS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
____________, 1998
CRUTTENDEN ROTH INCORPORATED
DOUGHERTY SUMMIT SECURITIES LLC
As Representatives of the several Underwriters
c/o Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
Integrated Sensor Solutions, Inc., a Delaware corporation (the
"Company") addresses you as the Representatives of each of the persons, firms
and corporations listed in SCHEDULE A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several
Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
2,250,000 shares of its authorized and unissued Common Stock, $.001 par value
per share, (the "Firm Shares") to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 337,500
additional shares of the Company's Common Stock, $.001 par value per share
(the "Option Shares"), as provided in Section 7 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. Further, the Company proposes to issue to the Representatives
warrants for the purchase of a total of 225,000 shares of its authorized and
unissued Common Stock, $.001 par value per share (the "Warrants"). The
shares of Common Stock issuable upon exercise of the Warrants are referred to
as the "Warrant Shares." All shares of Common Stock, $.001 par value, of the
Company to be outstanding after giving effect to the sales contemplated
hereby, including the Shares and Warrant Shares, are hereinafter referred to
as "Common Stock."
- ----------------------
(1) Plus an option to purchase up to 337,500 additional shares from the
Company to cover over-allotments.
<PAGE>
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form SB-2 (File No.
333-41351) with respect to the Shares, including a prospectus, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses and such
abbreviated registration statements pursuant to Rule 462(b) of the Rules and
Regulations as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, such amended
prospectuses and such abbreviated registration statements as may hereafter be
required. Copies of such registration statement and amendments together with
each exhibit filed therewith, of each related prospectus contained or filed
as part of any preeffective amendment to such registration statement or filed
pursuant to Rule 424(a) (the "Preliminary Prospectuses") and of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare
and promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if the Representatives on
behalf of the several Underwriters, shall agree to the utilization of Rule
434 of the Rules and Regulations, the information required to be included in
any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the
Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b)
of the Rules and Regulations or as part of a post-effective amendment to the
registration statement (including a final form of prospectus). If the
registration statement relating to the Shares has not been declared effective
under the Act by the Commission, the Company will prepare and promptly file
an amendment to the registration statement, including a final form of
prospectus, or, if the Representatives, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement, including financial statements, schedules and
exhibits (including exhibits incorporated by reference), in the form in which
it became or becomes, as the case may be, effective (including, if the
Company omitted information from the registration statement pursuant to Rule
430A(a) or files a term sheet pursuant to Rule 434 of the Rules and
Regulations, the information deemed to be a part of the registration
statement at the time it became effective pursuant to Rule 430A(b) or Rule
434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any abbreviated registration statement pursuant to
Rule 462(b) of the Rules and Regulations relating thereto after the effective
date of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended,
-2-
<PAGE>
together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to
the Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the
Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations,
the information deemed to be a part of the Registration Statement at the time
it became effective pursuant to Rule 430A(b) of the Rules and Regulations);
PROVIDED, HOWEVER, that if in reliance on Rule 434 of the Rules and
Regulations and with the consent of the Representatives, on behalf of the
several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the term "Prospectus" shall mean the "prospectus subject to completion"
(as defined in Rule 434(g) of the Rules and Regulations) last provided to the
Underwriters by the Company and circulated by the Underwriters to all
prospective purchasers of the Shares (including the information deemed to be
a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing,
if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that differs
from the prospectus referred to in the immediately preceding sentence
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use. If in reliance on Rule
434 of the Rules and Regulations and with the consent of the Representatives,
on behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable,
prior to the time that a confirmation is sent or given for purposes of
Section 2(10)(a) of the Act, the Prospectus and the term sheet, together,
will not be materially different from the prospectus in the Registration
Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings
for that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up
to and on the Closing Date (hereinafter defined) and on any later date on
which Option Shares are to be purchased, (i) the Registration Statement and
the Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act
and the Rules and Regulations and will in all material respects conform to
the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did not
and will not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; PROVIDED,
-3-
<PAGE>
HOWEVER, that none of the representations and warranties contained in this
subparagraph (b) shall apply to information contained in or omitted from the
Registration Statement or Prospectus, or any amendment or supplement thereto,
in reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter specifically for use
in the preparation thereof.
(c) The Company and the Subsidiary (as defined below) are
duly incorporated and validly existing as corporations in good standing under
the laws of the jurisdiction of their incorporation with full power and
authority (corporate and other) to own, lease and operate their properties
and conduct their business as described in the Prospectus; the Company and
the Subsidiary are duly qualified to do business as foreign corporations and
in good standing in each jurisdiction in which the ownership or leasing of
their properties or the conduct of their business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company or the Subsidiary; no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company and the
Subsidiary are in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
state, federal and other regulatory authorities that are material to the
conduct of their business, all of which are valid and in full force and
effect; the Company and the Subsidiary are not in violation of their charter
or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture
or other agreement or instrument to which the Company (or any of the
Subsidiary) are a party or by which their properties may be bound; and the
Company and the Subsidiary are not in material violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company, the Subsidiary or over their properties. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than ISS-Nagano, GmbH, its majority-owned
subsidiary (the "Subsidiary").
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement
hereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; the making and performance of
this Agreement by the Company and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any bond, debenture, note
or other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument
-4-
<PAGE>
to which the Company or the Subsidiary is a party or by which their
properties may be bound, (ii) the charter or bylaws of the Company or the
Subsidiary or (iii) any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, administrative agency, regulatory body,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company, the Subsidiary or any of their respective
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or its properties is required
for the execution and delivery of this Agreement and the consummation by the
Company of the transactions herein contemplated, except such as may be
required under the Act, by the National Association of Securities Dealers,
Inc. (the "NASD"), the rules of the Nasdaq National Market, or under state or
other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim or proceeding against the Company or the
Subsidiary, any of its officers, any of its properties, assets or rights
before any court, administrative agency, regulatory body, government or
governmental agency or body, domestic or foreign, having jurisdiction over
the Company, its officers, its properties, the Subsidiary or otherwise which
(i) might, individually or in the aggregate, result in any material adverse
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company or might materially and
adversely affect the Company's properties, assets or rights, (ii) might
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is
not so disclosed; and there are no agreements, contracts, leases or documents
of the Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
The Company and the Subsidiary are not parties or subject to the provisions
of any injunction, judgment, decree or order of any court, regulatory body,
administrative agency, government or governmental agency or body domestic or
foreign, that could be expected to result in a material adverse change in the
condition (financial or other), earnings, operations, business or business
prospects of the Company. The Company and the Subsidiary have conducted and
are conducting their businesses in compliance with all applicable Federal,
state, local and foreign statutes, laws, rules, regulations, ordinances,
codes, decisions, decrees, directives and orders, except where the failure to
do so would not, singly or in the aggregate, have a material adverse effect
on the condition (financial or other) earnings, operations, business or
business prospects of the Company.
(f) All outstanding shares of capital stock of the Company and the
Subsidiary have been duly authorized and validly issued and are fully paid
and nonassessable, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and the authorized and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" and conforms in
all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly
state
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the substance of the instruments defining the capitalization of the Company);
the Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement, and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable,
and will be sold free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; and no preemptive right, co-sale
right, registration right, right of first refusal or other similar right of
stockholders exists with respect to any of the Shares or the issuance and
sale thereof other than those that have been satisfied or expressly waived
prior to the date hereof and those that will automatically expire upon and
will not apply to the consummation of the transactions contemplated on or
before the Closing Date. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for
the issuance and sale of the Shares except as may be required under the Act
or under state or other securities or Blue Sky laws. Except as disclosed in
the Registration Statement, Prospectus and the financial statements of the
Company, and the related notes thereto included in the Prospectus, the
Company has no outstanding options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option and other stock
plans or arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus fairly and accurately presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(g) The Warrants and the Warrant Shares have been duly
authorized. The Warrants, when issued and delivered to you, will constitute
valid and binding obligations of the Company in accordance with their terms,
except as enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance.
The Warrant Shares when issued in accordance with the terms of this Agreement
and pursuant to the Warrants, will not be subject to any preemptive rights or
similar rights on the part of any person or entity. A sufficient number of
shares of the Company have been reserved for issuance by the Company upon
exercise of the Warrants.
(h) Ernst & Young LLP, Independent Auditors, which has
examined the financial statements of the Company, together with the related
schedules and notes, as of December 31, 1997 for each of the fiscal years in
the three (3) years in the period ended March 31, 1997 filed with the
Commission as a part of the Registration Statement, which are included in the
Prospectus, are independent accountants within the meaning of the Act and the
Rules and Regulations; the audited financial statements of the Company,
together with the related schedules and notes, and the unaudited financial
information, forming part of the Registration Statement and Prospectus,
fairly present the financial position and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply; and all audited financial statements of the Company, together with the
related schedules and notes, and the unaudited financial information, filed
with the Commission as part of the Registration Statement, have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved except as may be
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otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information
shown therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(i) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
not been (i) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company or the Subsidiary, (ii) any transaction that is material to the
Company or the Subsidiary, (iii) any obligation, direct or contingent, that
is material to the Company or the Subsidiary, incurred by the Company or the
Subsidiary, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the
Company or the Subsidiary, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or the Subsidiary,
(vi) any default in the payment of principal of or interest on any
outstanding debt obligations, or (vii) any loss or damage (whether or not
insured) to the property of the Company or the Subsidiary which has been
sustained or will have been sustained which has a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(j) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and the Subsidiary have good and marketable
title to all properties and assets described in the Registration Statement
and Prospectus as owned by them, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would
not have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (ii) the
agreements to which either the Company or the Subsidiary is a party described
in, or filed as exhibits to, the Registration Statement and Prospectus are
valid agreements, enforceable by the Company and the Subsidiary, as the case
may be, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the Company's knowledge, the other contracting party or
parties thereto are not in material breach or material default under any of
such agreements, and (iii) the Company and the Subsidiary has valid and
enforceable leases for all properties described in the Registration Statement
and Prospectus as leased by it, except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company and the Subsidiary owns or leases all
such properties as are necessary to their operations as now conducted or as
proposed to be conducted.
(k) The Company and the Subsidiary have timely filed all
necessary federal, state and foreign income and franchise tax returns and
have paid all taxes shown thereon as due, and there is no tax deficiency that
has been or, to the Company's knowledge, might be asserted against the
Company (or the Subsidiary) that might have a material adverse effect on the
condition (financial
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or otherwise), earnings, operations, business or business prospects of the
Company; and all tax liabilities are adequately provided for on the books of
the Company.
(l) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed prudent for the business of the Company and the Subsidiary and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company or the Subsidiary against
theft, damage, destruction, acts of vandalism, products liability, errors and
omissions, and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused any
insurance coverage sought or applied for; and the Company does not have any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue the business of the Company
or any Subsidiary at a cost that would not materially and adversely affect
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(m) To the Company's knowledge, no labor disturbance by the
employees of the Company or the Subsidiary exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subcontractors, authorized
dealers or international distributors that might be expected to result in a
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company. No collective
bargaining agreement exists with any of the Company's employees and, to the
Company's knowledge, no such agreement is imminent.
(n) The Company and the Subsidiary own or possess exclusive
rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct their business as now conducted and as described in the
Registration Statement and Prospectus; except as set forth in the
Registration Statement and the Prospectus, the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company or the Subsidiary; neither the Company nor the
Subsidiary has received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company or the
Subsidiary by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights; and the Company and the Subsidiary have not received any notice
of, nor has it any knowledge of, any infringement of or conflict with
asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names
or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
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<PAGE>
(o) The Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
is approved for quotation on the Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the
Common Stock from the Nasdaq National Market, nor has the Company received
any notification that the Commission or the NASD is contemplating terminating
such registration or listing.
(p) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it is not
and will not become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option
Shares are to be purchased, as the case may be, and (ii) completion of the
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(r) Neither the Company nor the Subsidiary have at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(t) Except as otherwise set forth in the Registration
Statement and the Prospectus, each officer and director of the Company, and
each stockholder that holds capital stock of the Company has agreed in
writing that such person will not, except as described below, for a period of
180 days from the date of the final Prospectus (the "Lock-Up Period"), sell,
offer to sell, solicit an offer to buy, contract to sell, loan, pledge, grant
any option to purchase, or otherwise transfer or dispose of (collectively, a
"Disposition"), any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock (collectively,
"Securities"), now owned or hereafter acquired by such person or with respect
to which such person has or hereafter acquires the power of disposition
otherwise than (i) on exercise (on a cash or cashless basis, whether in a
traditional cashless exercise or in a "brokers" cashless exercise), of Common
Stock options or warrants outstanding, it being understood, however, that the
shares of Common Stock received (net of shares sold by or on behalf of such
person in a "brokers" cashless exercise or shares delivered to the Company in
a traditional cashless exercise thereof) by such person upon exercise thereof
shall be
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<PAGE>
subject to the terms of the Lock-Up Agreement (as defined below), (ii) on the
transfer of shares of Common Stock or Securities during such person's
lifetime by BONA FIDE gift or upon death by will or intestacy, provided that
any transferee agrees to be bound by the Lock-Up Agreement, and (iii) on the
transfer or other disposition of shares of Common Stock or Securities as a
distribution to limited partners or stockholders of such person, provided
that the distributees thereof agree to be bound by the terms of the Lock-Up
Agreement. The foregoing restriction has been expressly agreed to preclude
the holder of the Securities from engaging in any hedging, pledge or other
transaction which is designed to or may reasonably be expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such stockholder. Such
prohibited hedging, pledge or other transactions would include, without
limitation, any short sale (whether or not against the box) any pledge of
shares covering an obligation that matures, or could reasonably mature during
the Lock-Up Period, or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or
index) that includes, relates to or derives any significant part of its value
from Securities. Furthermore, such person has also agreed and consented to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for
the Underwriters a complete and accurate list of all securityholders of the
Company as of _______, 1998 and the number and type of securities held by
each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and stockholders have agreed to
such or similar restrictions (the "Lock-up Agreements") presently in effect
or effected hereby. The Company hereby represents and warrants that it will
not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of the Representatives.
(u) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions
are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access
to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus.
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(w) Other than the Representatives, on behalf of the several
Underwriters, no person is or will be owed any finders fee or commission or
similar payment in connection with the transactions contemplated by this
Agreement.
(x) All offers and sales of capital stock of the Company and
the Subsidiary prior to the date hereof were at all relevant times duly
registered or exempt from the registration requirements of the Act and were
duly registered or subject to an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws.
(y) To the knowledge of the Company, if any full-time
employee identified in the Prospectus has entered into any non-competition,
non-disclosure, confidentiality or other similar agreement with any party
other than the Company or the Subsidiary, such employee is neither in
violation thereof nor is expected to be in violation thereof as a result of
the business conducted or expected to be conducted by the Company or the
Subsidiary as described in the Prospectus or such person's performance of his
obligations to the Company or the Subsidiary; neither the Company nor the
Subsidiary has received written notice that any consultant or scientific
advisor of the Company or the Subsidiary is in violation of any
noncompetition, non-disclosure, confidentiality or similar agreement.
(z) The Company and the Subsidiary: (i) are in material
compliance with any and all applicable foreign, United States, state and
local environmental laws, rules, regulations, treaties, statutes and codes
promulgated by any and all governmental authorities relating to the
protection of human health and safety, the environment or toxic substances or
wastes, pollutants or contaminates ("Environmental Laws"); (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their business as currently conducted; and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permit licenses or other approvals would not,
individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise) earnings, operations, business or business
prospects of the Company or the Subsidiary. No action, proceeding,
revocation proceeding, writ, injunction or claim is pending or threatened
against the Company or the Subsidiary relating to the Environmental Laws or
to the activities of the Company or the Subsidiary involving Hazardous
Materials. The terms "Hazardous Materials" as used in this Agreement means
any material or substance that: (i) is prohibited or regulated by any
environmental law, rule, regulation, order, treaty, statute or code
promulgated by any governmental authority, or any amendment or modification
thereto; or (ii) has been designated or regulated by any governmental
authority as radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment.
(aa) Neither the Company nor the Subsidiary is engaged in the
generation, use, manufacture, transportation or storage of any Hazardous
Materials on any of the properties of the Company or the Subsidiary or former
properties, except where such use, manufacture, transportation or storage is
in compliance with Environmental Laws. No Hazardous Materials have
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been treated or disposed of on any properties of the Company or the
Subsidiary or on properties formerly owned or leased by the Company or the
Subsidiary during the time of such ownership or lease, except in compliance
with Environmental Laws. No spills, discharges, releases, deposits,
emplacements, leaks or disposal of any Hazardous Materials have occurred on
or under or have emanated from any of the Company's properties or former
properties of the Company or any subsidiary for which the cost of remediation
would materially and adversely affect the Company.
(bb) No relationship, direct or indirect, exists between or
among the Company and the Subsidiary on the one hand and the directors,
officers, stockholders, customers or suppliers of the Company and the
Subsidiary on the other hand, that is required by the Act or 1934 Act or the
Rules and Regulations to be described in the Registration Statement and the
Prospectus or documents incorporated by reference therein that is not
described as so required.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares which is set forth opposite the name of such
Underwriter in SCHEDULE A hereto (subject to adjustment as provided in
Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made
against payment of the purchase price therefor by the several Underwriters by
wire transfer to the account specified by the Company, at the offices of Gray
Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301
(or at such other place as may be agreed upon between the Representative and
the Company, at 7:00 A.M. Pacific standard time, (a) on the third (3rd) full
business day following the first day that Shares are traded, (b) if this
Agreement is executed and delivered after 1:30 P.M. Pacific standard time,
the fourth (4th) full business day following the day that this Agreement is
executed and delivered or (c) at such other time and date not later than
seven (7) full business days following the first day that Shares are traded
as the Representative and the Company may determine (or at such time and date
to which payment and delivery shall have been postponed pursuant to Section
10 hereof), such time and date of payment and delivery being herein called
the "Closing Date"; PROVIDED, HOWEVER, that if the Company has not made
available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full
business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered
will be made available to you at such office or such other location
including, without limitation, in San Jose, California, as you may reasonably
request for checking at least one (1) full business day prior to the Closing
Date and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
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It is understood that each of you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior
to the Closing Date for the Firm Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $_____
per share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
The information set forth on the front cover page (insofar as such
information relates to the Underwriters) concerning stabilization and
over-allotment by the Underwriters, and under the first, fourth and ninth
paragraphs under the caption "Underwriting" in any Preliminary Prospectus and
in the Prospectus constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the
respective Underwriters, represent and warrant to the Company that the
statements made therein do not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the date
the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the
Rules and Regulations, the Company will provide evidence satisfactory to you
that the Prospectus and term sheet meeting the requirements of Rule 434(b) or
(c), as applicable, of the Rules
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and Regulations have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information
and has been filed with the Commission within the time period prescribed; it
will notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and file
with the Commission any amendments or supplements to the Registration
Statement or Prospectus which, in the opinion of counsel for the several
Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if,
at any time when a prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a result of which
the Prospectus or any other prospectus relating to the Shares as then in
effect would include any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine (9) months or more after
the effective date of the Registration Statement in connection with the sale
of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement
and such prospectus or prospectuses as may be necessary to permit compliance
with the requirements of Section 10(a)(3) of the Act; and it will file no
amendment or supplement to the Registration Statement or Prospectus which
shall not previously have been submitted to you a reasonable time prior to
the proposed filing thereof or to which you shall reasonably object in
writing, subject, however, to compliance with the Act and the Rules and
Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(c) The Company will use its best efforts (including by
providing full cooperation with your counsel, whose services in this matter
are required and which you and the Company will seek to expedite) to qualify
the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in
effect for so long as may be required for purposes of the distribution of the
Shares, except that the Company shall not be required in connection therewith
or as a condition thereof to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction in which it is not
otherwise required to be so qualified or to so execute a general consent to
service of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such
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statements and reports in each year as are or may be required by the laws of
such jurisdiction for such purpose.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term
sheet under Rule 434, in no event later than the first full business day
following the first day that Shares are traded, copies of the Registration
Statement (two of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements
to such documents, including any prospectus prepared to permit compliance
with Section 10(a)(3) of the Act, all in such quantities as you may from time
to time reasonably request. Notwithstanding the foregoing, if the
Representatives, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall
provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you in such quantities as you may from time to
time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in reasonable
detail but need not be audited) complying with the provisions of Section
11(a) of the Act and covering a twelve (12) month period beginning after the
effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and, upon request by a
stockholder, unaudited quarterly reports of operations for each of the first
three quarters of the fiscal year, and will furnish to you and the other
several Underwriters hereunder, upon request (i) concurrently with furnishing
such reports to its stockholders, statements of operations of the Company for
each of the first three (3) quarters in the form furnished to the Company's
stockholders, (ii) concurrently with furnishing to its stockholders, a
balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the certificate or
report thereon of independent certified public accountants, (iii) as soon as
they are available, copies of all reports (financial or other) mailed to
stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any
securities exchange or the NASD, (v) every material press release and every
material news item or article in respect of the Company or its affairs which
was generally released to stockholders or prepared by the Company, and (vi)
any additional information of a public nature concerning the Company, or its
business which you may reasonably request. During such five (5) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts
of the Company and such subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
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(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance of
and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(j) During the Lock-up Period, the Company will not, without
the prior written consent of the Representatives, effect the Disposition of,
directly or indirectly, any Securities other than the sale of the Firm Shares
and the Option Shares hereunder and the Company's issuance of options or
Common Stock under the Company's presently authorized stock option and stock
purchase plans described in the Registration Statement and the Prospectus.
(k) The Company shall reimburse and pay to the
Representatives a nonaccountable expense allowance equal to $150,000.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey
and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and
Power of Attorney, and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing
the Shares and transfer agents' and registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus, and any
amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such jurisdictions
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as you may designate (including filing fees and fees and disbursements of
Underwriters' Counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company in
connection with the performance of its obligations hereunder. The provisions
of this Section 5(a)(i) are intended to relieve the Underwriters from the
payment of the expenses and costs which the Company hereby agrees to pay.
(ii) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing) listed
from time to time in THE WALL STREET JOURNAL which represents the base rate
on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within
thirty (30) days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis
on which such amounts shall be apportioned among the reimbursing parties,
shall be settled by arbitration conducted pursuant to the Code of Arbitration
Procedure of the NASD. Any such
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arbitration must be commenced by service of a written demand for arbitration
or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice,
then the party responding to said demand or notice is authorized to do so.
Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii) and 5(b) hereof and
will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses which is created by the provisions of Sections 8(a)
and 8(b) hereof or the obligation to contribute to expenses which is created
by the provisions of Section 8(d) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date
and any later date on which Option Shares are to be purchased, as the case
may be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., Pacific standard time, on the date following the
date of this Agreement, or such later date and time as shall be consented to
in writing by you; and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
initiated or, to the knowledge of the Company or any Underwriter, threatened
by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such papers and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
the following opinion of counsel for the Company dated the Closing Date or
such later date on which Option Shares are to be purchased
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addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
Delaware;
(ii) The Company has the corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectus;
(iii) The Company is duly qualified to do business
as a foreign corporation and is in good standing in the State of
California. The Company is not required to be qualified to do
business as a foreign corporation in any other jurisdiction. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than
ISS-Nagano, GmbH;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein, the issued
and outstanding shares of capital stock of the Company have been duly
and validly issued and are fully paid and nonassessable, and will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right and all offers and sales of the Company's capital stock
were at all relevant times exempt from the registration or
qualification requirements of the Act;
(v) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable and will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right contained in the Company's charter or bylaws or in any
other agreement or contract to which the Company is a party; and the
forms of certificates evidencing the Common Stock comply with Delaware
law;
(vi) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by
all necessary corporate action on the part of the Company and has been
duly executed and delivered
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by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(viii) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted
or are pending or threatened under the Act;
(ix) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements (including supporting schedules), financial data derived
therefrom and other financial and statistical information included
therein as to which such counsel need express no opinion), as of the
effective date of the Registration Statement, complied as to form in
all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(x) The information in the Prospectus under the
captions "Limitations of Directors' Liability and Indemnification,"
"Description of Capital Stock," and "Shares Eligible for Future Sale"
to the extent that it constitutes matters of law or legal conclusions,
has been reviewed by such counsel and is a fair summary of such
matters and conclusions;
(xi) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required
to be presented by the Act and the applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company or the
Subsidiary is a party of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required;
(xiii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any violation of the charter or bylaws of the Company or (b) result in
a material breach or violation of any of the terms and
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provisions of, or constitute a default under, any material bond,
debenture, note or other evidence of indebtedness, or any material
lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which
the Company or the Subsidiary is a party or by which their
respective properties are bound, or any applicable statute, rule or
regulation generally applicable to transactions of the type
contemplated hereunder or any order, writ or decree known to us of
any court, government or governmental agency or body having
jurisdiction over the Company, the Subsidiary or any of their
respective properties or operations; provided, however, that such
counsel need not express any opinion or belief with respect to
state securities or Blue Sky laws;
(xiv) No consent, approval, authorization or order
of or qualification with any court, government or governmental agency
or body having jurisdiction over the Company or any of its properties
or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have
been obtained under the Act or such as may be required under state or
other securities or Blue Sky laws in connection with the purchase and
the distribution of the Shares by the Underwriters;
(xv) To such counsel's best knowledge, there are no
legal or governmental proceedings pending or threatened against the
Company or the Subsidiary of a character required to be disclosed in
the Registration Statement or the Prospectus by the Act or the Rules
and Regulations, other than those described therein;
(xvi) Neither the Company nor the Subsidiary is in
violation of their respective charter or bylaws.
(xvii) The Company is not required to register as an
"investment company" under the Investment Company Act of 1940, as
amended.
(xviii) To the best of their knowledge and
information, the Company is in compliance with, and conducts its
respective businesses in conformity with, all applicable laws and
regulations relating to the operation of its business as described in
the Registration Statement, except to the extent that any failure so
to comply or conform would not have a material adverse effect on the
condition (financial or other), earnings, operations, business or
business prospects of the Company.
(xix) Except as set forth in the Registration
Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, holders of securities of the Company have
rights to registration of such shares of Common Stock or other
securities, because
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of the filing of the Registration Statement by the Company (except
such rights as have been waived or otherwise complied with); and
(xx) Except as set forth in the Registration Statement
and the Prospectus, such counsel has no knowledge of any actual or
threatened action, suit, claim or proceeding relating to patents,
patent rights or licenses, trademarks or trademark rights, copyrights,
collaborative research, licenses or royalty arrangements or agreements
or trade secrets, know-how or proprietary techniques or technology,
including, processes and substances, owned by or affecting the
business operations of the Company which are pending or threatened
against the Company or any Subsidiary and which action, suit, claim or
proceeding would have a material adverse effect on the condition
(financial or other), earnings, operations, business or business
prospects of the Company.
In addition, such counsel shall state that such counsel has
acted as outside corporate legal counsel to the Company and participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel which leads such counsel to believe
that, at the time the Registration Statement became effective and at all
times subsequent thereto up to and on the Closing Date and on any later date
on which Option Shares are to be purchased, the Registration Statement and
any amendment or supplement thereto (other than the financial statements
including supporting schedules, other financial information derived
therefrom and other financial and statistical information included therein,
as to which such counsel need express no opinion) contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
or at the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States, the State of
California or the corporate laws of the State of Delaware upon opinions of
local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, and of government officials, in
which case their opinion is to state that they are so relying and that they
have no knowledge of any material misstatement or inaccuracy in any such
opinion, representation or certificate. Copies of any opinion, representation
or certificate so relied upon shall be delivered to you, as Representatives
of the Underwriters, and to Underwriters' Counsel.
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(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Ernst & Young LLP, Independent Auditors ("E&Y"), addressed to
the Underwriters, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be (in each case, the "Bring Down
Letter"), confirming that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in a
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more
than five (5) business days prior to the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth
in the Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since its date, or to reflect the
availability of more recent financial statements, data or information. The
Bring Down Letter shall not disclose any change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in
your sole judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The Original
Letter from E&Y shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent,
to the extent true, that they are independent certified public accountants
with respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the balance sheet of the Company as of December 31, 1997
and related statements of operations, stockholders' equity and cash flows for
the twelve (12) months ended March 31, 1997, (iii) state that E&Y has
performed the procedures set out in Statement on Auditing Standards No. 71
("SAS 71") for a review of interim financial information and providing the
report of E&Y as described in SAS 71 on the financial statements for the
three-quarter period ended December 31, 1997 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications
need to be made to any of the Quarterly Financial Statements in order for
them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, (v) state that nothing
came to their attention that caused them to believe that the financial
statements included in the Registration Statement and Prospectus do not
comply as to form in all material respects with the applicable
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accounting requirements of Rule 11-02 of Regulation S-X and that any
adjustments thereto have not been properly applied to the historical amounts
in the compilation of such statements, and (vi) address other matters agreed
upon by E&Y and you. In addition, you shall have received from E&Y a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's financial statements as of
December 31, 1997, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct in all material respects, as if
made on and as of the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be, and the Company has
complied in all material respects with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of
such certificate, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, contained all material
information required to be included therein by the Act and the Rules
and Regulations, and in all material respects conformed to the
requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
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(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company, (b) any transaction that is material to the
Company, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that is material
to the Company, incurred by the Company, except obligations incurred
in the ordinary course of business, (d) any change in the capital
stock or outstanding indebtedness of the Company that is material to
the Company or is out of the ordinary course of business of the
Company, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company, or (f) any loss or damage
(whether or not insured) to the property of the Company which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(h) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each stockholder of
the company and each entity that is affiliated with an officer or director of
the Company in writing prior to the date hereof that such person will not,
except as described below, during the Lock-Up Period, effect the Disposition
of any Securities now owned or hereafter acquired by such person or with
respect to which such person has or hereafter acquires the power of
disposition, otherwise than (i) on exercise (on a cash or cashless basis,
whether in a traditional cashless exercise or in a "brokers" cashless
exercise), of Common Stock options or warrants outstanding, it being
understood, however, that the shares of Common Stock received (net of shares
sold by or on behalf of such person in a "brokers" cashless exercise or
shares delivered to the Company in a traditional cashless exercise thereof)
by such person upon exercise thereof shall be subject to the terms of the
Lock-Up Agreement, (ii) on the transfer of shares of Common Stock or
Securities during such person's lifetime by BONA FIDE gift or upon death by
will or intestacy, provided that any transferee agrees to be bound by the
Lock-Up Agreement, and (iii) on the transfer or other disposition of shares
of Common Stock or Securities as a distribution to limited partners or
stockholders of such person, provided that the distributees thereof agree to
be bound by the terms of the Lock-Up Agreement. The foregoing restriction
shall have been expressly agreed to preclude the holder of the Securities
from engaging in any hedging, pledge or other transaction which is designed
to or may reasonably be expected to lead to or result in a Disposition of
Securities during the Lock-Up Period, even if such Securities would be
disposed of by someone other than the such holder. Such prohibited hedging,
pledge or other transactions would include, without limitation, any short
sale (whether or not against the box), any pledge of shares covering an
obligation that matures or could reasonably mature during the Lock-Up Period,
or any purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person will have also agreed and consented to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction.
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(i) The Company shall have furnished you a warrant for
the purchase of up to 225,000 shares of Common Stock at an exercise price per
share equal to 120% of the offering price per share of the Shares, in the
form attached hereto as EXHIBIT A.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance
by the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters, for the
purpose of covering over-allotments in connection with the distribution and
sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of 337,500 Option Shares at the purchase price per share for the
Firm Shares set forth in Section 3 hereof. Such option may be exercised by
the Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public by giving
written notice (the "Option Notice") to the Company. The number of Option
Shares to be purchased by each Underwriter upon the exercise of such option
shall be the same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise of such option
as the number of Firm Shares purchased by such Underwriter (set forth in
SCHEDULE A hereto) bears to the total number of Firm Shares purchased by the
several Underwriters (set forth in SCHEDULE A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the
option granted by this Section 7 shall be made against payment of the
purchase price therefor by the several Underwriters by wire transfer to the
account specified by the Company. Such delivery and payment shall take place
at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo
Alto, California 94301, or at such other place as may be agreed upon between
the Representatives and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least two
(2) full business days prior to the Closing Date, or (ii) on a date which
shall not be later than the third (3rd) full business day following the date
the Company receives written notice of the exercise of such
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<PAGE>
option, if such notice is received by the Company after the date two (2) full
business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in San Jose, California, as you may reasonably request
for checking at least one (1) full business day prior to the date of payment
and delivery and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to such
date of payment and delivery. If the Representatives so elect, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior
to the date of payment and delivery for the Option Shares to be purchased by
such Underwriter or Underwriters. Any such payment by you shall not relieve
any such Underwriter or Underwriters of any of its or their obligations
hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment
and delivery for such Option Shares) to the accuracy of and compliance with
the representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and
to the condition that all proceedings taken at or prior to the payment date
in connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and
you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and
completeness of any of the representations, warranties or statements, the
performance of any of the covenants or agreements of the Company or the
satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD),
under the Act, the Exchange Act or otherwise arising out of or based upon (i)
any breach of any representation, warranty, agreement or covenant of the
Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any
-27-
<PAGE>
untrue statement or alleged untrue statement of any material fact contained
in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and agrees to reimburse each Underwriter for any legal
or other expenses reasonably incurred by it in connection with investigating
or defending any such loss, claim, damage, liability or action; PROVIDED,
HOWEVER, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, such Preliminary
Prospectus or the Prospectus, or any such amendment or supplement thereto, in
reliance upon, and in conformity with, written information relating to any
Underwriter furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof and, PROVIDED FURTHER,
that the indemnity agreement provided in this Section 8(a) with respect to
any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any losses, claims, damages, liabilities or
actions based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material
fact purchased Shares, if a copy of the Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected had not been sent or given to such person within the time required
by the Act and the Rules and Regulations, unless such failure is the result
of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages
or liabilities, joint or several, to which the Company may become subject
under the Act or otherwise arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter, directly or through you, specifically for
use in the preparation thereof, and agrees to reimburse the Company for
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<PAGE>
any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each
director of the Company, and each person, if any, who controls the Company
within the meaning of the Act or the Exchange Act. This indemnity agreement
shall be in addition to any liabilities which each Underwriter may otherwise
have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under this Section 8 except to the extent that it has
been prejudiced by such omission. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume
such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of
notice from the indemnifying party to such indemnified party of the
indemnifying party's election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel (together with
appropriate local counsel) approved by the indemnifying party representing
all the indemnified parties under Section 8(a) or 8(b) hereof who are parties
to such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action or (iii)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved
the terms of such settlement; PROVIDED that such consent shall not be
unreasonably withheld. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnification could have been sought
hereunder by such
-29-
<PAGE>
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the
subject matter of such proceeding.
(d) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 8 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 8
provides for indemnification in such case, all the parties hereto shall
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so
that the Underwriters severally and not jointly are responsible pro rata for
the portion represented by the percentage that the underwriting discount
bears to the public offering price, and the Company is responsible for the
remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be
required to contribute any amount in excess of the amount by which the
underwriting discount applicable to the Shares purchased by such Underwriter
exceeds the amount of damages which such Underwriter has otherwise been
required to pay and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(d) shall
extend upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls any Underwriter or the Company within
the meaning of the Act or the Exchange Act and each officer of the Company
who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including, without
limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of
this Section 8 fairly allocate the risks in light of the ability of the
parties to investigate the Company and its business in order to assure that
adequate disclosure is made in the Registration Statement and Prospectus as
required by the Act and the Exchange Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter within the meaning of the Act or the Exchange
Act, or by or on behalf of the Company, or any of its officers, directors or
controlling persons within the meaning of the Act or the Exchange Act, and
shall survive the delivery of the Shares to the several Underwriters
hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such
Firm Shares in accordance with the terms hereof, and if the aggregate
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<PAGE>
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of
such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters
agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the
remaining Underwriters shall have the right, but shall not be obligated, to
take up and pay for (in such proportions as may be agreed upon among them)
the Firm Shares which the defaulting Underwriter or Underwriters so agreed
but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing
Date shall be postponed for twenty-four (24) hours to allow the several
Underwriters the privilege of substituting within twenty-four (24) hours
(including non-business hours) another underwriter or underwriters (which may
include any nondefaulting Underwriter) satisfactory to the Company. If no
such underwriter or underwriters shall have been substituted as aforesaid by
such postponed Closing Date, the Closing Date may, at the option of the
Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or
underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If
it shall be arranged for the remaining Underwriters or substituted
underwriter or underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section 10, (i) the Company
shall have the right to postpone the time of delivery for a period of not
more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement, supplements to
the Prospectus or other such documents which may thereby be made necessary,
and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to
be purchased by the defaulting Underwriter or Underwriters or substitute
another underwriter or underwriters as aforesaid and the Company shall not
find or shall not elect to seek another underwriter or underwriters for such
Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, then, other than as set forth in the
Letter Agreement, the Company shall not be liable to any Underwriter (except
as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than
an Underwriter who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the number of Firm Shares agreed
by such Underwriter to be purchased hereunder, which Underwriter shall remain
liable to the Company and the other Underwriters for damages, if any,
resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
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<PAGE>
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., Pacific standard time, on the first full business day
following the effective date of the Registration Statement, or (ii) the time
of the public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the public offering
shall mean the time of the release by you, for publication, of the first
newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by
letter, telephone, telegram or telecopy, whichever shall first occur. By
giving notice as set forth in Section 12 before the time this Agreement
becomes effective, you, as Representatives of the several Underwriters, or
the Company, may prevent this Agreement from becoming effective without
liability of any party to any other party, except as provided in Sections
4(i) and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time on or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the
case may be, (i) if the Company shall have failed, refused or been unable to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled
is not fulfilled, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse, or (ii) if
additional governmental restrictions, not in force and effect on the date
hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq market or in
the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall
have sustained a loss by strike, fire, flood, earthquake, accident or other
calamity of such character as to interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured, or (iv) if there shall have been a material adverse
change in the general political or economic conditions or financial markets
as in your judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency
which, in the opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. In the event of termination pursuant to subparagraph (i)
above, the Company shall remain obligated to pay costs and expenses pursuant
to Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of
subparagraphs
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<PAGE>
(ii) through (v) above shall be without liability of any party to any other
party except as provided in Sections 4(i) and 8 hereof.
If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter with a copy to [GREGORY M. GALLO AT GRAY CARY WARE &
FRIEDENRICH]. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter with a copy to
Brobeck, Phleger & Harrison LLP, 4675 MacArthur Court, Suite 1000, Newport,
CA 92660-1846 Attention: Laura B. Hunter, Esq.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to the
Representatives shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to Cruttenden Roth
Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715,
telecopier number (714) 852-9603, Attention: General Counsel and to
Dougherty Summit Securities LLC, Suite 500, 900 Second Avenue South,
Minneapolis, Minnesota 55402-2547, Attention: Thomas P. Niemiec, with a copy
to Brobeck, Phleger & Harrison LLP, 4675 MacArthur Court, Suite 1000,
Newport, CA 92660-1846, Attention: Laura Hunter; and if sent to the Company,
such notice shall be mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to Integrated Sensor Solutions, Inc.
624 River Oaks Parkway, San Jose, CA 95134, telecopier number (408)
324-1033, Attention: President, with a copy to Gray Cary Ware & Freidenrich
LLP, 400 Hamilton Avenue, Palo Alto, CA 94301, Attention: Gregory M. Gallo.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling
persons within the meaning of the Act or the Exchange Act, officers and
directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors and assigns
and said controlling persons and said officers and directors, and for the
benefit of no other person or entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company under this Agreement, you shall
act on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by Cruttenden Roth Incorporated on behalf of
you.
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<PAGE>
14. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
15. COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between the Company and the several Underwriters.
Very truly yours,
INTEGRATED SENSOR SOLUTIONS, INC.
By: _______________________________
Its:_______________________________
Accepted as of the date first above written:
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By: _______________________________
Authorized Signatory
By: DOUGHERTY SUMMIT SECURITIES LLC
By: _______________________________
Authorized Signatory
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<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ -----------
<S> <C>
Cruttenden Roth Incorporated
Dougherty Summit Securities LLC
Total......................... 2,250,000
</TABLE>
A-1
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
COMMON STOCK WARRANT
--------------------
THE SECURITIES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
This certifies that, for good and valuable consideration, receipt
of which is hereby acknowledged, __________________ ("HOLDER") is entitled to
purchase, subject to the terms and conditions of this Warrant, from
Integrated Sensor Solutions, Inc., a Delaware corporation (the "COMPANY"),
_______ fully paid and nonassessable shares of the Common Stock ("COMMON
STOCK") of the Company, in accordance with Section 2 during the period
commencing one year after the date hereof and ending at 5:00 p.m. California
time, ____________________, 2003 (the "EXPIRATION DATE"), at which time this
Warrant will expire and become void unless earlier terminated as provided
herein. The shares of Common Stock of the Company for which this Warrant is
exercisable, as adjusted from time to time pursuant to the terms hereof, are
hereinafter referred to as the "SHARES."
1. EXERCISE PRICE. The initial purchase price for the Shares
shall be $________ per share. Such price shall be subject to adjustment
pursuant to the terms hereof (such price, as adjusted from time to time, is
hereinafter referred to as the "EXERCISE PRICE").
2. EXERCISE AND PAYMENT.
(a) CASH EXERCISE. At any time after _______________, 1999,
this Warrant may be exercised, in whole or in part, from time to time by the
Holder, during the term hereof, by surrender of this Warrant and the Notice
of Exercise annexed hereto duly completed and executed by the Holder to the
Company at the principal executive offices of the Company, together with
payment in the amount obtained by multiplying the Exercise Price then in
effect by the number of Shares thereby purchased, as designated in the Notice
of Exercise. Payment may be in cash or by check payable to the order of the
Company.
(b) NET ISSUANCE. In lieu of payment of the Exercise Price
described in Section 2(a), the Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant
or such portion to the Company, with the net issue election notice annexed
hereto (the "Net Issuance Election") duly executed, at the office of the
Company. Thereupon, the Company shall issue to the Holder such number of
fully paid and nonassessable
1.
<PAGE>
shares of Common Stock as is computed using the following formula:
where: X = Y (A-B)
-------
A
X = the number of shares to be issued to the Holder pursuant to this
Section 2.
Y = the number of shares covered by this Warrant in respect of which the
net issuance election is made pursuant to this Section 2.
A = the fair market value of one share of Common Stock, as determined in
accordance with the provisions of this Section 2.
B = the Exercise Price in effect under this Warrant at the time the net
issuance election is made pursuant to this Section 2.
For purposes of this Section 2, the "FAIR MARKET VALUE" per share of the
Company's Common Stock shall mean:
i. If the Common Stock is traded on a national securities
exchange or admitted to unlisted trading privileges on such an exchange, or
is listed on the National Market (the "NATIONAL MARKET") of the National
Association of Securities Dealers Automated Quotations System (the
"NASDAQ") or other over-the-counter quotation system, the fair market value
shall be the last reported sale price of the Common Stock on such exchange
or on the Nasdaq National Market on the last business day before the
effective date of exercise of the Net Issuance Election or if no such sale
is made on such day, the mean of the closing bid and asked prices such day
on such exchange, the Nasdaq National Market or over-the-counter quotation
system; and
ii. If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and ask prices are not reported, the fair market
value shall be the price per share which the Company could obtain from a
willing buyer for shares sold by the Company from authorized but unissued
shares, as such price shall be determined by mutual agreement of the
Company and the Holder of this Warrant.
3. DELIVERY OF STOCK CERTIFICATES. Within a reasonable time
after exercise, in whole or in part, of this Warrant, the Company shall issue
in the name of and deliver to the Holder, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock which the
Holder shall have requested in the Notice of Exercise. If this Warrant is
exercised in part, the Company shall deliver to the Holder a new Warrant for
the unexercised portion of this Warrant at the time of delivery of such stock
certificate or certificates.
4. NO FRACTIONAL SHARES. No fractional shares or scrip
representing fractional shares will be issued upon exercise of this Warrant.
If upon any exercise of this Warrant a fraction of a share results, the
Company will pay the Holder the difference between the cash
2.
<PAGE>
value of the fractional share and the portion of the Exercise Price allocable
to the fractional share.
5. CHARGES, TAXES AND EXPENSES. The Holder shall pay all
transfer taxes or other incidental charges, if any, in connection with the
transfer of the Shares purchased pursuant to the exercise hereof from the
Company to the Holder.
6. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and in case of loss, theft
or destruction, of indemnity or security reasonably satisfactory to the
Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new Warrant of like tenor and
dated as of such cancellation, in lieu of this Warrant.
7. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed
day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday or a Sunday or shall be a legal holiday,
then such action may be taken or such right may be exercised on the next
succeeding weekday which is not a legal holiday.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees
that all Shares will, upon issuance, be duly authorized and issued, fully
paid, nonassessable, and free from all taxes, liens, and charges with respect
to the issue thereof. The Company further covenants and agrees that during
the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved for the
purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number
of and kind of securities purchasable upon exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the
Company shall at any time after the date hereof but prior to the expiration
of this Warrant subdivide its outstanding securities as to which purchase
rights under this Warrant exist, by split-up or otherwise, or combine its
outstanding securities as to which purchase rights under this Warrant exist,
the number of Shares as to which this Warrant is exercisable as of the date
of such subdivision, split-up or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate adjustments shall also
be made to the purchase price payable per share, but the aggregate purchase
price payable for the total number of Shares purchasable under this Warrant
as of such date shall remain the same.
(b) STOCK DIVIDEND. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other
3.
<PAGE>
securities or rights convertible into Common Stock ("COMMON STOCK
EQUIVALENTS") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including
the additional shares of Common Stock issuable upon exercise or conversion
thereof), then the number of shares of Common Stock for which this Warrant
may be exercised shall be increased as of the record date (or the date of
such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividend, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Exercise
Price shall be adjusted so that the aggregate amount payable for the purchase
of all the Shares issuable hereunder immediately after the record date (or on
the date of such distribution, if applicable), for such dividend shall equal
the aggregate amount so payable immediately before such record date (or on
the date of such distribution, if applicable).
(c) OTHER DISTRIBUTIONS. If at any time after the date
hereof the Company distributes to holders of its Common Stock, other than as
part of its dissolution or liquidation or the winding up of its affairs, any
shares of its capital stock, any evidence of indebtedness or any of its
assets (other than cash, Common Stock or securities convertible into Common
Stock), then the Company may, at its option, either (i) decrease the per
share Exercise Price of this Warrant by an appropriate amount based upon the
value distributed on each share of Common Stock as determined in good faith
by the Company's Board of Directors or (ii) provide by resolution of the
Company's Board of Directors that on exercise of this Warrant, the Holder
hereof shall thereafter be entitled to receive, in addition to the shares of
Common Stock otherwise receivable on exercise hereof, the number of shares or
other securities or property which would have been received had this Warrant
at the time been exercised.
(d) MERGER. If at any time after the date hereof there shall
be a merger or consolidation of the Company with or into another corporation
when the Company is not the surviving corporation then the Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the aggregate Exercise Price then
in effect, the number of shares or other securities or property of the
successor corporation resulting from such merger or consolidation, which
would have been received by Holder for the shares of stock subject to this
Warrant had this Warrant at such time been exercised.
(e) RECLASSIFICATION, ETC. If at any time after the date
hereof there shall be a change or reclassification of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, then the Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Exercise Price then in
effect, the number of shares or other securities or property resulting from
such change or reclassification, which would have been received by Holder for
the shares of stock subject to this Warrant had this Warrant at such time
been exercised.
10. NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Exercise Price
or number of Shares purchasable hereunder shall be adjusted pursuant to
Section 9 hereof, the Company shall execute and deliver to the Holder a
certificate setting forth, in reasonable detail, the event
4.
<PAGE>
requiring the adjustment, the amount of the adjustment, the method by which
such adjustment was calculated and the Exercise Price and number of shares
purchasable hereunder after giving effect to such adjustment, and shall cause
a copy of such certificate to be mailed (by first class mail, postage
prepaid) to the Holder.
11. RIGHTS AS STOCKHOLDER. Prior to exercise of this Warrant, the
Holder shall not be entitled to any rights as a stockholder of the Company
with respect to the Shares, including (without limitation) the right to vote
such Shares, receive dividends or other distributions thereon, or be notified
of stockholder meetings, and the Holder shall not be entitled to any notice
or other communication concerning the business or affairs of the Company.
However, in the event of any taking by the Company of a 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, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each Holder of this
Warrant, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
12. RESTRICTED SECURITIES. The Holder understands that the Shares
purchasable hereunder constitute "RESTRICTED SECURITIES" under the federal
securities laws inasmuch as they are, or will be, acquired from the Company
in transactions not involving a public offering and accordingly may not,
under such laws and applicable regulations, be resold or transferred without
registration under the Securities Act of 1933, as amended (the "1933 ACT") or
an applicable exemption from such registration. In this connection, the
Holder acknowledges that Rule 144 of the Commission is not now, and may not
in the future be, available for resales of the Shares purchasable hereunder.
Unless the Shares are subsequently registered pursuant to Section 15, the
Holder further acknowledges that the securities legend on Exhibit A to the
Notice of Exercise attached hereto shall be placed on any Shares issued to
the Holder upon exercise of this Warrant.
13. CERTIFICATION OF INVESTMENT PURPOSE. Unless a current
registration statement under the 1933 Act shall be in effect with respect to
the securities to be issued upon exercise of this Warrant, the Holder
covenants and agrees that, at the time of exercise hereof, it will deliver to
the Company a written certification executed by the Holder that the
securities acquired by him upon exercise hereof are for the account of such
Holder and acquired for investment purposes only and that such securities are
not acquired with a view to, or for sale in connection with, any distribution
thereof.
14. DISPOSITION OF SHARES. Holder hereby agrees not to make any
disposition of any Shares purchased hereunder unless and until:
(a) Holder shall have notified the Company of the proposed
disposition and provided a written summary of the terms and conditions of the
proposed disposition;
5.
<PAGE>
(b) Holder shall have complied with all requirements of this
Warrant applicable to the disposition of the Shares; and
(c) Holder shall have provided the Company with written
assurances, in form and substance satisfactory to legal counsel of the
Company, that (i) the proposed disposition does not require registration of
the Shares under the 1933 Act or (ii) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or of any
exemption from registration available under the 1933 Act has been taken.
The Company shall NOT be required (i) to transfer on its books any
Shares which have been sold or transferred in violation of the provisions of
this Section 14 or (ii) to treat as the owner of the Shares, or otherwise to
accord voting or dividend rights to, any transferee to whom the Shares have
been transferred in contravention of the terms of this Warrant.
15. REGISTRATION RIGHTS.
(a) PIGGYBACK REGISTRATION. If at any time during the
seven-year period commencing _________________, 1998 and ending on
_________________, 2005, the Company shall determine to register for its own
account or the account of others under the 1933 Act any of its equity
securities, other than on Form S-4 or Form S-8 or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business, or equity securities issuable in
connection with stock option or other employee benefit plans, the Company
shall send to each Holder of Warrants or Shares, who is entitled to
registration rights under this Section 15(a) written notice of such
determination and, if within twenty (20) days after receipt of such notice,
such Holder shall so request in writing (hereafter a "SELLING HOLDER"), the
Company shall include in such Registration Statement all or any part of the
Shares issuable upon exercise of the Warrants (the "REGISTRABLE SECURITIES")
such Selling Holder requests to be registered. The obligations of the
Company under this Section 15(a) may be waived by Holders holding a majority
in interest of the Registrable Securities. In the event that the managing
underwriter for said offering advises the Company in writing that the
inclusion of such securities in the offering would be materially detrimental
to the offering, such securities shall be excluded from such Registration
Statement; provided, however, that in the event of such exclusion, the
Company shall, within 90 days after the closing of the underwritten offering
from which the Holders' Shares were excluded, file a registration statement
on Form S-3, S-2 or S-1 with respect to the resale of such Shares and use its
best efforts to cause such registration statement to become effective as soon
as practicable and maintain such effectiveness for a period of at least nine
months, subject to Section 15(c) below.
(b) DEMAND REGISTRATION. In addition to any Registration
Statement pursuant to subparagraph (a) above, during the five-year period
beginning on _______________, 1999 and ending on _____________, 2003, the
Company will, as promptly as practicable (but in any event within 60 days),
after written request (the "REQUEST") by the Holder, or by a person or
persons holding (or having the right to acquire by virtue of holding the
Warrants) at least 50% of the shares of Common Stock which have been (or may
be) issued upon exercise of the Warrants (such Holder
6.
<PAGE>
or Holders to be included in the definition of "SELLING HOLDER" for the
purposes of Section 15(c) hereof), prepare and file at its own expense a
Registration Statement with the Commission and appropriate "blue sky"
authorities sufficient to permit the public offering of the Registrable
Securities and will use its best efforts at its own expense through its
officers, directors, auditors and counsel, in all matters necessary or
advisable, to cause such Registration Statement to become effective as
promptly as practicable and to maintain such effectiveness so as to permit
resale of the Shares covered by the Request until the earlier of the time
that all such Shares have been sold or the expiration of 90 days from the
effective date of the Registration Statement, provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 15(b).
(c) Notwithstanding Sections 15(a) and 15(b), the Company
shall be entitled to suspend the effectiveness of any registration statement
filed in connection with the registration of Registrable Securities for a
reasonable period of time, not to exceed thirty (30) calendar days, if the
Board of Directors of the Company, acting in good faith, determines that
there exists material nonpublic information about the Company which the Board
does not wish to disclose in a registration statement which information would
otherwise be required by the 1933 Act to be disclosed in such registration
statement; provided, however, that the Company may exercise this right only
once with respect to any particular registration statement.
(d) OBLIGATIONS OF THE HOLDERS. In connection with the
registration of the Registrable Securities pursuant to either Sections 15(a)
or (b), the Selling Holders shall have the following obligations:
i. It shall be a condition precedent to the obligations
of the Company to take any action pursuant to this Agreement with respect to
each Selling Holder that such Selling Holder shall furnish to the Company
such information regarding itself, the Registrable Securities held by it and
the intended method of disposition of the Registrable Securities held by it
as shall be reasonably required to effect the registration of the Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least fifteen (15)
days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Selling Holder of the information
the Company requires from each such Selling Holder (the "REQUESTED
INFORMATION") in the case of a Registration Statement being prepared pursuant
to Section 15(b) or if such Selling Holder elects to have any of such Selling
Holder's Registrable Securities included in the Registration Statement in the
case of a Registration Statement being prepared pursuant to Section 15(a).
ii. Each Selling Holder by such Selling Holder's
acceptance of the Registrable Securities agrees to cooperate with the Company
as reasonably requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder, unless such Selling Holder
has notified the Company in writing of such Selling Holder's election to
exclude all of such Selling Holder's Registrable Securities from the
Registration Statement; and
iii. No Selling Holder may participate in any
underwritten registration hereunder unless such Selling Holder (i) agrees to
sell such Selling Holder's Registrable Securities on the basis provided in
any underwriting arrangements approved by the
7.
<PAGE>
Selling Holders entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the
terms of such underwriting arrangements, and (iii) agrees to pay its pro rata
share of all underwriting discounts and commissions and other fees and
expenses of investment bankers and any manager or managers of such
underwriting, except as provided in Section 15(d) below.
(e) EXPENSES OF REGISTRATION. All expenses, other than
underwriting discounts and commissions and other fees and expenses of
investment bankers and other than brokerage commissions, incurred in
connection with registrations, filings or qualifications pursuant to Section
15(a) or 15(b), including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees and the fees and
disbursements of counsel for the Company and the Selling Holders, shall be
borne by the Company; PROVIDED, HOWEVER, that the Company shall only be
required to bear the fees and out-of-pocket expenses of one legal counsel
selected by the Selling Holders in connection with such registration.
(f) INDEMNIFICATION. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
i. To the extent permitted by law, the Company will
indemnify and hold harmless each Selling Holder who holds such Registrable
Securities, the directors, if any, of such Selling Holder, the officers, if
any, of such Selling Holder, each person, if any, who controls any Selling
Holder within the meaning of the 1933 Act, any underwriter (as defined in the
1933 Act) for the Selling Holders, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the 1933 Act (each, an
"INDEMNIFIED PERSON"), against any losses, claims, damages, expenses or
liabilities (joint or several) (collectively, "CLAIMS") to which any of them
may become subject under the 1933 Act or otherwise, insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
when it first became effective, or any related final prospectus, amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which the statements
therein were made, not misleading (a "VIOLATION"). The Company shall
reimburse the Selling Holders and each such underwriter or controlling
person, promptly as such expenses are incurred and are due and payable, for
any legal fees or other reasonable expenses incurred by them in connection
with investigating or defending any such Claim. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in
this Section 15(e)(i) shall not apply in such case to the extent any such
Claim arising out of or based upon a Violation which occurs in reliance upon
and in conformity with information furnished in writing to the Company by any
Indemnified Person or underwriter for such Indemnified Person expressly for
use in connection with the preparation of the Registration Statement or any
such amendment thereof or supplement thereto, and shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the
prior written consent of the Company, which consent shall not be unreasonably
withheld.
8.
<PAGE>
ii. In connection with any Registration Statement in which a
Selling Holder is participating, each such Selling Holder agrees to indemnify
and hold harmless, to the same extent and in the same manner set forth in
Section 15(e)(i), the Company, each of its directors, each of its officers
who signs the Registration Statement, each person, if any, who controls the
Company within the meaning of the 1933 Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any
of its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the 1933 Act (collectively and together
with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim to
which any of them may become subject, under the 1933 Act or otherwise,
insofar as such Claim arises out of or is based upon any Violation, in each
case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished to the
Company by such Selling Holder expressly for use in connection with such
Registration Statement, and such Selling Holder will reimburse any legal or
other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; PROVIDED, HOWEVER, that the indemnity agreement
contained in this Section 15(e)(ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior
written consent of such Selling Holder, which consent shall not be
unreasonably withheld.
iii. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in any distribution to the same extent
as provided above, with respect to information furnished in writing by such
persons expressly for inclusion in the Registration Statement.
iv. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 15(e) of notice of the commencement of
any action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is made against any
indemnifying party under this Section 15(e), deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly
noticed, to assume control of the defense thereof with counsel mutually
satisfactory to the indemnifying parties; PROVIDED, HOWEVER, that an
Indemnified Person or Indemnified Party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party,
the representation by such counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be inappropriate due to actual or
potential differing interests between such Indemnified Person or Indemnified
Party and any other party represented by such counsel in such proceeding.
The Indemnifying Party shall pay for only one separate legal counsel for the
Indemnified Parties; such legal counsel shall be selected by the Indemnified
Parties holding a majority in interest of the Registrable Securities. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 15(e), except to the extent that the indemnifying
party is prejudiced in its ability to defend such action. The
indemnification required by this Section 15(e) shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred
9.
<PAGE>
and is due and payable.
v. Notwithstanding any of the foregoing, if, in connection
with an underwritten public offering of Registrable Securities, the Company,
the Selling Holders and the underwriter(s) enter into an underwriting or
purchase agreement relating to such offering which contains provisions
covering indemnification and contribution among the parties, the
indemnification and contribution provisions of this Section 15(e) shall be
deemed inoperative for purposes of such offering.
(g) CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which
it would otherwise be liable under Section 15(e) to the fullest extent
permitted by law; PROVIDED, HOWEVER, that (i) no contribution shall be made
under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 15(e), (ii) no
seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
such fraudulent misrepresentation, and (iii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
(h) REPORTS UNDER EXCHANGE ACT. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 1933
Act or any other similar rule or regulation of the SEC that may at any time
permit the Holders to sell securities of the Company to the public without
registration ("RULE 144"), the Company agrees to:
i. make and keep public information available, as those
terms are understood and defined in Rule 144; and
ii. file with the SEC in a timely manner all reports and
other documents required of the Company under the 1933 Act and the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"); and
iii. furnish to each Holder so long as such Holder owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such
other information as may be reasonably requested to permit the Holders to
sell such securities without registration pursuant to Rule 144.
(i) ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to
have the Company register Registrable Securities pursuant to this Agreement
shall be automatically assigned by the Holders to transferees or assignees of
all or any portion of such securities only if: (i) the Holder agrees in
writing with the transferee or assignee to assign such rights, (ii) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of the name and address of such transferee or
assignee (iii) such assignment is in
10.
<PAGE>
accordance with and permitted by law and all other agreements between the
transferor or assignor and the Company, including without limitation,
stockholder's agreements, warrants and subscription agreements, and the
transferor or assignor otherwise is not in material default of any obligation
to the Company under any such other agreement, and (iv) at or before the time
the Company received the written notice contemplated by clause (ii) of this
sentence the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions contained herein.
(j) TERMINATION OF REGISTRATION RIGHTS. No Holder of
Warrants or Shares shall be entitled to exercise any right provided for in
this Section 15 at such time as such Holder would be able to dispose of all
of its Registrable Securities in any three (3) month period under SEC Rule
144.
16. TRANSFERABILITY.
(a) GENERAL. This Warrant shall be transferable only on the
books of the Company maintained at its principal office in San Jose,
California or wherever its principal office may then be located, upon
delivery thereof duly endorsed by the Holder or by its duly authorized
attorney or representative, accompanied by proper evidence of succession,
assignment or authority to transfer. Upon any registration of transfer, the
Company shall execute and deliver new Warrants to the person entitled thereto.
(b) LIMITATIONS ON TRANSFER. This Warrant shall not be sold,
transferred, assigned or hypothecated by the Holder except to (i) one or more
persons, each of whom on the date of transfer is an officer of the Holder;
(ii) a general partnership or general partnerships, the general partners of
which are the Holder and one or more persons, each of whom on the date of
transfer is an officer of the Holder; (iii) a successor to the Holder in any
merger or consolidation; (iv) a purchaser of all or substantially all of the
Holder's assets; or (v) any person receiving this Warrant from one or more of
the persons listed in this Section 16(b) at such person's or persons' death
pursuant to will, trust or the laws of intestate succession. This Warrant
may be divided or combined, upon request to the Company by the Holder, into a
certificate or certificates representing the right to purchase the same
aggregate number of Shares.
17. MISCELLANEOUS.
(a) CONSTRUCTION. Unless the context indicates otherwise,
the term "Holder" shall include any transferee or transferees of this Warrant
pursuant to Section 16(b), and the term "Warrant" shall include any and all
warrants outstanding pursuant to this Agreement, including those evidenced by
a certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to Section 16(b).
(b) RESTRICTIONS. By receipt of this Warrant, the Holder
makes the same representations with respect to the acquisition of this
Warrant as the Holder is required to make upon the exercise of this Warrant
and acquisition of the Shares purchasable hereunder as set forth in the Form
of Investment Letter attached as Exhibit A to the Notice of Exercise
11.
<PAGE>
attached hereto.
(c) NOTICES. Unless otherwise provided, any notice required
or permitted under this Warrant shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or three
(3) days following deposit with the United States Post Office, by registered
or certified mail, postage prepaid and addressed to the party to be notified
(or one (1) day following timely deposit with a reputable overnight courier
with next day delivery instructions), or upon confirmation of receipt by the
sender of any notice by facsimile transmission, at the address indicated
below or at such other address as such party may designate by ten (10) days'
advance written notice to the other parties.
To Holder: __________________________
__________________________
__________________________
__________________________
To the Company: Integrated Sensor Solutions, Inc.
625 River Oaks Parkway
San Jose, CA 95134
Attention: President
(d) GOVERNING LAW. This Warrant shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
(e) ENTIRE AGREEMENT. This Warrant, the exhibits and
schedules hereto, and the documents referred to herein, constitute the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with
respect to the subject matter hereof.
(f) BINDING EFFECT. This Warrant and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding
upon the Company and its successors and assigns, and Holder and its
successors and assigns.
(g) WAIVER; CONSENT. This Warrant may not be changed,
amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by a writing executed by the
parties hereto, and no waiver of any of the provisions or conditions of this
Warrant or any of the rights of a party hereto shall be effective or binding
unless such waiver shall be in writing and signed by the party claimed to
have given or consented thereto.
(h) SEVERABILITY. If one or more provisions of this Warrant
are held to be unenforceable under applicable law, such provision shall be
excluded from this Warrant and the balance of the Warrant shall be
interpreted as if such provision were so excluded and the balance shall be
enforceable in accordance with its terms.
12.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Common
Stock Warrant effective as of the date hereof.
DATED: _____________, 1998 THE COMPANY:
-----------
Integrated Sensor Solutions, Inc.
By: ___________________________________
Its: ___________________________________
HOLDER:
-------
________________________________________
By: ___________________________________
Its: ___________________________________
13.
<PAGE>
NOTICE OF EXERCISE
------------------
To: INTEGRATED SENSOR SOLUTIONS, INC.
1. The undersigned hereby elects to purchase _____________ shares
of Common Stock ("STOCK") of Integrated Sensor Solutions, Inc., a Delaware
corporation (the "COMPANY") pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price pursuant to the terms of
the Warrant.
2. Attached as Exhibit A is an investment representation letter
addressed to the Company and executed by the undersigned as required by
Section 13 of the Warrant.
3. Please issue certificates representing the shares of Stock
purchased hereunder in the names and in the denominations indicated on
Exhibit A attached hereto.
4. Please issue a new Warrant for the unexercised portion of the
attached Warrant, if any, in the name of the undersigned.
Dated: _______________ _____________________________________________
<PAGE>
NET ISSUANCE ELECTION NOTICE
----------------------------
To: INTEGRATED SENSOR SOLUTIONS, INC. Date:_____________
The undersigned hereby elects under Section 2 of the attached Warrant to
surrender the right to purchase ___________ shares of Common Stock pursuant
to the attached Warrant. The Certificate(s) for the shares issuable upon
such net issuance election shall be issued in the name of the undersigned or
as otherwise indicated below.
___________________________________________
Signature
___________________________________________
Name for Registration
___________________________________________
Mailing Address
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EXHIBIT A
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To: INTEGRATED SENSOR SOLUTIONS, INC.
In connection with the purchase by the undersigned of ___________
shares of the Common Stock (the "STOCK") of Integrated Sensor Solutions,
Inc., a Delaware corporation (the "COMPANY"), upon exercise of that certain
Common Stock Warrant dated as of __________________, 1998, the undersigned
hereby represents and warrants as follows:
1. The shares of Stock to be received by the undersigned upon
exercise of the Warrant are being acquired for its own account, not as a
nominee or agent, and not with a view to resale or distribution of any part
thereof, and the undersigned has no present intention of selling, granting
any participation in, or otherwise distributing the same. The undersigned
further represents that it does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participation to
such person or to any third person, with respect to the Stock. The
undersigned believes it has received all the information it considers
necessary or appropriate for deciding whether to purchase the Stock.
2. The undersigned understands that the shares of Stock are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in transactions not
involving a public offering and that under such laws and applicable
regulations such securities may be resold without registration under the
Securities Act of 1933, as amended (the "ACT"), only in certain limited
circumstances. In this connection, the undersigned represents that it is
familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Act.
3. Without in any way limiting the representations set forth
above, the undersigned agrees not to make any disposition of all or any
portion of the Stock unless and until:
(a) There is then in effect a registration statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) The undersigned shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if requested, the undersigned shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such
disposition will not require registration of such shares under the Act. The
Company will not require an opinion of counsel for sales made pursuant to
Rule 144 except in unusual circumstances.
4. The undersigned understands the instruments evidencing the
Stock may
A-1
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bear the following legend:
THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR THE COMPANY RECEIVES
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
ACT.
Dated: _______________ _____________________________________________
A-2
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INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Integrated Sensor Solutions,
Inc. 1997 Employee Stock Purchase Plan (the "PLAN") is hereby established
effective as of the effective date of the initial registration by the Company
of its Stock under Section 12 of the Securities Exchange Act of 1934, as
amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of Company and its stockholders by providing an incentive to
attract, retain and reward Eligible Employees of the Participating Company
Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group. The Plan provides such
Eligible Employees with an opportunity to acquire a proprietary interest in
the Company through the purchase of Stock. The Company intends that the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments or replacements of such section), and the Plan
shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect
until the earlier of its termination by the Board or the date on which all of
the shares of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the
Plan but defined for purposes of Section 423 of the Code shall have the same
definition herein. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified
by the Board. Unless the powers of the Committee have been specifically
limited, the Committee shall have all of the powers of the Board granted
herein, including, without limitation, the power to amend or terminate the
Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law.
(d) "COMPANY" means Integrated Sensor Solutions, Inc., a
Delaware corporation, or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering
Period, base wages or salary, commissions, overtime, bonuses, annual awards,
other incentive payments, shift premiums, and all other compensation paid in
cash during such Offering Period before deduction for any contributions to
any plan maintained by a Participating Company and described in Section
401(k) or Section 125 of the Code. Compensation shall not include
reimbursements of expenses, allowances, long-term disability, workers'
compensation or any amount deemed received without the actual transfer of
cash or any amounts directly or indirectly paid pursuant to the Plan or any
other stock purchase or stock option plan, or any other compensation not
included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the
Plan.
(g) "EMPLOYEE" means a person treated as an employee of
a Participating Company for purposes of Section 423 of the Code. A
Participant shall be deemed to have ceased to be an Employee either upon an
actual termination of employment or upon the corporation employing the
Participant ceasing to be a Participating Company. For purposes of the Plan,
an individual shall not be deemed to have ceased to be an Employee while such
individual is on any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event an
individual's leave of absence exceeds ninety (90) days, the individual shall
be deemed to have ceased to be an Employee on the ninety-first (91st) day of
such leave unless the individual's right to reemployment with the
Participating Company Group is guaranteed either by statute or by contract.
The Company shall determine in good faith and in the exercise of its
discretion whether an individual has become or has ceased to be an Employee
and the effective date of such individual's employment or termination of
employment, as the case may be. For purposes of an individual's
participation in or other rights, if any, under the Plan as of the time of
the Company's determination, all such determinations by the Company shall be
final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if there
is then a public market for the Stock, the closing price of a share of Stock
(or the mean of the closing bid and asked prices if the Stock is so quoted
instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market
or such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in THE WALL STREET
JOURNAL or such other source as the Company deems reliable. If the relevant
date does not fall on a day on which the Stock has traded on such securities
exchange or market system, the date on which the Fair Market Value shall be
established shall be the last day on which the Stock was so traded prior to
the relevant date, or such other appropriate day as shall be determined by
the Board, in its sole discretion. If there is then no public market for the
Stock, the Fair Market Value on any relevant date shall be as determined by
the Board. Notwithstanding the foregoing, the Fair Market Value per share of
Stock on the Effective Date shall be deemed to be the public offering price
set forth in the final prospectus filed with the Securities and Exchange
Commission in connection with the initial public offering of the Stock.
(i) "OFFERING" means an offering of Stock as provided in
Section 6.
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(j) "OFFERING DATE" means, for any Offering, the first
day of the Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(l) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall
be Participating Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(p) "PURCHASE DATE" means, for any Purchase Period, the
last day of such period.
(q) "PURCHASE PERIOD" means a period established in
accordance with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with
Section 9.
(s) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided
in Section 8, which the Participant may or may not exercise during the
Offering Period in which such option is outstanding. Such option arises from
the right of a Participant to withdraw any accumulated payroll deductions of
the Participant not previously applied to the purchase of Stock under the
Plan and to terminate participation in the Plan at any time during an
Offering Period.
(t) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(u) "SUBSCRIPTION AGREEMENT" means a written agreement
in such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan
from the Employee's Compensation.
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(v) "SUBSCRIPTION DATE" means the last business day
prior to the Offering Date of an Offering Period or such earlier date as the
Company shall establish.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation
of any provision of the Plan. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include
the singular. Use of the term "or" is not intended to be exclusive, unless
the context clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan, of
any form of agreement or other document employed by the Company in the
administration of the Plan, or of any Purchase Right shall be determined by
the Board and shall be final and binding upon all persons having an interest
in the Plan or the Purchase Right. Subject to the provisions of the Plan,
the Board shall determine all of the relevant terms and conditions of
Purchase Rights granted pursuant to the Plan; provided, however, that all
Participants granted Purchase Rights pursuant to the Plan shall have the same
rights and privileges within the meaning of Section 423(b)(5) of the Code.
All expenses incurred in connection with the administration of the Plan shall
be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election that is the
responsibility of or that is allocated to the Company herein, provided that
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY.
The Company may, from time to time, consistent with the Plan and the
requirements of Section 423 of the Code, establish, change or terminate such
rules, guidelines, policies, procedures, limitations, or adjustments as
deemed advisable by the Company, in its sole discretion, for the proper
administration of the Plan, including, without limitation, (a) a minimum
payroll deduction amount required for participation in an Offering, (b) a
limitation on the frequency or number of changes permitted in the rate of
payroll deduction during an Offering, (c) an exchange ratio applicable to
amounts withheld in a currency other than United States dollars, (d) a
payroll deduction greater than or less than the amount designated by a
Participant in order to adjust for the Company's delay or mistake in
processing a Subscription Agreement or in otherwise effecting a Participant's
election under the Plan or as advisable to comply with the requirements of
Section 423 of the Code, and (e) determination of the date and manner by
which the Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan.
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4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to
adjustment as provided in Section 4.2, the maximum aggregate number of shares
of Stock that may be issued under the Plan shall be two hundred fifty
thousand (250,000) and shall consist of authorized but unissued or reacquired
shares of Stock, or any combination thereof. If an outstanding Purchase
Right for any reason expires or is terminated or canceled, the shares of
Stock allocable to the unexercised portion of such Purchase Right shall again
be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In
the event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in the
capital structure of the Company, or in the event of any merger (including a
merger effected for the purpose of changing the Company's domicile), sale of
assets or other reorganization in which the Company is a party, appropriate
adjustments shall be made in the number and class of shares subject to the
Plan and each Purchase Right and in the Purchase Price. If a majority of the
shares which are of the same class as the shares that are subject to
outstanding Purchase Rights are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event) shares of
another corporation (the "NEW SHARES"), the Board may unilaterally amend the
outstanding Purchase Rights to provide that such Purchase Rights are
exercisable for New Shares. In the event of any such amendment, the number
of shares subject to, and the Purchase Price of, the outstanding Purchase
Rights shall be adjusted in a fair and equitable manner, as determined by the
Board, in its sole discretion. Notwithstanding the foregoing, any fractional
share resulting from an adjustment pursuant to this Section 4.2 shall be
rounded down to the nearest whole number, and in no event may the Purchase
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of
a Participating Company is eligible to participate in the Plan and shall be
deemed an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding
any provision of the Plan to the contrary, no Employee shall be granted a
Purchase Right under the Plan if, immediately after such grant, such Employee
would own or hold options to purchase stock of the Company or of any Parent
Corporation or Subsidiary Corporation possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of such
corporation, as determined in accordance with Section 423(b)(3) of the Code.
For purposes of this Section 5.2,
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the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth
below, the Plan shall be implemented by sequential Offerings of approximately
twenty-four (24) months duration (an "OFFERING PERIOD"); provided, however,
that the first Offering Period shall commence on the Effective Date and end
on April 30, 2000 (the "INITIAL OFFERING PERIOD"). Subsequent Offerings
shall commence on the first day of May and November of each year and end on
the last day of the second April and October, respectively, occurring
thereafter. Notwithstanding the foregoing, the Board may establish a
different duration for one or more future Offering Periods or different
commencing or ending dates for such Offering Periods; provided, however, that
no Offering Period may have a duration exceeding twenty-seven (27) months.
If the first or last day of an Offering Period is not a day on which the
national securities exchanges or Nasdaq Stock Market are open for trading,
the Company shall specify the trading day that will be deemed the first or
last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall
consist of four (4) consecutive Purchase Periods of approximately six (6)
months duration, or such other number or duration as the Board shall
determine. The Purchase Period commencing on the Offering Date of the
Initial Offering Period shall end on October 31, 1998. A Purchase Period
commencing on or about May 1 shall end on or about the next October 31. A
Purchase Period commencing on or about November 1 shall end on or about the
next April 30. Notwithstanding the foregoing, the Board may establish a
different duration for one or more future Purchase Periods or different
commencing or ending dates for such Purchase Periods. If the first or last
day of a Purchase Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall
specify the trading day that will be deemed the first or last day, as the
case may be, of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may
become a Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not
deliver a properly completed Subscription Agreement to the Company's
designated office on or before the Subscription Date for an Offering Period
shall not participate in the Plan for that Offering Period or for any
subsequent Offering Period unless such Eligible Employee subsequently
delivers a properly completed Subscription Agreement to the appropriate
office of the Company on or before the Subscription Date for such subsequent
Offering Period. An Employee who becomes an Eligible Employee after the
Offering Date of an Offering Period shall not be eligible to participate in
such Offering Period but may participate in any subsequent Offering Period
provided such Employee is still an Eligible Employee as of the Offering Date
of such subsequent Offering Period.
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7.2 CONTINUED PARTICIPATION. A Participant shall
automatically participate in the next Offering Period commencing immediately
after the final Purchase Date of each Offering Period in which the
Participant participates provided that such Participant remains an Eligible
Employee on the Offering Date of the new Offering Period and has not either
(a) withdrawn from the Plan pursuant to Section 12.1 or (b) terminated
employment as provided in Section 13. A Participant who may automatically
participate in a subsequent Offering Period, as provided in this Section, is
not required to deliver any additional Subscription Agreement for the
subsequent Offering Period in order to continue participation in the Plan.
However, a Participant may deliver a new Subscription Agreement for a
subsequent Offering Period in accordance with the procedures set forth in
Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
Eligible Employees may not participate simultaneously in more than one
Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below,
on the Offering Date of each Offering Period, each Participant in such
Offering Period shall be granted automatically a Purchase Right consisting of
an option to purchase the lesser of (a) that number of whole shares of Stock
determined by dividing Fifty Thousand Dollars ($50,000) by the Fair Market
Value of a share of Stock on such Offering Date or (b) five thousand (5,000)
shares of Stock. No Purchase Right shall be granted on an Offering Date to
any person who is not, on such Offering Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT.
Notwithstanding the provisions of Section 8.1, if the Board establishes an
Offering Period of any duration other than twenty-four months, then (a) the
dollar amount in Section 8.1 shall be determined by multiplying $2,083.33 by
the number of months (rounded to the nearest whole month) in the Offering
Period and rounding to the nearest whole dollar, and (b) the share amount in
Section 8.1 shall be determined by multiplying 208.33 shares by the number of
months (rounded to the nearest whole month) in the Offering Period and
rounding to the nearest whole share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding
any provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock
under the Plan to accrue at a rate which, when aggregated with such
Participant's rights to purchase shares under all other employee stock
purchase plans of a Participating Company intended to meet the requirements
of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars ($25,000) in
Fair Market Value (or such other limit, if any, as may be imposed by the
Code) for each calendar year in which such Purchase Right is outstanding at
any time. For purposes of the preceding sentence, the Fair Market Value of
shares purchased during a given Offering Period shall be determined as of the
Offering Date for such Offering Period. The limitation described in this
Section 8.3 shall be applied in conformance with applicable regulations under
Section 423(b)(8) of the Code.
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9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired in
an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price shall not be less than eighty-five percent (85%) of the lesser of (a)
the Fair Market Value of a share of Stock on the Offering Date of the
Offering Period or (b) the Fair Market Value of a share of Stock on the
Purchase Date. Unless otherwise provided by the Board prior to the
commencement of an Offering Period, the Purchase Price for that Offering
Period shall be eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period,
or (b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the
Offering Period for which such Purchase Right was granted, subject to the
following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise
provided herein, the amount to be deducted under the Plan from a
Participant's Compensation on each payday during an Offering Period shall be
determined by the Participant's Subscription Agreement. The Subscription
Agreement shall set forth the percentage of the Participant's Compensation to
be deducted on each payday during an Offering Period in whole percentages of
not less than one percent (1%) (except as a result of an election pursuant to
Section 10.3 to stop payroll deductions made effective following the first
payday during an Offering) or more than ten percent (10%). Notwithstanding
the foregoing, the Board may change the limits on payroll deductions
effective as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll
deductions shall commence on the first payday following the Offering Date and
shall continue to the end of the Offering Period unless sooner altered or
terminated as provided herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS.
During an Offering Period, a Participant may elect to increase or decrease
the rate of or to stop deductions from his or her Compensation by delivering
to the Company's designated office an amended Subscription Agreement
authorizing such change on or before the "Change Notice Date." The "CHANGE
NOTICE DATE" shall be a date prior to the beginning of the first pay period
for which such election is to be effective as established by the Company from
time to time and announced to the Participants. A Participant who elects to
decrease the rate of his or her payroll deductions to zero percent (0%) shall
nevertheless remain a Participant in the current Offering Period unless such
Participant withdraws from the Plan as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS.
The Company may, in its sole discretion, suspend a Participant's payroll
deductions under the Plan as the Company deems advisable to avoid
accumulating payroll deductions in excess of the amount that could
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reasonably be anticipated to purchase the maximum number of shares of Stock
permitted during a calendar year under the limit set forth in Section 8.3.
Payroll deductions shall be resumed at the rate specified in the
Participant's then effective Subscription Agreement at the beginning of the
next Purchase Period the Purchase Date of which falls in the following
calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping
accounts shall be maintained for each Participant. All payroll deductions
from a Participant's Compensation shall be credited to such Participant's
Plan account and shall be deposited with the general funds of the Company.
All payroll deductions received or held by the Company may be used by the
Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on
sums deducted from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A
Participant may withdraw all or any portion of the payroll deductions
credited to his or her Plan account and not previously applied toward the
purchase of Stock by delivering to the Company's designated office a written
notice on a form provided by the Company for such purpose. A Participant who
withdraws the entire remaining balance credited to his or her Plan account
shall be deemed to have withdrawn from the Plan in accordance with Section
12.1. Amounts withdrawn shall be returned to the Participant as soon as
practicable after the withdrawal and may not be applied to the purchase of
shares in any Offering under the Plan. The Company may from time to time
establish or change limitations on the frequency of withdrawals permitted
under this Section, establish a minimum dollar amount that must be retained
in the Participant's Plan account, or terminate the withdrawal right provided
by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date
of an Offering Period, each Participant who has not withdrawn from the Plan
and whose participation in the Offering has not terminated before such
Purchase Date shall automatically acquire pursuant to the exercise of the
Participant's Purchase Right the number of whole shares of Stock determined
by dividing (a) the total amount of the Participant's payroll deductions
accumulated in the Participant's Plan account during the Offering Period and
not previously applied toward the purchase of Stock by (b) the Purchase
Price. However, in no event shall the number of shares purchased by the
Participant during an Offering Period exceed the number of shares subject to
the Participant's Purchase Right. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering
or the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that
the number of shares of Stock which might be purchased by all Participants in
the Plan on a Purchase Date exceeds the number of shares of Stock available
in the Plan as provided in Section 4.1, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable. Any
fractional share resulting from such pro rata allocation to any Participant
shall be disregarded.
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11.3 DELIVERY OF CERTIFICATES. As soon as practicable
after each Purchase Date, the Company shall arrange the delivery to each
Participant, as appropriate, of a certificate representing the shares
acquired by the Participant on such Purchase Date; provided that the Company
may deliver such shares to a broker that holds such shares in street name for
the benefit of the Participant. Shares to be delivered to a Participant
under the Plan shall be registered in the name of the Participant, or, if
requested by the Participant, in the name of the Participant and his or her
spouse, or, if applicable, in the names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining
in a Participant's Plan account following any Purchase Date shall be refunded
to the Participant as soon as practicable after such Purchase Date. However,
if the cash to be returned to a Participant pursuant to the preceding
sentence is an amount less than the amount that would have been necessary to
purchase an additional whole share of Stock on such Purchase Date, the
Company may retain such amount in the Participant's Plan account to be
applied toward the purchase of shares of Stock in the subsequent Purchase
Period or Offering Period, as the case may be.
11.5 TAX WITHHOLDING. At the time a Participant's
Purchase Right is exercised, in whole or in part, or at the time a
Participant disposes of some or all of the shares of Stock he or she acquires
under the Plan, the Participant shall make adequate provision for the
foreign, federal, state and local tax withholding obligations of the
Participating Company Group, if any, which arise upon exercise of the
Purchase Right or upon such disposition of shares, respectively. The
Participating Company Group may, but shall not be obligated to, withhold from
the Participant's compensation the amount necessary to meet such withholding
obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the
Offering Period to which the Purchase Right relates shall expire immediately
upon the end of the Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has
exercised all or part of his or her Purchase Right shall receive, as soon as
practicable after the Purchase Date, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated prior to such
exercise, the number of shares of Stock purchased, the Purchase Price for
such shares, the date of purchase and the cash balance, if any, remaining
immediately after such purchase that is to be refunded or retained in the
Participant's Plan account pursuant to Section 11.4. The report required by
this Section may be delivered in such form and by such means, including by
electronic transmission, as the Company may determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant
may withdraw from the Plan by signing and delivering to the Company's
designated office a written notice of withdrawal on a form provided by the
Company for such purpose. Such withdrawal may be elected at any time prior to
the end of an Offering Period; provided, however, that if a Participant
withdraws from the Plan after the Purchase Date of a Purchase Period, the
withdrawal shall not affect shares of Stock acquired by the Participant on
such Purchase Date. A Participant who
10
<PAGE>
voluntarily withdraws from the Plan is prohibited from resuming participation
in the Plan in the same Offering from which he or she withdrew, but may
participate in any subsequent Offering by again satisfying the requirements
of Sections 5 and 7.1. The Company may impose, from time to time, a
requirement that the notice of withdrawal from the Plan be on file with the
Company's designated office for a reasonable period prior to the
effectiveness of the Participant's withdrawal.
12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair
Market Value of a share of Stock on a Purchase Date of an Offering Period
(other than the final Purchase Date of such offering) is less than the Fair
Market Value of a share of Stock on the Offering Date for such Offering
Period, then every Participant shall automatically be (a) withdrawn from such
Offering Period after the acquisition of shares of Stock on the Purchase Date
and (b) enrolled in the new Offering Period effective on its Offering Date.
A Participant may elect not to be automatically withdrawn from an Offering
Period pursuant to this Section 12.2 by delivering to the Company's
designated office not later than the close of business on Offering Date new
Offering Period a written notice indicating such election.
12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Sections 12.1 or automatic
withdrawal from an Offering pursuant to Section 12.2, the Participant's
accumulated payroll deductions which have not been applied toward the
purchase of shares of Stock (except, in the case of an automatic withdrawal
pursuant to Section 12.2, for an amount necessary to purchase an additional
whole share as provided in Section 11.4) shall be refunded to the Participant
as soon as practicable after the withdrawal, without the payment of any
interest, and the Participant's interest in the Plan or the Offering, as
applicable, shall terminate. Such accumulated payroll deductions to be
refunded in accordance with this Section may not be applied to any other
Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be
an Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's legal representative, and all of
the Participant's rights under the Plan shall terminate. Interest shall not
be paid on sums returned pursuant to this Section 13. A Participant whose
participation has been so terminated may again become eligible to participate
in the Plan by again satisfying the requirements of Sections 5 and 7.1.
11
<PAGE>
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be
deemed to have occurred if any of the following occurs with respect to the
Company: (i) the direct or indirect sale or exchange in a single or series of
related transactions by the stockholders of the Company of more than fifty
percent (50%) of the voting stock of the Company; (ii) a merger or
consolidation in which the Company is a party; (iii) the sale, exchange, or
transfer of all or substantially all of the assets of the Company; or (iv) a
liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "TRANSACTION") wherein the stockholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of
shares of the Company's voting stock immediately before the Transaction,
direct or indirect beneficial ownership of more than fifty percent (50%) of
the total combined voting power of the outstanding voting stock of the
Company or the corporation or corporations to which the assets of the Company
were transferred (the "TRANSFEREE CORPORATION(s)"), as the case may be. For
purposes of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of the
voting stock of one or more corporations which, as a result of the
Transaction, own the Company or the Transferee Corporation(s), as the case
may be, either directly or through one or more subsidiary corporations. The
Board shall have the right to determine whether multiple sales or exchanges
of the voting stock of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In
the event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may assume the Company's rights and obligations
under the Plan. If the Acquiring Corporation elects not to assume the
Company's rights and obligations under outstanding Purchase Rights, the
Purchase Date of the then current Purchase Period shall be accelerated to a
date before the date of the Change in Control specified by the Board, but the
number of shares of Stock subject to outstanding Purchase Rights shall not be
adjusted. All Purchase Rights which are neither assumed by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control shall terminate and cease to be outstanding
effective as of the date of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner
otherwise than by will or the laws of descent and distribution and shall be
exercisable during the lifetime of the Participant only by the Participant.
12
<PAGE>
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or
regulations or the requirements of any securities exchange or market system
upon which the Stock may then be listed. In addition, no Purchase Right may
be exercised unless (a) a registration statement under the Securities Act of
1933, as amended, shall at the time of exercise of the Purchase Right be in
effect with respect to the shares issuable upon exercise of the Purchase
Right, or (b) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Purchase Right may be issued in accordance with
the terms of an applicable exemption from the registration requirements of
said Act. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal
counsel to be necessary to the lawful issuance and sale of any shares under
the Plan shall relieve the Company of any liability in respect of the failure
to issue or sell such shares as to which such requisite authority shall not
have been obtained. As a condition to the exercise of a Purchase Right, the
Company may require the Participant to satisfy any qualifications that may be
necessary or appropriate, to evidence compliance with any applicable law or
regulation, and to make any representation or warranty with respect thereto
as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue
of the Participant's participation in the Plan until the date of the issuance
of a certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company).
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 4.2. Nothing herein shall confer upon a Participant
any right to continue in the employ of the Participating Company Group or
interfere in any way with any right of the Participating Company Group to
terminate the Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present
to the Company any and all certificates representing shares acquired pursuant
to a Purchase Right in the possession of the Participant in order to carry
out the provisions of this Section. Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:
13
<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES
EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF
THE SHARES BY THE REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD
ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT
IN THE NAME OF ANY NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right within two years from the date of granting such Purchase Right or one
year from the date of exercise of such Purchase Right. The Company may
require that until such time as a Participant disposes of shares acquired
upon exercise of a Purchase Right, the Participant shall hold all such shares
in the Participant's name (or, if elected by the Participant, in the name of
the Participant and his or her spouse but not in the name of any nominee)
until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding sentence. The Company may direct that the
certificates evidencing shares acquired by exercise of a Purchase Right refer
to such requirement to give prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the
location, or by the person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they
may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or
employees of the Participating Company Group to whom authority to act for the
Board or the Company is delegated shall be indemnified by the Company against
all reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan, or any right granted hereunder, and against all amounts paid
by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60)
days after the institution of such action, suit or
14
<PAGE>
proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, except as permitted under the Plan, and (b) no amendment may
adversely affect a Purchase Right previously granted under the Plan (except
to the extent permitted by the Plan or as may be necessary to qualify the
Plan as an employee stock purchase plan pursuant to Section 423 of the Code
or to obtain qualification or registration of the shares of Stock under
applicable federal, state or foreign securities laws). In addition, an
amendment to the Plan must be approved by the stockholders of the Company
within twelve (12) months of the adoption of such amendment if such amendment
would authorize the sale of more shares than are authorized for issuance
under the Plan or would change the definition of the corporations that may be
designated by the Board as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing Integrated Sensor Solutions, Inc. 1997 Employee
Stock Purchase Plan was duly adopted by the Board of Directors of the Company
on August 8, 1997.
/s/ David Satterfield
-----------------------------------
Secretary
15
<PAGE>
PLAN HISTORY
------------
August 8, 1997 Board adopts the Plan, with an initial reserve of 250,000
shares.
October 14, 1997 Stockholders approve Plan, with an initial reserve of
250,000 shares.
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
// Original Application for the Offering Period beginning ____________, 199__.
// Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan
(the "PLAN") of Integrated Sensor Solutions, Inc. (the "COMPANY") and
subscribe to purchase shares of the Company's Stock in accordance with this
Subscription Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________ percent
(in whole percentages not less than 1% (unless an election to stop deductions
is being made) or more than 10%) of my "COMPENSATION" on each payday
throughout the "OFFERING PERIOD" in accordance with the Plan. I understand
that these payroll deductions will be accumulated for the purchase of shares
of Stock at the applicable purchase price determined in accordance with the
Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in
which I am participating until I withdraw from the Plan by giving written
notice on a form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S): ________________________________________________________________
ADDRESS: ________________________________________________________________
MY SOCIAL SECURITY NUMBER: _______________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase
of shares under the Plan and/or my disposition of such shares. The Company
may, but will not be obligated to, withhold from my compensation the amount
necessary to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose
of the shares I purchased under the Plan, I will hold such shares in the
name(s) entered above (and not in the name of any nominee) for at least two
years from the first day of the Offering Period in which, and at least one
year from the Purchase Date on which, I acquired such shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING
PARAGRAPH (A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE
PLAN. I FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF
A DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE
COMPANY MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A
DISQUALIFYING DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE
SERVICE THE ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING
DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided
by the Plan. I understand that the effectiveness of this Subscription
Agreement is dependent upon my eligibility to participate in the Plan.
Date: _______________________ Signature:__________________________________
<PAGE>
INTEGRATED SENSOR SOLUTIONS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): __________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under Integrated Sensor
Solutions, Inc. 1997 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating
(the "CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
/ / A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if any)
not previously used to purchase shares under the Plan shall NOT be
used to purchase shares on the next Purchase Date of the Current
Offering. Instead, I request that all such amounts be paid to me
as soon as practicable. I understand that this election
immediately terminates my interest in the Current Offering and in
the Plan.
/ / B. I elect to terminate my participation in the Current Offering and
in the Plan following my purchase of shares on next Purchase Date
of the Current Offering.
I request that the Company cease all further payroll deductions
from my Compensation under the Plan (provided that I have given
sufficient notice prior to the next payday). I request that all
payroll deductions credited to my account under the Plan (if any)
not previously used to purchase shares under the Plan shall be used
to purchase shares on the next Purchase Date of the Current
Offering to the extent permitted by the Plan. I understand that
this election will terminate my interest in the Current Offering
and in the Plan immediately following such purchase. I request
that any cash balance remaining in my account under the Plan after
my purchase of shares be paid to me as soon as practicable.
I understand that by making this election I am terminating my interest
in the Plan and that no further payroll deductions will be made (provided
that I have given sufficient notice prior to the next payday) unless I elect
in accordance with the Plan to become a participant in another Offering under
the Plan by filing a new Subscription Agreement with the Company.
Date:_______________________ Signature:____________________________________
<PAGE>
"[ ]" INDICATES THAT
THE CONFIDENTIAL
SUPPLY AGREEMENT PORTION HAS BEEN
OMITTED AND FILED
BETWEEN SEPARATELY WITH
THE COMMISSION
ISS-NAGANO GmbH,
GRENZSTR. 28
01109 DRESDEN
- HEREINAFTER CALLED "ISS" -
AND
ROBERT BOSCH GmbH
POSTFACH 10 60 50
70049 STUTTGART
- HEREINAFTER CALLED "BOSCH" -
WHEREAS Bosch is currently developing a new Common Rail Diesel Injection System
which shall be introduced into the market in 1996;
WHEREAS this new Injection System uses a high pressure sensor to measure and
control the system pressure;
WHEREAS ISS Inc., San Jose, USA - hereinafter called "ISS Inc." through its
strategic alliance with Nagano Keiki Seisakusho Ltd., Otaku, Japan - hereinafter
called "Nagano" - has developed such high pressure sensor elements which are
currently produced for automotive and industrial applications also by ISS;
WHEREAS ISS and Bosch entered into a Development Agreement on May 18, 1995 for
the development, mass production, application and test of a high pressure sensor
for these new Common Rail Diesel Fuel Injection Systems on the basis of the
existing ISS XKP- and HVP-product family;
WHEREAS ISS is prepared to manufacture for and to supply to Bosch such newly
developed high pressure sensors;
WHEREAS Bosch is willing to purchase such sensors from ISS;
<PAGE>
NOW, therefore in consideration of the mutual agreements herein contained it is
agreed by and between ISS and Bosch as follows:
1. DEFINITIONS
As used in this Agreement the following terms shall have the meanings set
forth below:
(i) "CR" means the new Common Rail Diesel Injection System currently
developed by Bosch.
(ii) "PRODUCTS" means high pressure sensors for CR as described in the
drawing (with the components as specified therein) and in the detailed
technical and performance specifications attached hereto as
APPENDIX 1, including its improvements and/or design changes as
specified in Section 1.l of the Development Agreement ((iii) below).
(iii)"DEVELOPMENT AGREEMENT" means the Development Agreement between ISS
and Bosch of May 18, 1995.
2. GENERAL RULES
This Agreements sets forth the general terms and conditions of the sale by
ISS and the purchase by Bosch of the Products and shall apply to all such
purchases and sales.
3. SUBJECT MATTER
3.1 During the term of this agreement ISS, using the best of its design and
manufacturing knowledge, will design and manufacture Products in
accordance with the specifications and the quality standards as attached
in APPENDIX 1 and referred to in SECTION 5 and will sell and ship the
Products as will be ordered from time to time by Bosch. ISS has the
right to propose and will propose to Bosch process or component
modifications which, to the best of ISS knowledge, will improve the
efficiency, quality or yield of the manufacturing process. Bosch will
examine such proposal and, within reasonable amount of time, will have
the right to either accept or refuse them. Once accepted by Bosch in
writing, the modification will become integral part of the Products.
3.2 ISS will manufacture and supply the Products in accordance with Bosch's
requirements as set out in SECTION 3.1 above and will make design and
styling changes as mutually agreed upon in writing.
3.3 If so required by Bosch, ISS shall place or affix trademarks and/or
tradenames of Bosch or its customers on the Products and their packaging
in the design and at the location as designated by Bosch to ISS.
2
<PAGE>
ISS agrees not to sell or otherwise dispose of such marked Products to
any person other than Bosch or designated by Bosch. Any necessary
tooling charges for affixing trademarks on the Products based on Bosch
specification will be borne by Bosch, and such toolings will become the
property of Bosch.
4. MARKETING
During the term of this Agreement, ISS shall manufacture and supply the
Products, which form the result of the common development work by the
parties to Bosch only as set out in the Development Agreement.
Competitive conditions (price, quality, meeting of delivery deadlines,
technical performance etc.) provided, RB is willing to procure its
demand of the Products but at least a part of its demand with ISS, for a
period ending at least December 31st, 1999.
APPENDIX 2 shows the expected yearly demand until December 31st, 1999.
The figures quoted in APPENDIX 2 constitute a non-binding forecast based
on the best knowledge of Bosch; they do not represent binding orders.
Due to circumstances beyond the control of Bosch the volumes may
decrease.
5. QUALITY
Bosch and ISS shall cooperate closely to ensure that the Products
conform with the specifications and satisfy the quality standards as
hereinafter. Accordingly, ISS will design the Products, buy the
components and produce and ship the Products in accordance with the
quality management system requirements and specifications of the Bosch
Quality Assurance Guide for Suppliers (APPENDIX 3). ISS intends to
comply with ISO 9000 quality principles at a later date. ISS,
particularly, will use a documentation and traceability system capable
to determine the manufacturing conditions under which the Products have
been produced. In case of rejects of Products due to their
nonconformity to Bosch specification ISS will, notwithstanding the
respective warranty provisions, provide Bosch upon request a
manufacturing report stating the results of the quality controls and the
root causes and the corrective actions to be taken.
ISS agrees to allow Bosch on request to inspect quality control and
production activities of ISS associated with the design and production
of said Products. Such information shall be deemed confidential.
6. PRODUCT LIABILITY
6.1 ISS shall bear the product liability risk and undertakes to hold Bosch
harmless against product liability claims by third parties, unless Bosch
on its own responsibility issues instructions which have not been agreed
upon with ISS. If such an instruction is a contributing factor to
damages arising in connection with product liability, the legal
provisions apply.
3
<PAGE>
6.2 ISS is obliged to take all measures necessary with regard to product
liability, particularly with regard to faultless design, manufacture,
instructions and after sales product observation, and to keep Bosch
continuously informed regarding these measures and any changes made
thereto. Bosch is entitled to check these measures to the extent
necessary in each case.
6.3 In case of defects in the Products which may necessitate a recall
campaign, Bosch shall keep ISS at all times fully informed about all
relevant facts and both parties shall negotiate and determine in good
faith the actions to be taken. It is understood that Bosch shall have
the ultimate decision as to the necessity of a recall campaign. ISS
shall negotiate a fair and mutually acceptable reimbursement of Bosch's
recall expenses, based on the principle that the reimbursement shall be
Proportional to the degree of ISS's responsibility.
6.4 ISS shall subscribe for a General Liability Insurance, including a
Product Liability Insurance and recall coverage with a limit of
liability of 5 million DM each and shall provide evidence thereof to
Bosch. ISS shall inform its insurance company expressly that ISS is
supplier to the Automotive Industry.
7. PRICES AND TERMS
7.1 Prices and delivery terms shall be set out in annual agreements
effective for a calendar year, taking into account the price projection
as per ANNEX 4.
7.2 If necessary, the parties will negotiate in good faith price adjustments
at least 3 months before a new annual agreement comes into force. In
case the parties cannot agree on a price adjustment, the prices of the
previous annual agreement shall remain in force.
8. HANDLING BOSCH DEPARTMENT
Price agreements HoW Purchasing Dept. (HoW/EKF)
Calls by HoW Material Planning Dept.
(HoW1/ALP)
Shipment to Robert Bosch GmbH
Homburg Plant
Bexbacher Strasse 72
66424 Homburg/Saar
Invoices to HoW Controlling Accounting Dept.
(HoW/WIR)
Coordination HoW/EKF
Quality assurance HoW1/QSG5
4
<PAGE>
9. DELIVERY
9.1 Orders for quantities of Products will be made by schedules consisting
usually of fixed orders and non-binding order forecasts. In order to
organize the manufacturing of Products, Bosch grants to ISS a production
and material release for a defined period of time to be mutually agreed
upon by both parties. The fixed orders and the production and material
releases shall constitute binding commitments upon ISS to manufacture,
sell and ship the Products within the specified schedule in accordance
to this Agreement.
If Bosch's demand for the products reduces completely or to a
significant extent due to circumstances beyond the control of Bosch and
if ISS has committed to commercially reasonable quantities of material
for the production of the products covered by Bosch's fixed orders and
production and material releases, Bosch shall reimburse ISS the cost for
such appropriately ordered material upon evidence, provided, however,
such materials cannot be cancelled or rescheduled subsequent to the
receipt of an abrupt reduction or cancellation of orders by Bosch which
do not originate from a defect in the products.
Title to these goods shall pass to Bosch subsequently to such
reimbursement.
9.2 Supply Assurance:
In order to guarantee a steady and punctual supply of the Products ISS
agrees to keep a minimum stock of Products at ISS's expense. The volume
of products in this minimum stock shall cover Bosch's demand for the
Products in one month and the volume of components in this minimum stock
shall cover Bosch's demand in one month, especially for the
sensor-subassembly, the printed circuit board and the connector. The
calculation of such minimum volumes stock shall be based on the figures
as stated in SECTION 9.1 above.
Following termination of this Agreement Bosch will be entitled to
purchase the pressure sensor-subassembly, the ASIC, the connector and
the sensor element itself for Bosch's own CR application from ISS at
fair market prices.
10. INSPECTION PRIOR TO DELIVERY
10.1 Prior to delivery all Products shall be tested and inspected by ISS at
ISS's factory so as to ensure that the Products are in accordance with
the specifications.
10.2 Bosch reserves the right to inspect at its own expense all Products at
ISS's factory before delivery. Bosch will provide sufficient notice
prior to any inspection.
11. INCOMING INSPECTION
As soon as this is feasible in the normal course of business, Bosch
shall conduct an incoming spot-check inspection of the Products. Bosch
will give notice of any failings
5
<PAGE>
immediately on discovery; to this extent the supplier waives the rights
to object those complaints as being late.
If due to defects or failures a 100% inspection is necessary, ISS shall
bear the costs. If defects can be narrowed to specific lots this will
cover those lots only.
12. WARRANTY
12.1 ISS hereby warrants that the Products to be delivered and sold hereunder
will meet the agreed specifications and quality standards and will be
merchantable and free from defects in material and workmanship.
12.2 If the Products are found to be defective during the warranty period,
Bosch may at its option ask ISS for replacement of such products free of
all charges and shipping costs to Bosch, or to the enterprises of its
service organization, or may ask for refund of the purchase price. In
case defectiveness will be discovered during or after installation of
the Product in Bosch's products, ISS will bear the costs Bosch incurs
for discovering the defect or for repairing the Bosch product.
12.3 If, on the basis of provisions of law and/or contractual agreements with
its customers or with enterprises of its service network, Bosch is
required to pay incidental expenses such as, for instance, transport
charges, cost of materials, cost of labour, ISS will also bear those
costs. However, if such incidental expenses, taken as a whole, would
operate to threaten the existence of ISS, then Bosch and ISS will
negotiate in good faith a fair and reasonable amount ISS has to pay for
such incidental costs.
12.4 The warranty period is 36 months following the first registration of the
vehicle equipped with the Bosch CR System containing the Product.
13. MACHINERY AND EQUIPMENT
Bosch agrees to purchase from ISS and ISS agrees to sell to Bosch its
machinery and equipment used for production of the HVP-Version of the
Products. Such machinery and equipment as well as the purchase
consideration therefor not exceeding 2.4 million USD and payable in
installments will be specified and agreed upon separately. Title to
those machinery and equipment shall pass to Bosch in proportion to the
purchase consideration actually paid. Bosch offers to attend the
installation of the machinery and equipment and to provide appropriate
inputs; however, ISS has the final responsibility to assure the Products
meet the agreed quality requirements. Bosch will make such machinery
and equipment available to ISS on the basis of a contract of loan as set
out in APPENDIX 5. Notwithstanding other provisions of such loan
contract, ISS shall be entitled to manufacture high pressure sensors for
non-CR use on such machinery and equipment. Prior to any such
production with reference to the utilization of capacity for non-CR
applications, ISS has to get RB's written consent, such consent not to
be withheld if any
6
<PAGE>
such production will cover surplus capacity of the machinery and
equipment not needed for any production for Bosch.
Bosch hereby grants to ISS the option to purchase such machinery and
equipment on December 31st, 1999 at a purchase price equivalent to the
book value of the machinery and equipment (according to linear
depreciation ending five years after complete installation of such
machinery and equipment) at that date. Notice to exercise such option
shall be given until December 31st, 1998.
In case ISS does not exercise its option, Bosch is prepared to reimburse
to ISS engineering costs related to such machines and equipment at an
amount equal to the depreciated value of an initial amount of 400,000
USD on December 31st, 1999; depreciation method: linear; depreciation
period: five years, starting with complete installation of such
machinery and equipment.
14. PROPRIETARY RIGHTS
14.1 If the Products are used as stipulated, ISS is liable for claims arising
as a result of the infringement of proprietary rights, applications for
proprietary rights and/or of copyrights (proprietary rights). ISS shall
hold Bosch and the parties purchasing from Bosch harmless against all
claims arising from the use of such proprietary rights. This shall not
apply if ISS has manufactured the Products on the basis of drawings,
models or other comparable descriptions provided by Bosch and did not
know or was not bound to know that proprietary rights were infringed as
a result.
14.2 Both parties to this Agreement undertake to inform each other without
delay of risks of infringement and alleged cases of infringement which
became known to them.
14.3 If required by Bosch, ISS will inform Bosch concerning the use of
published or unpublished proprietary rights held by ISS, as well as of
applications for such proprietary rights and of licenses issued for
proprietary rights related to the Contract Products.
15. FORCE MAJEURE
If any Party to this Agreement cannot perform its obligations out of
this Agreement because of an event of Force Majeure, it shall notify the
other Party in writing within undue delay about the occurrence of such
an event and provide accurate supporting evidence thereof.
Force Majeure shall mean any of the following:
Earthquake, storm, flood, fire or other acts of nature, epidemic, war,
riot, public disturbance, strike or lock-out, government actions or
other events beyond the control of the Parties and where their
occurrence is unpreventable and unavoidable.
7
<PAGE>
If an event of Force Majeure occurs, neither Party may be responsible
for any damage, incurred cost or losses which the other Party may
sustain by reason of such failure or delay of performance. The Party
claiming Force Majeure shall adopt measures to minimize or remove the
effects of Force Majeure and within the shortest possible time attempt
to resume the performance of obligations affected by the event of Force
Majeure. If the consequences of such an event cannot be remedied within
ninety days from the occurrence, both Parties shall through
consultations decide whether to modify or terminate the Agreement
according to the effects of the event of Force Majeure on the
performance of this Agreement.
16. TERM OF AGREEMENT/TERMINATION
16.1 This Agreement comes into force upon signature by both parties and is
concluded for an indefinite period of time. It may be terminated at the
end of a calendar year, observing a period of written notice of six
months; however, such ordinary termination is not possible before
December 31st, 1999.
16.2 Bosch is entitled to terminate this Agreement at any time without
observing a notice period, if the requirements of Bosch for the Products
decrease substantially due to reasons beyond the control of Bosch or if
the Development Agreement is terminated prematurely.
16.3 The right to terminate this Agreement for extraordinary reasons without
complying with the period of notice as a result of a serious breach of
duty by one of the parties remains unaffected. The overrun of delivery
deadlines by more than 2 months shall be regarded as a serious breach of
duty.
16.4 Regardless of the reason for the termination of this Agreement, all
outstanding credits and liabilities resulting from previous orders
accepted prior to the date of termination shall continue to remain in
force.
17. CONFIDENTIALITY
17.1 Either party shall keep strictly confidential and secret towards third
parties the existence of this Agreement, related working results arising
from this Agreement as well as technical and commercial information
obtained from the other party under this Agreement as long and as far as
this information is not in the public domain or unless the disclosing
party waived further secrecy in writing. This obligation of
confidentiality terminates five years after expiration of this Agreement.
17.2 ISS Inc. and Nagano, to the extent they have a need to know information
arising from this Agreement as well as technical or commercial
information received from RB for the purposes set forth above, shall not
be deemed third parties provided they abide by the obligations of this
Agreement. Insofar, ISS shall be fully responsible to ensure that the
obligations of this Agreement are respected by ISS Inc. and Nagano.
8
<PAGE>
17.3 Neither party hereto may, without the prior written consent of the other
party, disclose or publish the name of the other party or the contents
of this Agreement in any advertisement, publicity release or the like.
18. MISCELLANEOUS
18.1 All prior negotiations between the parties are merged in this Agreement.
This Agreement including all its annexes constitutes the entire
agreement between the parties with respect to the subject matter hereof,
and there are no understandings, representations or warranties of any
kind except as expressly set forth therein, notwithstanding sections 4.2
to 4.4 of the Development Agreement.
18.2 Changes and additions to this Agreement - including this Article 18 as
well as any additional agreement must be made in writing in order to
become legally effective.
18.3 If one of the provisions of this Agreement becomes invalid, this shall
not affect the contract's remaining provisions. Instead of the
provision that has become invalid, a new provision shall come into
effect which shall come as near as possible to the business aims of both
parties. The same applies with regard to agreement loopholes.
19. APPLICABLE LAW/PLACE OF JURISDICTION
This Agreement shall be governed by the substantive laws of Germany to
the exclusion of the provisions for conflict of laws and international
conventions relating to the sale of goods.
Place of jurisdiction shall be Stuttgart/Germany.
Dresden, 04.11.1996 Stuttgart, 22.10.1996
ISS-NAGANO GMBH ROBERT BOSCH GMBH
/s/ WOLFRAM BEYER /S/ KLAUS G. BORCHERS
- ------------------------ --------------------------
9
<PAGE>
Nagano Keiki Seisakusho Ltd., Tokyo, Japan, and ISS Inc. read and approve
the conditions herein and are prepared to sell and deliver the sensor
subassembly and printed circuit board and, after establishment of the relevant
production lines to be accomplished not later than Dec. 31, 1997, also the
Products to Bosch at the terms and conditions as stipulated hereinabove in order
to ensure timely fulfillment of this agreement, in case ISS is prevented from
doing so.
Tokyo, 11.18.1996 San Jose, 11.11.1996
Nagano Keiki Seisakusho Ltd. ISS Inc., San Jose, CA., USA
/s/ SHIGERU MIYASHITO /s/ RAMESH SIRSI
- ----------------------------------- ----------------------------------------
APPENDIX 1: Product Specification and Model Drawing
APPENDIX 2: Delivery Forecast
APPENDIX 3: Quality Assurance Guide for Suppliers
APPENDIX 4: Price Projection
APPENDIX 5: Loan Contract
10
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 1
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 2
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 3
BOSCH-QUALITY ASSURANCE GUIDE FOR SUPPLIERS
[BOSCH LOGO]
<PAGE>
1. INTRODUCTION
In view of intensified international competition, quality assumes a position
of great importance.
In the manufacture of its products, Bosch increasingly makes use of items
from suppliers. The perfect condition and reliability of these items
crucially influence the quality of the products made from them.
The quality of supplied products and suppliers' quality capabilities are
therefore crucial criteria in the purchase decision reached by Bosch.
Quality necessitates a modern and effective quality assurance system. Its
essential elements are summarized in this "Bosch Quality Assurance Guide for
Suppliers". This quality assurance guide is an integral component of the
purchase contracts concluded by Robert Bosch GmbH with suppliers.
Important characteristics are:
- - Assumption of full responsibility by suppliers for the quality of the
supplied products.
- - Proof of a reasonable and effective quality assurance system.
- - Consistent application of preventive quality assurance methods, e.g. in
order to intervene in a regulating manner in the production process and in
order to avoid or eliminate sources of defects at an early stage.
The supplier is obligated to deliver defect-free products. It is intended
for the "Bosch Quality Assurance Guide for Suppliers" to contribute towards
attaining this aim reliably and surely (zero defect target).
With a view to the great importance of quality, the Bosch company will inform
itself, in an atmosphere of partner-like cooperation with its suppliers,
about their quality assurance systems. During the course of the concomitant
assessment, Bosch expects suppliers to reach at least 70% in accordance with
the Bosch assessment system. The aim of this assessment is to prove that the
supplier is capable of supplying products to the necessary, homogeneous
quality.
The regulations laid down in this quality assurance guide for suppliers
fundamentally apply to all product areas. Further stipulations (e.g. in the
direction of DIN/ISO 9001 to 9003, particularly in the field of products
supplied to public clients) may become additionally necessary. These require
additional agreements.
2. TECHNICAL DOCUMENTS
The characteristics which supplied products must exhibit are defined in the
"Technical Documents". We draw attention to these in our orders and business
transactions. Technical documents in this meaning of the term are:
- - Bosch drawings
- - Bosch order specifications
- - Bosch inspection specifications
- - Other standards and stipulations
- - Corresponding documents from the supplier which bear our mark of approval.
The supplier is included in the update service for replacements of our
technical documents. By means of suitable measures, the supplier and his
sub-contractors ensure that production is always in accordance with the
latest technical documents. No deviations from the technical documents nor
changes are permissible without prior written approval from Bosch;
replacement of technical documents by Bosch constitutes such approval. Prior
to their introduction, changes to the supplier's own designs also require
written approval by Bosch.
3. QUALITY ASSURANCE
3.1 Quality assurance system
To be able to reliably fulfill the quality requirements placed on the
products to be supplied, the supplier must apply an appropriate quality
assurance system which has been recorded in writing and covers all areas of
his plant. This also includes the stipulation that responsibilities for all
quality assurance actions must be defined. The effective realization of the
defined quality assurance measures must be monitored; this surveillance must
be independent from the actual production in terms of personnel.
3.2 Quality assurance in the development phase
If the products to be supplied are developed and designed by the supplier
himself, then he is responsible for the quality of design. Quality assurance
in the design phase includes adequate initial sample tests and lifetime tests
by the supplier, failure mode and effects analyses (FMEA) and systematic
assessment of the design quality at the end of the individual development
phases.
3.3 Quality assurance in the procurement phase
The supplier takes precautions to ensure that the products procured from his
suppliers will meet the agreed quality requirements. These include sampling
and release procedures as well as receiving inspections.
3.4 Production engineering
To be able to realize the characteristics defined in the technical documents
within the scope of a controlled production process, the following measures
are necessary, among other things:
- - Planning and written definition of the necessary production and inspection
operations and of the affiliated production and gauging equipment; also the
operations required for rework if they should be necessary.
- - Realization of machine and process capability analyses.
- - Failure mode and effects analyses (FMEA) of production and inspection
processes if necessary.
3.5 Quality assurance during production
Suitable methods must be employed during production for the purposes of
quality control and surveillance. Among other things, these include
automatic or statistical process control (SPC), process surveillance and the
application of further statistical methods.
To guarantee that products to be supplied will fulfill the agreed quality
requirements, quality inspections will be indispensable. These are
subdivided into:
- - initial sample inspection and release (see also 5.)
- - inspections accompanying production
- - product audits and if applicable
- - reliability inspections.
<PAGE>
The extent of inspection must be defined in accordance with the degree of the
attained process capabilities, the importance of the respective
characteristic and the possible effect of defects.
In the event of process disturbances and quality deviations, defective units
must be sorted out, the causes must be analyzed and corrective actions must
be initiated and, in addition, its effectiveness must be reviewed. This
applies also if Bosch should discover defects and should return defective
units. In this case, Bosch must be informed at short notice about the causes
of defects and the corrective actions taken.
Defective units must be specially marked to exclude the possibility of
confusion between good and bad products. Defective products which have been
reworked must then be re-inspected.
If, in exceptional cases, products not conforming to the specifications have
to be delivered, an acceptance by concession must be obtained from Bosch
beforehand. Bosch must also be informed immediately about any deviations
detected later.
3.6 Inspections records
Systematic records must be kept of the results of quality surveillance (e.g.
process capability indices), the quality inspections and the measures
intended and carried out for the purpose of eliminating defects. For the
suppliers' own developments, documents concerning initial sample tests and
lifetime tests must additionally be available.
The supplier must allow Bosch to inspect these records on demand. In special
cases, it may be agreed that specific inspection records have to be supplied
regularly along with the products.
3.7 Handling and dispatch
The production flow and methods intended for handling products must be
defined in such a manner that quality impairments and damages will be
avoided. This applies particularly to transportation, storage, packaging and
dispatch. Special Bosch packaging specifications must be observed.
Every packing unit of deliveries to Bosch must have an externally visible
product label conforming to VDA* recommendation 4902.
After any changes, the first three deliveries must additionally be marked as
follows on the affiliated delivery note: "1st (2nd, 3rd) delivery in
accordance with change date..." (see also 6.) The word "SAMPLE" must be
clearly marked on packing units and delivery notes of initial sample
shipments.
4. INSPECTION GAUGES
The supplier must be equipped with adequate inspection gauges in order that
all characteristics agreed in accordance with the technical documents can be
tested. If required, special inspection gauges may be obtained from Bosch
within the framework of a lending contract.
Reviewing the usefulness and accuracy of inspection gauges at preplanned,
regular intervals is indispensable; if necessary, these must be corrected.
5. SUBMISSION AND RELEASE OF INITIAL SAMPLES
In the following cases, initial samples must be submitted to the ordering
Bosch plant in good time before the commencement of series deliveries:
- - new products
- - changes to a product (amendments to the technical documents)
- - when using new or relocated tools and production equipment.
These samples must have been manufactured completely using series production
facilities and under series production conditions and must have been tested
thoroughly with reference to all quality characteristics. Inspection and
test results determined by the supplier must be submitted along with the
samples in the form of initial sample inspection reports and measurement
sheets (Bosch or VDA* forms). The deliveries must be specially marked (see
3.7).
The quantity of necessary samples will be defined in each individual case
when ordering or must be agreed with us. Generally, at least 25 items will
be involved. In the case of multiple moulds and tools, samples from each
individual mould and tool must be measured and supplied separately. Bosch
will check the samples, will notify the supplier of the result of this
re-inspection and will release series production if the samples meet the
requirements.
Series deliveries must not be commenced without written release from Bosch.
The supplier must keep one released sample, as well as the test results
determined by him, until the series is discontinued or until the item
concerned is changed.
6. INFORMATION OBLIGATION
When implementing any changes for which Bosch does not stipulate a previous
initial sample inspection and approval, the supplier must complete all
necessary tests in order to ensure conformity with the technical documents.
The supplier is also obliged to inform Bosch in the following cases before
commencing series deliveries:
- - If a production process, even of a subcontractor, changes (e.g. production
procedures and conditions)
- - If there is a change in production location (e.g. production site or scope
of responsibility)
- - In the event of changes in the sources of "critical" prefinished products
if, in the objective opinion of the supplier, important product
characteristics could be influenced detrimentally.
Bosch will decide whether these cases necessitate sample inspection followed
by release as detailed in point 5.
7. DOCUMENTARY ITEMS
In the case of documentary items (e.g. safety items), the supplier is obliged
to document the quality assurance measures and the results of quality
inspections. Besides the Bosch quality assurance guide for suppliers, the
VDA* publication, Volume 1 "Dokumentationspflichtige Teile bei
Automobilherstellern und deren Zulieferanten" (Documentary items supplied by
automobile manufacturers and their suppliers) or other special agreements
must be observed.
ROBERT BOSCH GMBH
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 4
[ ]
<PAGE>
CONFIDENTIAL
TREATMENT
REQUESTED
APPENDIX 5
ROBERT BOSCH GMBH BOSCH
- -----------------------------------------------------------------------------
CONTRACT OF LOAN
concluded between ROBERT BOSCH GmbH, STUTTGART
(Federal Republic of Germany)
- hereinafter referred to as "Bosch"
and
- hereinafter referred to as "Manufacturer"
1. SUBJECT MATTER OF THE CONTRACT
Bosch hereby agrees to loan to the Manufacturer the equipment covered by
this Contract as listed below in detail, hereinafter called "the
Equipment". The Manufacturer shall not use the Equipment for purposes
other than the manufacture of parts and products ordered by Bosch.
The Manufacturer shall not without the prior written consent of Bosch
permit third parties to make drawings of the Equipment nor to have
possession of or access to the Equipment.
LIST OF THE EQUIPMENT
- -----------------------------------------------------------------------------
Units Designation used for Part/Drawing No.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
2. OWNERSHIP, EFFECTIVE DATE OF THE CONTRACT
2.1 If the Equipment is handed over by Bosch the parties agree as follows:
Bosch shall at its cost deliver the Equipment to the Manufacturer in good
working condition. The Equipment shall remain the property of Bosch. The
Contract becomes effective on the date of signature by both parties.
2.2 If the Equipment is manufactured by the Manufacturer the parties agree as
follows:
The Manufacturer shall manufacture the Equipment for the account of Bosch
and assign to the latter in accordance with the order No. _______________
of _______________ the full title thereto, retaining physical possession
thereof.
The Contract shall become effective as to that Equipment on the date on
which the title passes to Bosch.
3. MAINTENANCE, DAMAGES
The Manufacturer undertakes to keep the Equipment in serviceable condition
at its own cost; it shall in particular,
(i) handle the Equipment properly and expertly and in accordance with any
instructions supplied by Bosch and ensure adequate care and
maintenance thereof;
(ii) carry out at its own expense the necessary repair work expertly and
properly and without delay;
(iii) notify Bosch without delay of any damage to the Equipment.
<PAGE>
Further Explanations
- - "Notes on and Explanation of the
Bosch Quality Assurance Guide for
Suppliers" (obtainable from Bosch)
- - VDA* publication, Volume 1:
"Dokumentationspflichtige Teile
bei Automobilherstellern und deren
Zulieferanten".
(Documentary items supplied by
automobile manufacturers and
their suppliers)
- - VDA* recommendation 4902,
Version 2: "Warenanhanger"
(Product labels)
- - Explanations written in English
can be found in the following EOQC**
Publications:
- - "European Recommendations for
Quality Control of Purchased Items"
- - "European Recommendations for
Documentation for Items related
to Traffic Safety and Environment Pro-
tection in the Automotive Industry".
(Based on the above VDA publica-
tion, Volume I).
* The VDA (German Professional
Organization of the Automobile
Industry) publications are written
in German.
Obtainable from:
Verband der Automobilindustrie e. V., BOSCH
Westendrasse 61,
6000 Frankfurt a. M. Robert Bosch GmbH
Zentralabteilung Qualitatssicherung
** EOQC publications are obtainable Postfach 30 02 20
from: D-7000 Stuttgart 30
European Organization for Quality
Control - EOQC Robert Bosch GmbH
P.O. Box 5032 Zentraleinkauf
CH-3001 Bern Postfach 10 60 50
Switzerland D-7000 Stuttgart 10